ACC 455 Week 4 MyAccountingLab, Week 4

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Why is it necessary to distinguish between current and accumulated

E and P?

A.

Distributions are deemed to come first out of current E&P and then out of accumulated E&P, so if current E&P is positive, any distributions will be dividends to the extent of current E&P. However if E&P is insufficient to cover all distributions, distributions are deemed to come pro rata out of current E&P and then in chronological order out of accumulated E&P.

B.

Distributions are deemed to come first out of accumulated E&P and then out of current E&P, so if accumulated E&P does not cover the full distribution, the remaining is taken from current E&P. However, if current E&P is still insufficient to cover the remaining distribution, the distributions are treated as a return of capital and reduce the shareholder’s stock basis.

C.

Distributions are deemed to come first out of current E&P and then out of accumulated E&P. However if the distribution is for the sole intent of avoiding tax, the distribution is disallowed and the full amount that would have been paid out is deemed a capital gain, and required to be taxed at the corporate level.

D.

Distributions can come out of accumulated E&P or current E&P first. The order does not matter, but once a method has been chosen, the corporation must stay with that method. However, if the distribution exceeds the total E&P, the remainder will be dividends.

Describe the effect of a $100,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is $25,000 when the corporation has

Answer Parts a through d again, assuming instead that the corporation makes the distribution on October 1 in a nonleap year.

1. Describe the effect of a $100,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is $25,000 when the corporation has $100,000 of current E&P and $100,000 of accumulated E&P.

A.

The distribution is a $100,000 dividend payable out of current E&P.

B.

First, $25,000 is a return of capital that reduces the shareholder’s stock basis to zero. The remaining $75,000 is a capital gain.

C.

The dividend is a $100,000 dividend payable out of accumulated E&P.

D.

First, $25,000 is a return of capital that reduces the shareholder’s stock basis to zero. The remaining $75,000 is ordinary income.

1. Describe the effect of a $100,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is $25,000 when the corporation has a $50,000 accumulated E&P deficit and a $60,000 current E&P balance.

A.

First, $15,000 is a return of capital that reduces the shareholder’s stock basis to zero. Second, $60,000 of the distribution is ordinary income from current E&P. Third, the remaining $25,000 is a capital gain. The $50,000 accumulated E&P deficit remains.

B.

First, $25,000 is a return of capital that reduces the shareholder’s stock basis to zero. Second, $85,000 of the distribution is ordinary income from current E&P. The $50,000 accumulated E&P deficit remains.

C.

First, $25,000 is a return of capital that reduces the shareholder’s stock basis to zero. Second, $60,000 of the distribution is ordinary income from current E&P. Third, the remaining $15,000 is a capital gain. The $50,000 accumulated E&P deficit remains.

D.

First, $60,000 of the distribution is a dividend from current E&P. Second, $25,000 is a return of capital that reduces the shareholder’s stock basis to zero. Third, the remaining $15,000 is a capital gain. The $50,000 accumulated E&P deficit remains.

1. Describe the effect of a $100,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is $25,000 when the corporation has a $60,000 accumulated E&P deficit and a $60,000 current E&P deficit.

A.

First, $25,000 is a capital loss. The remaining $75,000 is ordinary income.

B.

First, $25,000 of the distribution is a return of capital that reduces the shareholder’s stock basis to zero. Second, the remaining $75,000 is a capital gain. a $120,000 accumulated E&P deficit remains.

C.

First, $25,000 of the distribution is a return of capital that reduces the shareholder’s stock basis to zero. Second, $35,000 is a capital gain. A $60,000 accumulated E&P deficit remains.

D.

The distribution is a $100,000 dividend payable out of accumulated E&P.

1. Describe the effect of a $100,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is $25,000 when the corporation has an $80,000 current E&P deficit and a $100,000 accumulated E&P balance.

A.

The distribution is a $100,000 dividend payable out of accumulated E&P. None of the current E&P deficit reduces accumulated E&P since the distribution is made on January 1.

B.

First, $80,000 of the distribution is a dividend payable out of accumulated E&P. The remaining $20,000 is a return of capital.

C.

First, $80,000 of the distribution is a dividend payable out of accumulated E&P. The remaining $20,000 reduces current E&P.

D.

The distribution is a $100,000 dividend payable out of accumulated E&P. The current E&P deficit reduces accumulated E&P.

Answer Parts a through d again, assuming instead that the corporation makes the distribution on October 1 in a nonleap year.

1. Describe the effect of a $100,000 cash distribution paid on October 1 to the sole shareholder of a calendar year corporation whose stock basis is $25,000 when the corporation has $100,000 of current E&P and $100,000 of accumulated E&P.

A.

First, $25,000 is a return of capital that reduces the shareholder’s stock basis to zero. The remaining $75,000 is a capital gain.

B.

The distribution is a $100,000 dividend payable out of current E&P.

C.

The dividend is a $100,000 dividend payable out of accumulated E&P.

D.

First, $25,000 is a return of capital that reduces the shareholder’s stock basis to zero. The remaining $75,000 is ordinary income.

1. Describe the effect of a $100,000 cash distribution paid on October 1 to the sole shareholder of a calendar year corporation whose stock basis is $25,000 when the corporation has a $50,000 accumulated E&P deficit and a $60,000 current E&P balance.

A.

First, $15,000 is a return of capital that reduces the shareholder’s stock basis to zero. Second, $60,000 of the distribution is ordinary income from current E&P. Third, the remaining $25,000 is a capital gain. The $50,000 accumulated E&P deficit remains.

B.

First, $25,000 is a return of capital that reduces the shareholder’s stock basis to zero. Second, $60,000 of the distribution is ordinary income from current E&P. Third, the remaining $15,000 is a capital gain. The $50,000 accumulated E&P deficit remains.

C.

First, $60,000 of the distribution is a dividend from current E&P. Second, $25,000 is a return of capital that reduces the shareholder’s stock basis to zero. Third, the remaining $15,000 is a capital gain. The $50,000 accumulated E&P deficit remains.

D.

First, $25,000 is a return of capital that reduces the shareholder’s stock basis to zero. Second, $85,000 of the distribution is ordinary income from current E&P. The $50,000 accumulated E&P deficit remains.

1. Describe the effect of a $100,000 cash distribution paid on October 1 to the sole shareholder of a calendar year corporation whose stock basis is $25,000 when the corporation has a $60,000 accumulated E&P deficit and a $60,000 current E&P deficit.

A.

First, $25,000 is a capital loss. The remaining $75,000 is ordinary income.

B.

First, $25,000 of the distribution is a return of capital that reduces the shareholder’s stock basis to zero. Second, $35,000 is a capital gain. A $60,000 accumulated E&P deficit remains.

C.

The distribution is a $100,000 dividend payable out of accumulated E&P.

D.

First, $25,000 of the distribution is a return of capital that reduces the shareholder’s stock basis to zero. Second, the remaining $75,000 is a capital gain. a $120,000 accumulated E&P deficit remains.

1. Describe the effect of a $100,000 cash distribution paid on October 1 to the sole shareholder of a calendar year corporation whose stock basis is $25,000 when the corporation has an $80,000 current E&P deficit and a $100,000 accumulated E&P balance.

A.

The distribution is a $100,000 dividend payable out of accumulated E&P. None of the current E&P deficit reduces accumulated E&P since the distribution is made on October 1.

B.

The distribution is a $100,000 dividend payable out of accumulated E&P. The current E&P deficit reduces accumulated E&P.

C.

Accumulated E&P as of October 1 is $40,0000 so that $40,000 of the distribution is a dividend. Allocation of the current E&P deficit to the pre-October 1 period is accomplished by multiplying $80,000 times 9/12ths. Of the remaining $60,000, $25,000 is a return of capital that reduces the shareholder’s stock basis to zero, and the remaining $35,000 is a capital gain.

D.

First, $80,000 of the distribution is a dividend payable out of accumulated E&P. The remaining $20,000 reduces current E&P.

What effect do the following transactions have on the calculation of Young Corporation’s current E&P? Assume that the starting point for the calculation is Young’s taxable income for the current year.

1. The corporation earns tax-exempt interest income of $10,000.

A.

Tax-exempt interest has no effect on the current E&P.

B.

The tax-exempt interest is deducted from taxable income to compute current E&P.

C.

The tax-exempt interest is added to taxable income to compute current E&P.

D.

None of the above.

1. Taxable income includes a $10,000 dividend and is reduced by a $7,000 dividends-received deduction.

A.

The dividends-received deduction is added to taxable income.

B.

The dividends-received deduction reduces capital gains.

C.

The dividends-received deduction reduces taxable income.

D.

None of the above.

1. A $5,000 capital loss carryover from the preceding tax year offsets $5,000 of capital gains.

A.

The capital loss carryover has no effect on the E&P.

B.

The capital loss carryover is added to taxable income.

C.

The capital loss carryover reduces taxable income.

D.

None of the above.

280. The corporation accrued federal income taxes of $25,280.

A.

The federal income taxes are deducted from accumulated E&P.

B.

The federal income taxes are deducted from taxable income.

C.

Only 20% of the federal income taxes are deducted from taxable income.

D.

The federal income taxes increase taxable income.

1. The corporation took a U.S. production activities deduction of $3,000.

A.

The U.S. production activities deduction is actually a tax credit.

B.

The U.S. production activities deduction is only allowable if the corporation suffered losses in the current year.

C.

The U.S. production activities deduction is added to taxable income.

D.

The U.S. production activities deduction is deducted from taxable income.

Cook Corporation, an accrual basis taxpayer, reports the following results for the current year:

Requirements

1. What is Cook’s taxable income?
2. What is Cook’s current E&P?

Requirement a. What is Cook’s taxable income?

Requirement b. What is

Cook’s

current E&P?

Hydro Corporation reports $500,000 of taxable income for the current year. The following additional information is available:

Assume a 34% corporate tax rate.

Requirement

What is Hydro’s current E&P for this year? (Leave any unused cells blank.)

C:4.2-4

Identify which of the following increases Earnings & Profits.

A.

tax-exempt interest income

B.

a capital contribution

C.

life insurance proceeds payable to the spouse

D.

All of the above increase E&P of a corporation.

Current E&P does not include

A.

tax-exempt interest income.

B.

life insurance proceeds where the corporation is the beneficiary.

C.

federal income tax refunds from prior years.

D.

All of the above are included.

Dixie Corporation distributes $31,000 to its sole shareholder, Sally. At the time of the distribution, Dixie’s E&P is $25,000 and Sally’s basis in her Dixie stock is $10,000. Sally’s basis in her Dixie stock after the distribution is

A.

$31,000.

B.

$10,000.

C.

$4,000.

D.

$25,000.

Why are stock dividends generally nontaxable? Under what circumstances are stock dividends taxable?

A.

Stock dividends are nontaxable because cash is not exchanging hands, just ownership. However stock dividends are taxable when a corporation requires the holding period of the dividend to be a set amount of time. This is considered tax avoidance.

B.

Stock dividends are nontaxable when a shareholder’s proportionate interest changes or has the potential to change, however they are taxable whenever a stock dividend does not change the shareholder’s proportionate interest in the distributing corporation.

C.

Stock dividends are nontaxable because they do not add to the property the shareholder already owns, however they are taxable whenever a stock dividend changes or has the potential to change the shareholder’s proportionate interest in the distributing corporation.

D.

Stock dividends are generally nontaxable to preferred stockholders since they can elect to receive the stock dividend in other property instead. However, stock dividends are taxable to common stockholders when they are also given the option to elect to receive the stock dividend in other property instead.

In a taxable distribution of stock, the recipient shareholder takes a basis equal to the FMV of the stock received.

True

False

A partial liquidation of a corporation is treated as a dividend in the case of a corporate shareholder.

True

False

Identify which of the following statements is

false.

A.

Under Sec. 311, a corporation does not recognize a loss when it distributes property that has declined in value.

B.

Generally, little or no gain is recognized by the redeeming shareholder in a qualified Sec. 303 redemption.

C.

The rules for the recognition of a gain or loss by a corporation that distributes property in redemption of its stock are the same as the rules for property distributions that are not in redemption of stock.

D.

When a stock redemption is considered a sale of stock by the shareholder, the E&P of the redeeming corporation is reduced by the FMV of the property used to redeem the stock.

Madeleine owns 100% of Omega Corporation’s common stock.

Omega is an accrual basis, calendar year corporation.

Madeleine formed the corporation six years ago by transferring $200,000

of cash in exchange for the Omega stock. Thus, she has held the stock for six years and has a $200,000

adjusted basis in the stock.

Omega’s balance sheet at January 1 of the current year is as follows:

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the icon to view the balance sheet.)

Omega has held the marketable securities for two years.

In addition, Omega has claimed $110,000 of MACRS depreciation on the machinery and $160,000

of straight-line depreciation on the building. On January 2 of the current year, Omega liquidates and distributes all property to Madeleine except that Omega retains cash to pay the accounts payable and any tax liability resulting from Omega’s liquidation. Assume that Omega has no other taxable income or loss.

Requirement

Determine the tax consequences to Omega and Madeleine. Assume a 34% corporate tax rate.

Let’s begin by determining the tax consequences for Omega. Select the property needed to compute

Omega’s total gain or loss, compute the gain or loss for each asset and determine the character for each gain or loss. Then, compute Omega’s total gain or loss and compute Omega’s tax liability.

Next, determine the gain or loss for

Madeleine.

Select the formula then enter the amounts and compute the gain or loss recognized.

Select the property distributed to

Madeleine

and enter her basis for each property received.

Riverwalk Corporation is liquidated, with Juan receiving $5,000 in money, other property having a $6,000 FMV, and a $1,000 mortgage on the property. Juan’s basis in his River walk stock is $8,000. Upon liquidation, Juan must recognize a gain of

A.

$2,000.

B.

0.

C.

$11,000.

D.

$3,000.

Property received in a corporate liquidation by a noncorporate shareholder has

A.

a basis equal to its FMV. Its holding period commences on the day after the distribution date.

B.

a basis equal to its basis on the liquidating corporation’s books increased by any gain recognized by the shareholder upon receipt of the property. Its holding period commences on the day after the distribution date.

C.

a basis equal to its FMV reduced by any liabilities assumed by the shareholder. Its holding period commences on the day after the distribution date.

D.

a basis equal to its basis on the liquidating corporation’s books increased by any gain recognized by the shareholder upon receipt of the property. Its holding period includes the holding period of the shareholder’s stock.

A new partner, Gary, contributes cash and assumes a share of partnership liabilities. Diane’s capital, profits, and loss interest in the partnership is reduced by 5% due to the admission of Gary. The Sec. 751 rules do not apply. Partnership liabilities at the time Gary is admitted are $200,000, and all of the liabilities are recourse debts for which the partners share the economic risk of loss in the same way they share partnership profits. Diane’s basis in the partnership interest prior to Gary’s admission is $5,000. Due to the admission of Gary, partner Diane has

A.

no recognized gain or loss and a partnership interest basis of $10,000.

B.

no recognized gain or loss.

C.

a recognized gain of $5,000 and a partnership interest basis of zero.

D.

a recognized gain of $5,000 and a partnership interest basis of $5,000.

What conditions are required for a partner to recognize a loss upon receipt of a distribution from a partnership?

A.

A partner can recognize a loss on a distribution from a partnership that is fully liquidating. The distribution can consist of any form of money or property, where the sum of all of the distributions is more than the sum of all of the partner’s bases in the partnership.

B.

A partner can recognize a loss on a distribution only if it is a liquidating distribution consisting of any form of money or property, where the sum of the distributions is less than the partner’s predistribution basis in his or her partnership interest.

C.

A partner can recognize a loss on a distribution from a partnership when loss property is distributed to the partner. Loss property is determined by comparing the FMV at the date of distribution and the basis of the property on the partnership’s books.

D.

A partner can recognize a loss on a distribution only if it is a liquidating distribution consisting of money, unrealized receivables, and/or inventory and the sum of these amounts is less than the partner’s predistribution basis in his or her partnership interest.

Julie, a one-third partner, retires from the JJM Partnership on January 1 of the current year. Her basis in her partnership interest is $133,000 including her share of liabilities.

Julie receives $176,000 in cash from the partnership for her interest. On that date, the partnership balance sheet is as follows:

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the icon to view the balance sheet.)

Requirements

Requirement a. What are the amount and character of Julie’s recognized gain or loss?

Complete the table below to show Julie’s recognized gain or loss.

Requirement b. How would your answers to Part a change if

Jenn and Mini each purchased one-half of Julie’s partnership interest for $88,000 cash instead of having the partnership distribute the $176,000 in cash to Julie?

Complete the table below to show Julie’s recognized gain or loss in this scenario.

Javier is retiring from the JKL Partnership. In January of the current year, he has a $100,000 basis in his partnership interest when he receives a $10,000 cash distribution. The partnership plans to distribute $10,000 each month this year, and Javier will cease to be a partner after the December payment. Is the January payment to Javier a current distribution or a liquidating distribution?

A.

It is a current distribution. A liquidating distribution is a distribution that terminates the partner’s interest in the partnership by making a series of payments intended to terminate the partner’s interest in the partnership. A current distribution is made with the intention of terminating the partner’s entire interest in the partnership with a planned series of payments.

B.

It is a current distribution. A current distribution is a distribution that does not terminate the partner’s interest in the partnership, nor is the payment one of a series of payments intended to terminate the partner’s interest in the partnership. A liquidating distribution is made with the intention of terminating the partner’s entire interest in the partnership with a lump-sum payment to the partner.

C.

It is a liquidating distribution. A current distribution is a distribution that terminates the partner’s interest in the partnership by making a series of payments intended to terminate the partner’s interest in the partnership. A liquidating distribution is made with the intention of terminating the partner’s entire interest in the partnership with a planned series of payments.

D.

It is a liquidating distribution. A current distribution is a distribution that does not terminate the partner’s interest in the partnership, nor is the payment one of a series of payments intended to terminate the partner’s interest in the partnership. A liquidating distribution is made with the intention of terminating the partner’s entire interest in the partnership either with this payment or with a planned series of payments including this one.