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Exam 5: Corporations: Earnings Profits and Dividend Distributions

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Question 21

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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.

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Lena should accept the $75,000 bonus ins...

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Question 22

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Falcon Corporation ended its first year of operations with taxable income of $250,000. At the time of Falcon's formation, it incurred $50,000 of organizational expenses. In calculating its taxable income for the year, Falcon claimed an $8,000 deduction for the organizational expenses. What is Falcon's current E & P?

A) $200,000
B) $208,000
C) $250,000
D) $258,000
E) None of the above

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

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Question 23

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

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 2014. a. Increase b. Decrease c. No effect -Gain realized, but not recognized, in a like-kind exchange transaction in 2014.

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?

Which one of the following statements is false?

Rust Corporation distributes property to its sole shareholder, Andre. The property has a fair market value of $350,000, an adjusted basis of $205,000, and is subject to a liability of $220,000. Current E & P is $500,000. With respect to the distribution, which of the following statements is correct?

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

Provide a brief outline on computing current E & P.

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.

Robin Corporation distributes furniture (basis of $40,000; fair market value of $50,000) as a property dividend to its shareholders. The furniture is subject to a liability of $55,000. Robin Corporation recognizes gain of:

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. 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?

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 2014. a. Increase b. Decrease c. No effect -Dividends received deduction.

Briefly describe the reason a corporation might distribute a property dividend to a shareholder in lieu of a cash distribution. Describe the tax effects of the property distribution on the shareholder and on the corporation.

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.

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 2014. a. Increase b. Decrease c. No effect -Premiums paid on key employee life insurance policy (assume no increase in cash surrender value of policy) in 2014.

Certain dividends from foreign corporations can be qualified dividends for purposes of the preferential rate available to individuals.

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

Robin Corporation, a calendar year taxpayer, has a deficit in current E & P of $200,000 and a $580,000 positive balance in accumulated E & P. If Robin determines that a $700,000 distribution to its shareholders is appropriate at some point during the year, what is the maximum amount of the distribution that could potentially be treated 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 2014. a. Increase b. Decrease c. No effect -Domestic production activities deduction claimed in 2014.