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Exam 13: Corporations: Earnings and Profits and Distributions

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Question 61

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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) None of the above
G) C) and E)

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Question 62

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Silver Corporation, a calendar year taxpayer, has taxable income of $550,000.Among its transactions for the year are the following: Disregarding any provision for Federal income taxes, Silver Corporation's current E & P is:

A) $500,500.
B) $588,500.
C) $599,500.
D) $687,500.
E) None of the above.

F) A) and B)
G) A) and C)

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Question 63

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Intangible drilling costs deducted currently.

Albatross Corporation acquired land for investment purposes in 2004 at a cost of $100,000.Albatross sold the land to Monty on December 30, 2018, and did not elect out of the installment method of accounting.The selling price of the property was $400,000.Monty made a cash down payment of $50,000 on the date of sale and executed a $350,000 note, payable in seven annual installments of $50,000 each plus interest at the rate of 6% per annum.The first installment of $50,000 was due in 2019 which Monty paid, plus interest of $21,000.Discuss the effect of this sale on Albatross's taxable income and its E & P account in 2018 and 2019.

As a result of a redemption, a shareholder's interest direct and indirect) in the corporation decreased from 80% to 55%.The redemption qualifies for sale or exchange treatment as a disproportionate redemption.

The Code treats corporate distributions that are a return of a shareholder's investment as sales or exchanges and corporate distributions that are a return from a shareholder's investment as dividends.

What is a constructive dividend? Provide several examples of the term.

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

Cash dividends distributed to shareholders in 2018.

Thrush, Inc., is a calendar year, accrual basis corporation with Henry as its sole shareholder basis in his stock is $90,000).On January 1 of the current year, Thrush Corporation has accumulated E & P of $200,000.Before considering the effect of the distribution described below, the corporation's current E & P is $50,000.On November 1, Thrush distributes an office building to Henry.The office building has an adjusted basis of $80,000 fair market value of $100,000) and is subject to a mortgage of $110,000.Assume that the building has been depreciated using the ADS method for both income tax and E & P purposes.What are the tax consequences of the distribution to Thrush and to Henry? In your answer, be sure to describe the effects on taxable income for both Thrush and Henry, the impact of the distribution on Thrush's E & P, and Henry's basis in the building.)

Starling Corporation has accumulated E & P of $60,000 on January 1, 2018.In 2018, Starling Corporation had an operating loss of $80,000.It distributed cash of $40,000 to Zoe, its sole shareholder, on December 31, 2018.Starling Corporation's balance in its E & P account as of January 1, 2019, is:

Loss on sale between related parties in 2018.

A decrease in the LIFO recapture amount during the year.

Purple Corporation makes a property distribution to its sole shareholder, Kyung.The property distributed is a house fair market value of $189,000; basis of $154,000) that is subject to a $245,000 mortgage that Kyung assumes.Before considering the consequences of the distribution, Purple's current E & P is $35,000 and its accumulated E & P is $140,000.Purple makes no other distributions during the current year.What is Purple's taxable gain on the distribution of the house?

In general, if a shareholder's ownership interest is not diminished as a result of a stock redemption, the Code will treat the transaction as a sale or exchange.

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:

Federal income tax paid in the current year must be subtracted from taxable income to determine E & P.

Seven years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351.The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer.In the current year, Blue Corporation E & P of $1 million) redeems 600 shares from Eleanor for $260,000 in a transaction that does not qualify for sale or exchange treatment.With respect to the redemption, Eleanor will have a:

Constructive dividends have no effect on a distributing corporation's E & P.

To determine E & P, some but not all) previously excluded income items are added back to taxable income.