Chapter 4

Question 0

Non-taxable distribution of stock rights, when the value of the rights is less than 15% of the value of the stock – what is the basis of the rights?

Answer 0

$0, unless the shareholder elects to allocate stock basis to the rights

Question 1

Compute Current E&P

if given Taxable Income

Answer 1

+ Exclusions from taxable income
+ Deductions allowed for tax but not E&P
*DRD, net capital loss deduction carry-forward/back
*NOL carry-forward/back, contribution carryforwards
+ Income deferred for tax but not E&P
+ Deductions deferred for E&P
*first year expensing & amortize over 5 years (sec 248/195)
- Deductions allowed for E&P
*fed income taxes paid/accrued
*current year charitable contrib >10% limitation
*disallowed entertainment expenses, lobbying & political contrib
*penalties and fines

= CURRENT E&P

Question 2

A stock redemption qualifies as a sale if the redemption…

Answer 2

1) Substantially disproportionate
2) Complete termination of shareholder’s interest
3) Not essentially equivalent to a dividend
4) Involves a partial liquidation
5) Provides funds for an estate to pay death taxes

Question 3

A stock redemption treated like a sale affects shareholders how?

Answer 3

Recognize G/L equal to FMV less adjusted basis in the stock surrendered. Generally treated as capital G/L.

Question 4

When corp distributes non-liquidating property to shareholder, what is company’s basis?

Answer 4

FMV minus any liability assumed by the shareholder

Question 5

When corp distributes non-liquidating property to shareholder, what is shareholder basis?

Answer 5

FMV, not reduced by any liabilities assumed

the property BASIS is not affected by liability. The income realized IS reduced by any liability attached to the property

Question 6

Companies recognize loss on non-liquidating distribution T/F

Answer 6

False

must recognize gain by corp on non-liquidating distribution, never recognize loss