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Exam 5: Corporations: Earnings and Profits and Dividend Distributions

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Question 31

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Puffin 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,Bonnie.The land is subject to a liability of $55,000 that Bonnie assumes.Bonnie has:

A) A taxable dividend of $15,000.
B) A taxable dividend of $25,000.
C) A taxable dividend of $45,000.
D) A taxable dividend of $70,000.
E) A basis in the machinery of $55,000.

F) All of the above
G) B) and D)

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Question 32

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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 2008. a.Increase b.Decrease c.No effect -Interest on municipal bonds received in 2008.

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Question 33

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Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to determine current E & P for 2008. a.Increase b.Decrease c.No effect -Federal income tax paid.

Dividends taxed at a 15% rate are not considered investment income for purposes of the investment interest expense limitation.

A realized gain from a like-kind exchange under § 1031 that is not recognized for income tax purposes has no effect on E & P.

Differences between MACRS and ADS cost recovery require an E & P adjustment.

Green Corporation has accumulated E & P of $50,000 on January 1,2008.In 2008,Green has current E & P of $65,000 (before any distribution) .On December 31,2008,the corporation distributes $125,000 to its sole shareholder,Maxwell (an individual) .Green Corporation's E & P as of January 1,2009 is:

Regardless of any deficit in accumulated E & P,distributions during the year are treated as dividends to the extent of current E & P.

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 2008. a.Increase b.Decrease c.No effect -Meal and entertainment expenses not deducted in 2008 because of the 50% limitation.

Ten years ago,Connie purchased 4,000 shares in Platinum Corporation for $40,000.In the current year,Connie receives a nontaxable stock dividend of 40 shares of Platinum preferred.Values at the time of the dividend are: $8,000 for the preferred stock and $72,000 for the common.Based on this information,Connie's basis is:

A constructive dividend must satisfy the legal requirements of a dividend as set forth by applicable state law.

Rust Corporation has accumulated E & P of $30,000 on January 1,2008.In 2008,Rust Corporation had an operating loss of $40,000.It distributed cash of $20,000 to Andre,its sole shareholder,on December 31,2008.Rust Corporation's balance in its E & P account as of January 1,2009,is:

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to determine current E & P for 2008. a.Increase b.Decrease c.No effect -Section 179 expenses in year of election.

Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to determine current E & P for 2008. a.Increase b.Decrease c.No effect -Penalties paid to state government for failure to comply with state law.

Blue Corporation distributes property to its sole shareholder,Zeke.The property has a fair market value of $450,000,an adjusted basis of $305,000,and is subject to a liability of $250,000.Current E & P is $550,000.With respect to the distribution,Blue has a gain of:

In the current year,Verdigris Corporation (with E & P of $250,000) made the following property distributions to its shareholders (all corporations) : Verdigris Corporation is not a member of a controlled group.As a result of the distribution:

When computing E & P,no adjustment to taxable income is necessary for the domestic production activities deduction.

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 2008. a.Increase b.Decrease c.No effect -Cash dividends distributed to shareholders in 2008.

Sophie is the sole shareholder and president of Green Corporation. She feels that she can justify at least a $200,000 bonus this year because of her performance. However,rather than a bonus in the form of a salary,she plans to have Green pay her a $200,000 dividend. She believes this is preferable because it will be taxed at only 15% (her marginal rate is 39.6%). Her CPA suggests a $300,000 bonus in lieu of the $200,000 (Green Corporation is in a 34% tax bracket).Should Sophie take the $200,000 dividend or the $300,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Green and to Sophie.

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