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Exam 18: Corporate Taxation: Nonliquidating Distributions

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Question 1

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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?

A) 100
B) 150
C) 200
D) 300

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

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Question 2

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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:

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

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

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B

Question 3

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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. The shares are owned as follows: $\begin{array} { l r } \text { Madison Cheeseman } & 350 \\\text { Brewer Partnership } & 250 \\\text { Brett Cheeseman (Madison's granddaughter) } & 100 \\\text { Packer Corporation } & \underline { 300 } \\\text { Total } & { 1,000 }\end{array}$ 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. How many shares of stock is Madison deemed to own under the family attribution rules in a stock redemption?

Walloon, Inc. reported taxable income of $1,000,000 in 20X3 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 20X2, resulting in a net capital gain of $110,000 included in taxable income. Compute the company's current E&P for 20X3.

Tappan Company pays its sole shareholder, Carlita Hill, a salary of $200,000. At the end of each year, the company pays Carlita a "bonus" equal to the difference between the corporation's taxable income for the year (before the bonus) and $75,000. For 20X3, Tappan reported pre-bonus taxable income of $800,000 and paid Carlita a bonus of $725,000. On audit, the IRS determined that individuals working in Carlita's position earned on average $300,000 per year. The company had no formal compensation policy and never paid a dividend. How much of Carlita's compensation (salary plus bonus) might the IRS recharacterize as a dividend? Assuming the IRS recharacterizes $500,000 of Carlita's bonus as a dividend, what additional income tax liability does Tappan Company face? (Ignore payroll taxes)

Which of these items is not an adjustment to taxable income or net loss to compute current E&P?

Battle Corporation redeems 20 percent of its stock for $100,000 in a stock redemption that is treated as an exchange by the shareholders. Battle's E&P at the date of the redemption is $200,000. Battle will reduce its earnings and profits by $100,000 because of the redemption.

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?

Ozark Corporation reported taxable income of $500,000 from operations for 20X3. 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 because of the distribution. Using your solution, compute Otter's accumulated E&P at January 1, 20X4.

Longhorn Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of negative $200,000. Longhorn distributed $300,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $100,000. How is the distribution treated by the shareholder in 20X3?

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?

Erie Corporation reported taxable income of $2,200,000 in 20X3 before any deduction for any payment to its sole shareholder and employee, LaBron Cleveland. Erie paid a bonus of $200,000 to LaBron at year-end. Erie Corporation is subject to a flat-rate tax of 34%. The bonus meets the requirements to be "reasonable" and is therefore deductible by Erie. LaBron is subject to a marginal tax rate of 35% on the bonus. What is the total federal income tax imposed on the corporate income earned by Erie and paid to LaBron as a bonus?

Sweetwater Corporation declared a stock dividend to all common stock shareholders of record on December 31, 20X3. Shareholders will receive 1 share of Sweetwater common stock for each 5 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 in his new and existing common stock in Sweetwater, assuming the distribution is non-taxable?

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.

Loon, Inc. reported taxable income of $600,000 in 20X3 and paid federal income taxes of $202,000. Not included in the company's computation of taxable income is tax-exempt interest of $30,000, disallowed meals and entertainment expenses of $15,000, and disallowed expenses related to the tax-exempt income of $4,000. Loon deducted depreciation of $200,000 on its tax return. Under the alternative (E&P) depreciation method, the deduction would have been $80,000. Compute the company's current E&P for 20X3.

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

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?

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, 20X3. 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?

Otter Corporation reported taxable income of $400,000 from operations for 20X3. 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 because of the distribution (assume a tax rate of 34%). Using your solution, compute Otter's current E&P for 20X3.

The recipient of a tax-free stock dividend will have a zero tax basis in the stock.