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Exam 14: Corporate Nonliquidating and Liquidating Distributions

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Question 21

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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.Assuming sufficient earnings and profits, the amount of dividend reported by the shareholder is $200,000.

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B) False

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Question 22

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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.

A) True
B) False

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Question 23

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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?

Comet Corporation is owned equally by Patrick 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 $160,000 on December 31, year 1.What are the tax consequences to Comet as a result of the stock redemption?

Catamount Company had current and accumulated E&P of $500,000 at December 31, year 1.On December 31, the company made a distribution of land to its sole shareholder, Caroline West.The land's fair market value was $200,000 and its tax and E&P basis to Catamount was $250,000.The tax consequences of the distribution to Catamount in year 1 would be:

The term "earnings and profits" is well-defined in the Internal Revenue Code.

Superior Corporation reported taxable income of $1,000,000 in year 1.Superior paid a dividend of $100,000 to its sole shareholder, Mary Yooper.The dividend meets the requirements to be a "qualified dividend" and Mary is subject to a tax rate of 15 percent on the dividend.What is the total federal income tax imposed on the corporate income earned by Superior and distributed to Mary as a dividend?

A distribution in partial liquidation of a corporation is always treated as an exchange by an individual shareholder.

General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Inc., in partial liquidation of the company on December 31, year 1.Tiara, Inc., owns 500 shares (50 percent) 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 percent 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 as a result of the transaction?

Austin Corporation reports positive current E&P of $200,000 and negative accumulated E&P of $300,000.Austin distributed $250,000 to its sole shareholder, Betsy Bevo, on December 31, year 1.Betsy's tax basis in her stock is $125,000.How much of the $250,000 distribution is treated as a dividend to Betsy and what is her tax basis in Austin stock after the distribution?

A liquidating corporation always recognizes gain realized in a complete liquidation.

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

Oriole Inc.decided to liquidate its wholly owned subsidiary, Tiger Corporation.Tiger had the following tax accounting balance sheet. $\begin{array} { l r r r r } &&& \\& \text { Tax Basis } & \text { FMV } & \text { Appreciation } \\\text { Cash } & \$ 400,000 & \$400,000 & \\\text { Building } & 100,000 & 20,000& 80,000 \\\text { Land } & \underline{300,000 }&\underline{ 180,000 }& \underline{120,000} \\\text { Total}&\underline{ \$ 800,000} &\underline{ \$ 600,000} & \underline{\$ 200,000}\\\end{array}$ a.What amount of gain or loss does Tiger recognize in the complete liquidation? b.What amount of gain or loss does Oriole recognize in the complete liquidation? c.What is Oriole's tax basis in the building and land after the complete liquidation?

Grand River Corporation reported taxable income of $500,000 in year 1 and paid federal income taxes of $105,000.Not included in the computation was a disallowed meals expense of $2,000, tax-exempt income of $1,000, and deferred gain on an installment sale of $25,000.The corporation's current earnings and profits for year 1 would be:

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?

Green Corporation has current earnings and profits of $100,000 and negative accumulated earnings and profits of $(200,000).A $50,000 distribution from Green to its sole shareholder will not be treated as a dividend because total earnings and profits is a negative $100,000.

Red Blossom Corporation transferred its 40 percent interest to Tea Company as part of a complete liquidation of the company.In the exchange Red Blossom received land with a fair market value of $500,000.The corporation's basis in the Tea Company stock was $300,000.The land had a basis to Tea Company of $600,000.What amount of gain does Red Blossom recognize in the exchange and what is its basis in the land it receives?

Buckeye Company is owned equally by James and his brother Terrelle, each of whom own 500 shares in the company.Terrelle wants to reduce his ownership in the company, and it was decided that the company will redeem 200 of his shares for $5,000 per share on December 31, year 1.Terrelle's income tax basis in each share is $1,000.Buckeye has current E&P of $10,000,000 and accumulated E&P of $20,000,000.What is the amount and character (capital gain or dividend)recognized by Terrelle as a result of the stock redemption?

The "double taxation" of corporate income refers to the fact that corporate income is taxed at both the entity level and the shareholder level.

Wonder Corporation declared a common stock distribution to all shareholders of record on September 30, year 1.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, year 1.What are the tax consequences of the stock distribution to Diana?