454. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB61 As of January 1 Warbler Corporation has a deficit in accumulated E & P of $150 000. For the year current E & P (accrued ratably) is $260 000 (prior to any distributions). On July 1 Warbler Corporation distributes $295 000 to its sole shareholder. The amount of the distribution that is a dividend is: a. $10 000. b. $110 000. c. $260 000. d. $295 000. e. None of the above. 455. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB62 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. 456. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB63 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. 457. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB64 Which of the following is not an economic distortion created by the double tax on dividends? a. An incentive to invest in noncorporate rather than corporate businesses. b. An incentive for corporations to finance operations with debt rather than equity. c. An incentive to invest domestically rather than internationally. d. An incentive for corporations to retain earnings and structure distributions to avoid dividend treatment. e. All of the above represent economic distortions created by the double tax on dividends. 458. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB65 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. 459. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB66 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. 460. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB67 In the current year Verdigris Corporation (with E & P of $250 000) made the following property distributions to its shareholders (all corporations): Adjusted Fair Market Basis Value Black Corporation stock (held for investment) $75 000 $60 000 Non-LIFO inventory 40 000 55 000 Verdigris Corporation is not a member of a controlled group. As a result of the distribution: a. The shareholders have dividend income of $100 000. b. The shareholders have dividend income of $130 000. c. Verdigris has a gain of $15 000 and a loss of $15 000 both of which it must recognize. d. Verdigris has no recognized gain or loss. e. None of the above. 461. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB68 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. 462. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB69 Navy Corporation makes a property distribution to its sole shareholder Troy. The property distributed is a car (fair market value of $10 000; basis of $15 000) that is subject to a $2 000 liability which Troy assumes. Navy makes no other distributions during the current year. Navy has no accumulated E & P and $15 000 of current E & P from other sources during the year. What is Navy’s E & P after taking into account the distribution of the car? a. $2 000. b. $3 000. c. $5 000. d. $7 000. e. None of the above. 463. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB70 Pelican Corporation has E & P of $260 000. It distributes land with a fair market value of $80 000 (adjusted basis of $30 000) to its sole shareholder Bernard. The land is subject to a liability of $45 000 that Bernard assumes. Bernard has a taxable dividend of: a. $10 000. b. $35 000. c. $55 000. d. $80 000. e. None of the above.
