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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 71

True/False

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Cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will be taxed as dividend income.

A) True
B) False

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Question 72

Multiple Choice

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Five years ago,Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 1,000 shares of Blue Corporation in a transaction that qualified under § 351.The assets had a tax basis to her of $100,000 and a fair market value of $270,000 on the date of the transfer.In the current year,Blue Corporation (E & P of $800,000) redeems 250 shares from Eleanor for $220,000 in a transaction that does not qualify for sale or exchange treatment.With respect to the redemption,Eleanor will have a:

A) $195,000 capital gain.
B) $220,000 capital gain.
C) $195,000 dividend.
D) $220,000 dividend.
E) None of the above.

F) All of the above
G) A) and C)

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Question 73

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In applying the stock attribution rules to a stock redemption,stock owned by a shareholder who owns 65% of a corporation is deemed to be owned in full by the corporation.

Reginald and Roland (Reginald's son)each own 50% of the stock of Robin Corporation.Reginald's stock interest is entirely redeemed by Robin Corporation.Two years later,Reginald loans Robin Corporation $250,000.The loan to Robin Corporation constitutes a prohibited interest for purposes of the family attribution waiver.

Sam's gross estate includes stock in Tern Corporation and Wren Corporation,valued at $1.4 million and $980,000,respectively.At the time of Sam's death in 2011,the stock represented 22% of Tern's outstanding stock and 27% of Wren's outstanding stock.Sam's adjusted gross estate equals $6,500,000.Death taxes and funeral and administration expenses for Sam's estate total $980,000.Sam had a basis of $350,000 in the Tern stock and $190,000 in the Wren stock at the time of his death.None of the beneficiaries of Sam's estate own (directly or indirectly)any stock in Tern Corporation,but some of the beneficiaries own stock of Wren Corporation.Consider the following independent questions.

In 2008,Floyd carried out a successful complete termination redemption of his stock in Gray Corporation.Floyd was able to qualify the transaction as a complete termination redemption only by use of the family attribution waiver.In 2011,Floyd receives stock in Gray Corporation as a gift from his father.Floyd has acquired a prohibited interest within the 10-year postredemption period and,as a result,the 2008 redemption no longer qualifies as a complete termination redemption.

The adjusted gross estate of Debra,decedent,is $8 million.Debra's estate will incur death taxes and funeral and administration expenses of $1 million.Debra's gross estate includes stock in Silver Corporation that she had purchased twelve years ago for $600,000 (date of death fair market value of $3 million) .At the time of her death in 2011,Debra owned 80% of the stock in Silver Corporation.Silver Corporation (E & P of $4 million) redeems all of the estate's stock in the corporation for $3 million.Debra's will names her daughter,Dena,who owns the remaining 20% interest in Silver Corporation,as her sole heir.With respect to this redemption,Debra's estate has the following income:

Explain the stock attribution rules that apply in the case of stock redemptions.

Distributions by a corporation to its shareholders are presumed to be a return of capital unless the parties can prove otherwise.

Swan Corporation makes a property distribution to its sole shareholder,Matthew.The property distributed is a cottage (fair market value of $135,000; basis of $110,000) that is subject to a $175,000 mortgage that Matthew assumes.Before considering the consequences of the distribution,Swan's current E & P is $25,000 and its accumulated E & P is 100,000.Swan makes no other distributions during the current year.What is Swan's taxable gain on the distribution of the cottage?

Which of the following is an incorrect statement regarding the application of the § 318 stock attribution rules?

For a stock redemption to qualify for sale or exchange treatment under § 303 (redemption to pay death taxes),it need not satisfy any of the § 302 redemption provisions.

On January 1,Gull Corporation (a calendar year taxpayer) has accumulated E & P of $200,000.During the year,Gull incurs a net loss of $280,000 from operations that accrues ratably.On June 30,Gull distributes $120,000 to Sharon,its sole shareholder,who has a basis in her stock of $75,000.How much of the $120,000 is a dividend to Sharon?

A realized gain from an involuntary conversion under § 1033 that is not recognized for income tax purposes has no effect on E & P.

When computing current E & P,taxable income is not adjusted for the deferred gain in a § 1031 like-kind exchange.

Stephanie is the sole shareholder and president of Hawk Corporation.She feels that she can justify at least a $220,000 bonus this year because of her performance.However,rather than a bonus in the form of a salary,she plans to have Hawk pay her a $220,000 dividend.Because Stephanie's marginal tax rate is 35%,she prefers to receive a dividend taxed at 15%.Her accountant,however,suggests a $310,000 bonus in lieu of the $220,000 dividend since Hawk Corporation is in the 34% tax bracket.Should Stephanie take the $220,000 dividend or the $310,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Hawk and to Stephanie.

A distribution in excess of E & P is treated as capital gain by shareholders.