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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 1

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On January 2,2017,Orange Corporation purchased equipment for $300,000 with an ADS recovery period of 10 years and a MACRS useful life of 7 years.Section 179 was not elected.MACRS depreciation properly claimed on the asset,including depreciation in the year of sale,totaled $79,605.The equipment was sold on July 1,2018,for $290,000.As a result of the sale,the adjustment to taxable income needed to arrive at current E & P is:

A) No adjustment is required.
B) Decrease $49,605.
C) Increase $49,605.
D) Decrease $79,605.
E) None of the above.

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

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Question 2

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Which of the following is a correct statement regarding a redemption to pay death taxes under § 303?

A) An estate recognizes gain on the redemption equal to the excess of the distribution proceeds over the decedent's basis in the stock.
B) The § 318 stock attribution rules do not apply to the redemption.
C) The value of the stock in the decedent's gross estate must exceed 40% of the value of the adjusted gross estate.
D) A corporation recognizes gains and losses on the distribution of property in the redemption.
E) None of the above.

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

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Question 3

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Leon owns 750 shares of the 2,000 outstanding shares of Crane Corporation (E & P of $900,000) .None of the other shareholders of Crane are related to Leon.Leon acquired his Crane shares ten years ago for $80,000.Crane has operated several trades or businesses for more than five years.In the current year,Crane sells the assets of one of those trades or businesses and distributes the proceeds from the asset sale to the shareholders in a pro rata stock redemption.In this transaction,Leon receives $250,000 in redemption of 300 shares of Crane.As a result of this transaction,Leon will recognize:

A deficit in current E & P is treated as occurring ratably during the year,unless the taxpayer can show otherwise.

Grackle Corporation (E & P of $600,000) distributes cash of $200,000 and land (fair market value of $400,000; basis of $250,000) to a shareholder in a qualifying stock redemption.The land distributed is subject to a mortgage of $460,000.Grackle will recognize a gain of $210,000 as a result of the distribution.

How does the payment of a property dividend affect E & P?

At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding,the corporation distributed $300,000 to redeem 400 shares of its stock.The transaction qualified as a disproportionate redemption for the shareholder.Blackbird's E & P is reduced by $300,000 as a result of the distribution.

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:

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?

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

Pheasant Corporation,a calendar year taxpayer,has $400,000 of current E & P and a deficit in accumulated E & P of $180,000.If Pheasant pays a $600,000 distribution to its shareholders on July 1,how much dividend income do the shareholders report?

A shareholder's basis in property acquired in a stock redemption is the property's fair market value as of the date of redemption.

​ 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 -A decrease in the LIFO recapture amount during the year.

Robin Corporation distributes furniture (basis of $40,000; fair market value of $50,000) as a property dividend to its shareholders.The furniture is subject to a liability of $55,000.Robin Corporation recognizes gain of:

Under what circumstances will preferred stock received in a nontaxable stock dividend not generate ordinary income,under § 306,upon its disposition?

​ 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 -Excess capital loss in year incurred.

Glenda is the sole shareholder of Condor Corporation.She sold her stock to Melissa on October 31 for $150,000.Glenda's basis in Condor stock was $50,000 at the start of the year.Condor distributed land to Glenda immediately before the sale.Condor's basis in the land was $20,000 (fair market value of $25,000) .On December 31,Melissa received a $75,000 cash distribution from Condor.During the year,Condor has $20,000 of current E & P and its accumulated E & P balance on January 1 is $10,000.Which of the following statements is true?

To determine current E & P,taxable income must be increased for any domestic production activities deduction.

Tern Corporation,a cash basis taxpayer,has taxable income of $500,000 for the current year.Tern elected $25,000 of § 179 expense.It also had a related party loss of $20,000 and a realized (not recognized) gain from an involuntary conversion of $75,000.It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000.Tern's current E & P is:

Timothy owns 100% of Forsythia Corporation's stock.Corporate employees and annual salaries include Timothy ($300,000); Richard,Timothy's son ($80,000); Rita,Timothy's daughter ($100,000); and Sandy ($120,000).The operation of Forsythia Corporation is shared about equally between Timothy and Sandy (an unrelated party).Richard and Rita are full-time college students at a university about 150 miles away.Forsythia Corporation has substantial E & P but has not distributed a dividend for the past five years.Discuss problems related to the salary arrangement for Forsythia Corporation.