Ch 4 part 1

Question 0

When a corporation makes a nonliquidating distribution to a shareholder, what 2 questions must the corporation answer?

Answer 0

1 what are the amount and character of the gain or loss the
Corporation must recognize?

2 what effect does the distribution have on distributing the
Corporation’s earnings and profits?

Question 1

When a corporation makes a nonliquidating distribution to a shareholder, what 3 questions must the shareholder answer?

Answer 1

1 what is the amount of the distribution?
2 to what extent is this amount treated as a dividend
3 what is the basis of the distributed property and when does
It’s holding period begin?

Question 2

Section 301 requires the shareholder to include in gross income…

Answer 2

The amount of any corporate distribution to extent it is treated
As a dividend

Question 3

Dividend

Answer 3

Distribution of property made by corporation out of earnings
And profits (E&P)

Question 4

How does section 317a define property?

Answer 4

Includes money, securities and other property

Except stock or stock rights of distributing corporation

Question 5

Distributed amounts that exceed a corporation’s E&P are treated as…

Answer 5

Return of capital that reduces shareholder’s basis in his stock
(But not below 0)

Question 6

Distributions exceeding the shareholder’s basis are treated as…

Answer 6

Gain from sale of stock

Question 7

2 kinds of corporate E&Ps

Answer 7

1 current E&P

2 accumulated E&P

Question 8

Current E&P

Answer 8

Calculated annually

Question 9

What does E&P measure?

Answer 9

Corporation’s economic ability to pay dividends to its shareholders

Question 10

Accumulated E&P equation

Answer 10

Accumulated E&P =
(Sum undistributed current E&P for all previous years balances)
- (sum of all previous current E&P deficits + distributions made out
Of accumulated E&P)

Question 11

Distributions are deemed to be made out of E&P accounts in which order?

Answer 11

First out of current E&P

2nd out of accumulated E&P

Question 12

Computation of current E&P

Answer 12

Taxable income
+ income excluded from taxable income but included in E&P
+ income deferred to later year but included in E&P
+/- income and deduction computed for E&P
+ deductions allowed for taxable income purposes/denied for E&P
- expenses and losses denied for taxable income/allowed for E&P
= current E&P balance (or deficit)

Question 13

Income excluded from taxable income but included in E&P 4

Answer 13

1 tax exempt interest
2 proceeds from life insurance where corp. is beneficiary
3 recoveries from bad debts where corp received no tax benefit
4 prior yr. Federal tax refunds

Question 14

Income and deduction items that must be recomputed for E&P purposes 3

Answer 14

1 income for long term percentage completion contracts
(Instead of completed contract method)
2 depreciation on personal and real property
3 excess percentage depletion over cost depletion

Question 15

3 deductions that are allowed for taxable income but denied for E&P

Answer 15

1 dividends received deduction
2 NOL carryovers, charitable carryovers, capital loss carryovers
Applied to current year
3 US production activities deduction

Question 16

Expenses and losses that are denied for taxable income purposes but allowed for E&P 8

Answer 16

1 federal income tax
2 premiums on life insurance (corp is beneficiary)
3 excess capital losses not currently deductible
4 excess charitable contributions not currently deductible
5 expenses related to production of tax exempt income
6 no deductible losses on sales to related parties
7 no deductible penalties and fines
8 non deductible political contributions and lobbying expenses

Question 17

Income excluded from taxable income but included in E&P: Current E&P includes the recovery of an item deducted in a previous year if…

Answer 17

The deduction produced no tax benefit for corporation and

Was therefore excluded from its taxable income

Question 18

Income deferred to later year when computing taxable income

but included in E&P in current year

Answer 18

Gains and losses on property transactions generally included
in E&P is same year they’re recognized for taxable income purposes

With installment sales, entire realized gain must be included
In current E&P in year of sale

Question 19

Income and deduction items that must be recomputed for E&P: depreciation

Answer 19

Must be recomputed under the alternative depreciation system

Sec. 168g

Question 20

E&P: federal income taxes

Answer 20

Subtracted from taxable income

Question 21

Charitable contributions

Answer 21

Current years deduction is subtracted from taxable income

The carryover is added to taxable income and deducted
In later years

Question 22

Taxation: if current E&P is sufficient to cover all distributions during the year, how is the distribution treated?

2) when does this rule continue to apply?

Answer 22

Treated as taxable dividend

2) rule still applies if deficit exists in beginning accumulated E&P
Account

Question 23

If corporation generates both a current E&P deficit and an accumulated E&P deficit, how are the distributions treated?

Answer 23

Distributions are treated as return of capital to extent of
Shareholder’s stock basis, distributions exceeding basis are
Taxed as capital gain

Non of the distributions are treated as a dividend

Question 24

If a corporation has both an accumulated E&P deficit of $20k and a current E&P deficit of $15k and the corporation distributes $10k, what is the accumulated E&P deficit for the following year?

Answer 24

$35,000, the distribution was not made out of E&P

Question 25

How are gains/losses recognized on distribution from corporation to shareholders of land or inventory?

Answer 25

The corporation must recognize the gain but not the loss on the Distribution

Question 26

When a corporation distributes property to a shareholder, the distribution amount is? How will the amount of any liability distributed to the shareholder affect the distribution amount?

Answer 26

The property's FMV on the date of distribution Liability assumed by the shareholder reduces the distribution Amount but never below $0

Question 27

What is the shareholder's basis when he receives a property distribution from the corporation ? When does the holding period begin for the shareholder?

Answer 27

FMV basis Holding period begins the day after the distribution (doesn't include the corp's holding period)

Question 28

When a corporation distributes property and liabilities to a shareholder, how do the liabilities affect the shareholder's income and adjusted basis?

Answer 28

Liabilities reduce the shareholder's income Liabilities don't affect the shareholder's adjusted basis in The distributed property

Question 29

When a corporation distributes appreciated property to its shareholder's it must increase E&P...

Answer 29

By the E&P gain

Question 30

E&P gain calculation

Answer 30

E&P gain = property's FMV - E&P adjusted basis

Question 31

When a corporation distributes its own obligations (notes, bonds) to the shareholder, E&P is reduced by...

Answer 31

The principal amount, not the FMV

Question 32

If E&P adjusted basis of non cash asset distributed equals or exceeds FMV... 2) if the FMV of the asset distributed exceeds its E&P adjusted basis...

Answer 32

E&P is reduced by asset's E&P adjusted basis 2) E&P is reduced by asset's FMV

Question 33

Constructive dividend

Answer 33

How IRS/courts might recharacterize an excessive corporate | Payment

Question 34

How does the IRS treat the constructive dividends

Answer 34

Recast as E&P distribution Deny corporation offsetting deduction, treat all or portion Recognized by shareholder as a dividend

Question 35

Without recharacterization, a loan would be... 2 things

Answer 35

1 neither deductible to the corporation 2 nor taxable to the shareholder

Question 36

Loans to shareholders may be viewed as disguised dividends unless...

Answer 36

The shareholder can prove the loans are bonafide Shown by their intent at the time they take the loan, and repay It

Question 37

If shareholder purchases corporate property at a discount from the property's FMV?

Answer 37

The discount may be treated as a constructive dividend to | The shareholder

Question 38

Distribution of Stock dividends

Answer 38

Usually not taxable Taxable when the shareholder's proportionate interest in the distributing corporation changes

Question 39

Taxable stock dividend distributions include 4 instances

Answer 39

1 when shareholder can elect to receive stock or other property 2 some shareholders receive property, others receive an Increase in proportionate interest of corporation 3 some holders receive preferred stock, others receive common 4 distribution includes preferred and convertible preferred

Question 40

Distribution of Stock rights

Answer 40

Nontaxable unless it changes or has the potential to change the Shareholders' proportionate interest in the distributing corporation

Question 41

Receiving stock rights less than 15% value of the stock the share holder owns 2) receive 15% or more stock rights of value of stock shareholder owns

Answer 41

The stock rights will have a basis of $0, unless the shareholder Elects to allocate his stock basis between the stock and stock Rights 2) if 15% or more, it's mandatory to allocate the basis between The stock and stock rights

Question 42

If the stock rights expire

Answer 42

The shareholder can't claim a loss The basis of allocated rights is added back to the basis of Stock

Question 43

If the taxpayer exercises the stock rights before they expire, what happens to the taxpayer's basis? Holding period?

Answer 43

The basis of allocated rights is added to the basis of stock Acquired through exercise of the rights Holding period for stock acquired begins on exercise date

Question 44

If distribution of stock or stock rights is taxable, what is the distribution amount equal to? How is it treated?

Answer 44

Distribution amount equals the FMV of stock or stock rights Distribution is treated like a dividend

Question 45

Stock redemption

Answer 45

Corporation's acquiring its own stock in exchange for corporate Property

Question 46

Corporate property

Answer 46

May be cash, securities of other corporations or any consideration The corporation uses to acquire its own stock

Question 47

What 3 actions might the corporation take with reacquired stock?

Answer 47

1 cancel the acquired stock 2 retire it 3 hold it as treasury stock

Question 48

A redemption may be treated in 2 ways depending on the situation

Answer 48

1 redemption resembles a dividend 2 redemption resembles a stock sale

Question 49

When does a redemption resemble a dividend 2) when does the redemption resemble a capital gain sale

Answer 49

When the shareholder's proportionate ownership hasn't changed Because of the redemption 2) when there is a change in the proportion of ownership interest

Question 50

5 conditions for stock redemptions to be treated as sales, when redemptions are:

Answer 50

1 substantially disproportionate 2 complete termination of shareholders interest 3 not essentially equivalent to a dividend 4 involves partial liquidation of corp. in conjunction with its Redeeming stock from non corporate shareholder 5 provides funds for an estate to pay death taxes

Question 51

How is a stock redemption taxable as a sale compared to a dividend .

Answer 51

Sale: FMV - adjusted basis is taxable Dividend: whole FMV is taxable, the taxpayer' basis is surrendered And added to remaining shares still owned

Question 52

2 advantages of structuring stock redemption as a sale

Answer 52

1 capital gains may offset capital losses 2 basis of shares redeemed reduces amount of income recognized

Question 53

Tax consequences of distributing corporations: stock redemptions

Answer 53

1 corporation recognizes a gain immediately after transaction, But not a loss 2 E&P adjustment

Question 54

Corporate E&P adjustments 3

Answer 54

1 E&P reduced by redemption treated as dividend 2 E&P reduced by portion of current and ACC. E&P attributable To redeemed stock in sale 3 any distribution exceeding E&P reduces corporation's paid- In capital

Question 55

Stock redemption in which ownership interest remains the same or increases is treated as a dividend, unless...

Answer 55

The corporation doesn't have sufficient E&P

Question 56

Stock redemption: attribution rules

Answer 56

Test if stock redemption should be treated as a dividend or sale