Chapter 18 Questions

Question 1

Qualified dividends from preferred stock are taxed at a maximum 20%

Answer 1

False. Dividends from preferred stock are not qualified.

Question 2

Dividends are taxed according to “FIFO” return of capital rules

Answer 2

False. Dividends are generally taxed at the dividend rate. Excess dividends above corporate profit are received tax-free up to shareholder basis as a return of capital.

Question 3

Distributions considered a return of capital reduce shareholder basis

Answer 3

True. Once a shareholder’s basis is reduce to $0, they can no longer receive tax-free returns of capital.

Question 4

Tax-free distributions may be reclassified as constructive dividends and taxed up to 20%

Answer 4

True. An audit may reveal that certain tax-free distributions function more like dividends.

Question 5

Corporations may deduct dividends as a business expense

Answer 5

False. Dividends are not considered a business expense nor are they deductible.

Question 6

A distribution can qualify as a substantially disproportionate redemption if it reduces a shareholder’s voting power to 50%

Answer 6

True

Question 7

Constructive ownership rules may cause a reattribution of a distribution in a taxable dividend

Answer 7

True. Such rules limit tax-free distributions.

Question 8

A sale of stock from a grandchild to a grandparent is likely to be reattributed as a dividend

Answer 8

True. Oddly enough, a sale from the grandparent to the grandchild will not be reattributed as a dividend.

Question 9

Section 303 redemptions only apply when a corporation makes up less than 35% of the deceased’s estate

Answer 9

False. Section 303 redemptions apply when the corporation makes up more than 35% of the deceased estate.