Question;474. CHAPTER;5?CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB81 Using the legend provided, classify each;statement accordingly. In all cases, assume that taxable income is being;adjusted to arrive at current E & P for 2011.Gain on installment sale;in 2011 deferred until 2012.Interest received from municipal bonds in;2011.Federal income tax refunds from tax paid in prior years.Loss on sale;between related parties in 2011.Meal and entertainment expenses not deducted in;2011 because of the 50% limitation.Cash dividends distributed to shareholders;in 2011.Gain realized, but not recognized, in a like-kind exchange transaction;in 2011.Domestic production activities deduction claimed in 2011.Premiums paid;on key employee life insurance policy (assume no increase in cash surrender;value of policy) in 2011.Section 179 expense in second year following;election.Increase Increase Increase Decrease Decrease Decrease No effect;Increase Decrease Decrease;[a] 1. Gain on installment sale in;2011 deferred until 2012.;[b] 2. Interest received from;municipal bonds in 2011.;[c] 3. Federal income tax;refunds from tax paid in prior years.;[d] 4. Loss on sale between;related parties in 2011.;[e] 5. Meal and entertainment;expenses not deducted in 2011 because of the 50% limitation.;[f] 6. Cash dividends;distributed to shareholders in 2011.;[g] 7. Gain realized, but not;recognized, in a like-kind exchange transaction in 2011.;[h] 8. Domestic production;activities deduction claimed in 2011.;[i] 9. Premiums paid on key;employee life insurance policy (assume no increase in cash surrender value of;policy) in 2011.;[j] 10. Section 179 expense in;second year following election.;475. CHAPTER;5?CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB82 Using the legend provided, classify each;statement accordingly. In all cases, assume that taxable income is being;adjusted to determine current E & P.Penalties paid to state government;for failure to comply with state law.Dividends received deduction.Charitable;contribution carryforward deducted in the current year.Intangible drilling;costs deducted currently.Gain realized (but not recognized) on a like-kind;exchange.A decrease in the LIFO recapture amount during the year.Excess capital;loss in year incurred.State income tax paid in the current year. Proceeds of;life insurance received upon the death of a key employee (policy had no cash;surrender value).Decrease Increase Increase Increase No effect Decrease;Decrease No effect Increase;[a] 1. Penalties paid to state;government for failure to comply with state law.;[b] 2. Dividends received;deduction.;[c] 3. Charitable contribution;carryforward deducted in the current year.;[d] 4. Intangible drilling;costs deducted currently.;[e] 5. Gain realized (but not;recognized) on a like-kind exchange.;[f] 6. A decrease in the LIFO;recapture amount during the year.;[g] 7. Excess capital loss in;year incurred.;[h] 8. State income tax paid;in the current year.;[i] 9. Proceeds of life;insurance received upon the death of a key employee (policy had no cash;surrender value).;476. CHAPTER;5?CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB83;On January 1, Tulip Corporation (a calendar year taxpayer) has accumulated E;P of $300,000. Its current E & P for the year is $90,000 (before;considering dividend distributions). During the year, Tulip distributes;$600,000 ($300,000 each) to its equal shareholders, Anne and Tom. Anne has a;basis in her stock of $65,000, while Tom?s basis is $120,000. What is the;effect of the distribution by Tulip Corporation on Anne and Tom?;477. CHAPTER;5?CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB84;Daisy Corporation is the sole shareholder of Ostrich Corporation, which it;hopes to sell within the next three years. The Ostrich stock (basis of $25;million) is currently worth $30 million, but Daisy believes that it would be;easier to find a buyer if it was worth less. To lower the value of its stock;Ostrich distributes $4 million cash to Daisy (sufficient E & P exists to;cover the distribution). At a later date, Daisy sells Ostrich for $26 million.;a.;What are the;tax consequences to Daisy on the sale?;b.;What would;be the tax consequences if Ostrich had not first distributed the $4 million;in cash and Daisy sold the Ostrich stock for $30 million?;478. CHAPTER;5?CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB85;Ashley, the sole shareholder of Hawk Corporation, has a stock basis of $200,000;at the beginning of the year. On July 1, she sells all of her stock to Matt for;$1 million. On January 1, Hawk has accumulated E & P of $90,000 and during;the year, current E & P of $160,000. Hawk makes the following cash;distributions: $270,000 to Ashley on March 31 and $90,000 to Matt on December;1. How are the distributions taxed to Ashley and Matt? What is Ashley?s;recognized gain on the sale to Matt?;479. CHAPTER;5?CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB86;Puce Corporation, an accrual basis taxpayer, has struggled to survive since its;formation, six years ago. As a result, it has a deficit in accumulated E;P at the beginning of the year of $340,000. This year, however, Puce earned a significant;profit, taxable income was $240,000. Consequently, Puce made two cash;distributions to Martha, its sole shareholder: $150,000 on July 1 and $200,000;December 31. The following information might be relevant to determining the tax;treatment of the distributions.;?;This year?s;taxable income included a net operating loss carryover of $50,000.;?;The;corporation?s Federal income tax liability is $72,000 for the year.;?;Puce paid;nondeductible fines and kickbacks of $10,000. The company also paid;nondeductible life insurance premiums of $22,000.;?;The cash;surrender value of the corporate-owned life insurance policies increased by;$11,000 during the year.;?;The company;sold a piece of equipment during the year and reported a ? 1231 gain of;$105,000 and recapture income under ? 1245 of $35,000. There were no other;1231 transactions during the year, but the corporation did have a capital;loss carryforward of $30,000.;?;MACRS;depreciation exceeds E & P depreciation by $14,000. In addition, an;election under ? 179 was made this year for $18,000 of assets.;a.;Compute;Puce?s E & P for the year.;b.;What are the;tax consequences of the two distributions made during the year to Martha (her;stock basis is $74,000)?;480. CHAPTER;5?CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB87;Stephanie is the sole shareholder and president of Hawk Corporation. She feels;that she can justify at least a $220,000 bonus this year because of her;performance. However, rather than a bonus in the form of a salary, she plans to;have Hawk pay her a $220,000 dividend. Because Stephanie?s marginal tax rate is;35%, she prefers to receive a dividend taxed at 15%. Her accountant, however;suggests a $310,000 bonus in lieu of the $220,000 dividend since Hawk;Corporation is in the 34% tax bracket. Should Stephanie take the $220,000;dividend or the $310,000 bonus? Support your answer by computing the after-tax;cost of the two alternatives to Hawk and to Stephanie.;481. CHAPTER;5?CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB88;Thistle Corporation declares a nontaxable dividend payable in rights to;subscribe to common stock. One right and $25 entitle the holder to subscribe to;one share of stock. One right is issued for each share of stock held. Annette;a shareholder, owns 200 shares of stock that she purchased five years ago for;$3,000. At the date of distribution of the rights, the market values were $50;per share for the stock and $25 for a right. Annette received 200 rights. She;exercises 160 rights and purchases 160 additional shares of stock. She sells;the remaining 40 rights for $1,080. What are the tax consequences to Annette?;482. CHAPTER;5?CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB89;Gold Corporation has accumulated E & P of $2 million as of January 1 of the;current year. During the year, it expects to have earnings from operations of;$1,680,000 and to distribute $900,000 in cash to shareholders. Gold Corporation;also expects to sell an asset for a loss of $2 million. Thus, it anticipates;incurring a deficit of $320,000 for the year. What can Gold do to minimize the;amount of dividend income to its shareholders?;483. CHAPTER;5?CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB90;Timothy owns 100% of Forsythia Corporation?s stock. Corporate employees and;annual salaries include Timothy ($300,000), Richard, Timothy?s son ($80,000);Rita, Timothy?s daughter ($100,000), and Sandy ($120,000). The operation of;Forsythia Corporation is shared about equally between Timothy and Sandy (an;unrelated party). Richard and Rita are full-time college students at a;university about 150 miles away. Forsythia Corporation has substantial E;P but has not distributed a dividend for the past five years. Discuss problems;related to the salary arrangement for Forsythia Corporation.;484. CHAPTER;5?CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB91;Briefly describe the reason a corporation might distribute a property dividend;to a shareholder in lieu of a cash distribution. Describe the tax effects of;the property distribution on the shareholder and on the corporation.
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