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Exam 14: Corporate Nonliquidating and Liquidating Distributions

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Question 61

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Terrapin Corporation incurs federal income taxes of $250,000 in year 1. Terrapin deducts the federal income taxes in computing its current earnings and profits for year 1.

A) True
B) False

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Question 62

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Yellowstone Corporation made a distribution of $300,000 to Cheney, Inc. in partial liquidation of the company on December 31, year 1. Cheney, Inc. owns 50 percent of Yellowstone Corporation (1,000 shares). The other 50 percent is owned by an unrelated corporation. The distribution was in exchange for 50% of Cheney's stock in the company (500 shares). At the time of the distribution, the shares had a fair market value of $800 per share. Cheney's income tax basis in the shares was $500 per share. Yellowstone had total E&P of $5,000,000 at the time of the distribution. What is the amount and character (capital gain or dividend) of any income or gain recognized by Cheney as a result of the partial liquidation?

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$300,000 dividend
Explanation: A corpora...

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Question 63

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El Toro Corporation declared a common stock distribution to all shareholders of record on June 30, year 1. Shareholders will receive 1 share of El Toro stock for each 2 shares of stock they already own. Raoul owns 300 shares of El Toro stock with a tax basis of $60 per share. The fair market value of the El Toro stock was $100 per share on June 30, year 1. What are the tax consequences of the stock distribution to Raoul?

Orchard, Inc. reported taxable income of $800,000 in year 1 and paid federal income taxes of $272,000. Included in the company's computation of taxable income is gain from sale of a depreciable 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 year 1.

Green Corporation has negative current earnings and profits of $100,000 and positive accumulated earnings and profits of $200,000. A $50,000 distribution from Green to its sole shareholder at the end of the year will be treated as a dividend because total earnings and profits is a positive $100,000.

Husker Corporation reports current E&P of negative $200,000 in year 1 and accumulated E&P at the beginning of the year of $300,000. Husker distributed $200,000 to its sole shareholder on December 31, year 1. The shareholder's tax basis in her stock in Husker is $50,000. How is the distribution treated by the shareholder in year 1?

Greenwich Corporation reported a net operating loss of $800,000 in year 1, which the corporation elected to carryforward to year 2. Not included in the computation was a disallowed fine of $50,000, life insurance proceeds of $500,000, and a current year charitable contribution of $10,000 that will be carried forward to year 2. The corporation's current earnings and profits for year 1 would be:

Lansing Company is owned equally by Jennifer, her husband Dan, and DeWitt Corporation, which is owned 50 percent by Jennifer and her sister Jane. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Lansing stock is DeWitt Corporation deemed to own?

Packard Corporation transferred its 100 percent interest to State Company as part of a complete liquidation of the company. In the exchange Packard received land with a fair market value of $300,000. Packard's basis in the State stock was $600,000. The land had a basis to State Company of $500,000. What amount of loss does State recognize in the exchange and what is Packard's basis in the land it receives?

The tax basis of property received by a noncorporate shareholder in a complete liquidating will be the property's fair market value.

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 year 1, Tappan reported pre-bonus taxable income of $800,000 and paid Carlita a bonus of $725,000. On audit, the IRS determined that individuals working in Carlita's position earned $300,000 per year on average. 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)

Gary and Laura decided to liquidate their jointly owned corporation, Amelia, Inc. After liquidating its remaining inventory and paying off its remaining liabilities, Amelia had the following tax accounting balance sheet. $\begin{array} { | l r | } \hline \text { Taxable income } & \$ 800,000 \\\hline \text { Subtract: } & \\\hline \text { Federal income taxes } & ( 272,000 ) \\\hline \begin{array} { l } \text { Regular tax gain from sale of asset } \\( \$ 200,000 - \$ 50,000 )\end{array} & ( 150,000 ) \\\hline \text { Add: } \\\hline \text { E\&P gain from sale of asset } & \\ \$ 200,000 - \$ 75,000 ) & 125,000 \\\hline \text { Current E \&P } & \$ 503,000 \\\hline\end{array}$ Under the terms of the agreement, Gary will receive the $100,000 cash in exchange for his interest in Amelia. Gary's tax basis in his Amelia stock is $30,000. Laura will receive the building and land in exchange for her interest in Amelia. Laura's tax basis in her Amelia stock is $60,000. What amount of gain or loss does Laura recognize in the complete liquidation and what is Laura's tax basis in the building and land after the complete liquidation?

Longhorn Company reports current E&P of $100,000 in year 1 and accumulated E&P at the beginning of the year of negative $200,000. Longhorn distributed $300,000 to its sole shareholder on January 1, year 1. The shareholder's tax basis in his Longhorn stock is $100,000. How is the distribution treated by the shareholder in year 1?

Sweetwater Corporation declared a stock dividend to all common stock shareholders of record on December 31, year 1. 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 in his new and existing common stock in Sweetwater, assuming the distribution is non-taxable?

St. Clair Company reports positive current E&P of $500,000 in year 1 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, year 1. 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?

Gary and Laura decided to liquidate their jointly owned corporation, Amelia, Inc. After liquidating its remaining inventory and paying off its remaining liabilities, Amelia had the following tax accounting balance sheet. $\begin{array} { | l | r | } \hline \text { Corporate tax: } \$ 2,000,000 \times & \$ 680,000 \\34 \% & \\\hline \text { Shareholder tax: } \$ 200,000 & 70,000 \\\times 35 \% &\\ \text { Total income tax } & \$ 750,000 \\\hline\end{array}$ Under the terms of the agreement, Gary will receive the $100,000 cash in exchange for his interest in Amelia. Gary's tax basis in his Amelia stock is $30,000. Laura will receive the building and land in exchange for her interest in Amelia. Laura's tax basis in her Amelia stock is $60,000. What amount of gain or loss does Amelia recognize in the complete liquidation?

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

Compensation recharacterized by the IRS as a dividend because it was considered "unreasonable" will affect only the income tax liability of the corporation paying the compensation.

Which of the following stock distributions would be nontaxable to the shareholder?