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Exam 13: Corporations: Earnings and Profits and Distributions

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Proceeds of life insurance received upon the death of a key employee policy had no cash surrender value).

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a

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Penalties paid to state government for failure to comply with state law.

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State income tax paid in the current year.

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

The tax treatment of corporate distributions at the shareholder level does not depend on:

When computing current E & P, taxable income must be adjusted for the deferred gain in a § 1031 like-kind exchange.

Daisy Corporation is the sole shareholder of Ostrich Corporation, which it hopes to sell within the next three years.The Ostrich stock basis of $25 million) is currently worth $30 million, but Daisy believes that it would be easier to find a buyer if it was worth less.To lower the value of its stock, Ostrich distributes $4 million cash to Daisy sufficient E & P exists to cover the distribution).At a later date, Daisy sells Ostrich for $26 million. a.Because Daisy is the sole shareholder of Ostrich, it has a 100% dividends received deduction on the $4 million cash distribution.Thus, Daisy Corporation is not taxed on the $4 million distribution, and it has a gain on the sale of its stock in a.What are the tax consequences to Daisy on the sale? b.What would be the tax consequences if Ostrich had not first distributed the $4 million in cash and Daisy sold the Ostrich stock for $30 million?

A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.

If a stock dividend is taxable, the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.

On January 1, Tulip Corporation a calendar year taxpayer) has accumulated E & P of $300,000.Its current E & P for the year is $90,000 before considering dividend distributions).During the year, Tulip distributes $600,000 $300,000 each) to its equal shareholders, Anne and Tom.Anne has a basis in her stock of $65,000, while Tom's basis is $120,000.What is the effect of the distribution by Tulip Corporation on Anne and Tom?

Navy Corporation has E & P of $240,000.It distributes land with a fair market value of $70,000 adjusted basis of $25,000) to its sole shareholder, Troy.The land is subject to a liability of $55,000 that Troy assumes.Troy has:

Brown Corporation, an accrual basis corporation, has taxable income of $150,000 in the current year.Included in its determination of taxable income are the following transactions. ∙ Brown incurred a $65,000 capital loss from the sale of stock.Because Brown had no capital gains this year, none of the loss is deductible. ∙ The corporation's Federal income tax liability is $41,750. ∙ Brown incurred $18,000 in nondeductible meal expenses. ∙ Brown uses the LIFO method when accounting for inventory.This year, the company's LIFO recapture amount increased by $3,000. ∙ Brown claimed a dividends received deduction of $1,500.What is Brown's current E & P for the year?

Briefly discuss the rules related to distributions of non-cash property.

Finch Corporation distributes property basis of $225,000, fair market value of $300,000) to a shareholder in a distribution that is a qualifying stock redemption.The property is subject to a liability of $160,000, which the shareholder assumes.The basis of the property to the shareholder is:

Excess capital loss in year incurred.

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, Ava basis in stock of $8,000).Determine the effect of the distribution on Ava's taxable income and stock basis.

Under certain circumstances, a distribution can generate or add to) a deficit in E & P.

Use of MACRS cost recovery when computing taxable income does not require an E & P adjustment.

Lena is the sole shareholder and president of Gold Corporation.She feels that she can justify at least a $50,000 bonus this year because of her performance for the company.However, rather than a bonus in the form of a salary, she considers having Gold pay her a $50,000 dividend.She believes this would be preferable because it will be taxed at only 15% instead of her marginal rate of 35%.Her CPA has advised her to pay a $75,000 bonus in lieu of the $50,000 dividend.Assuming that Gold Corporation is in a 34% tax bracket, should Lena take the $50,000 dividend or the $75,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Gold and to Lena.

Gain realized, but not recognized, in a like-kind exchange transaction in 2018.