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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 71

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The adjusted gross estate of Debra,decedent,is $8 million.Debra's estate will incur death taxes and funeral and administration expenses of $1 million.Debra's gross estate includes stock in Silver Corporation that she had purchased twelve years ago for $600,000 (date of death fair market value of $3 million) .At the time of her death in 2009,Debra owned 80% of the stock in Silver Corporation.Silver Corporation (E & P of $4 million) redeems all of the estate's stock in the corporation for $3 million.Debra's will names her daughter,Dena,who owns the remaining 20% interest in Silver Corporation,as her sole heir.With respect to this redemption,Debra's estate has the following income:

A) $0.
B) $2.4 million long-term capital gain.
C) $1 million dividend.
D) $2 million dividend.
E) None of the above.

F) C) and E)
G) All of the above

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Question 72

Multiple Choice

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Pheasant Corporation ended its first year of operations with taxable income of $225,000.At the time of Pheasant's formation,it incurred $50,000 of organizational expenses.In calculating its taxable income for the year,Pheasant claimed an $8,000 deduction for the organizational expenses.What is Pheasant's current E & P?

A) $175,000.
B) $183,000.
C) $225,000.
D) $233,000.
E) None of the above.

F) B) and C)
G) B) and E)

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Question 73

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Dividends taxed at a 15% rate are not considered investment income for purposes of the investment interest expense limitation.

Five years ago,Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 1,000 shares of Blue Corporation in a transaction that qualified under § 351.The assets had a tax basis to her of $300,000 and a fair market value of $450,000 on the date of the transfer.In the current year,Blue Corporation (E & P of $600,000) redeems 200 shares from Eleanor for $190,000 in a transaction that does not qualify for sale or exchange treatment.With respect to the redemption,Eleanor will have a:

Robin Corporation distributes equipment (basis of $80,000 and fair market value of $100,000) as a property dividend to its shareholders.The equipment is subject to a liability of $110,000.Robin Corporation recognizes gain of:

A shareholder's holding period of property acquired in a stock redemption includes that of the distributing corporation.

Puce Corporation,an accrual basis taxpayer,has struggled to survive since its formation,six years ago.As a result,it has a deficit in accumulated E & P at the beginning of the year of $340,000.This year,however,Puce earned a significant profit;taxable income was $240,000.Consequently,Puce made two cash distributions to Martha,its sole shareholder: $150,000 on July 1 and $200,000 December 31.The following information might be relevant to determining the tax treatment of the distributions.

The terms "earnings and profits" and "retained earnings" are identical in meaning.

Wendy and David,equal shareholders in Loon Corporation,receive $300,000 each in distributions on December 31 of the current year.Loon's current year E & P is $500,000 and it has no accumulated E & P.Last year,Loon sold an appreciated asset for $600,000 (basis of $200,000) .Payment for one half of the sale of the asset was made this year.How much of Wendy's distribution will be taxed as a dividend?

When computing E & P,an adjustment to taxable income is necessary for any domestic production activities deduction.

Use of MACRS cost recovery when computing taxable income requires an E & P adjustment.

A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.

When computing current E & P,taxable income is not adjusted for the deferred gain in a § 1033 involuntary conversion.

Stephanie is the sole shareholder and president of Hawk Corporation.She feels that she can justify at least a $220,000 bonus this year because of her performance.However,rather than a bonus in the form of a salary,she plans to have Hawk pay her a $220,000 dividend.She believes this is preferable because it will be taxed at only 15% (her marginal rate is 39.6%).Her accountant,however,suggests a $310,000 bonus in lieu of the $220,000 dividend since Hawk Corporation is in the 34% tax bracket.Should Stephanie take the $220,000 dividend or the $310,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Hawk and to Stephanie.

What are the tax consequences of a qualifying stock redemption to the distributing corporation?

Thistle Corporation declares a nontaxable dividend payable in rights to subscribe to common stock.One right and $25 entitle the holder to subscribe to one share of stock.One right is issued for each share of stock held.Annette,a shareholder,owns 200 shares of stock that she purchased five years ago for $3,000.At the date of distribution of the rights,the market values were $50 per share for the stock and $25 for a right.Annette received 200 rights.She exercises 160 rights and purchases 160 additional shares of stock.She sells the remaining 40 rights for $1,080.What are the tax consequences to Annette?