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Exam 5: Corporations Earnings Profits and Dividend Distributions

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Question 71

Multiple Choice

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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 2016. -A decrease in the LIFO recapture amount during the year.

A) Increase
B) Decrease
C) No effect

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

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Question 72

True/False

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No E & P adjustment is required for regular tax gains under the installment method.

A) True
B) False

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Question 73

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

An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

When current E & P has a deficit and accumulated E & P is positive, the two accounts are netted at the date of the distribution. If a positive balance results, the distribution is a dividend to the extent of the balance.

On January 1, Eagle Corporation (a calendar year taxpayer) has accumulated E & P of $300,000. During the year, Eagle incurs a net loss of $420,000 from operations that accrues ratably. On June 30, Eagle distributes $180,000 to Libby, its sole shareholder, who has a basis in her stock of $112,500. How much of the $180,000 is a dividend to Libby?

To determine current E & P, taxable income must be increased for any domestic production activities deduction.

As of January 1, Cassowary Corporation has a deficit in accumulated E & P of $100,000. For the tax year, current E & P (accrued ratably) is $240,000 (prior to any distributions) . On July 1, Cassowary Corporation distributes $275,000 to its sole shareholder. The amount of the distribution that is a dividend is: