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Exam 5: Corporations Earnings Profits and Dividend Distributions

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Question 31

Multiple Choice

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Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2016. -Interest received from municipal bonds in 2016.

A) Increase
B) Decrease
C) No effect

D) A) and B)
E) A) and C)

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Question 32

Multiple Choice

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Falcon Corporation ended its first year of operations with taxable income of $250,000. At the time of Falcon's formation, it incurred $50,000 of organizational expenses. In calculating its taxable income for the year, Falcon claimed an $8,000 deduction for the organizational expenses. What is Falcon's current E & P?

A) $200,000
B) $208,000
C) $250,000
D) $258,000
E) None of the above

F) C) and D)
G) A) and B)

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Question 33

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The dividends received deduction has no impact on E & P.

Aaron and Michele, equal shareholders in Cavalier Corporation, receive $25,000 each in distributions on December 31 of the current year. During the current year, Cavalier sold an appreciated asset for $60,000 (basis of $15,000) . Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year, with interest payable at a rate of 6 percent. Before considering the effect of the asset sale, Cavalier's current year E & P is $40,000 and it has no accumulated E & P. How much of Aaron's distribution will be taxed as a dividend?

Which of the following statements is incorrect with respect to determining current E & P?

Federal income tax paid in the current year must be subtracted from taxable income to determine E & P.

Maria owns 75% and Christopher owns 25% of Cockatoo Corporation, a calendar year taxpayer. Cockatoo makes a $600,000 distribution to Maria on April 1 and a $200,000 distribution to Christopher on May 1. Cockatoo's current E & P is $120,000 and its accumulated E & P is $500,000. What are the tax implications of the distributions to Maria and Christopher?

If a distribution of stock rights is taxable and their fair market value is less than 15 percent of the value of the old stock, then either a zero basis or a portion of the old stock basis may be assigned to the rights, at the shareholder's option.

If stock rights are taxable, the recipient has income to the extent of the fair market value of the rights.

If there is sufficient E & P, a distribution of nonconvertible preferred stock to common shareholders is taxable.

In the current year, Warbler Corporation (E & P of $250,000) made the following property distributions to its shareholders (all corporations) : $\begin{array}{lrr}&& \text { Fair Market } \\&\text { Adjusted Basis } & \text { Value }\\\text { Pink Corporation stock (held for investment) } & \$ 150,000 & \$ 120,000 \\\text { Non-LIFO inventory } & 80,000 & 110,000\end{array}$ ? Warbler Corporation is not a member of a controlled group. As a result of the distribution:

A corporation that distributes a property dividend must reduce its E & P by the adjusted basis of the property less any liability on the property.

Which of the following statements regarding constructive dividends is not correct?

Regardless of any deficit in current E & P, distributions during the year are taxed as dividends to the extent of accumulated E & P.

During the current year, Hawk Corporation sold equipment for $600,000 (adjusted basis of $360,000) . The equipment was purchased a few years ago for $760,000 and $400,000 in MACRS deductions have been claimed. ADS depreciation would have been $300,000. As a result of the sale, the adjustment to taxable income needed to determine current E & P is:

When current E & P is positive and accumulated E & P has a deficit balance, the two accounts are netted for dividend determination purposes.

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2016. -Federal income tax refunds from tax paid in prior years.

Using the legend provided, classify each statement accordingly. In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2016. -Charitable contribution carryforward deducted in the current year.

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2016. -Premiums paid on key employee life insurance policy (assume no increase in cash surrender value of policy) in 2016.

Thrush, Inc., is a calendar year, accrual basis corporation with Henry as its sole shareholder (basis in his stock is $90,000). On January 1 of the current year, Thrush Corporation has accumulated E & P of $200,000. Before considering the effect of the distribution described below, the corporation's current E & P is $50,000. On November 1, Thrush distributes an office building to Henry. The office building has an adjusted basis of $80,000 (fair market value of $100,000) and is subject to a mortgage of $110,000. Assume that the building has been depreciated using the ADS method for both income tax and E & P purposes. What are the tax consequences of the distribution to Thrush and to Henry? (In your answer, be sure to describe the effects on taxable income for both Thrush and Henry, the impact of the distribution on Thrush's E & P, and Henry's basis in the building.)