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Exam 18: Corporate Taxation: Nonliquidating Distributions

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Question 1

True/False

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The "double taxation" of corporate income refers to the taxation of corporate income atboth the entity-level and the shareholder-level.

A) True
B) False

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Question 2

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Which of the following forms of earnings distributions would not be subject to double taxation at the corporate and shareholder level?

A) Partial liquidation.
B) Dividend.
C) Stock redemption.
D) Compensation paid to a shareholder/employee of the corporation.

E) A) and B)
F) C) and D)

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Question 3

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Tappan Company pays its sole shareholder, Carlita Hill, a salary of $200,000. At the end of each year, the company pays Carlita a "bonus" equal to the difference between the corporation's taxable income for the year (before the bonus) and $75,000. For 20X3, Tappan reported pre-bonus taxable income of $800,000 and paid Carlita a bonus of $725,000. On audit, the IRS determined thatindividuals working in Carlita's position earned on average $300,000 per year. The company had no formal compensation policy and never paid a dividend. How much of Carlita's compensation (salary plus bonus) might the IRS recharacterize as a dividend? Assuming the IRS recharacterizes $500,000 of Carlita's bonus as a dividend, what additional income tax liability does Tappan Company face? (Ignore payroll taxes)

Pine Creek Company is owned equally by Bob and his sister Samantha, each of whom own 1,000 shares in the company. On December 31, 20X3, Pine Creek redeemed 200 of Samantha's shares for$5,000,000 in a transaction treated as an exchange by Samantha. Pine Creek has current E&P of$10,000,000 and accumulated E&P of $30,000,000 (computed without regard to the stockredemption). Assuming Pine Creek did not make any dividend distributions during 20X3, by what amount does the company reduce its E&P because of the redemption?

The "family attribution" rules are automatically waived in a complete redemption of a shareholder's stock.

Beltway Company is owned equally by George, his brother Thomas, and a partnership owned 50 percent by George and his father Abe. Each of the three shareholders holds100 shares in the company. Under the §318 stock attribution rules, how many shares ofBeltway stock is George deemed to own?

St. Clair Company reports positive current E&P of $500,000 in 20X3 and positive accumulated E&P at the beginning of the year of $400,000. St. Clair Company distributed $600,000 to its sole shareholder, Danielle Brush on December 31, 20X3. Danielle's tax basis in her St. Clair stock is$120,000. How much of the $600,000 distribution is treated as a dividend to Danielle and what is her basis in St. Clair stock after the distribution?

Wildcat Corporation reports current E&P of negative $200,000 in 20X3 and accumulated E&P at the beginning of the year of $100,000. Wildcat distributed $300,000 to its sole shareholder on December 31, 20X3. How much of the distribution is treated as adividend in 20X3?

Sherburne Corporation reported current earnings and profits for 20X3 of $500,000. During the year, the company made a distribution of land to its sole shareholder, Ted Bozeman. The land's fair market value was $150,000 and its tax and E&P basis to Sherburne was $100,000. Ted assumed a mortgage attached to the land of $25,000. What amount of dividend income does Ted reportbecause of the distribution and what is Ted's income tax basis in the land received from Sherburne?

Otter Corporation reported taxable income of $400,000 from operations for 20X3. The company paid federal income taxes of $136,000 on this taxable income. During the year, the company made a distribution of land to its sole shareholder, Emmet Jugg. The land's fair market value was $50,000 and its tax and E&P basis to Otter was $30,000. Emmet assumed a mortgage attached to the land of$10,000. Any gain from the distribution will be taxed at 34%. The company had accumulated E&P of $900,000 at the beginning of the year. Compute Otter's total taxable income and federal income tax paid because of the distribution (assume a tax rate of 34%). Using your solution, compute Otter's current E&P for 20X3.

Terrapin Corporation incurs federal income taxes of $250,000 in 20X3. Terrapin deducts the federal income taxes in computing its current earnings and profits for 20X3.

Walloon, Inc. reported taxable income of $1,000,000 in 20X3 and paid federal income taxes of$340,000. The company reported a capital gain from sale of investments of $150,000, which was partially offset by a $40,000 net capital loss carryover from 20X2, resulting in a net capital gain of$110,000 included in taxable income. Compute the company's current E&P for 20X3.

Superior Corporation reported taxable income of $1,000,000 in 20X3. Superior paid a dividend of$100,000 to its sole shareholder, Mary Yooper. Superior Corporation is subject to a flat rate tax of34%. The dividend meets the requirements to be a "qualified dividend" and Mary is subject to a tax rate of 15% on the dividend. What is the total federal income tax imposed on the corporate income earned by Superior including taxes on the amount distributed to Mary as a dividend?

The recipient of a taxable stock dividend will have a tax basis in the stock equal to the fair market value of the stock received.

Sweetwater Corporation declared a stock dividend to all common stock shareholders of record on December 31, 20X3. Shareholders will receive 1 share of Sweetwater common stock for each 5 shares of common stock they already own. Pierre Dorgan owns 500 shares of Sweetwater common stock with a tax basis of $150 per share. The fair market value of the Sweetwater common stock was $90 per share on December 31. What is Pierre's income tax basis per share in his new andexisting common stock in Sweetwater, assuming the distribution is non-taxable?

A distribution in partial liquidation of a corporation is always treated as a sale or exchange by an individual shareholder.

Orchard, Inc. reported taxable income of $800,000 in 20X3 and paid federal income taxes of$272,000. Included in the company's computation of taxable income is gain from sale of adepreciable asset of $200,000. The income tax basis of the asset was $50,000. The E&P basis of the asset using the alternative depreciation system was $75,000. Compute the company's current E&P for 20X3.

Cedar Corporation incurs a net capital loss of $20,000 in 20X3 that cannot be deductedon its income tax return but must be carried forward to 20X4. However, Cedar will deduct the net capital loss in the computation of current earnings and profits for 20X3.

The term "earnings and profits" is well defined in the Internal Revenue Code.

Which of the following statements is true?