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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 31

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Lupe and Rodrigo,father and son,each own 50% of the stock outstanding of Heron Corporation (E & P of $400,000) .During the current year,Heron redeems all of Lupe's shares for $250,000.The transaction cannot qualify as a complete termination redemption if:

A) Lupe received a $250,000 note receivable from Heron in the stock redemption.
B) Lupe loaned Heron Corporation $50,000 two years following the redemption.
C) Rodrigo continued to serve on Heron Corporation's board of directors for two years following the redemption.
D) Three years after the redemption,Lupe inherited Rodrigo's shares in Heron as a result of his son's death.
E) None of the above.

F) A) and E)
G) A) and B)

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Question 32

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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.

A) True
B) False

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Question 33

Multiple Choice

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Which of the following is a correct statement regarding a redemption to pay death taxes under § 303?

Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.

Tanya is in the 33% tax bracket.She acquired 1,000 shares of stock in Swan Corporation seven years ago for $100 a share.In the current year,Swan Corporation (E & P of $1.2 million) redeems all of her shares for $160,000.What are the income tax consequences to Tanya if: a.The redemption qualifies for sale or exchange treatment,and Tanya has no other transactions in the current year involving capital assets? b.The redemption does not qualify for sale or exchange treatment?

A redemption will qualify as a not essentially equivalent redemption only if the shareholder's interest in the redeeming corporation has been meaningfully reduced.

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.

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

If stock rights are taxable,the recipient has income to the extent of the fair market value of the rights.

The terms "earnings and profits" and "retained earnings" are identical in meaning.

Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.

adjusted to arrive at current E & P for 2015. a.Increase b.Decrease c.No effect -State income tax paid in the current year.

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 2015. a.Increase b.Decrease c.No effect -Gain realized,but not recognized,in a like-kind exchange transaction in 2015.

Briefly define the term "earnings and profits."

Hazel,Emily,and Frank,unrelated individuals,own all of the stock in Wren Corporation (E & P of $1.2 million) as follows: Hazel,1,500 shares;Emily,300 shares;and Frank,200 shares.Wren redeems 900 of Hazel's shares (basis of $210,000) for $625,000.With respect to the distribution in redemption of the stock:

Aaron and Michele,equal shareholders in Cavalier Corporation,receive $25,000 each in distributions on December 31 of the current year.During the current year,Cavalier sold an appreciated asset for $60,000 (basis of $15,000) .Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year,with interest payable at a rate of 6 percent.Before considering the effect of the asset sale,Cavalier's current year E & P is $40,000 and it has no accumulated E & P.How much of Aaron's distribution will be taxed as a dividend?

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 2015. a.Increase b.Decrease c.No effect -Loss on sale between related parties in 2015.

Goldfinch Corporation distributes stock rights to its shareholders.How is the basis of the stock rights received by Goldfinch's shareholders determined?

Silver Corporation,a calendar year taxpayer,has taxable income of $550,000.Among its transactions for the year are the following: Collection of proceeds from insurance policy on life of corporate officer (in excess of cash surrender value) $82,500 Realized gain (not recognized) on an involuntary conversion 11,000 Nondeductible fines and penalties 44,000 ​ Disregarding any provision for Federal income taxes,Silver Corporation's current E & P is:

Christian,the president and sole shareholder of Venture Corporation,is paid an annual salary of $150,000.Christian would like to draw additional funds from the corporation but is concerned that increased salary might cause the IRS to contend his salary is unreasonable.Further,Christian does not want the corporation to pay any dividends.He would like to contribute $40,000 to his alma mater to establish scholarships for needy students.If Christian makes a pledge to the university to provide $40,000 for scholarships,would there be a problem if Venture Corporation paid the pledge on his behalf? Explain.