Chapter 19 MC Flashcards
The Magic Missile Corporation has two shareholders. Past earnings and profits totaled $100,000. This year the corporation had earnings and profits of $200,000 and distributed $175,000 to each shareholder. How much of the distribution is taxable as a dividend to each shareholder?
(C) $150,000
(C). The distribution to each shareholder is taxed as a dividend to the extent of the pro rata earnings and profits of the corporation, both accumulated and current. The combined earnings and profits in this case totaled $300,000. Therefore $150,000 of the distribution to each of the two shareholders is a dividend.
Which of the following statements concerning dividends from a corporation to its shareholders is (are) correct? I. Cash dividends are generally taxed at a maximum rate of 15 percent under current law. II. Dividends of property other than money are considered capital transactions for income tax purposes.
(A) I only
(A). II is incorrect because a distribution of any type of property in the form of a dividend can be taxed as a dividend and not as a capital transaction.
Which of the following transactions between a corporation and its shareholders could result in a taxable distribution to the shareholders? I. The corporation sells property to the shareholders at a price equivalent to the fair market value. II. The corporation cancels debts that several shareholders owed to it.
(B) II only
B). I is incorrect because a sale of property at fair market value by a corporation to its shareholders is not treated as a dividend or other taxable distribution made with respect to stock ownership.
A shareholder must meet which of the following requirements to avoid having the family attribution rules applied to an IRC Sec. 302 complete redemption? I. The shareholder must receive the proceeds in cash at the time the stock is redeemed by the corporation. II. The shareholder must repay all debts owed to the corporation at the time the stock is redeemed by the corporation.
(D) Neither I nor II
(D). I is incorrect because it is immaterial under the attribution rules whether the shareholder receives cash at the time of the redemption. II is incorrect because there is no requirement that the shareholder repay debts to the corporation in order to avoid family attribution.
Mrs. Morris sells all or some of her shares in the QT Corporation at a price in excess of her basis. The corporation has only one class of voting common stock. All the following qualify as capital transactions for Mrs. Morris EXCEPT
(D) The corporation redeems the shares that belong to Mrs. Morris, her son is the sole remaining stockholder, and she will be a director of QT.
(D). Although the corporation redeems all of Mrs. Morris’s shares, she is constructively deemed to own the shares belonging to her son and will therefore be denied capital transaction tax treatment on the redemption. She cannot claim a waiver of the family attribution rules because of her status as a director of QT Corporation.
All the following statements concerning the attribution rules for determining constructive ownership of stock are correct EXCEPT
(A) Shares of stock owned by a father are considered as being owned by his daughter’s husband.
(A). The attribution rules apply from parent to child and between spouses, but not from a parent to the spouse of a child because the family attribution rules cannot be applied twice in succession.
