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7 Dec 2018

At the beginning of the current year, Sandra and Houston eachown 50% of Rust Corporation. In June, Sandra sold her stock toAaliyah for $35,000. At the beginning of the year, Rust Corporationhas accumulated E & P of $50,000. Its current E & P for theyear is $70,000 (prior to any distributions). Rust distributed$80,000 on March 31 ($40,000 to Sandra and $40,000 to Houston). Itdistributed another $80,000 on September 30 ($40,000 to Aaliyah and$40,000 to Houston). Aaliyah has taxable income as a result of thedistributions from Rust of:

a. $17,500.

b. $20,000.

c. $30,000.

d. $40,000.

e. None of the above.

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Trinidad Tremblay
Trinidad TremblayLv2
7 Dec 2018

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W Corporation was owned by shareholder C prior to a sale of allof his stock (basis at the beginning of the year, $5,000) to D inJune for $10,000. During the year, W Corporation distributed$60,000 on May 1 and $40,000 on September

1. Indicate how the distributions would be treated by individualshareholders C and D in the following situations (15):

Accumulated E&P

Current E&P

a

10,000

50,000

b

(70,000)

50,000

c

95,000

(18,250)

22) Boxer Corporation buysequipment in January of the current year with a 7-year class lifefor $15,000. The corporation expensed the $15,000 under Sec. 179.The deduction in the year of purchase for E&P purposes due tothe acquisition and expensing of the equipment is
A. $14,000
B. $15,000
C. $1,500
D. $3,000
23) Maxwell Corporation reportsthe following results:
Year CurrentE&P Distributions
2005 $6,000 $4,000
2006 5,000 1,000
2007 1,000 -0-

Maxwell's dividends-received deduction is
A. $5,000
B. $12,000
C. $0
D. $7,000
24) Identify which of thefollowing statements is false.
A. At formation, acorporation's E&P depends on the amount of capital contributedby the shareholders.
B. Adjustments totaxable income when computing E&P do not include tax exemptinterest.
C. For E&Pdividend distribution purposes, property as defined in Sec. 317(a)includes money.
D. The function ofE&P is to provide a measure of a corporation's economic abilityto pay dividends.
25) Exit Corporation hasaccumulated E&P of $24,000 at the beginning of the current taxyear. Current E&P is $20,000. During the year the corporationmakes the following distributions to its sole shareholder who has a$22,000 basis for her stock.
Date AmountDistributed
April 1 $20,000
June 1 20,000
August 1 15,000
November 1 5,000

The treatment of the $15,000 August 1 distribution would be
A. $4,000 is taxableas a dividend from accumulated E&P, and $11,000 is tax-free asa return of capital
B. $5,000 is taxableas a dividend from current E&P and $10,000 is tax-free as areturn of capital
C. $15,000 is taxableas a dividend; $5,000 from current E&P and the balance fromaccumulated E&P
D. $15,000 is taxableas a dividend from accumulated E&P
26) Current E&P does notinclude
A. tax-exemptinterest income
B. life insuranceproceeds where the corporation is the beneficiary
C. federal income taxrefunds from prior years
D. All of the theseare included
27) Identify which of thefollowing statements is true.
A. Section 179property must be expensed ratably over a 5-year period whencomputing E&P.
B. Losses on propertysales to related parties are not deductible when computingE&P.
C. Distributions madeout of accumulated E&P are allocated ratably between multipledistributions made during the tax year.
D. All arefalse.
28) Crossroads Corporationdistributes $60,000 to its sole shareholder Harley. Crossroads hasearnings and profits of $55,000 and Harley's basis in her stock is$20,000. After the distribution, Harley's basis is
A. $20,000
B. $60,000
C. $5,000
D. $15,000
29) Hogg Corporation distributes$30,000 to its sole shareholder, Ima. At the time of thedistribution, Hoggs' E&P is $14,000 and Ima's basis in herstock is $10,000. Ima's gain from this transaction is
A. $20,000 capitalgain
B. $30,000 capitalgain
C. $6,000 capitalgain
D. $14,000 capitalgain
30) One consequence of aproperty distribution by a corporation to a shareholder is
A. the amount of thedistribution is increased by any liability assumed by theshareholder
B. any liabilitiesassumed by the shareholder do not reduce the shareholder'sbasis
C. the shareholder'sbasis in the distributed property is the same as the distributingcorporation's basis
D. the holding periodof the distributed property includes the holding period of thedistributing corporation
31) Identify which of thefollowing statements is true.
A. The distributingcorporation's E&P must be reduced by the FMV of nontaxablestock rights distributed to shareholders.
B. A stock redemptioncan be used to withdraw some assets from a corporation prior to asale of the business.
C. A shareholder canredeem part of his stock and recognize a capital gain if thecorporation has only one shareholder.
D. All arefalse.
32) Which of the following isnot a reason for a stock redemption?
A. desire byremaining shareholders to retain control
B. No outside marketexists for the stock.
C. Redemption ofshares is a good corporate investment.
D. desire byshareholders to reduce the corporate tax liability
33) Elijah owns 20% of ParkCorporation's single class of stock. Elijah's basis in the stock is$8,000. Park's E&P is $28,000. If Park redeems all of Elijah'sstock for $48,000, Elijah must report dividend income of
A. $0
B. $48,000
C. $40,000
D. $28,000

ssumptions: The stock of ChadCo is owned equally by twoshareholders: SecondCo (a corporation) and Arnold (an individual).ChadCo and SecondCo use the accrual method, Arnold uses the cashmethod. All use a calendar taxable year. Assume § 1059 does notapply. Use a 34 percent corporate tax rate in this problem. Duringthe current year, ChadCo accrued income and expenses 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 Arnold incorporated ChadCo and capitalized ChadCo withcash of $100,000 each. On December 31 of that preceding year,SecondCo and Arnold received distributions from ChadCo of $5,000each; ChadCo did not earn any income for that year. In addition,SecondCo and Arnold received distributions of $5,000 each, in thecurrent year. Which distributions should be gross income toSecondCo and Arnold, in what amounts, and why? What does E&Phave to do with this? (2) Alternative: Arnold just bought theChadCo shares on December 30 of the current year from anothershareholder for FMV of $145,000, before the declaration and paymentof 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 $100,000and Arnold’s basis in his ChadCo stock is $40,000. On January 2 ofthe current taxable year, ChadCo distributes $100,000 in cash toSecondCo and $100,000 in cash to Arnold. As of the end of thepreceding taxable year, ChadCo’s accumulated E&P was zero. Whatare the tax consequences of this distribution to ChadCo, SecondCo,and Arnold? [Hint: First compute ChadCo’s current-year taxableincome and then compute current-year E&P before reducing theE&P for the distribution (“interim E&P”); after reducingfor the distribution, compute final accumulated 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 andthe holders of Arnold’s shares receive? (5) Suppose under the basicfacts in (3) above that ChadCo had an accumulated deficit of$100,000 in its E&P account as of December 31 of the precedingtaxable year. (6) If, on December 1 of the current year (thedeclaration date), ChadCo’s board of directors voted to pay the$200,000 distribution by mailing the checks on December 31 of thecurrent taxable year (the payment date, the identification of whichis a practice 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 thatChadCo has always been an S corporation. What is ChadCo’s E&P‘?How is each shareholder’s personal income tax return affected forthe current year by the tax items of ChadCo? How will ChadCodistribution of $100,000 to each shareholder in the current yearaffect shareholders?

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