CHAPTER 19 CORPORATIONS: DISTRIBUTIONS NOT IN COMPLETE LIQUIDATION

1. Which one of the following statements is false?

a. Most countries that trade with the U.S. do not impose a double tax on dividends.

b. Tax proposals that include corporate integration would eliminate the double tax on dividends.

c. The double tax on dividends may make corporations more financially vulnerable during economic downturns.

d. Many of the arguments in support of the double tax on dividends relate to fairness.

e. None of the above.

2. In June of the current year, Marigold Corporation declares a $4 dividend out of E & P on each share of common stock to shareholders of record on August 1. Ellen and Tim each purchase 100 shares of Marigold stock on July 1. On July 15, Ellen also purchases a short position in Marigold. Tim sells 50 of his shares on August 10 and continues to hold the remaining 50 shares through the end of the year. Ellen closes her short position in Marigold on October 15. With respect to the dividends, which of the following is correct?

a. Ellen will have $400 of qualifying dividends subject to reduced tax rates and $400 of ordinary income (from dividends paid on the short position of Marigold stock).

b. Tim will have $200 of qualifying dividends subject to reduced tax rates and $200 of ordinary income.

c. All $800 of Ellen’s dividends will qualify for reduced tax rates.

d. All $400 of Tim’s dividends will qualify for reduced tax rates.

e. None of the above.

3. In the current year, Warbler Corporation (E & P of $250,000) made the following property distributions to its shareholders (all corporations):

Adjusted Fair Market

Basis Value

Pink Corporation stock (held for investment) $150,000 $120,000

Non-LIFO inventory 80,000 110,000

Warbler Corporation is not a member of a controlled group. As a result of the distribution:

a. The shareholders have dividend income of $200,000.

b. The shareholders have dividend income of $260,000.

c. Warbler has a recognized gain of $30,000 and a recognized loss of $30,000.

d. Warbler has no recognized gain or loss.

e. None of the above.

4. Purple Corporation makes a property distribution to its sole shareholder, Paul. 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 Paul 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?

a. $0.

b. $21,000.

c. $35,000.

d. $91,000.

e. None of the above.

5. Puffin Corporation makes a property distribution to its sole shareholder, Bonnie. The property distributed is a car (basis of $30,000; fair market value of $20,000) that is subject to a $6,000 liability which Bonnie assumes. Puffin has no accumulated E & P and $30,000 of current E & P from other sources during the year. What is Puffin’s E & P after taking into account the distribution of the car?

a. $4,000.

b. $6,000. c. $10,000. d. $14,000.

e. None of the above.

6. Navy Corporation has E & P of $240,000. It distributes land with a fair market value of $70,000 (adjusted basis of $25,000) to its sole shareholder, Troy. The land is subject to a liability of $55,000 that Troy assumes. Troy has:

a. A taxable dividend of $15,000.

b. A taxable dividend of $25,000.

c. A taxable dividend of $45,000.

d. A taxable dividend of $70,000.

e. A basis in the machinery of $55,000.

7. Which one of the following statements about property distributions is false?

a. When the basis of distributed property is greater than its fair market value, a deficit may be created in E & P.

b. When the basis of distributed property is less than its fair market value, the distributing corporation recognizes gain.

c. When the basis of distributed property is greater than its fair market value, the distributing corporation does not recognize loss.

d. The amount of a distribution received by a shareholder is measured by using the property’s fair market value.

e. All of the above statements are true.

8. Brett owns stock in Oriole Corporation (basis of $100,000) as an investment. Oriole distributes property (fair market value of $375,000; basis of $187,500) to him during the year. Oriole has current E & P of $25,000 (which includes the E & P gain on the property distribution), accumulated E & P of $100,000, and makes no other distributions during the year. What is Brett’s capital gain on the distribution?

a. $0.

b. $100,000.

c. $150,000.

d. $187,500.

e. None of the above.

9. Rust Corporation distributes property to its sole shareholder, Andre. The property has a fair market value of $350,000, an adjusted basis of $205,000, and is subject to a liability of $220,000. Current E & P is $500,000. With respect to the distribution, which of the following statements is correct?

a. Rust has a gain of $15,000 and Andre has dividend income of $350,000.

b. Rust has a gain of $145,000 and Andre’s basis in the distributed property is $130,000.

c. Rust has a gain of $130,000 and Andre’s basis in the distributed property is $350,000.

d. Rust has a gain of $145,000 and Andre has dividend income of $130,000.

e. None of the above.

10.Purple Corporation has accumulated E & P of $100,000 on January 1, 2014. In 2014, Purple has current E & P of $130,000 (before any distribution). On December 31, 2014, the corporation distributes $250,000 to its sole shareholder, Cindy (an individual). Purple Corporation’s E & P as of January 1, 2015 is:

a. $0.

b. ($20,000).

c. $100,000.

d. $130,000.

e. None of the above.