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tax problems - questin and answer,.,. ch 19




Question;Ch19DISCUSSION QUESTIONS1. LO.1 What is meant by the term earnings and profits?2. LO.1 What factors affect the tax treatment of corporate distributions?3. LO.2 In determining Blue Corporation?s current E & P for 2013, how should taxable income be adjusted as a result of the following transactions?a. A capital loss carryover from 2013, fully used in 2014.b. Nondeductible meal expenses in 2013.c. Interest on municipal bonds received in 2013.d. Nondeductible lobbying expenses in 2013.e. Loss on a sale between related parties in 2013.f. Federal income tax refund received in 2013.4. LO.3 Describe the effect of a distribution in a year when the distributing corporation has any of the following:a. A deficit in accumulated E & P and a positive amount in current E & P.b. A positive amount in accumulated E & P and a deficit in current E & P.c. A deficit in both current and accumulated E & P.d. A positive amount in both current and accumulated E & P.5. LO.3 A calendar year corporation has substantial accumulated E & P, but it expects to incur a deficit in current E & P for the year due to significant losses in the last half of the year. A cash distribution to its shareholders on January 1 should result in a return of capital. Comment on the validity of this statement.6. LO.4 Discuss the rationale for the reduced tax rates on dividends paid to individuals.7. LO.1, 2, 3, 4, 5 Orange Corporation distributes $200,000 in cash to each of its three shareholders: Sandy, Byron, and Fuchsia Corporation. What factors must be considered when determining how the distribution is treated for tax purposes by the shareholders?8. LO.5 Assume the same facts as in Question 7, except that noncash property is distributed.What factors must be considered when determining how the distribution is treated for tax purposes by Orange Corporation?9. LO.5 Ochre Corporation?s board of directors decides to distribute property to its shareholders rather than pay a cash dividend. Why might Ochre?s board make this decision?10. LO.5 Raven Corporation owns three machines that it uses in its business. It no longer needs two of these machines and is considering distributing them to its two shareholders as a property dividend. All three machines have a fair market value of $20,000 each. The basis of each machine is as follows: Machine A, $27,000, Machine B, $20,000, and Machine C, $12,000. The corporation has asked you for advice. What do you recommend?11. LO.5 What is the effect on the corporation when it makes a property distribution?12. LO.5 Tangerine Corporation is considering a property distribution to its shareholders.If appreciated property is to be used, does it matter to Tangerine whether the property distributed is a long-term capital asset or property subject to depreciation recapture?Would your answer differ if the property distributed has a fair market value less than the adjusted basis? Explain.13. LO.6 Samantha is the president and sole shareholder of Toucan Corporation. She is paid an annual salary of $500,000, while her son, Aaron, the company?s chief financial officer, is paid a salary of $290,000. Aaron works for Toucan on a part-time basis and spends most of his time training for triathlons. Toucan advances $85,000 to Samantha as an interest-free loan. What are the tax issues?14. LO.6 Whether compensation paid to a corporate employee is reasonable is a question of fact to be determined from the surrounding circumstances. How would the resolution of this problem be affected by each of the following factors?a. The employee owns no stock but is the mother-in-law of the sole shareholder.b. The shareholder-employee does not have a college degree.c. The shareholder-employee works 40 hours per week for another unrelated employer.d. The shareholder-employee was underpaid for services during the formative period of the corporation.e. The corporation has never paid a dividend.f. Year-end bonuses are paid to all employees, but officer-shareholders receive disproportionately larger bonuses.


Paper#38674 | Written in 18-Jul-2015

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