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Exam 18: Corporate Taxation: Nonliquidating Distributions

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Question 21

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El Toro Corporation declared a common stock dividend to all shareholders of record on June 30, 20X3. Shareholders will receive 1 share of El Toro stock for each 2 shares of stock they already own. Raoul owns 300 shares of El Toro stock with a tax basis of $60 per share. The fair market value of the El Toro stock was $100 per share on June 30, 20X3. What are the tax consequences of the stock dividend to Raoul?

A) $0 dividend income and a tax basis in the new stock of $100 per share
B) $0 dividend income and a tax basis in the new stock of $60 per share
C) $0 dividend income and a tax basis in the new stock of $40 per share
D) $15,000 dividend and a tax basis in the new stock of $100 per share

E) A) and B)
F) B) and D)

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Question 22

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Yellowstone Corporation made a distribution of $300,000 to Cheney, Inc. in partial liquidation of the company on December 31, 20X3. Cheney, Inc. owns 50 percent of Yellowstone Corporation (1,000 shares). The other 50 percent is owned by an unrelated corporation. The distribution was in exchange for 50% of Cheney's stock in the company (500 shares). At the time of the distribution, the shares had a fair market value of $800 per share. Cheney's income tax basis in the shares was $500 per share. Yellowstone had total E&P of $5,000,000 at the time of the distribution. What is the amount and character (capital gain or dividend) of any income or gain recognized by Cheney as a result of the partial liquidation?

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Question 23

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Buckeye Company is owned equally by James and his brother Terrelle, each of whom own 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 term "earnings and profits" is well defined in the Internal Revenue Code.

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?

Cavalier Corporation had current and accumulated E&P of $500,000 at December 31 20X3. On December 31, the company made a distribution of land to its sole shareholder, Tom Jefferson. The land's fair market value was $200,000 and its tax and E&P basis to Cavalier was $50,000. The tax consequences of the distribution to Cavalier in 20X3 would be:

Aztec Company reports current E&P of $200,000 in 20X3 and accumulated E&P at the beginning of the year of negative $100,000. Aztec distributed $300,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

General Inertia Corporation made a distribution of $50,000 to Henry Tiara in partial liquidation of the company on December 31, 20X3. Henry owns 500 shares (50%) of General Inertia. The distribution was in exchange for 250 shares of Henry's stock in the company. After the partial liquidation, Henry continued to own 50% of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Henry'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 are the tax consequences to Henry because of the transaction?

Erie Corporation reported taxable income of $2,200,000 in 20X3 before any deduction for any payment to its sole shareholder and employee, LaBron Cleveland. Erie paid a bonus of $200,000 to LaBron at year-end. Erie Corporation is subject to a flat-rate tax of 34%. The bonus meets the requirements to be "reasonable" and is therefore deductible by Erie. LaBron is subject to a marginal tax rate of 35% on the bonus. What is the total federal income tax imposed on the corporate income earned by Erie and paid to LaBron as a bonus?

Oakland Corporation reported a net operating loss of $500,000 in 20X3 and elected to carry the loss forward to 20X4. Not included in the computation was a disallowed meals and entertainment expense of $20,000, tax-exempt income of $10,000, and deferred gain on an installment sale of $250,000. The corporation's current earnings and profits for 20X3 would be:

A distribution from a corporation to a shareholder will only be treated as a dividend for tax purposes if the distribution is paid out of current or accumulated earnings and profits.

Stock dividends are always tax-free to the recipient.

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 DeWitt Corporation deemed to own?

Husker Corporation reports current E&P of negative $200,000 in 20X3 and accumulated E&P at the beginning of the year of $300,000. Husker distributed $200,000 to its sole shareholder on December 31, 20X3. The shareholder's tax basis in her stock in Husker is $50,000. How is the distribution treated by the shareholder in 20X3?

Viking Corporation is owned equally by Sven and his wife Olga, each of whom hold 100 shares in the company. Viking redeemed 75 shares of Sven's stock for $2,000 per share on December 31, 20X3. Viking has total E&P of $500,000. What are the tax consequences to Viking because of the stock redemption?

Tiger Corporation, a privately-held company, has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows: $\begin{array} { l r } \text { Mark Bird } & 300 \\\text { Connie Bird (Mark's wife) } & 250 \\\text { Bonnie Bird (Mark's daughter) } & 200 \\\text { Billy Bird (Mark's brother) } & \underline{250} \\\text { Total } & 1,000\end{array}$ How many shares of stock is Mark deemed to own under the family attribution rules in a stock redemption?

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?

The "double taxation" of corporate income refers to the taxation of corporate income at both the entity-level and the shareholder-level.

Longhorn Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of negative $200,000. 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?

Evergreen Corporation distributes land with a fair market value of $200,000 to its sole shareholder. Evergreen's tax basis in the land is $50,000. Assuming sufficient earnings and profits, the amount of dividend reported by the shareholder is $200,000.