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Exam 13: Earnings Profits and Distributions

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Question 1

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Briefly describe the reason a corporation might distribute a property dividend to a shareholder in lieu of a cash distribution.Describe the tax effects of the property distribution on the shareholder and on the corporation.

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A corporation could distribute property ...

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Question 2

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How does the definition of accumulated E & P differ from the definition of current E & P?

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Accumulated E & P is the total of all previous years' current E & P (since February 28, 1913) reduced by distributions made from E & P in previous years.Current E & P is determined by making a series of adjustments to the corporation's taxable income.Current E & P is determined at year-end and is not reduced by current year distributions.

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An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

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

Ten years ago, Carrie purchased 2,000 shares of common stock in Osprey Corporation for $20,000.In the current year, Carrie receives a nontaxable stock dividend of 20 shares of Osprey preferred.Values at the time of the dividend are: $8,000 for the preferred stock and $72,000 for the common.Based on this information, Carrie's basis in the stock 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. ​ -Dividends received deduction.

Finch Corporation (E & P of $400,000) distributed machinery ($10,000 adjusted basis, $150,000 fair market value) to its sole shareholder, Kathleen.The property is subject to a $50,000 mortgage, which Kathleen assumed.How much dividend income does Kathleen recognize as a result of the distribution and what is her basis in the machinery?

A corporation borrows money to purchase State of Texas bonds.The interest on the loan has no impact on either taxable income or current E & P.

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

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

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

Matching 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. -Premiums paid on key employee life insurance policy (assume no increase in cash surrender value of policy) in 2017.

Matching 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. -Loss on sale between related parties in 2017.

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:

Albatross Corporation acquired land for investment purposes in 2003 at a cost of $100,000.Albatross sold the land to Monty on December 30, 2017, and did not elect out of the installment method of accounting.The selling price of the property was $400,000.Monty made a cash down payment of $50,000 on the date of sale and executed a $350,000 note, payable in seven annual installments of $50,000 each plus interest at the rate of 6% per annum.The first installment of $50,000 was due in 2018 which Monty paid, plus interest of $21,000.Discuss the effect of this sale on Albatross's taxable income and its E & P account in 2017 and 2018.

Constructive dividends do not need to satisfy the legal requirements for a dividend as set forth by applicable state law.

Renee, the sole shareholder of Indigo Corporation, sold her stock to Chad on July 1 for $180,000.Renee's stock basis at the beginning of the year was $120,000.Indigo made a $60,000 cash distribution to Renee immediately before the sale, while Chad received a $120,000 cash distribution from Indigo on November 1.As of the beginning of the current year, Indigo had $26,000 in accumulated E & P, while current E & P (before distributions) was $90,000.Which of the following statements is correct?

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?

Matching 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. -Cash dividends distributed to shareholders in 2017.

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.