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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 61

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Pink Corporation declares a nontaxable dividend payable in rights to subscribe to common stock. Each right entitles the holder to purchase one share of stock for $25. One right is issued for every two shares of stock owned. Jocelyn owns 100 shares of stock in Pink, which she purchased three years ago for $3,000. At the time of the distribution, the value of the stock is $45 per share and the value of the rights is $2 per share. Jocelyn receives 50 rights. She exercises 25 rights and sells the remaining 25 rights three months later for $2.50 per right.

A) Jocelyn must allocate a part of the basis of her original stock in Pink to the rights.
B) If Jocelyn does not allocate a part of the basis of her original stock to the rights, her basis in the new stock is zero.
C) Sale of the rights produces ordinary income to Jocelyn of $62.50.
D) If Jocelyn does not allocate a part of the basis of her original stock to the rights, her basis in the new stock is $625.
E) None of these.

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

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Question 62

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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.

A) True
B) False

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Question 63

Multiple Choice

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Purple Corporation has accumulated E & P of $100,000 on January 1, 2019. In 2019, Purple has current E & P of $130,000 (before any distribution) . On December 31, 2019, the corporation distributes $250,000 to its sole shareholder, Cindy (an individual) . Purple Corporation's E & P as of January 1, 2020 is:

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 and 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 and current E & P (before distributions) was $90,000. Which of the following statements is correct?

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 2019. -Section 179 expense in second year following election.

Under certain circumstances, a distribution can generate (or add to) a deficit in E & P.

Hannah, Greta, and Winston own the stock in Redpoll Corporation (E & P of $900,000) as follows: Hannah, 600 shares; Greta, 400 shares; and Winston, 1,000 shares. Greta is Hannah's daughter, and Winston is Hannah's brother. Redpoll Corporation redeems 400 of Hannah's shares (basis of $55,000) for $240,000. Hannah purchased the stock three years ago as an investment. With respect to the stock redemption, Hannah has:

Ivory Corporation (E & P of $1 million) has 2,000 shares of common stock outstanding owned by unrelated parties as follows: Veronica, 1,000 shares, and Tommie, 1,000 shares. Both Veronica and Tommie paid $150 per share for the Ivory stock 12 years ago. In May of the current year, Ivory distributes land held as an investment (basis of $180,000, fair market value of $390,000) to Veronica in redemption of 350 of her shares. a. What are the tax results to Veronica on the redemption of her Ivory stock? b. What are the tax results to Ivory Corporation on the distribution of the land?

Goldfinch Corporation distributes stock rights to its shareholders. How is the basis of the stock rights received by Goldfinch's shareholders determined?

Cedar Corporation is a calendar year taxpayer formed in 2015. Cedar's E & P before distributions for each of the past 5 years is listed below. $\begin{array} { l l } 2019 & \$ 28,000 \\2018 & \$ 40,000 \\2017 & \$ 39,000 \\2016 & \$ 68,000 \\2015 & \$ 16,000\end{array}$ Cedar Corporation made the following distributions in the previous 5 years. 2018 Land (basis of $70,000, fair market value of $80,000) 2015 $20,000 cash Cedar's accumulated E & P as of January 1, 2020 is:

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?

The stock of Tan Corporation (E & P of $1.5 million) is owned as follows: 90% by Egret Corporation (basis of $900,000), and 10% by Zoe (basis of $70,000). Both shareholders acquired their shares in Tan more than six years ago. In the current year, Tan Corporation liquidates and distributes land (fair market value of $1.1 million, basis of $1.3 million) and equipment (fair market value of $700,000, basis of $410,000) to Egret Corporation, and securities (fair market value of $200,000, basis of $260,000) to Zoe. What are the tax consequences of these distributions to Egret, to Tan, and to Zoe?

Nondeductible meal expense must be subtracted from taxable income to determine current E & P.

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 2019. -Excess capital loss in year incurred.

Julian, Berta, and Maria own 400 shares, 400 shares, and 200 shares, respectively, in Caramel Corporation (E & P of $750,000) . Berta is Julian's sister, and Maria is Julian's aunt. Caramel Corporation redeems all of Julian's stock for $420,000. Julian paid $200 a share for the stock five years ago. Julian continued to serve on Caramel's board of directors after the redemption. With respect to the redemption:

Which of the following is not a consequence of the double tax on dividends?

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

Blue Corporation has a deficit in accumulated E & P of $300,000 and has current E & P of $225,000. On July 1, Blue distributes $250,000 to its sole shareholder, Sam, who has a basis in his stock of $52,500. As a result of the distribution, Sam has:

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

Thistle Corporation declares a nontaxable dividend payable in rights to subscribe to common stock. One right and