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Exam 18: Corporate Taxation: Nonliquidating Distributions

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Question 41

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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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Question 42

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Cavalier Corporation had current and accumulated E&P of $500,000 at December 3120X3. 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:

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 $50,000.
C) No gain recognized and a reduction in E&P of $50,000.
D) $150,000 gain recognized and a reduction in E&P of $200,000.

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

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Question 43

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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.

Stock dividends are always tax-free to the recipient shareholder.

Which of the following statements is not considered a potential answer to the question of why corporations pay dividends?

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:

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 remainingstock 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. GeneralInertia had total E&P of $800,000 at the time of the distribution. What are the taxconsequences to Henry because of the transaction?

Townsend Corporation declared a 1-for-1 stock split to all common stock shareholders of record onDecember 31, 20X3. Townsend reported current E&P of $400,000 and accumulated E&P of$1,000,000. The total fair market value of the stock distributed was $500,000. Regina Williams owned 1,000 shares of Townsend common stock with a tax basis of $200 per share ($2,000,000total). The fair market value of the common stock was $300 per share on December 31, 20X3. What is Regina's income tax basis per share in the new and existing common stock she owns inTownsend, assuming the distribution is tax-free?

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 taxconsequences to Viking because of the stock redemption?

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?

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: How many shares of stock is Mark deemed to own under the family attribution rules in a stock redemption?

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 a current year transaction treated as an installment sale of $250,000. The corporation's current earnings and profits for 20X3 would be:

A calendar-year corporation has negative current E&P of $500 and accumulated positive E&P of $1,000. The corporation makes a $600 distribution to its sole shareholder. Which of the following statements is true?

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?

Tar Heel Corporation had current and accumulated E&P of $500,000 at December 3120X3. On December 31, the company made a distribution of land to its sole shareholder, William Roy. The land's fair market value was $100,000 and its tax and E&P basis to Tar Heel was $25,000. William assumed a mortgage attached to the land of $10,000. The tax consequences of the distribution to William in 20X3 would be:

General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Inc. in partial liquidation of the company on December 31, 20X3. Tiara, Inc. owns 500 shares (50%) of General Inertia. The distribution was in exchange for 250 shares of Tiara's stock in the company. After the partial liquidation, Tiara 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. Tiara'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 amount of dividend or capital gain does Tiara recognize because of the transaction?

Siblings are considered "family" under the stock attribution rules that apply to stock redemptions.

Which of the following statements best describes current earnings and profits?

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

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.