WEEK 4 HOMEWORK QUESTIONS

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Week 4 Homework Questions

QC:4-2 (book/static)

Why is it necessary to distinguish between current and accumulated

E and P ?

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.

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.

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.

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

QC:4-3 (book/static)

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.	$100,000 of current E&P and $100,000 of accumulated E&P
b.	A $50,000 accumulated E&P deficit and a $60,000 current E&P balance
c.	A $60,000 accumulated E&P deficit and a $60,000 current E&P deficit
d.	An $80,000 current E&P deficit and a $100,000 accumulated E&P balance

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

a. 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.

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

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

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

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.

QC:4-5 (book/static)

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.

a.	The corporation earns tax-exempt interest income of $10,000.
b.	Taxable income includes a $10,000 dividend and is reduced by a $7,000 dividends-received deduction.
c.	A $5,000 capital loss carryover from the preceding tax year offsets $5,000 of capital gains.
d.	The corporation accrued federal income taxes of $25,280.
e.	The corporation took a U.S. production activities deduction of $3,000.

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

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

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

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

None of the above

incorrect, PC:4-27 (similar to)

Gray

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

(Click

the icon to view the results.)

(Click

the icon to view the corporate tax table.)

Requirements

a. What is

Gray

taxable income?

b. What is

Gray

current E&P?

Requirement a. What is

Gray

taxable income?





Gross income
Minus:


PC:4-28 (similar to)

Fresh

Corporation reports

$ 650 comma 000

of taxable income for the current year. The following additional information is available:

(Click

the icon to view the additional information.)

Assume a

34 %

corporate tax rate.

Requirement

What is

Fresh

current E&P for this year? (Leave any unused cells blank.)

Taxable income
Plus:




Minus:



C:4.2-4

Identify which of the following increases Earnings & Profits.

life insurance proceeds payable to the spouse

a capital contribution

tax-exempt interest income

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

C:4.2-5

Current E&P does not include

federal income tax refunds from prior years.

life insurance proceeds where the corporation is the beneficiary.

tax-exempt interest income.

All of the above are included.

C:4.3-4

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

$10,000.

$31,000.

$25,000.

$4,000.

QC:4-11 (book/static)

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

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.

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.

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.

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:4.4-2

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

True

False

C:4.5-3

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

True

False

C:4.5-24

Identify which of the following statements is

false.

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

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.

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.

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

C:6.2-9

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

$11,000.

$2,000.

$3,000.

C:6.2-13

Property received in a corporate liquidation by a noncorporate shareholder has

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

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.

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 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:10.1-5

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

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

no recognized gain or loss.

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

QC:10-7 (book/static)

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

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.

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.

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.

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

PC:10-46 (similar to)

Luna

a one-third partner, retires from the

LKR

Partnership on January 1 of the current year. Her basis in her partnership interest is

$ 104 comma 000

including her share of liabilities.

Luna

receives

$ 139 comma 000

in cash from the partnership for her interest. On that date, the partnership balance sheet is as follows:

(Click

the icon to view the balance sheet.)

Requirements

What are the amount and character of

Luna

recognized gain or loss?

How would your answers to Part a change if

Kendra

and

Rae

each purchased one-half of

Luna

partnership interest for

$ 69 comma 500

cash instead of having the partnership distribute the

$ 139 comma 000

in cash to

Luna

Requirement a. What are the amount and character of

Luna

recognized gain or loss?

Complete the table below to show

Luna

recognized gain or loss.

		Character of gain (loss)
Amount realized
Minus:	Adjusted basis
Recognized gain (loss)

QC:10-1 (book/static)

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?

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.

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.

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.

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.