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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 41

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

A) Constructive dividends do not need to be formally declared or designated as a dividend.
B) Constructive dividends need not be paid pro rata to the shareholders.
C) Corporations that receive constructive dividends may not use the dividends received deduction.
D) Constructive dividends are taxable as dividends only to the extent of earnings and profits.
E) All of the above.

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

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Question 42

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Scarlet Corporation is an accrual basis,calendar year corporation.Scarlet distributes inventory (basis of $20,000; fair market value of $40,000) to Frank,its shareholder.Assuming that Scarlet has $500,000 of current E & P,what is the impact of the distribution on Scarlet Corporation and on Frank?

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Scarlet's E & P is increased by the $20,...

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Question 43

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Christian,the president and sole shareholder of Venture Corporation,is paid an annual salary of $150,000.Christian would like to draw additional funds from the corporation but is concerned that increased salary might cause the IRS to contend his salary is unreasonable.Further,Christian does not want the corporation to pay any dividends.He would like to contribute $40,000 to his alma mater to establish scholarships for needy students.If Christian makes a pledge to the university to provide $40,000 for scholarships,would there be a problem if Venture Corporation paid the pledge on his behalf? Explain.

Seven years ago,Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351.The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer.In the current year,Blue Corporation (E & P of $1 million) redeems 600 shares from Eleanor for $260,000 in a transaction that does not qualify for sale or exchange treatment.With respect to the redemption,Eleanor will have a:

​ 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 2017.​ a.Increase b.Decrease c.No effect -Penalties paid to state government for failure to comply with state law.

Tanya is in the 33% tax bracket.She acquired 1,000 shares of stock in Swan Corporation seven years ago for $100 a share.In the current year,Swan Corporation (E & P of $1.2 million) redeems all of her shares for $160,000.What are the income tax consequences to Tanya if: a.The redemption qualifies for sale or exchange treatment, and Tanya has no other transactions in the current year involving capital assets? b.The redemption does not qualify for sale or exchange treatment?

All distributions that are not dividends are a return of capital and decrease the shareholder's basis.

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,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:

Use of MACRS cost recovery when computing taxable income does not require an E & P adjustment.

If a stock dividend is taxable,the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.

Starling Corporation has accumulated E & P of $60,000 on January 1,2017.In 2017,Starling Corporation had an operating loss of $80,000.It distributed cash of $40,000 to Zoe,its sole shareholder,on December 31,2017.Starling Corporation's balance in its E & P account as of January 1,2018,is:

Canary Corporation has 5,000 shares of stock outstanding.It redeems in a qualifying stock redemption 1,200 shares for $475,000 at a time when it has paid-in capital of $300,000 and E & P of $1.5 million.What would be the charge to Canary's E & P as a result of the redemption?

As a result of a redemption,a shareholder's interest (direct and indirect) in the corporation decreased from 80% to 55%.The redemption qualifies for sale or exchange treatment as a disproportionate redemption.

Navy Corporation has E & P of $240,000.It distributes land with a fair market value of $70,000 (adjusted basis of $25,000) to its sole shareholder,Troy.The land is subject to a liability of $55,000 that Troy assumes.Troy has:

A distribution in excess of E & P is treated as capital gain by shareholders.

Silver Corporation,a calendar year taxpayer,has taxable income of $550,000.Among its transactions for the year are the following: ​ Disregarding any provision for Federal income taxes,Silver Corporation's current E & P is:

Cedar Corporation is a calendar year taxpayer formed in 2013.Cedar's E & P before distributions for each of the past 5 years is listed below. ​ Cedar Corporation made the following distributions in the previous 5 years. ​ Cedar's accumulated E & P as of January 1,2018 is:

​ 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 2017.​ a.Increase b.Decrease c.No effect -Dividends received deduction.

Lena is the sole shareholder and president of Gold Corporation.She feels that she can justify at least a $50,000 bonus this year because of her performance for the company.However,rather than a bonus in the form of a salary,she considers having Gold pay her a $50,000 dividend.She believes this would be preferable because it will be taxed at only 15% instead of her marginal rate of 35%.Her CPA has advised her to pay a $75,000 bonus in lieu of the $50,000 dividend.Assuming that Gold Corporation is in a 34% tax bracket,should Lena take the $50,000 dividend or the $75,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Gold and to Lena.

What are the requirements that must be satisfied for a distribution to qualify under § 302(b)(2) as a disproportionate redemption?