CHAPTER 19 CORPORATIONS: DISTRIBUTIONS NOT IN COMPLETE LIQUIDATION

1. Starling Corporation has accumulated E & P of $60,000 on January 1, 2014. In 2014, Starling Corporation had an operating loss of $80,000. It distributed cash of $40,000 to Zoe, its sole shareholder, on December 31, 2014. Starling Corporation’s balance in its E & P account as of January 1, 2015, is:

a. $60,000 deficit.

b. $20,000 deficit.

c. $0.

d. $60,000.

e. None of the above.

2. Robin Corporation distributes furniture (basis of $40,000; fair market value of $50,000) as a property dividend to its shareholders. The furniture is subject to a liability of $55,000. Robin Corporation recognizes gain of:

a. $55,000.

b. $15,000.

c. $10,000.

d. $0.

e. None of the above.

3. Ten years ago, Carrie purchased 2,000 shares in Osprey Corporation for $20,000. In the current year, Carrie receives a nontaxable stock dividend of 20 shares of Osprey preferred. Values at the time of the dividend are: $8,000 for the preferred stock and $72,000 for the common. Based on this information, Carrie’s basis in the stock is:

a. $20,000 in the common and $8,000 in the preferred.

b. $2,000 in the common and $18,000 in the preferred.

c. $18,000 in the common and $2,000 in the preferred.

d. $19,802 in the common and $198 in the preferred.

e. None of the above.

4. Which of the following statements regarding constructive dividends is notcorrect?

a. Constructive dividends do not need to be formally declared or designated as a dividend.

b. Constructive dividends need not be paid pro rata to the shareholders.

c. Corporations that receive constructive dividends may not use the dividends received deduction.

d. Constructive dividends are taxable as dividends only to the extent of earnings and profits.

e. All of the above.

5. Pink Corporation declares a nontaxable dividend payable in rights to subscribe to common stock. Each right entitles the holder to purchase one share of stock for $25. One right is issued for every two shares of stock owned. Jack owns 100 shares of stock in Pink, which he purchased three years ago for $3,000. At the time of the distribution, the value of the stock is $45 per share and the value of the rights is $2 per share. Jack receives 50 rights. He exercises 25 rights and sells the remaining 25 rights three months later for $2.50 per right.

a. Jack must allocate a part of the basis of his original stock in Pink to the rights.

b. If Jack does not allocate a part of the basis of his original stock to the rights, his basis in the new stock is zero.

c. Sale of the rights produces ordinary income to Jack of $62.50.

d. If Jack does not allocate a part of the basis of his original stock to the rights, his basis in the new stock is $625.

e. None of the above.

6. On January 30, Juan receives a nontaxable distribution of stock rights from Platinum Corporation. Each right entitles the holder to purchase one share of stock for $40. One right is issued for every share of stock owned. Juan owns 100 shares of stock purchased two years ago for $4,000. At the date of distribution, the rights are worth $1,000 (100 rights at $10 per right) and Juan’s stock in Platinum is worth $5,000 (or $50 per share). On December 1, Juan sells all 100 stock rights for $12 per right. How much gain does Juan recognize on the sale?

a. $1,200.

b. $533.

c. $400.

d. $0.

e. None of the above.

7. Seven years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer. In the current year, Blue Corporation (E & P of $1 million) redeems 600 shares from Eleanor for $260,000 in a transaction that does not qualify for sale or exchange treatment. With respect to the redemption, Eleanor will have a:

a. $140,000 dividend.

b. $260,000 dividend.

c. $140,000 capital gain.

d. $260,000 capital gain.

e. None of the above.

8. Seven years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer. In the current year, Blue Corporation (E & P of $1 million) redeems 600 shares from Eleanor for $260,000 in a transaction that qualifies for sale or exchange treatment. With respect to the redemption, Eleanor will have a:

a. $140,000 dividend.

b. $260,000 dividend.

c. $140,000 capital gain.

d. $260,000 capital gain.

e. None of the above.

9. Finch Corporation distributes property (basis of $225,000, fair market value of $300,000) to a shareholder in a distribution that is a qualifying stock redemption. The property is subject to a liability of $160,000, which the shareholder assumes. The basis of the property to the shareholder is:

a. $0.

b. $140,000.

c. $225,000.

d. $300,000.

e. None of the above.

10. Coffee Corporation has 2,000 shares of common stock outstanding. John owns 700 of the shares, John’s grandfather owns 100 shares, John’s father owns 100 shares, John’s ex­wife owns 700 shares, and Redbird Partnership owns 400 shares. John is a 50% partner in Redbird Partnership. How many shares is John deemed to own in Coffee Corporation under the § 318 attribution rules?

a. 700.

b. 1,000.

c. 1,100.

d. 1,700.

e. None of the above.

11. Kite Corporation has 1,000 shares of stock outstanding. Kent owns 300 shares, Kent’s father owns 200 shares, Kent’s daughter owns 100 shares, and Kent’s aunt owns 200 shares. Plover Corporation owns the other 200 shares in Kite Corporation. Kent owns 75% of the stock in Plover Corporation. Applying the § 318 stock attribution rules, how many shares does Kent own in Kite Corporation?

a. 500.

b. 600.

c. 750.

d. 950.

e. None of the above.

12. Keshia owns 200 shares in Parakeet Corporation. Keshia has a 30% beneficiary interest in her deceased grandmother’s estate. The estate owns 400 shares in Parakeet Corporation. None of the other beneficiaries of the estate own stock in Parakeet. In applying the § 318 attribution rules:

a. The estate owns 400 shares.

b. Keshia owns 320 shares.

c. Keshia owns 600 shares.

d. The estate owns 460 shares.

e. None of the above.