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Exam 14: Corporate Nonliquidating and Liquidating Distributions

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Question 31

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Geneva Corporation, a privately-held company, has one class of voting common stock, of which 1,000 shares are issued and outstanding. Madison has a 20 percent interest in the partnership. The remaining 80 percent is owned by unrelated individuals. Madison owns 40% of Packer Corporation. The other 60 percent is owned by her father. The shares are owned as follows: $\begin{array} { | l | r | } \hline \text { Corporate tax: } \$ 1,000,000 \times & \$ 340,000 \\34 \% & \\\hline \text { Shareholder tax: } \$ 100,000 & 15,000 \\\times 15 \% &\\ \text { Total income tax } & \$ 355,000 \\\hline\end{array}$ How many shares of stock is Madison deemed to own under the family attribution rules in a stock redemption?

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800
Explanation: Madison is deemed to ow...

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Question 32

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Ozark Corporation reported taxable income of $500,000 from operations for year 1. During the year, the company made a distribution of land to its sole shareholder, Marcus Twain. The land's fair market value was $100,000 and its tax and E&P basis to Ozark was $125,000. Marcus assumed a mortgage attached to the land of $25,000. Ozark's tax rate is 34%. The company had accumulated E&P of $850,000 at the beginning of the year. Compute Ozark's total taxable income and federal income tax paid as a result of the distribution. Using your solution, compute Ozark's accumulated E&P at January 1, year 2.

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$500,000 taxable income, $170,...

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Question 33

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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, year 1. 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?

Cedar Corporation incurs a net capital loss of $20,000 in year 1 that cannot be deducted on its income tax return but must be carried forward to year 2. Cedar will deduct the net capital loss in the computation of current earnings and profits for year 1.

Half Moon Corporation made a distribution of $300,000 to Arnold Swartz in partial liquidation of the company on December 31, year 1. Arnold owns 100% of Half Moon Corporation (1,200 shares). The distribution was in exchange for 50% of Arnold's stock in the company (600 shares). At the time of the distribution, the shares had a fair market value of $500 per share. Arnold's income tax basis in the shares was $250 per share. Half Moon had total E&P of $2,000,000 at the time of the distribution. What is the amount and character (capital gain or dividend) of any income or gain recognized by Arnold as a result of the partial liquidation?

Which of the following statements is true?

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

A liquidation of a corporation always is a taxable event to the shareholders of the liquidating corporation.

Beltway Company is owned equally by George, his brother Thomas, and a partnership owned 50 percent by George and his father Abe. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Beltway stock is George deemed to own?

Corona Company is owned equally by Maria, her sister Carlita, her mother Gabriella, and her grandmother Olivia, each of whom hold 100 shares in the company. Under the family attribution rules, how many shares of Corona stock is Maria deemed to own?

Diego owns 30 percent of Azul Corporation. Azul Corporation owns 50 percent of Verde Corporation. Under the attribution rules applying to stock redemptions, Diego is treated as owning 15 percent of Verde Corporation.

Otter Corporation reported taxable income of $400,000 from operations for year 1. The company paid federal income taxes of $136,000 on this taxable income. During the year, the company made a distribution of land to its sole shareholder, Emmet Jugg. The land's fair market value was $50,000 and its tax and E&P basis to Otter was $30,000. Emmet assumed a mortgage attached to the land of $10,000. Any gain from the distribution will be taxed at 34%. The company had accumulated E&P of $900,000 at the beginning of the year. Compute Otter's total taxable income and federal income tax paid as a result of the distribution (assume a tax rate of 34%). Using your solution, compute Otter's current E&P for year 1.

Walloon, Inc. reported taxable income of $1,000,000 in year 2 and paid federal income taxes of $340,000. The company reported a capital gain from sale of investments of $150,000, which was partially offset by a $40,000 net capital loss carryover from year 1, resulting in a net capital gain of $110,000 included in taxable income. Compute the company's current E&P for year 2.

Comet Company is owned equally by Pat and his sister Pam, each of whom hold 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, year 1, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $250,000 on December 31, year 1. What are the tax consequences to Comet as a result of the stock redemption?

Which of the following forms of earnings distributions would not be subject to double taxation at the corporate and shareholder level?

The "family attribution" rules are automatically waived in a complete redemption of a shareholder's stock.

Sherburne Corporation reported current earnings and profits for year 1 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 as a result of the distribution and what is Ted's income tax basis in the land received from Sherburne?

Crystal, Inc. is owned equally by John and his wife Arlene, each of whom own 500 shares in the company. Arlene wants to reduce her ownership in the company, and it was decided that the company will redeem 200 of her shares for $5,000 per share on December 31, year 1. Arlene's income tax basis in each share is $1,000. Crystal has current E&P of $1,000,000 and accumulated E&P of $3,000,000. What is the amount and character (capital gain or dividend) recognized by Arlene as a result of the stock redemption, assuming only the "substantially disproportionate with respect to the shareholder" test is applied?

Katarina transferred her 10 percent interest to Spartan Company as part of a complete liquidation of the company. In the exchange she received land with a fair market value of $200,000. Katarina's basis in the Spartan stock was $100,000. The land had a basis to Spartan Company of $50,000. What amount of gain does Spartan recognize in the exchange and what is Katarina's basis in the land she receives?

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, year 1. 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 as a result of the stock redemption?