ch14 Student:

1. The "double taxation" of corporate income refers to the fact that corporate income is taxed at both the entity-level and the shareholder-level. True False

A distribution from a corporation to a shareholder will always be treated as a dividend for tax purposes. True False

A corporation's "earnings and profits" account is equal to the company's "retained earnings" account on its balance sheet. True False

A distribution from a corporation to a shareholder will only be treated as a dividend for tax purposes if the distribution is paid out of current or accumulated earnings and profits. True False

Green Corporation has current earnings and profits of $100,000 and negative accumulated earnings and profits of $(200,000). A $50,000 distribution from Green to its sole shareholder will not be treated as a dividend because total earnings and profits is a negative $100,000. True False

Green Corporation has negative current earnings and profits of $100,000 and positive accumulated earnings and profits of $200,000. A $50,000 distribution from Green to its sole shareholder will be treated as a dividend because total earnings and profits is a positive $100,000. True False

The term "earnings and profits" is well-defined in the Internal Revenue Code.

True False

Only income and deductions included on a corporation's income tax return are included in the computation of current earnings and profits. True False

Cedar Corporation incurs a net capital loss of $20,000 in 20X3 that cannot be deducted on its income tax return but must be carried forward to 20X4. Cedar will deduct the net capital loss in the computation of current earnings and profits for 20X3. True False

Terrapin Corporation incurs federal income taxes of $250,000 in 20X3. Terrapin deducts the federal income taxes in computing its current earnings and profits for 20X3. True False

Evergreen Corporation distributes land with a fair market value of $200,000 to its sole shareholder. Evergreen's tax basis in the land is $50,000. Assuming sufficient earnings and profits, the amount of dividend reported by the shareholder is $200,000. True False

Evergreen Corporation distributes land with a fair market value of $200,000 to its sole shareholder. Evergreen's tax basis in the land is $50,000. Evergreen will report a gain of $150,000 on the distribution regardless of whether its earnings and profits is positive or negative. True False

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13. Evergreen Corporation distributes land with a fair market value of $50,000 to its sole shareholder. Evergreen's tax basis in the land is $200,000. Evergreen will report a loss of $150,000 on the distribution regardless of whether its earnings and profits is positive or negative. True False

Compensation recharacterized by the IRS as a dividend because it was considered "unreasonable" will affect only the income tax liability of the corporation paying the compensation. True False

Unreasonable compensation issues are more likely to arise in audits of privately-held corporations rather than publicly-traded corporations. True False

Stock dividends are always tax-free to the recipient.

True False

The recipient of a tax-free stock dividend will have a zero tax basis in the stock.

True False

The recipient of a taxable stock dividend will have a tax basis in the stock equal to the fair market value of the stock received. True False

A stock redemption is always treated as a sale or exchange for tax purposes.

True False

Tammy owns 60 percent of the stock of Huron Corporation. Unrelated individuals own the remaining 40 percent. For a stock redemption to be treated as an exchange under the "substantially disproportionate" rule, Tammy must reduce her stock ownership to below 48 percent. True False

Brothers and sisters are considered "family" under the stock attribution rules that apply to stock redemptions. True False

Diego owns 30 percent of Azul Corporation. Azul Corporation owns 50 percent of Verde Corporation. Under the attribution rules applying to stock redemptions, Diego is treated as owning 15 percent of Verde Corporation. True False

The "family attribution" rules are automatically waived in a complete redemption of a shareholder's stock. True False

Battle Corporation redeems 20 percent of its stock for $100,000 in a stock redemption that is treated as an exchange by the shareholders. Battle's E&P at the date of the redemption is $200,000. Battle will reduce its earnings and profits by $100,000 as a result of the redemption. True False

A distribution in partial liquidation of a corporation is always treated as a sale by an individual shareholder. True False

A liquidation of a corporation always is a taxable event to the shareholders of the liquidated corporation. True False

The tax basis of property received by a noncorporate shareholder in a complete liquidation will be the property's fair market value. True False

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28. A liquidated corporation always recognizes gain realized in a complete liquidation. True False

A liquidated corporation always recognizes loss realized in a complete liquidation where none of the shareholders is a corporation. True False

Which statement best describes the concept of the "double taxation" of corporation income?

A. Corporate income is subject to two levels of taxation: the regular tax and the alternative minimum tax. B Corporate income is taxed twice at the corporate level: first when earned and then a second time if . appreciated property is distributed to a shareholder. C Corporate income is taxed when earned by a C corporation and then a second time at the shareholder . level when distributed as a dividend. D. Corporate income is subject to two levels of taxation: at the federal level and a second time at the state

level.

Which of the following forms of earnings distributions would not be subject to double taxation at the corporate and shareholder level? A. Dividend B. Stock redemption C. Partial liquidation D. Compensation paid to a shareholder/employee of the corporation

Which of the following statements best describes the priority of the tax treatment of a distribution from a corporation to a shareholder? A The distribution is a dividend to the extent of the corporation's earnings and profits, then a return of . capital, and finally gain from sale of stock. B The distribution is a return of capital, then a dividend to the extent of the corporation's earnings and . profits, and finally gain from sale of stock. C The distribution is a return of capital, then gain from sale of stock, and finally a dividend to the extent . of the corporation's earnings and profits. DThe shareholder can elect to treat the distribution as either a dividend to the extent of the corporation's . earnings and profits or a return of capital, followed by gain from sale of stock.

Which of the following statements best describes current earnings and profits?

A. Current earnings and profits is another name for a corporation's retained earnings on its balance sheet. B Current earnings and profits is a precisely defined tax term in the Internal Revenue Code and represents . a corporation's economic income. C Current earnings and profits is a partially defined tax concept in the Internal Revenue Code and . represents a corporation's economic income. D. Current earnings and profits is a conceptual tax concept with no definition in the Internal Revenue

Code.

Which of the following statements best describes the role of current and accumulated earnings and profits in determining if a distribution is a dividend? A A distribution will only be a dividend if total earnings and profits (current plus accumulated) is positive . at the time of the distribution. B. A distribution can never be a dividend if current earnings and profits is negative. C A distribution will be a dividend if current earnings and profits for the year is positive, even if . accumulated earnings and profits is negative. D A distribution will never be a dividend if current earnings and profits for the year is negative, even if . accumulated earnings and profits is positive.

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35. A calendar-year corporation has positive current E&P of $500 and accumulated negative E&P of $1,200. The corporation makes a $400 distribution to its sole shareholder. Which of the following statements is true? A. The distribution will not be a dividend because total earnings and profits is a negative $700. B.The distribution may be a dividend, depending on whether total earnings and profits at the date of the

distribution is positive. C. The distribution will be a dividend because current earnings and profits is positive and exceeds the

distribution. D.A distribution from a corporation to a shareholder is always a dividend, regardless of the balance in

earnings and profits.

A calendar-year corporation has negative current E&P of $500 and accumulated positive E&P of $1,000. The corporation makes a $600 distribution to its sole shareholder. Which of the following statements is true? A. $500 of the distribution will be a dividend because total earnings and profits is $500. B. $0 of the distribution will be a dividend because current earnings and profits is negative. C. $600 of the distribution will be a dividend because accumulated earnings and profits is $1,000. D Up to $600 of the distribution could be a dividend depending on the balance in accumulated earnings . and profits on the date of the distribution.

Which of these items is not an adjustment to taxable income or net loss to compute current E&P?

A. Dividends received deduction B. Tax-exempt income C. Net capital loss carryforward from the prior year tax return D. Refund of prior year taxes for an accrual method taxpayer

Grand River Corporation reported taxable income of $500,000 in 20X3 and paid federal income taxes of

$170,000. Not included in the computation was a disallowed meals and entertainment expense of $2,000, tax exempt income of $1,000, and deferred gain on an installment sale of $25,000. The corporation's current earnings and profits for 20X3 would be: A. $524,000 B. $500,000 C. $354,000 D. $331,000

Au Sable Corporation reported taxable income of $800,000 in 20X3 and paid federal income taxes of

$272,000. Not included in the computation was a disallowed penalty of $25,000, life insurance proceeds of $100,000, and an income tax refund from 20X2 of $50,000. Au Sable is an accrual basis taxpayer. The corporation's current earnings and profits for 20X3 would be: A. $875,000 B. $653,000 C. $603,000 D. $553,000

Oakland Corporation reported a net operating loss of $500,000 in 20X3 and elected to carry the loss forward to 20X4. Not included in the computation was a disallowed meals and entertainment expense of $20,000, tax exempt income of $10,000, and deferred gain on an installment sale of $250,000. The corporation's current earnings and profits for 20X3 would be: A. $(500,000) B. $(720,000) C. $(510,000) D. $(260,000)

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41. Packard Corporation reported taxable income of $1,000,000 in 20X3 and paid federal income taxes of $340,000. Included in the computation was a dividends received deduction of $5,000, a net capital loss carryover from 20X2 of $10,000, and gain of $50,000 from an installment sale that took place in 20X1. The corporation's current earnings and profits for 20X3 would be: A. $1,015,000 B. $965,000 C. $675,000 D. $625,000

Abbot Corporation reported a net operating loss of $400,000 in 20X3, which the corporation elected to carry forward to 20X4. Included in the computation was regular depreciation of $100,000 (E&P depreciation is $40,000), first year expensing under §179 of $50,000, and a dividends received deduction of $10,000. The corporation's current earnings and profits for 20X3 would be: A. $(290,000) B. $(330,000) C. $(400,000) D. $(490,000)

Madison Corporation reported taxable income of $400,000 in 20X3 and accrued federal income taxes of $136,000. Included in the computation was regular depreciation of $200,000 (E&P depreciation is $60,000), first year expensing under §179 of $100,000, and a net capital loss carryover of $20,000 from 20X2. The corporation's current earnings and profits for 20X3 would be: A. $504,000 B. $484,000 C. $460,000 D. $424,000

Greenwich Corporation reported a net operating loss of $800,000 in 20X3, which the corporation

elected to carry forward to 20X4. Not included in the computation was a disallowed fine of $50,000, life insurance proceeds of $500,000, and a current year charitable contribution of $10,000 that will be carried forward to 20X4. The corporation's current earnings and profits for 20X3 would be: A. $(250,000) B. $(260,000) C. $(300,000) D. $(360,000)

Bruin Company reports current E&P of $200,000 in 20X3 and accumulated E&P at the beginning of the year of $100,000. Bruin distributed $400,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3? A. $400,000 B. $300,000 C. $200,000 D. $100,000

Aztec Company reports current E&P of $200,000 in 20X3 and accumulated E&P at the beginning of the year of negative $100,000. Aztec distributed $300,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3? A. $300,000 B. $200,000 C. $100,000 D. $0

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47. Inca Company reports current E&P of negative $100,000 in 20X3 and accumulated E&P at the beginning of the year of $200,000. Inca distributed $300,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3? A. $0 B. $100,000 C. $200,000 D. $300,000

Wildcat Corporation reports current E&P of negative $200,000 in 20X3 and accumulated E&P at the beginning of the year of $100,000. Wildcat distributed $300,000 to its sole shareholder on December 31, 20X3. How much of the distribution is treated as a dividend in 20X3? A. $0 B. $100,000 C. $200,000 D. $300,000

Beaver Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of $200,000. Beaver distributed $400,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in her stock in Beaver is $200,000. How is the distribution treated by the shareholder in 20X3? A. $400,000 dividend B. $100,000 dividend, $200,000 tax-free return of basis, and $100,000 capital gain C. $200,000 dividend and $200,000 tax-free return of basis D. $300,000 dividend and $100,000 tax-free return of basis

Longhorn Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of negative $200,000. Longhorn distributed $300,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $100,000. How is the distribution treated by the shareholder in 20X3? A. $300,000 dividend B. $100,000 dividend, $100,000 tax-free return of basis, and $100,000 capital gain C. $100,000 dividend and $200,000 tax-free return of basis D. $0 dividend, $100,000 tax-free return of basis, and $200,000 capital gain

Husker Corporation reports current E&P of negative $200,000 in 20X3 and accumulated E&P at the beginning of the year of $300,000. Husker distributed $200,000 to its sole shareholder on December 31, 20X3. The shareholder's tax basis in her stock in Husker is $50,000. How is the distribution treated by the shareholder in 20X3? A. $200,000 dividend B. $100,000 dividend, $50,000 tax-free return of basis, and $50,000 capital gain C. $100,000 dividend and $100,000 tax-free return of basis D. $0 dividend, $50,000 tax-free return of basis, and $150,000 capital gain

Tar Heel Corporation had current and accumulated E&P of $500,000 at December 31 20X3. On December 31, the company made a distribution of land to its sole shareholder, William Roy. The land's fair market value was $100,000 and its tax and E&P basis to Tar Heel was $25,000. William assumed a mortgage attached to the land of $10,000. The tax consequences of the distribution to William in 20X3 would be: A. $100,000 dividend and a tax basis in the land of $100,000 B. $100,000 dividend and a tax basis in the land of $90,000 C. Dividend of $90,000 and a tax basis in the land of $100,000 D. Dividend of $90,000 and a tax basis in the land of $90,000

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53. Cavalier Corporation had current and accumulated E&P of $500,000 at December 31 20X3. On December 31, the company made a distribution of land to its sole shareholder, Tom Jefferson. The land's fair market value was $200,000 and its tax and E&P basis to Cavalier was $50,000. The tax consequences of the distribution to Cavalier in 20X3 would be: A. No gain recognized and a reduction in E&P of $200,000 B. $150,000 gain recognized and a reduction in E&P of $200,000 C. $150,000 gain recognized and a reduction in E&P of $50,000 D. No gain recognized and a reduction in E&P of $50,000

Montclair Corporation had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Molly Pitcher. The land's fair market value was $200,000 and its tax and E&P basis to Montclair was $50,000. Molly assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Montclair in 20X3 would be: A. No gain recognized and a reduction in E&P of $200,000 B. $150,000 gain recognized and a reduction in E&P of $200,000 C. $150,000 gain recognized and a reduction in E&P of $175,000 D. No gain recognized and a reduction in E&P of $175,000

Catamount Company had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Caroline West. The land's fair market value was $200,000 and its tax and E&P basis to Catamount was $250,000. The tax consequences of the distribution to Catamount in 20X3 would be: A. No loss recognized and a reduction in E&P of $250,000 B. $50,000 loss recognized and a reduction in E&P of $250,000 C. $50,000 loss recognized and a reduction in E&P of $150,000 D. No loss recognized and a reduction in E&P of $200,000

Paladin Corporation had current and accumulated E&P of $500,000 at December 31,20X3. On December 31, the company made a distribution of land to its sole shareholder, Maria Mendez. The land's fair market value was $200,000 and its tax and E&P basis to Paladin was $250,000. Maria assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Paladin in 20X3 would be: A. No loss recognized and a reduction in E&P of $200,000 B. $50,000 loss recognized and a reduction in E&P of $200,000 C. $50,000 loss recognized and a reduction in E&P of $225,000 D. No loss recognized and a reduction in E&P of $225,000

Which of the following payments could be treated as a constructive dividend by the IRS?

A. End-of-year bonus payment to a shareholder/employee B. Rent paid to a shareholder/lessor C. Interest paid to a shareholder/creditor D. All of these payments could be treated as a constructive dividend by the IRS

Which of the following factors would not be considered in determining if compensation paid to a

shareholder/employee is reasonable? A. The individual's duties and responsibilities B. What individuals performing in comparable capacities at other companies are paid C. Whether the corporation has a formal compensation policy D. The individual's marginal income tax rate

Which of the following statements is not considered a potential answer to the dividend puzzle (why do corporations pay dividends)? A. Paying dividends avoids the double taxation of corporate income B Demanding that managers pay out dividends restricts their investment activities and forces them to . adopt more efficient investment policies C. Paying dividends is a source of investor goodwill D. Dividends are a signal to the capital markets about the health of a corporation's activities

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60. Which of the following stock dividends would be tax-free to the shareholder? A. A 2-for-1 stock split to all holders of common stock B. A stock dividend where the shareholder could choose between cash and stock C. A stock dividend to all holders of preferred stock D. Both A and C are tax-free to the shareholder

El Toro Corporation declared a common stock dividend to all shareholders of record on June 30, 20X3. Shareholders will receive 1 share of El Toro stock for each 2 shares of stock they already own. Raoul owns 300 shares of El Toro stock with a tax basis of $60 per share. The fair market value of the El Toro stock was $100 per share on June 30, 20X3. What are the tax consequences of the stock dividend to Raoul? A. $0 dividend income and a tax basis in the new stock of $100 per share B. $0 dividend income and a tax basis in the new stock of $60 per share C. $0 dividend income and a tax basis in the new stock of $40 per share D. $15,000 dividend and a tax basis in the new stock of $100 per share

Wonder Corporation declared a common stock dividend to all shareholders of record on September 30, 20X3. Shareholders will receive three shares of Wonder stock for each five shares of stock they already own. Diana owns 300 shares of Wonder stock with a tax basis of $90 per share (a total basis of $27,000). The fair market value of the Wonder stock was $180 per share on September 30, 20X3. What are the tax consequences of the stock dividend to Diana? A. $0 dividend income and a tax basis in the new stock of $180 per share B. $0 dividend income and a tax basis in the new stock of $67.50 per share C. $0 dividend income and a tax basis in the new stock of $56.25 per share D. $10,800 dividend and a tax basis in the new stock of $180 per share

Which of the following individuals is not considered "family" for purposes of applying the stock attribution rules to a stock redemption? A. Parents B. Grandchildren C. Grandparents D. Spouse

Which of the following statements is true?

A. All stock redemptions are treated as exchanges for tax purposes. B. A stock redemption not treated as an exchange will automatically be treated as a taxable dividend. C. All stock redemptions are treated as dividends if received by an individual. D A stock redemption is treated as an exchange only if it meets one of three stock ownership tests . described in the Internal Revenue Code.

Sam owns 70 percent of the stock of Club Corporation. Unrelated individuals own the remaining 30 percent. For a stock redemption of Sam's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Club stock must Sam own after the redemption? A. Any percentage less than 70 percent B. Any percentage less than 56 percent C. Any percentage less than 50 percent D. All stock redemptions involving individuals are treated as exchanges

Sara owns 60 percent of the stock of Lea Corporation. Unrelated individuals own the remaining 40 percent. For a stock redemption of Sara's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Lea stock must Sara own after the redemption? A. Any percentage less than 60 percent B. Any percentage less than 50 percent C. Any percentage less than 48 percent D. All stock redemptions involving individuals are treated as exchanges

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67. Comet Company is owned equally by Pat and his sister Pam, each of whom hold 100 shares in the company. Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 50 of her shares for $1,000 per share on December 31, 20X3. Pam's income tax basis in each share is $500. Comet has total E&P of $250,000. What are the tax consequences to Pam as a result of the stock redemption? A. $25,000 capital gain and a tax basis in each of her remaining shares of $500. B. $25,000 capital gain and a tax basis in each of her remaining shares of $100. C. $50,000 dividend and a tax basis in each of her remaining shares of $100. D. $50,000 dividend and a tax basis in each of her remaining shares of $50.

Comet Company is owned equally by Pat and his sister Pam, each of whom hold 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X3, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $250,000 on December 31, 20X3. What are the tax consequences to Comet as a result of the stock redemption? A. No reduction in E&P as a result of the exchange. B. A reduction of $50,000 in E&P as a result of the exchange. C. A reduction of $62,500 in E&P as a result of the exchange. D. A reduction of $125,000 in E&P as a result of the exchange.

Comet Company is owned equally by Pat and his sister Pam, each of whom hold 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X3, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $160,000 on December 31, 20X3. What are the tax consequences to Comet as a result of the stock redemption? A. No reduction in E&P as a result of the exchange. B. A reduction of $50,000 in E&P as a result of the exchange. C. A reduction of $40,000 in E&P as a result of the exchange. D. A reduction of $80,000 in E&P as a result of the exchange.

Viking Corporation is owned equally by Sven and his wife Olga, each of whom hold 100 shares in the company. Viking redeemed 75 shares of Sven's stock in the company on December 31, 20X3. Viking paid Sven $2,000 per share. His income tax basis in each share is $1,000. Viking has total E&P of $500,000. What are the tax consequences to Sven as a result of the stock redemption? A. $75,000 capital gain and a tax basis in each of his remaining shares of $1,000. B. $75,000 capital gain and a tax basis in each of his remaining shares of $2,000. C. $150,000 dividend and a tax basis in each of his remaining shares of $1,000. D. $150,000 dividend and a tax basis in each of his remaining shares of $4,000.

Viking Corporation is owned equally by Sven and his wife Olga, each of whom hold 100 shares in the company. Viking redeemed 75 shares of Sven's stock for $2,000 per share on December 31, 20X3. Viking has total E&P of $500,000. What are the tax consequences to Viking as a result of the stock redemption? A. No reduction in E&P as a result of the exchange. B. A reduction of $150,000 in E&P as a result of the exchange. C. A reduction of $187,500 in E&P as a result of the exchange. D. A reduction of $375,000 in E&P as a result of the exchange.

Corona Company is owned equally by Maria, her sister Carlita, her mother Gabriella, and her grandmother Olivia, each of whom hold 100 shares in the company. Under the family attribution rules, how many shares of Corona stock is Maria deemed to own? A. 100 B. 200 C. 300 D. 400

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73. Panda Company is owned equally by Min, her husband Bin, her sister Xiao, and her grandson, Han, each of whom hold 100 shares in the company. Under the family attribution rules, how many shares of Panda stock is Min deemed to own? A. 100 B. 200 C. 300 D. 400

Beltway Company is owned equally by George, his brother Thomas, and a partnership owned 50 percent by George and his father Abe. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Beltway stock is George deemed to own? A. 100 B. 150 C. 200 D. 300

Lansing Company is owned equally by Jennifer, her husband Dan, and DeWitt Corporation, which is owned 50 percent by Jennifer and her sister Jane. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Lansing stock is Jennifer deemed to own? A. 100 B. 200 C. 250 D. 300

Lansing Company is owned equally by Jennifer, her husband Dan, and DeWitt Corporation, which is owned 50 percent by Jennifer and her sister Jane. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Lansing stock is DeWitt Corporation deemed to own? A. 100 B. 200 C. 250 D. 300

Tammy owns 100 shares in Star Struck Corporation. The other 100 shares are owned by her husband Tommy. Which of the following statements is true? A A stock redemption that completely terminates Tammy's direct interest in a corporation will be treated . as an exchange for tax purposes. BA stock redemption that completely terminates Tammy's direct interest in a corporation will be treated . as a dividend for tax purposes if Tammy waives the family attribution rules and files a "triple i"

agreement with the IRS. CA stock redemption that completely terminates Tammy's direct interest in a corporation will be treated . as an exchange if Tammy waives the family attribution rules and files a "triple i" agreement with the

IRS. D. None of the above.

General Inertia Corporation made a distribution of $50,000 to Henry Tiara in partial liquidation of the company on December 31, 20X3. Henry owns 500 shares (50%) of General Inertia. The distribution was in exchange for 250 shares of Henry's stock in the company. After the partial liquidation, Henry continued to own 50% of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Henry's income tax basis in the shares was $100 per share. General Inertia had total E&P of $800,000 at the time of the distribution. What are the tax consequences to Henry as a result of the transaction? A. Henry has dividend income of $50,000 and a tax basis in his remaining shares of $100 per share. B. Henry has capital gain of $25,000 and a tax basis in his remaining shares of $100 per share. C. Henry has dividend income of $50,000 and a tax basis in his remaining shares of $200 per share. D. Henry has capital gain of $25,000 and a tax basis in his remaining shares of $200 per share.

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79. General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Inc. in partial liquidation of the company on December 31, 20X3. Tiara, Inc. owns 500 shares (50%) of General Inertia. The distribution was in exchange for 250 shares of Tiara's stock in the company. After the partial liquidation, Tiara continued to own 50% of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Tiara's income tax basis in the shares was $100 per share. General Inertia had total E&P of $800,000 at the time of the distribution. What amount of dividend or capital gain does Tiara recognize as a result of the transaction? A. Tiara does not recognize any dividend income or capital gain. B. Tiara recognizes capital gain of $50,000. C. Tiara recognizes dividend income of $50,000. D. Tiara recognizes capital gain of $25,000.

Which of the following statements does not describe a tax consequence to shareholders in a complete liquidation? A. All complete liquidations are taxable to the shareholders. B. Complete liquidations are taxable to all individual shareholders. CComplete liquidations are taxable to all corporate shareholders owning stock of the liquidated . corporation representing less than 80 percent or more of voting power and value. DComplete liquidations are tax deferred to corporate shareholders owning stock of the liquidated . corporation representing 80 percent or more of voting power and value.

Jalen transferred his 10 percent interest to Wolverine Company as part of a complete liquidation of the company. In the exchange he received land with a fair market value of $100,000. Jalen's basis in the Wolverine stock was $50,000. The land had a basis to Wolverine Company of $80,000. What amount of gain does Jalen recognize in the exchange and what is his basis in the land he receives? A. $50,000 gain recognized and a basis in the land of $100,000 B. $50,000 gain recognized and a basis in the land of $80,000 C. No gain recognized and a basis in the land of $80,000 D. No gain recognized and a basis in the land of $50,000

Red Blossom Corporation transferred its 40 percent interest to Tea Company as part of a complete liquidation of the company. In the exchange Red Blossom received land with a fair market value of $500,000. The corporation's basis in the Tea Company stock was $300,000. The land had a basis to Tea Company of $600,000. What amount of gain does Red Blossom recognize in the exchange and what is its basis in the land it receives? A. $200,000 gain recognized and a basis in the land of $600,000 B. $200,000 gain recognized and a basis in the land of $500,000 C. No gain recognized and a basis in the land of $600,000 D. No gain recognized and a basis in the land of $300,000

Paladin Corporation transferred its 90 percent interest to Furman Company as part of a complete liquidation of the company. In the exchange Paladin received land with a fair market value of $1,000,000. The corporation's basis in the Furman Company stock was $400,000. The land had a basis to Furman Company of $200,000. What amount of gain does Paladin recognize in the exchange and what is its basis in the land it receives? A. $600,000 gain recognized and a basis in the land of $1,000,000 B. $600,000 gain recognized and a basis in the land of $400,000 C. No gain recognized and a basis in the land of $400,000 D. No gain recognized and a basis in the land of $200,000

Katarina transferred her 10 percent interest to Spartan Company as part of a complete liquidation of the company. In the exchange she received land with a fair market value of $200,000. Katarina's basis in the Spartan stock was $100,000. The land had a basis to Spartan Company of $50,000. What amount of gain does Spartan recognize in the exchange and what is Katarina's basis in the land she receives? A. $100,000 gain recognized by Spartan and a basis in the land of $200,000 B. $150,000 gain recognized by Spartan and a basis in the land of $200,000 C. No gain recognized by Spartan and a basis in the land of $100,000 D. No gain recognized by Spartan and a basis in the land of $50,000

80.

81.

82.

83.

84.

85. Which of the following statements best describes the recognition of loss on property transferred to shareholders in complete liquidation of a corporation? A.The liquidated corporation always recognizes loss on the distribution of property in complete

liquidation of the corporation. B.The liquidated corporation never recognizes loss on the distribution of property in complete liquidation

of the corporation. CThe liquidated corporation recognizes loss on the distribution of property in complete liquidation of the . corporation if the property is distributed to individuals who are not related parties to the corporation. DThe liquidated corporation recognizes loss on the distribution of property in complete liquidation of the . corporation only if the property is distributed to individuals who are related parties to the corporation.

Billie transferred her 20 percent interest to Jean Company as part of a complete liquidation of the company. In the exchange she received land with a fair market value of $200,000. Billie's basis in the Jean stock was $100,000. The land had a basis to Jean Company of $400,000. What amount of loss does Jean recognize in the exchange and what is Billie's basis in the land she receives? Billie is not considered a related party to Jean Company. A. $200,000 loss recognized by Jean and a basis to Billie in the land of $200,000 B. $200,000 loss recognized by Jean and a basis to Billie in the land of $400,000 C. No loss recognized by Jean and a basis to Billie in the land of $200,000 D. No loss recognized by Jean and a basis to Billie in the land of $400,000

Robin transferred her 60 percent interest to Cardinal Company as part of a complete liquidation of the company. In the exchange she received land with a fair market value of $800,000. Robin's basis in the Cardinal stock was $900,000. The land had a basis to Cardinal Company of $1,000,000. What amount of loss does Cardinal recognize in the exchange and what is Robin's basis in the land she receives? The distribution was non pro rata to Robin, a related person. A. $200,000 loss recognized by Cardinal and a basis to Robin in the land of $1,000,000 B. $200,000 loss recognized by Cardinal and a basis to Robin in the land of $800,000 C. No loss recognized by Cardinal and a basis to Robin in the land of $1,000,000 D. No loss recognized by Cardinal and a basis to Robin in the land of $800,000

Packard Corporation transferred its 100 percent interest to State Company as part of a complete liquidation of the company. In the exchange Packard received land with a fair market value of $300,000. Packard's basis in the State stock was $600,000. The land had a basis to State Company of $500,000. What amount of loss does State recognize in the exchange and what is Packard's basis in the land it receives? A. $200,000 loss recognized by State and a basis in the land of $300,000 B. $200,000 loss recognized by State and a basis in the land of $500,000 C. No loss recognized by State and a basis in the land of $300,000 D. No loss recognized by State and a basis in the land of $500,000

Superior Corporation reported taxable income of $1,000,000 in 20X3. Superior paid a dividend of

$100,000 to its sole shareholder, Mary Yooper. Superior Corporation is subject to a flat rate tax of 34%. The dividend meets the requirements to be a "qualified dividend" and Mary is subject to a tax rate of 15% on the dividend. What is the total federal income tax imposed on the corporate income earned by Superior and distributed to Mary as a dividend?

86.

87.

88.

89.

90. Erie Corporation reported taxable income of $2,200,000 in 20X3 before any deduction for any payment to its sole shareholder and employee, LaBron Cleveland. Erie paid a bonus of $200,000 to LaBron at year-end. Erie Corporation is subject to a flat-rate tax of 34%. The bonus meets the requirements to be "reasonable" and is therefore deductible by Erie. LaBron is subject to a marginal tax rate of 35% on the bonus. What is the total federal income tax imposed on the corporate income earned by Erie and paid to LaBron as a bonus?

91. St. Clair Company reports positive current E&P of $500,000 in 20X3 and positive accumulated E&P at the beginning of the year of $400,000. St. Clair Company distributed $600,000 to its sole shareholder, Danielle Brush on December 31, 20X3. Danielle's tax basis in her St. Clair stock is $120,000. How much of the $600,000 distribution is treated as a dividend to Danielle and what is her basis in St. Clair stock after the distribution?

92. Austin Company reports positive current E&P of $200,000 and negative accumulated E&P of $300,000. Austin distributed $250,000 to its sole shareholder, Betsy Bevo, on December 31, 20X3. Betsy' tax basis in her stock is $125,000. How much of the $250,000 distribution is treated as a dividend to Betsy and what is her tax basis in Austin stock after the distribution?

93. Elk Company reports negative current E&P of $200,000 and positive accumulated E&P of $300,000. Elk distributed $200,000 to its sole shareholder, Barney Rubble, on December 31, 20X3. Barney's tax basis in his Elk stock is $75,000. What is the tax treatment of the distribution to Barney and what is his tax basis in Elk stock after the distribution?

94. Houghton Company reports negative current E&P of $(500,000) and negative accumulated E&P of $(800,000). Houghton distributed $100,000 to its sole shareholder, Blossom Applegate, on December 31, 20X3. Blossom's tax basis in her Houghton stock is $50,000. What is the tax treatment of the distribution to Blossom and what is her tax basis in Houghton stock after the distribution?

95. Loon, Inc. reported taxable income of $600,000 in 20X3 and paid federal income taxes of $202,000. Not included in the company's computation of taxable income is tax-exempt interest of $30,000, disallowed meals and entertainment expenses of $15,000, and disallowed expenses related to the tax-exempt income of $4,000. Loon deducted depreciation of $200,000 on its tax return. Under the alternative (E&P) depreciation method, the deduction would have been $80,000. Compute the company's current E&P for 20X3.

96. Orchard, Inc. reported taxable income of $800,000 in 20X3 and paid federal income taxes of $272,000. Included in the company's computation of taxable income is gain from sale of a depreciable asset of $200,000. The income tax basis of the asset was $50,000. The E&P basis of the asset using the alternative depreciation system was $75,000. Compute the company's current E&P for 20X3.

97. Walloon, Inc. reported taxable income of $1,000,000 in 20X3 and paid federal income taxes of $340,000. The company reported a capital gain from sale of investments of $150,000, which was partially offset by a $40,000 net capital loss carryover from 20X2, resulting in a net capital gain of $110,000 included in taxable income. Compute the company's current E&P for 20X3.

98. Otter Corporation reported taxable income of $400,000 from operations for 20X3. The company paid federal income taxes of $136,000 on this taxable income. During the year, the company made a distribution of land to its sole shareholder, Emmet Jugg. The land's fair market value was $50,000 and its tax and E&P basis to Otter was $30,000. Emmet assumed a mortgage attached to the land of $10,000. Any gain from the distribution will be taxed at 34%. The company had accumulated E&P of $900,000 at the beginning of the year. Compute Otter's total taxable income and federal income tax paid as a result of the distribution (assume a tax rate of 34%). Using your solution, compute Otter's current E&P for 20X3.

99. Ozark Corporation reported taxable income of $500,000 from operations for 20X3. During the year, the company made a distribution of land to its sole shareholder, Marcus Twain. The land's fair market value was $100,000 and its tax and E&P basis to Ozark was $125,000. Marcus assumed a mortgage attached to the land of $25,000. Ozark's tax rate is 34%. The company had accumulated E&P of $850,000 at the beginning of the year. Compute Ozark's total taxable income and federal income tax paid as a result of the distribution. Using your solution, compute Ozark's accumulated E&P at January 1, 20X4.

100.Sherburne Corporation reported current earnings and profits for 20X3 of $500,000. During the year, the company made a distribution of land to its sole shareholder, Ted Bozeman. The land's fair market value was $150,000 and its tax and E&P basis to Sherburne was $100,000. Ted assumed a mortgage attached to the land of $25,000. What amount of dividend income does Ted report as a result of the distribution and what is Ted's income tax basis in the land received from Sherburne?

101.Sunapee Corporation reported taxable income of $700,000 from operations for 20X3. During the year, the company made a distribution of land to its sole shareholder, Jean McCarthy. The land's fair market value was $125,000 and its tax and E&P basis to Sunapee was $75,000. Jean assumed a mortgage attached to the land of $25,000. Sunapee's tax rate is 34%. Compute Sunapee's total taxable income and federal income tax paid as a result of the distribution. Using your solution, compute Sunapee's current E&P for 20X3.

102.Tappan Company pays its sole shareholder, Carlita Hill, a salary of $200,000. At the end of each year, the company pays Carlita a "bonus" equal to the difference between the corporation's taxable income for the year (before the bonus) and $75,000. For 20X3, Tappan reported pre-bonus taxable income of $800,000 and paid Carlita a bonus of $725,000. On audit, the IRS determined that individuals working in Carlita's position earned on average $300,000 per year. The company had no formal compensation policy and never paid a dividend. How much of Carlita's compensation (salary plus bonus) might the IRS recharacterize as a dividend? Assuming the IRS recharacterizes $500,000 of Carlita's bonus as a dividend, what additional income tax liability does Tappan Company face? (Ignore payroll taxes)

103.Townsend Corporation declared a 1-for-1 stock split to all common stock shareholders of record on December 31, 20X3. Townsend reported current E&P of $400,000 and accumulated E&P of $1,000,000. The total fair market value of the stock distributed was $500,000. Regina Williams owned 1,000 shares of Townsend common stock with a tax basis of $200 per share ($2,000,000 total). The fair market value of the common stock was $300 per share on December 31, 20X3. What is Regina's income tax basis in the new and existing common stock she owns in Townsend, assuming the distribution is tax-free?

104.Sweetwater Corporation declared a stock dividend to all common stock shareholders of record on December 31, 20X3. Shareholders will receive 1 share of Sweetwatercommon stock for each 5 shares of common stock they already own. Pierre Dorgan owns 500 shares of Sweetwatercommon stock with a tax basis of $150 per share. The fair market value of the Sweetwatercommon stock was $90 per share on December 31. What is Pierre's income tax basis in his new and existing common stock in Sweetwater, assuming the distribution is non-taxable?

105.Buckeye Company is owned equally by James and his brother Terrelle, each of whom own 500 shares in the company. Terrelle wants to reduce his ownership in the company, and it was decided that the company will redeem 200 of his shares for $5,000 per share on December 31, 20X3. Terrelle's income tax basis in each share is $1,000. Buckeye has current E&P of $10,000,000 and accumulated E&P of $20,000,000. What is the amount and character (capital gain or dividend) recognized by Terrelle as a result of the stock redemption?

106.Pine Creek Company is owned equally by Bob and his sister Samantha, each of whom own 1,000 shares in the company. On December 31, 20X3, Pine Creek redeemed 200 of Samantha's shares for $5,000,000 in a transaction treated as an exchange by Samantha. Pine Creek has current E&P of $10,000,000 and accumulated E&P of $30,000,000 (computed without regard to the stock redemption). Assuming Pine Creek did not make any dividend distributions during 20X3, by what amount does the company reduce its E&P as a result of the redemption?

107.Goose Company is owned equally by Val and her sister Eugenia, each of whom own 500 shares in the company. Val wants to reduce her ownership in the company and have the transaction treated as an exchange for tax purposes. Determine the minimum amount of stock that Goose must redeem from Val for her to treat the redemption as being "substantially disproportionate with respect to the shareholder" and receive exchange treatment.

108.Crystal, Inc. is owned equally by John and his wife Arlene, each of whom own 500 shares in the company. Arlene wants to reduce her ownership in the company, and it was decided that the company will redeem 200 of her shares for $5,000 per share on December 31, 20X3. Arlene's income tax basis in each share is $1,000. Crystal has current E&P of $1,000,000 and accumulated E&P of $3,000,000. What is the amount and character (capital gain or dividend) recognized by Arlene as a result of the stock redemption, assuming only the "substantially disproportionate with respect to the shareholder" test is applied?

109.Crescent Corporation is owned equally by George and his daughter Olympia, each of whom own100 shares in the company. George wants to retire from the company, and it was decided that the company will redeem all 100 of his shares for $10,000 per share on December 31, 20X3. George's income tax basis in each share is $2,000. Crescent has current E&P of $1,000,000 and accumulated E&P of $5,000,000. What must George do to ensure that the redemption will be treated as an exchange?

110.Tiger Corporation, a privately-held company, has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows:

How many shares of stock is Mark deemed to own under the family attribution rules in a stock redemption?

111.Geneva Corporation, a privately-held company, has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows:

Madison has a 20 percent interest in the partnership. The remaining 80 percent is owned by unrelated individuals. Madison owns 40% of Packer Corporation. The other 60 percent is owned by her father.

How many shares of stock is Madison deemed to own under the family attribution rules in a stock redemption?

112.Half Moon Corporation made a distribution of $300,000 to Arnold Swartz in partial liquidation of the company on December 31, 20X3. Arnold owns 100% of Half Moon Corporation (1,200 shares). The distribution was in exchange for 50% of Arnold's stock in the company (600 shares). At the time of the distribution, the shares had a fair market value of $500 per share. Arnold's income tax basis in the shares was $250 per share. Half Moon had total E&P of $2,000,000 at the time of the distribution. What is the amount and character (capital gain or dividend) of any income or gain recognized by Arnold as a result of the partial liquidation?

113.Yellowstone Corporation made a distribution of $300,000 to Cheney, Inc. in partial liquidation of the company on December 31, 20X3. Cheney, Inc. owns 50 percent of Yellowstone Corporation (1,000 shares). The other 50 percent is owned by an unrelated corporation. The distribution was in exchange for 50% of Cheney's stock in the company (500 shares). At the time of the distribution, the shares had a fair market value of $800 per share. Cheney's income tax basis in the shares was $500 per share. Yellowstone had total E&P of $5,000,000 at the time of the distribution. What is the amount and character (capital gain or dividend) of any income or gain recognized by Cheney as a result of the partial liquidation?

Gary and Laura decided to liquidate their jointly owned corporation, Amelia, Inc. After liquidating its remaining inventory and paying off its remaining liabilities, Amelia had the following tax accounting balance sheet.

Under the terms of the agreement, Gary will receive the $100,000 cash in exchange for his interest in Amelia. Gary's tax basis in his Amelia stock is $30,000. Laura will receive the building and land in exchange for her interest in Amelia. Laura's tax basis in her Amelia stock is $60,000.

114.What amount of gain or loss does Amelia recognize in the complete liquidation?

115.What amount of gain or loss does Gary recognize in the complete liquidation?

116.What amount of gain or loss does Laura recognize in the complete liquidation and what is Laura's tax basis in the building and land after the complete liquidation?

Mike and Michelle decided to liquidate their jointly owned corporation, Pennsylvania Corporation. After liquidating its remaining inventory and paying off its remaining liabilities, Pennsylvania had the following tax accounting balance sheet.

Under the terms of the agreement, Mike will receive the $200,000 cash in exchange for his 40 percent interest in Pennsylvania. Mike's tax basis in his Pennsylvania stock is $50,000. Michelle will receive the building and land in exchange for her 60 percent interest in Pennsylvania. Her tax basis in the Pennsylvania stock is $100,000.

117.What amount of gain or loss does Pennsylvania recognize in the complete liquidation?

118.What amount of gain or loss does Mike recognize in the complete liquidation?

119.What amount of gain or loss does Michelle recognize in the complete liquidation and what is her tax basis in the building and land after the complete liquidation?

Oriole, Inc. decided to liquidate its wholly-owned subsidiary, Tiger Corporation. Tiger had the following tax accounting balance sheet.

120.What amount of gain or loss does Tiger recognize in the complete liquidation?

121.What amount of gain or loss does Oriole recognize in the complete liquidation?

122.What is Oriole's tax basis in the building and land after the complete liquidation?

ch14 Key 1. TRUE

2. FALSE

3. FALSE

4. TRUE

5. FALSE

6. TRUE

7. FALSE

8. FALSE

9. TRUE

10. TRUE

11. TRUE

12. TRUE

13. FALSE

14. FALSE

15. TRUE

16. FALSE

17. FALSE

18. TRUE

19. FALSE

20. TRUE

21. FALSE

22. FALSE

23. FALSE

24. FALSE

25. TRUE

26. FALSE

27. TRUE

28. FALSE

29. FALSE

30. C

31. D

32. A

33. C

34. C

35. C

36. D

37. D

38. C

39. C

40. D

41. D

42. A

43. A

44. D

45. B

46. B

47. C

48. A

49. D

50. B

51. B

52. C

53. B

54. C

55. A

56. D

57. D

58. D

59. A

60. A

61. C

62. C

63. C

64. D

65. C

66. C

67. A

68. B

69. C

70. D

71. B

72. B

73. C

74. C

75. C

76. D

77. C

78. B

79. C

80. A

81. A

82. B

83. D

84. B

85. C

86. A

87. D

88. D

Feedback:

89. $355,000

Feedback:

90. $750,000

Feedback: All $600,000 is treated as a dividend because the distribution is less than the company's total earnings and profits of $900,000. Danielle's tax basis in her St. Clair stock remains $120,000. 91. $600,000 dividend and a tax basis of $120,000.

Feedback: Betsy has dividend income of $200,000, an amount equal to the company's current E&P. She reduces her tax basis in the Austin stock by $50,000, the excess of the distribution over the dividend amount. 92. $200,000 dividend and a tax basis in Austin stock of $75,000.

Feedback: Barney reports a dividend of $100,000, the accumulated E&P at December 31, 20X3. The excess $100,000 distribution first reduces his basis in Elk stock, and the excess is treated as capital gain from sale of the stock. His tax basis in Elk stock is $0. 93. $100,000dividend income, $75,000 tax-free return of capital, $25,000 capital gain. His tax basis in the Elk stock is $0.

Feedback: No part of the distribution is treated as a dividend because both current and accumulated E&P are negative. The first $50,000 of the distribution is a tax free return of capital and the remaining $50,000 is treated as gain from sale of stock. Her tax basis in Houghton stock is $0. 94. $0 dividend to Blossom, $50,000 tax free return of capital, and $50,000 capital gain. Her tax basis in Houghton stock is $0.

Feedback: 95. $529,000

Feedback:

96. $503,000

Feedback:

97. $700,000

Feedback:

98. $277,200

Feedback:

99. $500,000 taxable income, $170,000 federal income tax, $1,080,000 accumulated E&P at the beginning of 20X4.

Feedback: Ted reports dividend income of $125,000, computed as the fair market value of the land received of $150,000 less the mortgage he assumes of $25,000. Ted's income tax basis in the land equals its fair market value of $150,000. 100. $125,000 dividend and a tax basis of $150,000 in the land.

Feedback:

101. Taxable income of $750,000, federal income tax of $255,000, and current E&P of $495,000.

Tappan would be denied a deduction for the $500,000, increasing the company's taxable income from $75,000 to $575,000. The company's tax on $575,000 is $195,500. The company's tax on $75,000 is $13,750. The company would owe additional taxes of $181,750.

Feedback: The IRS could treat Carlita as receiving a constructive dividend to the extent the "bonus" is considered unreasonable compensation. The IRS could argue that the total "compensation" in excess of what an individual in Carlita's position typically receives as compensation should be recharacterized as a dividend. Carlita's compensation would be $300,000. She would report the disallowed compensation of $625,000 ($200,000 + $725,000 - $300,000) as a dividend. 102. The IRS could recharacterize $625,000 as a dividend. If the IRS recharacterizes $500,000 as a dividend, Tappan's tax liability would increase by $181,750.

Feedback: The new common stock is allocated part of the tax basis of the old common stock based on relative fair market value. In a 1 for 1 stock split, Regina would allocate half of the basis of the old common stock of $200 to the new common stock, making her tax basis in the old and new common stock $100 per share. 103. $100 per share

Feedback: The new stock is allocated part of the tax basis of the existing common stock based on relative fair market value. After the common stock dividend, Pierre will own 600 shares of Sweetwatercommon stock (500 + 500/5), each with the same fair market value. His basis in each share of common stock will be $125, computed as (500 shares x $150 basis)/600. 104. $125 per share

Feedback: Terrelle reduces his ownership in Buckeye Company from 50% to 37.5% (300/800). Terrelle meets the "substantially disproportionate" test to treat the redemption as an exchange. He reduces his ownership below 50%, and his ownership percentage after the redemption is less than 80% of his ownership before the redemption (80% x 50% = 40%). As a result, Terrelle recognizes a capital gain of $800,000 ($1,000,000 - $200,000). 105. $800,000 capital gain

Feedback: Pine Creek reduces its accumulated E&P by the lesser of the cash distributed ($5,000,000) or the percentage of stock redeemed times accumulated E&P at the date of the redemption, after reduction by any dividends paid during the year(200/2,000 x $40,000,000 = $4,000,000). 106. $4,000,000

Feedback: Val must reduce her stock ownership in Goose below 40% as a result of the exchange. The algebraic equation to solve for the number

of shares to have redeemed is (500 - X)/(1,000 - X) < 40%, where X equals the number of shares redeemed. Solving for X, the number of shares to be redeemed equals 167. After a redemption of 167 shares, Val will own 333 out of 833 shares of Goose stock. 333/833 = 39.98%, which is below the required 40% threshold to have the redemption treated as an exchange for tax purposes. 107. 167 shares

Feedback: Arlene reduces her direct ownership in Crystal, Inc. from 50% to 37.5% (300/800). However, under the family attribution rules, she is deemed to own the 500 shares owned by her husband, John. Her stock ownership before the exchange is 100%, and her ownership after the exchange is still 100% (800/800). Arlene fails the "substantially disproportionate" test to treat the redemption as an exchange. As a result, she recognizes a dividend of $1,000,000 ($5,000 x 200 shares). 108. $1,000,000 dividend

109. George must file a "triple i agreement" with the IRS, in which he agrees he will not acquire a prohibited interest in the next 10 years. By filing such an agreement, George can waive the family attribution rules and be treated as having a complete termination of his interest in Crescent Corporation.

Feedback: Mark is deemed to own his shares, his wife's shares, and his daughter's shares.

110. 750

Feedback: Madison is deemed to own her shares, her percentage ownership in the partnership's shares (50), her granddaughter's shares, and 100 percent of the corporation's shares (300). Under the family attribution rules, she is treated as owning 100 percent of the corporation. 111. 800

Feedback: An individual receives exchange treatment on distributions in partial liquidation of stock. As a result, Arnold reports capital gain of $150,000 on the stock exchanged ($300,000 - $150,000). 112. $150,000 capital gain.

Feedback: A corporation receives dividend treatment on distributions in partial liquidation of stock. As a result, Cheney, Inc. reports a dividend of $300,000, which is eligible for an 80% dividends received deduction. 113. $300,000 dividend

Feedback: In a complete liquidation that is taxable to the shareholders, the liquidated corporation has a taxable transaction when gain is realized.

114. Amelia has a taxable transaction and recognizes gain of $50,000 on the transfer of the building and gain of $70,000 on the transfer of the land.

Feedback: Distributions in complete liquidation to individual shareholders are taxable to the shareholders.

115. Gary recognizes gain of $70,000 on the transfer of his stock to Amelia ($100,000 - $30,000) in complete liquidation of Amelia.

Feedback: Distributions in complete liquidation to individual shareholders are taxable to the shareholders and noncash property received takes a basis equal to fair market value. 116. Laura recognizes gain of $260,000 on the transfer of her stock to Amelia ($320,000 - $60,000) in complete liquidation of Amelia. Her basis in the building is $200,000 and her basis in the land is $120,000.

Feedback: In a complete liquidation that is taxable to the shareholders, the liquidated corporation has a taxable transaction when gain is realized. The loss cannot be recognized because the property is distributed non pro rata to a related party (Michelle owns more than 50 percent of the stock of Pennsylvania). 117. Pennsylvania has a taxable transaction and recognizes gain of $100,000 on the transfer of the building. However, Pennsylvania cannot recognize the $50,000 loss.

Feedback: Distributions in complete liquidation to individual shareholders are taxable to the shareholders.

118. Mike recognizes gain of $150,000 on the transfer of his stock to Pennsylvania ($200,000 - $50,000) in complete liquidation of Pennsylvania.

Feedback: Distributions in complete liquidation to individual shareholders are taxable to the shareholders and noncash property received takes a basis equal to fair market value. 119. Michelle recognizes gain of $200,000 on the transfer of her stock to Pennsylvania ($300,000 - $100,000) in complete liquidation of Pennsylvania. Her basis in the building is $200,000 and her basis in the land is $100,000.

Feedback: Tiger does not recognize gain or loss on the liquidation because the liquidating distribution is to a corporation that owns 80-percent-or- more of Tiger. 120. No gain or loss is recognized.

Feedback: Oriole does not recognize gain or loss on the receipt of the liquidating distribution because it owns 80-percent-or-more of Tiger. 121. No gain or loss is recognized.

122. $600,000. Oriole takes a carryover tax basis in each of Tiger's assets received in the liquidation.

ch14 Summary Category # of Questions

AACSB: Analytic

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

Blooms: Analyze

Blooms: Apply

Blooms: Remember

Blooms: Understand

Learning Objective: 14- 1 Explain the basic tax law framework that applies to property distributions from a corporation to a shareholder.

Learning Objective: 14- 2 Compute a corporations earnings and profits and calculate the dividend amount received by a shareholder.

Learning Objective: 14-

3 Identify situations in which a corporation may be deemed to have paid a "constructive dividend" to a shareholder.

Learning Objective: 14-04 Explain the basic tax rules that apply to stock dividends.

Learning Objective: 14- 05 Comprehend the different tax consequences that can arise from stock redemptions; including partial liquidations.

Learning Objective: 14-06 Calculate the tax consequences that apply to the parties to a complete liquidation of a corporation.

Level of Difficulty: 1 Easy

Level of Difficulty: 2 Medium

Level of Difficulty: 3 Hard

Spilker - Chapter 14

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