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True or False questions

Nancy is a 30% partner in the ABC Partnership with an outsidebasis of $20,000. ABC distributes land with a basis of $12,000 andfair value of $18,000 to Cathy in complete liquidation of herinterest. Cathy recognizes a capital loss of $8,000 on thedistribution

In a disproportionate liquidating distribution of cash,inventory and capital gain property, a partner will alwaysrecognize gain

ABC Corporation distributes land with a fair market value of$200,000 to its sole shareholder. ABC's tax basis in the land is$50,000. Assuming sufficient earnings and profits, the amount ofdividend reported by the shareholder is $200,000

John owns 30 percent of ABC Corporation. ABC Corporation owns 50percent of ABCD Corporation. Under the attribution rules applyingto stock redemptions, John is treated as owning 15 percent of ABCDCorporation.

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Nestor Rutherford
Nestor RutherfordLv2
28 Sep 2019

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true and false questions

A redemption is always "essentially equivalent to a dividend"where a corporation's sole stockholder causes part of his shares tobe redeemed by the corporation.

When a partner receives a cash distribution from a partnershipthe partner always recognizes a gain on such distribution.

If a partner receives a non-liquidating cash distribution, thepartner will recognize a loss if the cash distributed is less thanthe partner's outside basis at the time of the distribution.

When a partner’s share of partnership liabilities and debts isreduced or relieved, such reduction or relief is treated as adeemed cash distribution which increases the partner’s outsidebasis.

A partner contributes property used in a trade or business to apartnership in return for a partnership interest. The partner heldthe property for 2 years prior to contribution. The partner thensells his partnership interest three weeks later. The contributingpartner will realize a short-term capital gain/loss on the sale ofhis partnership interest.

A distribution by a C-corporation that has Earnings and Profitsis always a dividend.

John is a 30% partner in the ABC Partnership with an outsidebasis of $42,000. ABC partnership distributes $15,000 of cash incomplete liquidation of John’s interest. John recognizes anordinary loss of $27,000 on the distribution

Like partnerships, an S corporation shareholder's stock basismust be adjusted annually.

A related party individual that receives a liquidatingdistribution from a corporation can recognize a loss

If a partnership makes a non-liquidating distribution oftangible property, and the inside basis of the property exceeds theoutside basis of the recipient-partner, the partner’s basis in thedistributed property is equal to his outside basis and he realizesgain on the difference between the inside basis and outsidebasis.

Outside basis is adjusted at the end of the tax year. TOR F


. A partner receives a distribution of cash, inventory and avehicle. His outside basis
is first allocated to the inventory, then to the cash and then tothe vehicle. T OR F

Any partnership debt that is allocated to another partner istreated as deemed cash
contribution. T OR F


Bobby owns 60 percent of the stock of ABC Corporation. Unrelatedindividuals
own the remaining 40 percent. For a stock redemption to be treatedas an exchange
under the "substantially disproportionate" rule, the redemptionmust reduce Bobby's
stock ownership below 48 percent T OR F


A partner can apply any passive activity losses against any passiveactivity income
for the year. T OR F


Flow-through S-corporation losses that are not deductible due toloss-limitation
rules are suspended and carried forward for 5 years. TOR F


. A shareholder that engages in a stock redemption will generallyrecognize a capital
gain or loss based on the FMV of the property received for thebasis of the stock
exchanged. T OR F


A partner that receives cash in a non-liquidating distributionrecognizes loss if the
cash distributed is less than the partner's outside basis in thepartnership immediately
before the distribution. T OR F


A partner that receives cash in a non-liquidating distributionrecognizes gain if the
cash distributed exceeds the partner's outside basis in thepartnership immediately
before the distribution. T OR F


Capital accounts reflect a partner’s value in the partnership, butunlike outside basis,
do not include allocable liabilities in its calculation. T OR F

A complete redemption of stock is always treated as a sale orexchange unless a
waivable activity occurs. T OR F

. Nonrecourse debt is generally allocated according to theprofit-sharing ratios of the
partnership. T OR F

A disproportionate distribution of hot assets is treated asthough the partnership
distributes a proportionate share of hot assets to the partner andthen the partner sells
those hot assets back to the partnership at fair market value inexchange for a portion
of the assets actually received in the distribution. T OR F

A partner recognizes gain when he receives cash in excess of hisoutside basis in a
liquidating distribution. T OR F

Question: Reading Federal Income Taxation of Corporations andShareholders Text: Study Chapters 7 & 8 o...

Reading

Federal Income Taxation of Corporations andShareholders

Text: Study Chapters 7 & 8of the Bittker & Eustice text.

Penalty Taxes on Undistributed CorporateIncome, Dividends and Other NonliquidatingDistributions

LESSON 6, PROBLEM #1

In not less than 1,000 words discuss "earnings and profits".Your discussion should include major differences between computingcurrent earnings and profits and current taxable income as well aswhy earnings and profits should be calculated before a corporationdecides to make a distribution to its shareholders.

LESSON 6, PROBLEM #2

Allan owns all of the stock of CadyCo. The stock’s basis is$100,000. CadyCo has a total of current and accumulated earningsand profits of $50,000. CadyCo distributes $200,000 cash to Allan“with respect to his stock” (i.e., as a state law “dividend”). Howis the $200,000 taxed? What is Allan’s stock basis after thedistribution? Alternatively, CadyCo distributes to Allan his noteto CadyCo for $200,000 borrowed from CadyCo.

LESSON 6, PROBLEM #3

Assumptions: The stock of ChadCo is owned equally bytwo shareholders: SecondCo (a corporation) and Arnold (anindividual). ChadCo and SecondCo use the accrual method, Arnolduses the cash method. All use a calendar taxable year. Assume §1059 does not apply. Use a 34 percent corporate tax rate in thisproblem. During the current year, ChadCo accrued income andexpenses as follows:

Gross income from business

$500,000

Dividends on AT&T stock (consider § 243)

100,000

Interest on municipal bonds (§ 103)

100,000

Capital gain

100,000

Total

$800,000

Deductible § 162(a)(l) business expenses

$430,000

Noncapital expenses not deductible under § 162(e)

90,000

Capital losses (see § 1211(a))

146,000

Total

$666,000

Net

$134,000

(1) On December 24 of the preceding year, SecondCo and Arnoldincorporated ChadCo and capitalized ChadCo with cash of $100,000each. On December 31 of that preceding year, SecondCo and Arnoldreceived distributions from ChadCo of $5,000 each; ChadCo did notearn any income for that year. In addition, SecondCo and Arnoldreceived distributions of $5,000 each, in the current year.

Which distributions should be gross income to SecondCo andArnold, in what amounts, and why? What does E&P have to do withthis?

(2) Alternative: Arnold just bought the ChadCo shares onDecember 30 of the current year from another shareholder for FMV of$145,000, before the declaration and payment of a

$5,000 distribution to Arnold on December 31 of the currentyear.

Should the distribution be taxable income to Arnold?Why?

(3) Now assume that SecondCo’s basis in its ChadCo stock is$100,000 and Arnold’s basis in his ChadCo stock is $40,000. OnJanuary 2 of the current taxable year, ChadCo distributes $100,000in cash to SecondCo and $100,000 in cash to Arnold. As of the endof the preceding taxable year, ChadCo’s accumulated E&P waszero.

What are the tax consequences of this distribution toChadCo, SecondCo, and Arnold? [Hint: First compute ChadCo’scurrent-year taxable income and then compute current- year E&Pbefore reducing the E&P for the distribution (“interimE&P”); after reducing for the distribution, compute finalaccumulated E&P.]

(4) Variation: Assume Arnold’s shares were owned by a differentshareholder every quarter and $50,000 was distributed ratably toall shareholders quarterly?

How much dividend would SecondCo and the holders of Arnold’sshares receive?

(5) Suppose under the basic facts in (3) above that ChadCo hadan accumulated de?cit of

$100,000 in its E&P account as of December 31 of thepreceding taxable year.

(6) If, on December 1 of the current year (the declarationdate), ChadCo’s board of directors voted to pay the $200,000distribution by mailing the checks on December 31 of the currenttaxable year (the payment date, the identi?cation of which is apractice generally used only by widely held corporations) toshareholders of record on December l5 of the current taxable year(the record date), such checks actually being received by SecondCoand Arnold in the mail on January 2 of the next year? Assume thatSecondCo and Arnold are the public and that they are the onlyshareholders (as in the basic facts).

How would your answer to (3) above change?

(7) Suppose that SecondCo is an individual and that ChadCo hasalways been an S corporation.

What is ChadCo’s E&P‘? How is each shareholder’spersonal income tax return affected for the current year by the taxitems ofChadCo? How will ChadCo distribution of

$100,000 to each shareholder in the current year affectshareholders?

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