59. Tern Corporation, a cash basis taxpayer, has taxable income of $500,000 for the current year. Tern elected $100,000 of § 179 expense. It also had a related party loss of $20,000 and a realized (not recognized) gain from an involuntary conversion of $75,000. It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000. Tern’s current E & P is:

A. $400,000.

B. $410,000.

C. $320,000.

D. $475,000.

E. None of the above.

60. Platinum Corporation, a calendar year taxpayer, has taxable income of $500,000. Among its transactions for the year are the following:

Collection of proceeds from insurance policy on life of corporate
officer (in excess of cash surrender value) $75,000
Realized gain (not recognized) on an involuntary conversion 10,000
Nondeductible fines and penalties 40,000

Disregarding any provision for Federal income taxes, Platinum Corporation’s current E & P is:

A. $455,000.

B. $535,000.

C. $545,000.

D. $625,000.

E. None of the above.

61. Which of the following statements is incorrect with respect to determining current E & P?

A. All tax-exempt income should be added back to taxable income.

B. Dividends received deductions should be added back to taxable income.

C. Charitable contributions in excess of the 10% of taxable income limit should be subtracted from taxable income.

D. Federal income tax refunds should be added back to taxable income.

E. None of the above statements are incorrect.

62. Ashley and Andrew, equal shareholders in Parrot Corporation, receive $250,000 each in distributions on December 31 of the current year. During the current year, Parrot sold an appreciated asset for $500,000 (basis of $150,000). Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year, with interest payable at a rate of 7.5%. Before considering the effect of the asset sale, Parrot’s current year E & P is $400,000 and it has no accumulated E & P. How much of Ashley’s distribution will be taxed as a dividend?

A. $0.

B. $200,000.

C. $250,000.

D. $425,000.

E. None of the above.

63. Tracy and Lance, equal shareholders in Macaw Corporation, receive $600,000 each in distributions on December 31 of the current year. Macaw’s current year taxable income is $1 million and it has no accumulated E & P. Last year, Macaw sold an appreciated asset for $1,200,000 (basis of $400,000). Payment for one-half of the sale of the asset was made this year. How much of Tracy’s distribution will be taxed as a dividend?

A. $0.

B. $300,000.

C. $500,000.

D. $600,000.

E. None of the above.

64. Falcon Corporation ended its first year of operations with taxable income of $250,000. At the time of Falcon’s formation, it incurred $50,000 of organizational expenses. In calculating its taxable income for the year, Falcon claimed an $8,000 deduction for the organizational expenses. What is Falcon’s current E & P?

A. $200,000.

B. $208,000.

C. $250,000.

D. $258,000.

E. None of the above.

65. During the current year, Goose Corporation sold equipment for $500,000 (adjusted basis of $260,000). The equipment was purchased a few years ago for $560,000 and $300,000 in MACRS deductions have been claimed. ADS depreciation would have been $200,000. As a result of the sale, the adjustment to taxable income needed to determine current E & P is:

A. No adjustment is required.

B. Subtract $100,000.

C. Add $100,000.

D. Add $80,000.

E. None of the above.

66. On January 2, 2012, Orange Corporation purchased equipment for $300,000 with an ADS recovery period of 10 years and a MACRS useful life of 7 years. Section 179 was not elected. MACRS depreciation properly claimed on the asset, including depreciation in the year of sale, totaled $79,605. The equipment was sold on July 1, 2013, for $290,000. As a result of the sale, the adjustment to taxable income needed to arrive at current E & P is:

A. No adjustment is required.

B. Decrease $49,605.

C. Increase $49,605.

D. Decrease $79,605.

E. None of the above.

67. Tungsten Corporation, a calendar year cash basis taxpayer, made estimated tax payments of $800 each quarter in 2012, for a total of $3,200. Tungsten filed its 2012 tax return in 2013 and the return showed a tax liability $4,200. At the time of filing, March 15, 2013, Tungsten paid an additional $1,000 in Federal income taxes. How does the additional payment of $1,000 impact Tungsten’s E & P?

A. Increase by $1,000 in 2012.

B. Increase by $1,000 in 2013.

C. Decrease by $1,000 in 2012.

D. Decrease by $1,000 in 2013.

E. None of the above.

68. Duck Corporation is a calendar year taxpayer formed in 2006. Duck’s E & P for each of the past 5 years is listed below.

2011 $280,000
2010 $400,000
2009 $390,000
2008 $680,000
2007 $160,000

Duck Corporation made the following distributions in the previous 5 years.

2010 Land (basis of $700,000, fair market value of $800,000)
2007 $200,000 cash

Duck’s accumulated E & P as of January 1, 2012 is:

A. $910,000.

B. $950,000.

C. $1,010,000.

D. $1,050,000.

E. None of the above.

69. Stacey and Andrew each own one-half of the stock in Parakeet Corporation, a calendar year taxpayer. Cash distributions from Parakeet are: $350,000 to Stacey on April 1 and $150,000 to Andrew on May 1. If Parakeet’s current E & P is $60,000, how much is allocated to Andrew’s distribution?

A. $5,000.

B. $10,000.

C. $18,000.

D. $30,000.

E. None of the above.

70. Maria and Christopher each own 50% of Cockatoo Corporation, a calendar year taxpayer. Distributions from Cockatoo are: $750,000 to Maria on April 1 and $250,000 to Christopher on May 1. Cockatoo’s current E & P is $300,000 and its accumulated E & P is $600,000. How much of the accumulated E & P is allocated to Christopher’s distribution?

A. $0.

B. $75,000.

C. $150,000.

D. $300,000.

E. None of the above.

71. Gander, a calendar year corporation, has a deficit in current E & P of $100,000 and a $290,000 positive balance in accumulated E & P. If Gander determines that a $500,000 distribution to its shareholders is appropriate at some point during the year, what is the maximum amount of the distribution that could potentially be treated as a dividend?

A. $0.

B. $190,000.

C. $240,000.

D. $290,000.

E. None of the above.

72. Pheasant Corporation, a calendar year taxpayer, has $400,000 of current E & P and a deficit in accumulated E & P of $180,000. If Pheasant pays a $600,000 distribution to its shareholders on July 1, how much dividend income do the shareholders report?

A. $0.

B. $20,000.

C. $220,000.

D. $400,000.

E. None of the above.

73. Glenda is the sole shareholder of Condor Corporation. She sold her stock to Melissa on October 31 for $150,000. Glenda’s basis in Condor stock was $50,000 at the start of the year. Condor distributed land to Glenda immediately before the sale. Condor’s basis in the land was $20,000 (fair market value of $25,000). On December 31, Melissa received a $75,000 cash distribution from Condor. During the year, Condor has $20,000 of current E & P and its accumulated E & P balance on January 1 is $10,000. Which of the following statements is true?

A. Glenda recognizes a $110,000 gain on the sale of her stock.

B. Glenda recognizes a $100,000 gain on the sale of her stock.

C. Melissa receives $5,000 of dividend income.

D. Glenda receives $20,000 of dividend income.

E. None of the above.

74. Orange Corporation has a deficit in accumulated E & P of $600,000 and has current E & P of $450,000. On July 1, Orange distributes $500,000 to its sole shareholder, Morris, who has a basis in his stock of $105,000. As a result of the distribution, Morris has:

A. Dividend income of $450,000 and reduces his stock basis to $55,000.

B. Dividend income of $105,000 and reduces his stock basis to zero.

C. Dividend income of $450,000 and no adjustment to stock basis.

D. No dividend income, reduces his stock basis to zero, and has a capital gain of $500,000.

E. None of the above.

75. Renee, the sole shareholder of Indigo Corporation, sold her stock to Chad on July 1 for $180,000. Renee’s stock basis at the beginning of the year was $120,000. Indigo made a $60,000 cash distribution to Renee immediately before the sale, while Chad received a $120,000 cash distribution from Indigo on November 1. As of the beginning of the current year, Indigo had $26,000 in accumulated E & P, while current E & P (before distributions) was $90,000. Which of the following statements is correct?

A. Renee recognizes a $60,000 gain on the sale of the stock.

B. Renee recognizes a $64,000 gain on the sale of the stock.

C. Chad recognizes dividend income of $120,000.

D. Chad recognizes dividend income of $30,000.

E. None of the above.

76. Tangelo Corporation has an August 31 year-end. Tangelo had $50,000 in accumulated E & P at the beginning of its 2012 fiscal year (September 1, 2011) and during the year, it incurred a $75,000 operating loss. It also distributed $65,000 to its sole shareholder, Cass, on November 30, 2011. If Cass is a calendar year taxpayer, how should she treat the distribution when she files her 2011 income tax return (assuming the return is filed by April 15, 2012)?

A. $65,000 of dividend income.

B. $60,000 of dividend income and $5,000 recovery of capital.

C. $50,000 of dividend income and $15,000 recovery of capital.

D. The distribution has no effect on Cass in the current year.

E. None of the above.

77. As of January 1, Cassowary Corporation has a deficit in accumulated E & P of $100,000. For the tax year, current E & P (accrued ratably) is $240,000 (prior to any distributions). On July 1, Cassowary Corporation distributes $275,000 to its sole shareholder. The amount of the distribution that is a dividend is:

A. $20,000.

B. $140,000.

C. $240,000.

D. $275,000.

E. None of the above.

78. At the beginning of the current year, Doug and Alfred each own 50% of Amaryllis Corporation (a calendar year taxpayer). In July, Doug sold his stock to Kevin for $140,000. At the beginning of the year, Amaryllis Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions). Amaryllis distributed $300,000 on February 15 ($150,000 to Doug and $150,000 to Alfred) and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Alfred). Kevin has dividend income of:

A. $150,000.

B. $140,000.

C. $110,000.

D. $70,000.

E. None of the above.

79. On January 1, Gull Corporation (a calendar year taxpayer) has accumulated E & P of $200,000. During the year, Gull incurs a net loss of $280,000 from operations that accrues ratably. On June 30, Gull distributes $120,000 to Sharon, its sole shareholder, who has a basis in her stock of $75,000. How much of the $120,000 is a dividend to Sharon?

A. $0.

B. $60,000.

C. $75,000.

D. $120,000.

E. None of the above.

80. Which of the following is not a consequence of the double tax on dividends?

A. Corporations have an incentive to retain earnings and structure distributions to avoid dividend treatment.

B. Corporations have an incentive to invest in noncorporate rather than corporate businesses.

C. The cost of capital for corporate investments is increased.

D. Corporations have an incentive to finance operations with debt rather than equity.

E. All of the above are consequences of the double tax on dividends.

81. 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.

82. 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.

83. 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.

84. Swan Corporation makes a property distribution to its sole shareholder, Matthew. The property distributed is a cottage (fair market value of $135,000; basis of $110,000) that is subject to a $175,000 mortgage that Matthew assumes. Before considering the consequences of the distribution, Swan’s current E & P is $25,000 and its accumulated E & P is 100,000. Swan makes no other distributions during the current year. What is Swan’s taxable gain on the distribution of the cottage?

A. $0.

B. $15,000.

C. $25,000.

D. $65,000.

E. None of the above.

85. 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.

86. 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.

87. 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.

88. Samantha owns stock in Pigeon Corporation (basis of $80,000) as an investment. Pigeon distributes property (fair market value of $300,000; basis of $150,000) to her during the year. Pigeon has current E & P of $20,000 and accumulated E & P of $80,000 and makes no other distributions during the year. What is Samantha’s capital gain on the distribution?

A. $0.

B. $80,000.

C. $120,000.

D. $150,000.

E. None of the above.

89. 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.

90. Purple Corporation has accumulated E & P of $100,000 on January 1, 2012. In 2012, Purple has current E & P of $130,000 (before any distribution). On December 31, 2012, the corporation distributes $250,000 to its sole shareholder, Cindy (an individual). Purple Corporation’s E & P as of January 1, 2013 is:

A. $0.

B. ($20,000).

C. $100,000.

D. $130,000.

E. None of the above.

112. The adjusted gross estate of Keith, decedent, is $6 million. Included in the gross estate is stock in Gold Corporation (E & P of $750,000), a closely held corporation, valued at $2.4 million as of the date of Keith’s death in 2012. Keith had acquired the stock twelve years ago at a cost of $420,000. Death taxes and funeral and administration expenses for Keith’s estate are $1.2 million. Gold Corporation redeems one-half of the stock from Keith’s estate in a § 303 redemption to pay death taxes using property with a fair market value of $1.2 million (adjusted basis of $950,000). Which of the following is a correct statement regarding the tax consequences of this redemption?

A. The estate will have a basis of $950,000 in the property received from Gold Corporation in redemption of the estate’s stock.

B. Gold Corporation will not reduce its E & P as a result of the distribution of the property to Keith’s estate.

C. The estate will recognize a $990,000 long-term capital gain on the redemption.

D. Gold Corporation will recognize gain of $250,000 on the distribution of the property to Keith’s estate.

E. None of the above.

113. The adjusted gross estate of Debra, decedent, is $8 million. Debra’s estate will incur death taxes and funeral and administration expenses of $1 million. Debra’s gross estate includes stock in Silver Corporation that she had purchased twelve years ago for $600,000 (date of death fair market value of $3 million). At the time of her death in 2012, Debra owned 80% of the stock in Silver Corporation. Silver Corporation (E & P of $4 million) redeems all of the estate’s stock in the corporation for $3 million. Debra’s will names her daughter, Dena, who owns the remaining 20% interest in Silver Corporation, as her sole heir. With respect to this redemption, Debra’s estate has the following income:

A. $0.

B. $2.4 million long-term capital gain.

C. $2 million dividend.

D. $1 million dividend.

E. None of the above.

115. Vulture Corporation distributes land (basis of $250,000, fair market value of $475,000) to Bonita, a shareholder, to carry out a qualifying stock redemption. The land is distributed subject to a $300,000 liability. Bonita had a basis of $25,000 in the shares redeemed. With respect to the redemption:

A. Vulture Corporation will recognize a gain of $50,000.

B. Vulture Corporation will recognize a gain of $225,000.

C. Bonita will recognize a gain of $450,000.

D. Bonita will have a basis of $175,000 in land.

E. None of the above.

117. Canary Corporation has 1,000 shares of stock outstanding. It redeems in a qualifying stock redemption 350 shares for $400,000 at a time when it has paid-in capital of $100,000 and E & P of $1 million. What would be the charge to Canary’s E & P as a result of the redemption?

A. $40,000.

B. $140,000.

C. $350,000.

D. $400,000.

E. None of the above.

118. In the current year, Loon Corporation made a distribution in redemption of some of its shares. Loon incurred expenditures in connection with the redemption totaling $35,000 (accounting fees of $9,000, legal fees of $20,000, and brokerage fees of $6,000). The distribution was a qualifying stock redemption. How much of the $35,000 is deductible in the current year?

A. $6,000.

B. $9,000.

C. $29,000.

D. $35,000.

E. None of the above.