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Exam 18: Corporate Taxation: Nonliquidating Distributions

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Question 51

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Paladin 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,Maria Mendez.The land's fair market value was $200,000 and its tax and E&P basis to Paladin was $250,000.Maria assumed a liability of $25,000 attached to the land.The tax consequences of the distribution to Paladin in 20X3 would be:

A) No loss recognized and a reduction in E&P of $200,000.
B) $50,000 loss recognized and a reduction in E&P of $200,000.
C) $50,000 loss recognized and a reduction in E&P of $225,000.
D) No loss recognized and a reduction in E&P of $225,000.

E) All of the above
F) B) and C)

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Question 52

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Biggain Corporation distributes land with a fair market value of $220,000 to its sole shareholder.Biggain's tax basis in the land is $115,000.Biggain will not be taxed on a gain on the distribution if it has a deficit of ($250,000)in E&P.

A) True
B) False

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Question 53

Multiple Choice

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Greenwich Corporation reported a net operating loss of $800,000 in 20X3,which the corporation elected to carry forward to 20X4.The computation of the loss did not include a disallowed fine of $50,000,life insurance proceeds of $500,000,and a current-year charitable contribution of $10,000 that will be carried forward to 20X4.The corporation's current E&P for 20X3 would be:

Sweetwater Corporation declared a stock distribution to all common stock shareholders of record on December 31,20X3.Shareholders will receive one share of Sweetwater common stock for each five shares of common stock they already own.Pierre Dorgan owns 500 shares of Sweetwater common stock,with a tax basis of $150 per share.The fair market value of the Sweetwater common stock was $90 per share on December 31.What is Pierre's income tax basis per share in his new and existing common stock in Sweetwater,assuming the distribution is nontaxable?

A stock redemption is always treated as a sale or exchange for tax purposes.

Crescent Corporation is owned equally by George and his daughter Olympia,each of whom own 100 shares in the company.George wants to retire from the company,and it was decided that the company will redeem all 100 of his shares for $10,000 per share on December 31,20X3.George's income tax basis in each share is $2,000.Crescent has current E&P of $1,000,000 and accumulated E&P of $5,000,000.What must George do to ensure that the redemption will be treated as an exchange?

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?

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.

Which of the following statements is true?

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.Evergreen will report a gain of $150,000 on the distribution regardless of whether its E&P is positive or negative.

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

A calendar-year corporation has deficit in 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?

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:

El Toro Corporation declared a common stock distribution to all shareholders of record on June 30,20X3.Shareholders will receive one share of El Toro stock for each two 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 distribution to Raoul?

A distribution from a corporation to a shareholder will always be treated as a dividend for tax purposes.

This year Truckit reported taxable income of $160,000 and received $20,000 of municipal interest.Truckit paid $55,000 in entertainment expenses and $15,000 in fines and penalties.Truckit had $50,000 of accumulated E&P at the beginning of the year.What is Truckit's current E&P?

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.

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

Wildcat Corporation reports a deficit in current E&P of ($200,000) in 20X3 and accumulated E&P at the beginning of the year of $100,000.Wildcat distributed $300,000 to its sole shareholder on December 31,20X3.How much of the distribution is treated as a dividend in 20X3?

Wonder Corporation declared a common stock distribution 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 distribution to Diana?