Chapter 5: Homework Flashcards
Classify the effect of a distribution in a year when the distributing corporation has the following conditions.
Question
a. A deficit in accumulated E & P and a positive amount in current E & P.
If a distributing corporation has a deficit in accumulated E & P and a positive amount in current E & P, a distribution during the year is a ____ to the extent of current E & P. Current and accumulated E & P ____ netted.
If a distributing corporation has a deficit in accumulated E & P and a positive amount in current E & P, a distribution during the year is a taxable dividend to the extent of current E & P. Current and accumulated E & P are not netted.
Accumulated E & P is the total of all previous years’ current E & P (since February 28, 1913) reduced by distributions made from E & P in previous years. It is important to distinguish between current E & P and accumulated E & P because the taxability of corporate distributions depends on how these two accounts are allocated to each distribution made during the year.
Classify the effect of a distribution in a year when the distributing corporation has the following conditions.
Question
b. A positive amount in accumulated E & P and a deficit in current E & P.
If the corporation has a positive amount in accumulated E & P and a deficit in current E & P, a distribution either is a ____, depending on the resulting balance in E & P when current and accumulated E & P are netted.
If the corporation has a positive amount in accumulated E & P and a deficit in current E & P, a distribution either is a taxable dividend or a return of capital, depending on the resulting balance in E & P when current and accumulated E & P are netted.
Classify the effect of a distribution in a year when the distributing corporation has the following conditions.
Question
c. A deficit in both current and accumulated E & P.
If there is a deficit in both current and accumulated E & P, a corporate distribution is treated as a ____ to the extent of the shareholder’s basis in his or her stock. Any excess is a ____.
If there is a deficit in both current and accumulated E & P, a corporate distribution is treated as a return of capital
to the extent of the shareholder’s basis in his or her stock. Any excess is a capital gain.
Classify the effect of a distribution in a year when the distributing corporation has the following conditions.
Question
d. A positive amount in both current and accumulated E & P.
If there is a positive amount in both current and accumulated E & P, to the extent of the positive balance in both amounts, the distribution is a ____.
If there is a positive amount in both current and accumulated E & P, to the extent of the positive balance in both amounts, the distribution is a taxable dividend.
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.
Complete the sentence below regarding the following statement: A cash distribution to its shareholders on January 1 should result in a return of capital.
The statement is ____, because in this case, there
____ deficit on January 1, so the distribution is a ____.
The statement is false, because in this case, there
is no deficit on January 1, so the distribution is a dividend to the extent of accumulated E & P.
Accumulated E & P is the total of all previous years’ current E & P reduced by distributions made from E & P in previous years. It is important to distinguish between current E & P and accumulated E & P because the taxability of corporate distributions depends on how these two accounts are allocated to each distribution made during the year. A complex set of rules governs the allocation process.
Complete the statement below in response to the question: “What is the rationale for the reduced tax rates on dividends paid to individuals?”
The reduced tax on dividends is intended to ____ the effect of ____ and to ____.
The reduced tax on dividends is intended to lessen the effect of double taxation and to stimulate the economy.
The double tax on corporate income has always been controversial. Arguably, taxing dividends twice creates several undesirable economic distortions.
At the beginning of the year, Myrna Corporation (a calendar year taxpayer) has E & P of $32,000. The corporation generates no additional E & P during the year. On December 31, the corporation distributes $50,000 to its sole shareholder, Abby, whose stock basis is $10,000. How is the distribution treated for tax purposes?
As a result the distribution Abby has the following:
* Dividend income: $32,000
* Return of capital: $10,000
* Capital gain: $8,000
* Stock basis after the distribution: $0
The importance of corporate distributions derives from the variety of tax treatments that may apply. From the shareholder’s perspective, distributions received from the corporation may be treated as ordinary income, preferentially taxed dividend income, capital gain, or a nontaxable recovery of capital.
In November of the current year, Emerald Corporation declared a dividend of $2 per share (the shareholder record date is December 15). Assume that Emerald has sufficient current E & P to cover the dividend payment.
If Judy purchases 500 shares of Emerald stock on December 5 and sells the stock on December 25, how is she taxed on the $1,000 dividend?
The $1,000 dividend will be taxed to Judy as ____ income because she ____ the holding period requirement. Therefore, the $1,000 ____ qualify for the preferential 0%/15%/20% tax rates.
The $1,000 dividend will be taxed to Judy as ordinary income because she does not meet the holding period requirement. Therefore, the $1,000 does not qualify for the preferential 0%/15%/20% tax rates.
For most individual taxpayers, dividends that meet certain requirements (called “qualified dividends”) are subject to a 15 percent tax rate. High-income taxpayers are subject to a 20 percent rate; a zero percent rate applies to lower-income taxpayers.
