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Tax Accounting Chapter 18 Quiz

Terms in this set (20)

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

-Corporate income is subject to two levels of taxation: the regular tax and excess profits tax.
-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.
-Corporate income is taxed when earned by a C corporation and then a second time at the shareholder level when distributed as a dividend.
-Corporate income is subject to two levels of taxation: at the federal level and a second time at the state level.
Corporate income is taxed when earned by a C corporation and then a second time at the shareholder level when distributed as a dividend.
Which of the following forms of earnings distributions would not be subject to double taxation at the corporate and shareholder level?

-Dividend
-Stock redemption
-Partial liquidation
-Compensation paid to a shareholder/employee of the corporation.
Compensation paid to a shareholder/employee of the corporation.


Compensation is deductible at the corporate level.
Which of the following statements best describes the priority of the tax treatment of a distribution from a corporation to a shareholder?

-The distribution is a dividend to the extent of the corporation's E&P, then a return of capital, and finally gain from sale of stock.
-The distribution is a return of capital, then a dividend to the extent of the corporation's E&P, and finally gain from sale of stock.
-The distribution is a return of capital, then gain from sale of stock, and finally a dividend to the extent of the corporation's E&P.
-The shareholder can elect to treat the distribution as either a dividend to the extent of the corporation's E&P or a return of capital, followed by gain from sale of stock.
The distribution is a dividend to the extent of the corporation's E&P, then a return of capital, and finally gain from sale of stock.


The tax treatment is specified in §301(c).
A calendar-year corporation has positive current E&P of $500 and a deficit in accumulated E&P of ($1,200). The corporation makes a $400 distribution to its sole shareholder. Which of the following statements is true?

-The distribution will not be a dividend because total E&P is a deficit.
-The distribution may be a dividend, depending on whether net E&P (current plus accumulated E&P) at the date of the distribution is positive.
-The distribution will be a dividend because current E&P is positive and exceeds the distribution.
-A distribution from a corporation to a shareholder is always a dividend, regardless of the balance in E&P.
The distribution will be a dividend because current E&P is positive and exceeds the distribution.


Distributions are first treated as paid out of current E&P.
Grand River Corporation reported taxable income of $750,000 in 20X3 and paid federal income taxes of $255,000. Not included in the computation was a disallowed meals and entertainment expense of $2,500, tax-exempt income of $1,500, and deferred gain on a current-year transaction treated as an installment sale of $27,500. The corporation's current E&P for 20X3 would be:

-$521,500.
-$776,000.
-$750,000.
-$496,500.
$521,500.


$750,000 − $255,000 − $2,500 + $1,500 + $27,500
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?

-$400,000
-$300,000
-$200,000
-$100,000
$300,000


The distribution is a dividend to the extent of current and accumulated E&P. The tax status of the dividend is determined based on current E&P for the full year.
Bruin Company reports current E&P of $290,000 in 20X3 and accumulated E&P at the beginning of the year of $145,000. Bruin distributed $490,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

-$490,000
-$435,000
-$290,000
-$145,000
$435,000


The distribution is a dividend to the extent of current and accumulated E&P. The tax status of the dividend is determined based on current E&P for the full year.
Aztec Company reports current E&P of $200,000 in 20X3 and a deficit of ($100,000) in accumulated E&P at the beginning of the year. Aztec distributed $300,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?

-$300,000
-$200,000
-$100,000
-$0
$200,000


The distribution is a dividend to the extent of current E&P. The tax status of the dividend is determined based on current E&P for the full year.
Tar Heel Corporation had current and accumulated E&P of $420,000 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 $125,000 and its tax and E&P adjusted tax basis to Tar Heel was $38,000. William assumed a mortgage attached to the land of $16,500. The tax consequences of the distribution to William in 20X3 would be:

-$125,000 dividend and an adjusted tax basis in the land of $125,000.
-$125,000 dividend and an adjusted tax basis in the land of $108,500.
-dividend of $108,500 and an adjusted tax basis in the land of $125,000.
-dividend of $108,500 and an adjusted tax basis in the land of $108,500.
dividend of $108,500 and an adjusted tax basis in the land of $125,000.


The dividend amount is the fair market value less the liability assumed. The tax basis of the land is the fair market value.
Catamount Company had current and accumulated E&P of $580,000 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 $229,000 and its tax and E&P adjusted tax basis to Catamount was $290,000. The tax consequences of the distribution to Catamount in 20X3 would be:

-no loss recognized and a reduction in E&P of $290,000.
-$61,000 loss recognized and a reduction in E&P of $290,000.
-$61,000 loss recognized and a reduction in E&P of $168,000.
-no loss recognized and a reduction in E&P of $229,000.
no loss recognized and a reduction in E&P of $290,000.


The distributing corporation does not recognize loss on the distribution and reduces E&P by the land's E&P basis.
Which of the following individuals is not considered "family" for purposes of applying the stock attribution rules to a stock redemption?

-Parents
-Grandchildren
-Grandparents
-Spouse
Grandparents


Children also are considered "family" under the 318 attribution rules.
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?

-Any percentage less than 70 percent
-Any percentage less than 56 percent
-Any percentage less than 50 percent
-All stock redemptions involving individuals are treated as exchanges.
Any percentage less than 50 percent


Under §302(b)(2), Sam must own less than the lesser of 1) 80% × 70% = 56% or 2) 50%.
Comet Company is owned equally by Pat and his sister Pam, each of whom holds 135 shares in the company. Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 68 of her shares for $1,360 per share on December 31, 20X3. Pam's adjusted tax basis in each share is $550. Comet has total E&P of $315,000. What are the tax consequences to Pam because of the stock redemption?

-$55,080 capital gain and a tax basis in each of her remaining shares of $550.
-$55,080 capital gain and a tax basis in each of her remaining shares of $135.
-$92,480 dividend and a tax basis in each of her remaining shares of $135.
-$92,480 dividend and a tax basis in each of her remaining shares of $68.
$55,080 capital gain and a tax basis in each of her remaining shares of $550.

$1,360 - $550 = $810
$810 x 68 shares = $55,080

The redemption will be treated as an exchange because Pam meets the substantially disproportionate test (her 33 percent ownership after the redemption is less than 50 percent and less than 40 percent). Her remaining shares retain a basis of $550 per share.
Which of these items is not an adjustment to taxable income or net loss to compute current E&P?

-Disallowed portion of meal expenditures
-Salaries and compensation
-Tax exempt life insurance proceeds
-Federal income taxes paid or accrued
Salaries and compensation


Employee compensation is allowed as a deduction and is not an adjustment to compute current E&P.
Manistee Corporation reported taxable income of $1,200,000 this year and paid federal income taxes of $252,000. Not included in the computation was disallowed entertainment expenses of $25,000, tax-exempt interest of $20,000, and a net capital loss of $50,000 incurred this year. Manistee is an accrual basis taxpayer.

The corporation's current earnings and profits this year would be:

-$1,200,000
-$1,125,000
-$893,000
-$898,000
$893,000


$1,200,000 − $252,000 − $25,000 + $20,000 − $50,000
Boulder Company reports current E&P of $500,000 this year and a deficit in accumulated E&P at the beginning of the year of negative ($200,000). Boulder distributed $400,000 to its sole shareholder on December 31 of this year.

How much of the distribution is treated as a dividend this year?

-$400,000
-$200,000
-$300,000
-$0
$400,000


The distribution is a dividend to the extent of current and accumulated E&P. The tax status of the dividend is determined based on current E&P for the full year irrespective of whether accumulated E&P is negative.
Tiger Company, a calendar year corporation, reports a deficit in current E&P of negative ($500,000) this year and positive accumulated E&P at the beginning of the year of $300,000. Tiger distributed $250,000 to its sole shareholder on June 30 of this year.

How much of the distribution is treated as a return of capital this year if the shareholder has a $1 million adjusted basis in Tiger stock?

-$500,000
-$50,000
-$200,000
-$0
$200,000


The distribution is a dividend to the extent of net E&P on the distribution date. At mid-year the current E&P deficit would be ($250,000) (6/12 months x -500,000), and this would be netted against the beginning balance in accumulated E&P, $300,000 resulting in a net E&P of $50,000. Thus, the dividend would be $50,000 and the remainder of the distribution, $200,000, would be a return of capital.
Samantha owns 70 percent of the stock of Bewitched Corporation. Unrelated individuals own the remaining 30 percent. Bewitched intends to redeem some of Samantha's stock. For the redemption to be treated as an exchange under the "substantially disproportionate" test, what is the maximum percentage of Bewitched stock Samantha can own after the redemption?

-Any amount less than 60 percent
-Any amount less than 56 percent
-Any amount less than 50 percent
-Any amount less than 40 percent
Any amount less than 50 percent


Under §302(b)(2), Samantha must own less than the lesser of 1) 80% × 70% = 56% or 2) 50%. A redemption that reduces her stock ownership below 50% might also qualify as an exchange under the "not essentially equivalent to a dividend" requirement of §302(b)(1).
Horned Frog Corporation is owned equally by Sandy, her husband Tom, her daughter Caitlin, and her grandmother, Martha. Each shareholder owns 200 shares in the company. Under the family attribution rules, how many shares of Horned Frog stock is Sandy deemed to own?

-200
-400
-600
-800
600


Sandy is treated as owning the shares of her husband and her daughter, but not her grandmother.
El Toro Corporation declared a common stock distribution to all shareholders of record on June 30, 20X3. Shareholders will receive one share of El Toro stock for each two shares of stock they already own. Raoul owns 410 shares of El Toro stock, with a tax basis of $57 per share. The fair market value of the El Toro stock was $97 per share on June 30, 20X3. What are the tax consequences of the stock distribution to Raoul?

-$0 dividend income and a tax basis in the new stock of $97 per share.
-$0 dividend income and a tax basis in the new stock of $57 per share.
-$0 dividend income and a tax basis in the new stock of $38 per share.
-$19,885 dividend and a tax basis in the new stock of $97 per share.
$0 dividend income and a tax basis in the new stock of $38 per share.
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