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Exam 18: Corporate Taxation: Nonliquidating Distributions

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Question 61

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General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Incorporated in partial liquidation of the company on December 31, 20X3. Tiara, Incorporated owns 500 shares (50 percent) of General Inertia. The distribution was in exchange for 250 shares of Tiara's stock in the company. After the partial liquidation, Tiara continued to own 50percent of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Tiara's income tax basis in the shares was $100 per share. General Inertia had total E&P of $800,000 at the time of the distribution. What amount of dividend or capital gain does Tiara recognize because of the transaction?

A) Tiara does not recognize any dividend income or capital gain.
B) Tiara recognizes capital gain of $50,000.
C) Tiara recognizes dividend income of $50,000.
D) Tiara recognizes capital gain of $25,000.

E) B) and D)
F) None of the above

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Question 62

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This year Truckit reported taxable income of $160,000 and received $20,000 of municipal interest. Truckit paid $55,000 in entertainment expenses and $15,000 in fines and penalties. Truckit had $50,000 of accumulated E&P at the beginning of the year. What is Truckit's current E&P?

A) $180,000
B) $142,200
C) $110,000
D) $76,400

E) B) and C)
F) None of the above

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Question 63

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A distributionof cash from a corporation to a shareholder will always result in a dividend for tax purposes.

Buckeye Company is owned equally by James and his brother Terrelle, each of whom owns 600 shares in the company. Terrelle wants to reduce his ownership in the company, and it was decided that the company will redeem 400 of his shares for $4,700 per share on December 31, 20X3. Terrelle's income tax basis in each share is $2,400. Buckeye has current E&P of $19,000,000 and accumulated E&P of $29,000,000. What is the amount and character (capital gain or dividend)recognized by Terrelle because of the stock redemption?

Buckeye Company is owned equally by James and his brother Terrelle, each of whom owns 500 shares in the company. Terrelle wants to reduce his ownership in the company, and it was decided that the company will redeem 200 of his shares for $5,000 per share on December 31, 20X3. Terrelle's income tax basis in each share is $1,000. Buckeye has current E&P of $10,000,000 and accumulated E&P of $20,000,000. What is the amount and character (capital gain or dividend)recognized by Terrelle because of the stock redemption?

The "family attribution" rules are automatically waived in a complete redemption of a shareholder's stock.

Longhorn Company reports current E&P of $100,000 in 20X3 anda deficit of ($200,000) in accumulated E&P at the beginning of the year. Longhorn distributed $300,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $100,000. How is the distribution treated by the shareholder in 20X3?

Half Moon Corporation made a distribution of $390,000 to Arnold Swartz in partial liquidation of the company on December 31, 20X3. Arnold owns 100 percent of Half Moon Corporation (1,200 shares). The distribution was in exchange for 50 percent of Arnold's stock in the company (600 shares). At the time of the distribution, the shares had a fair market value of $650 per share. Arnold's income tax basis in the shares was $325 per share. Half Moon had total E&P of $2,300,000 at the time of the distribution. What is the amount and character (capital gain or dividend)of any income or gain recognized by Arnold as a result of the partial liquidation?

Austin Company reports positive current E&P of $225,000 and a deficit in accumulated E&P of ($350,000). Austin distributed $280,000 to its sole shareholder, Betsy Bevo, on December 31, 20X3. Betsy's tax basis in her stock is $140,000. How much of the $280,000 distribution is treated as a dividend to Betsy, and what is her tax basis in Austin stock after the distribution?

Green Corporation has a deficitin current E&P of ($100,000)and positive accumulated E&P of $250,000. A $50,000 distribution from Green to its sole shareholder at year-end will be treated as a dividend.

Lansing Company is owned equally by Jennifer, her husband, Dan, and DeWitt Corporation, which is owned 50 percent by Jennifer and her sister Jane. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Lansing stock is Jennifer deemed to own?

Beltway Company is owned equally by George, his brother Thomas, and a partnership owned 50 percent by George and his father, Abe. Each of the three shareholders holds 190 shares in the company. Under the §318 stock attribution rules, how many shares of Beltway stock is George deemed to own?

Tar Heel Corporation had current and accumulated E&P of $560,000 at December 31 20X3. On December 31, the company made a distribution of land to its sole shareholder, William Roy. The land's fair market value was $160,000 and its tax and E&P basis to Tar Heel was $31,000. William assumed a mortgage attached to the land of $13,000. The tax consequences of the distribution to William in 20X3 would be:

Sunapee Corporation reported taxable income of $720,000 from operations for 20X3. During the year, the company made a distribution of land to its sole shareholder, Jean McCarthy. The land's fair market value was $129,000 and its tax and E&P basis to Sunapee was $77,000. Jean assumed a mortgage attached to the land of $27,000. Sunapee's tax rate is 21 percent. Compute Sunapee's total taxable income and federal income tax paid because of the distribution. Using your solution, compute Sunapee's current E&P for 20X3.

Comet Company is owned equally by Pat and his sister Pam, each of whom holds 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X3, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $250,000 on December 31, 20X3. What are the tax consequences to Comet because of the stock redemption?

Sunapee Corporation reported taxable income of $700,000 from operations for 20X3. During the year, the company made a distribution of land to its sole shareholder, Jean McCarthy. The land's fair market value was $125,000 and its tax and E&P basis to Sunapee was $75,000. Jean assumed a mortgage attached to the land of $25,000. Sunapee's tax rate is 21 percent. Compute Sunapee's total taxable income and federal income tax paid because of the distribution. Using your solution, compute Sunapee's current E&P for 20X3.

Superior Corporation reported taxable income of $1,600,000 in 20X3. Superior paid a dividend of $160,000 to its sole shareholder, Mary Yooper. Superior Corporation is subject to a flat-rate tax of 21 percent. The dividend meets the requirements to be a "qualified dividend," and Mary is subject to a tax rate of 15 percent on the dividend. What is the total federal income tax imposed on the corporate income earned by Superior, including taxes on the amount distributed to Mary as a dividend?

SaintClair Company reports positive current E&P of $500,000 in 20X3 and positive accumulated E&P at the beginning of the year of $400,000. SaintClair Company distributed $600,000 to its sole shareholder, Danielle Brush, on December 31, 20X3. Danielle's tax basis in her SaintClair stock is $120,000. How much of the $600,000 distribution is treated as a dividend to Danielle, and what is her basis in SaintClair stock after the distribution?

Bruin Company reports current E&P of $200,000 in 20X3 and accumulated E&P at the beginning of the year of $100,000. Bruin distributed $400,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

Sam owns 65 percent of the stock of Club Corporation. Unrelated individuals own the remaining 35 percent. For a stock redemption of Sam's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Club stock must Sam own after the redemption?