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Sherburne Corporation reported current earnings and profits for 20X3 of $500,000. During the year, the company made a distribution of land to its sole shareholder, Ted Bozeman. The land's fair market value was $150,000 and its tax and E&P basis to Sherburne was $100,000. Ted assumed a mortgage attached to the land of $25,000. What amount of dividend income does Ted report because of the distribution and what is Ted's income tax basis in the land received from Sherburne?

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$125,000 dividend and a tax basis of $15...

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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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$300,000 dividend
Explanation: A corpora...

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A distribution in partial liquidation of a corporation is always treated as a sale or exchange by an individual shareholder.

A) True
B) False

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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?


A) $200,000 dividend
B) $100,000 dividend, $50,000 tax-free return of basis, and $50,000 capital gain
C) $100,000 dividend and $100,000 tax-free return of basis
D) $0 dividend, $50,000 tax-free return of basis, and $150,000 capital gain

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

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Only taxable income and deductible expenses are included in the computation of current earnings and profits. The computation also includes tax-exempt income and nondeductible expenses.

A) True
B) False

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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) All of the above

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A corporation's "earnings and profits" account is equal to the company's "retained earnings" account on its balance sheet.

A) True
B) False

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Goose Company is owned equally by Val and her sister Eugenia, each of whom own 500 shares in the company. Val wants to reduce her ownership in the company and have the transaction treated as an exchange for tax purposes. Determine the minimum amount of stock that Goose must redeem from Val for her to treat the redemption as being "substantially disproportionate with respect to the shareholder" and receive exchange treatment.

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167 shares
Explanation: Val must reduce ...

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Montclair 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, Molly Pitcher. The land's fair market value was $200,000 and its tax and E&P basis to Montclair was $50,000. Molly assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Montclair in 20X3 would be:


A) No gain recognized and a reduction in E&P of $200,000
B) $150,000 gain recognized and a reduction in E&P of $200,000
C) $150,000 gain recognized and a reduction in E&P of $175,000
D) No gain recognized and a reduction in E&P of $175,000

E) A) and D)
F) A) and C)

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Which of the following statements is true?


A) All stock redemptions are treated as exchanges for tax purposes.
B) A stock redemption not treated as an exchange will automatically be treated as a taxable dividend.
C) All stock redemptions are treated as dividends if received by an individual.
D) A stock redemption is treated as an exchange only if it meets one of three stock ownership tests described in the Internal Revenue Code.

E) A) and D)
F) C) and D)

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Panda Company is owned equally by Min, her husband Bin, her sister Xiao, and her grandson, Han, each of whom hold 100 shares in the company. Under the family attribution rules, how many shares of Panda stock is Min deemed to own?


A) 100
B) 200
C) 300
D) 400

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

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Which of the following payments could be treated as a constructive dividend by the IRS?


A) End-of-year bonus payment to a shareholder/employee
B) Rent paid to a shareholder/lessor
C) Interest paid to a shareholder/creditor
D) All of these payments could be treated as a constructive dividend by the IRS

E) A) and D)
F) A) and C)

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Which of the following statements best describes the priority of the tax treatment of a distribution from a corporation to a shareholder?


A) The distribution is a dividend to the extent of the corporation's earnings and profits, then a return of capital, and finally gain from sale of stock.
B) The distribution is a return of capital, then a dividend to the extent of the corporation's earnings and profits, and finally gain from sale of stock.
C) The distribution is a return of capital, then gain from sale of stock, and finally a dividend to the extent of the corporation's earnings and profits.
D) The shareholder can elect to treat the distribution as either a dividend to the extent of the corporation's earnings and profits or a return of capital, followed by gain from sale of stock.

E) A) and D)
F) A) and C)

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Comet Company is owned equally by Pat and his sister Pam, each of whom hold 100 shares in the company. Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 50 of her shares for $1,000 per share on December 31, 20X3. Pam's income tax basis in each share is $500. Comet has total E&P of $250,000. What are the tax consequences to Pam because of the stock redemption?


A) $25,000 capital gain and a tax basis in each of her remaining shares of $500.
B) $25,000 capital gain and a tax basis in each of her remaining shares of $100.
C) $50,000 dividend and a tax basis in each of her remaining shares of $100.
D) $50,000 dividend and a tax basis in each of her remaining shares of $50.

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

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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 in the company on December 31, 20X3. Viking paid Sven $2,000 per share. His income tax basis in each share is $1,000. Viking has total E&P of $500,000. What are the tax consequences to Sven because of the stock redemption?


A) $75,000 capital gain and a tax basis in each of his remaining shares of $1,000.
B) $75,000 capital gain and a tax basis in each of his remaining shares of $2,000.
C) $150,000 dividend and a tax basis in each of his remaining shares of $1,000.
D) $150,000 dividend and a tax basis in each of his remaining shares of $4,000.

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

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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?


A) 100
B) 200
C) 250
D) 300

E) A) and B)
F) A) and C)

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Elk Company reports negative current E&P of $200,000 and positive accumulated E&P of $300,000. Elk distributed $200,000 to its sole shareholder, Barney Rubble, on December 31, 20X3. Barney's tax basis in his Elk stock is $75,000. What is the tax treatment of the distribution to Barney and what is his tax basis in Elk stock after the distribution?

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$100,000 dividend income, $75,000 tax-fr...

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Which of the following stock dividends would be tax-free to the shareholder?


A) A 2-for-1 stock split to all holders of common stock
B) A stock dividend where the shareholder could choose between cash and stock
C) A stock dividend to all holders of preferred stock
D) A 2-for-1 stock split to all holders of common stock and a stock dividend to all holders of preferred stock are tax-free to the shareholder

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

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Which statement best describes the concept of the "double taxation" of corporation income?


A) Corporate income is subject to two levels of taxation: the regular tax and the alternative minimum tax.
B) Corporate income is taxed twice at the corporate level: first when earned and then a second time if appreciated property is distributed to a shareholder.
C) Corporate income is taxed when earned by a C corporation and then a second time at the shareholder level when distributed as a dividend.
D) Corporate income is subject to two levels of taxation: at the federal level and a second time at the state level.

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

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Wonder Corporation declared a common stock dividend to all shareholders of record on September 30, 20X3. Shareholders will receive three shares of Wonder stock for each five shares of stock they already own. Diana owns 300 shares of Wonder stock with a tax basis of $90 per share (a total basis of $27,000) . The fair market value of the Wonder stock was $180 per share on September 30, 20X3. What are the tax consequences of the stock dividend to Diana?


A) $0 dividend income and a tax basis in the new stock of $180 per share
B) $0 dividend income and a tax basis in the new stock of $67.50 per share
C) $0 dividend income and a tax basis in the new stock of $56.25 per share
D) $10,800 dividend and a tax basis in the new stock of $180 per share

E) All of the above
F) None of the above

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