Chapter 18 Corporate Taxation: Nonliquidating Distributions

45. [LO2] Beaver Corporation reported taxable income of $500,000 from operations this year. The company paid federal income taxes of $170,000 on this taxable income. During the year, the company made a distribution of land to its sole shareholder, Eugenia VanDam. The land’s fair market value was $20,000 and its tax and E&P basis to Beaver was $50,000. Eugenia assumed a mortgage on the land of $25,000. Any gain from the distribution will be taxed at 34 percent. Beaver had accumulated E&P of $1,500,000.

a. Compute Beaver’s total taxable income and federal income tax.

b. Compute Beaver’s current E&P before the distribution.

c. Compute Beaver’s accumulated E&P at the beginning of next year.

d. What amount of dividend income does Eugenia report as a result of the distribution?

e. What is Eugenia’s income tax basis in the land received from Beaver?

46. [LO2] {research form} Tiny and Tim each own half of the 100 outstanding shares of Flower Corporation. This year Flower reported taxable income of $6,000 and was subject to a 25 percent tax rate. In addition, Flower received $20,000 of life insurance proceeds due to the death of an employee (Flower paid $500 in life insurance premiums this year). Flower had $5,000 of accumulated E&P at the beginning of the year.

a. What is Flower’s current E&P?

b. Flower distributed $6,000 on February 15 and $30,000 on August 1. What total amount of dividends will Tiny and Tim report?

c. What amount of capital gain (if any) would Tiny and Tim report on the distributions in part b if their stock basis is $2,000 and $10,000, respectively?

d. What form would Flower use to report non-dividend distributions?

e. On what form (line) would Tiny and Tim report these distributions?

47. [LO3] Nittany Company pays its sole shareholder, Tammy Lion, a salary of $100,000. At the end of each year, the company pays Tammy a “bonus” equal to the difference between the corporation’s taxable income for the year (before the bonus) and $75,000. In this way, the company hopes to keep its taxable income at amounts that are taxed at either 15 percent or 25 percent. This year Nittany reported pre-bonus taxable income of $675,000 and paid Tammy a bonus of $600,000. On audit, the IRS determined that individuals working in Tammy’s position earned on average $300,000 per year. The company had no formal compensation policy and never paid a dividend.

a. How much of Tammy’s bonus might the IRS recharacterize as a dividend?

b. What arguments might Tammy make to counter this assertion?

dividends.

c. Assuming the IRS recharacterizes $200,000 of Tammy’s bonus as a dividend, what additional income tax liability does Nittany Company face?

48. [LO4] Hoosier Corporation declared a 2-for-1 stock split to all shareholders of record on March 25 of this year. Hoosier reported current E&P of $600,000 and accumulated E&P of $3,000,000. The total fair market value of the stock distributed was $1,500,000. Barbara Bloomington owned 1,000 shares of Hoosier stock with a tax basis of $100 per share.

a. What amount of taxable dividend income, if any, does Barbara recognize this year? Assume the fair market value of the stock was $150 per share on March 25 of this year.

b. What is Barbara’s income tax basis in the new and existing stock she owns in Hoosier Corporation, assuming the distribution is tax-free?

c. How does the stock dividend affect Hoosier’s accumulated E&P at the beginning of next year?

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