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Exam 13: Earnings Profits and Distributions

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Question 61

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Maria and Christopher each own 50% of Cockatoo Corporation, a calendar year taxpayer.Distributions from Cockatoo are: $750,000 to Maria on April 1 and $250,000 to Christopher on May 1.Cockatoo's current E & P is $300,000 and its accumulated E & P is $600,000.How much of the accumulated E & P is allocated to Christopher's distribution?

A) $0
B) $75,000
C) $150,000
D) $300,000
E) None of the above

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

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Question 62

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Thrush, Inc., is a calendar year, accrual basis corporation with Henry as its sole shareholder (basis in his stock is $90,000).On January 1 of the current year, Thrush Corporation has accumulated E & P of $200,000.Before considering the effect of the distribution described below, the corporation's current E & P is $50,000.On November 1, Thrush distributes an office building to Henry.The office building has an adjusted basis of $80,000 (fair market value of $100,000) and is subject to a mortgage of $110,000.Assume that the building has been depreciated using the ADS method for both income tax and E & P purposes.What are the tax consequences of the distribution to Thrush and to Henry? (In your answer, be sure to describe the effects on taxable income for both Thrush and Henry, the impact of the distribution on Thrush's E & P, and Henry's basis in the building.)

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The corporation recognizes gain of $30,0...

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Question 63

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Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.

Cedar Corporation is a calendar year taxpayer formed in 2013.Cedar's E & P before distributions for each of the past 5 years is listed below. $\begin{array} { l l } 2017 & \$ 28,000 \\2016 & \$ 40,000 \\2015 & \$ 39,000 \\2014 & \$ 68,000 \\2013 & \$ 16,000\end{array}$ ? Cedar Corporation made the following distributions in the previous 5 years. 2016 Land (basis of $\$ 70,000$ , fair market value of $\$ 80,000$ ) $2013 \quad \$ 20,000$ cash ? Cedar's accumulated E & P as of January 1, 2018 is:

Federal income tax paid in the current year must be subtracted from taxable income to determine E & P.

When computing E & P, taxable income is not adjusted for § 179 expense.

As a result of a redemption, a shareholder's interest (direct and indirect) in the corporation decreased from 80% to 55%.The redemption qualifies for sale or exchange treatment as a disproportionate redemption.

Matching 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. -Domestic production activities deduction claimed in 2017.

In a property distribution, the amount of dividend income recognized by a shareholder is always reduced by the amount of liability assumed by a shareholder.

Matching 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. -Federal income tax refunds from tax paid in prior years.

To determine E & P, some (but not all) previously excluded income items are added back to taxable income.

A realized gain from an involuntary conversion under § 1033 that is not recognized for income tax purposes has no effect on E & P.

Briefly discuss the rules related to distributions of non-cash property.

What is a constructive dividend? Provide several examples of the term.

Provide a brief outline on computing current E & P.

On January 1, Tulip Corporation (a calendar year taxpayer) has accumulated E & P of $300,000.Its current E & P for the year is $90,000 (before considering dividend distributions).During the year, Tulip distributes $600,000 ($300,000 each) to its equal shareholders, Anne and Tom.Anne has a basis in her stock of $65,000, while Tom's basis is $120,000.What is the effect of the distribution by Tulip Corporation on Anne and Tom?

Purple Corporation makes a property distribution to its sole shareholder, Paul.The property distributed is a house (fair market value of $189,000; basis of $154,000) that is subject to a $245,000 mortgage that Paul assumes.Before considering the consequences of the distribution, Purple's current E & P is $35,000 and its accumulated E & P is $140,000.Purple makes no other distributions during the current year.What is Purple's taxable gain on the distribution of the house?

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. ​ -State income tax paid in the current year.

A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.

On January 1, Gold Corporation (a calendar year taxpayer) has E & P of $30,000 and generates no additional E & P during the year.On March 31, the corporation distributes $40,000 to its sole shareholder, Wyatt (basis in stock of $8,000).Determine the effect of the distribution on Wyatt's taxable income and stock basis.