REG 38 - Corporate Taxation 3 - Distributions/Liquidations/Re-org

Question 1

Webster, a C corporation, has $70,000 in accumulated and no current earnings and profits. Webster distributed $20,000 cash and property with an adjusted basis and fair market value of $60,000 to its shareholders. What amount should the shareholders report as dividend income?
	A. $20,000
	B. $60,000
	C. $70,000
	D. $80,000

Answer 1

C. Dividend income must be reported for the distribution to the extent of Webster’s current and accumulated earnings and profits ($70,000). The amount of the distribution is the cash of $20,000 plus the fair market value ($60,000) of the property distributed, or $80,000. This distribution is taxed as $70,000 of dividend income with the remaining $10,000 treated as a return of the shareholders’ bases in their stock.

Question 2

Tank Corp., which had earnings and profits of $500,000, made a non-liquidating distribution of property to its shareholders in 2014 as a dividend in kind. This property, which had an adjusted basis of $20,000 and a fair market value of $30,000 at the date of distribution, did not constitute assets used in the active conduct of Tank’s business.

How much gain did Tank recognize on this distribution?
	A.  	$30,000
	B.  	$20,000
	C.  	$10,000
	D.  	$0

Answer 2

C. When a corporation makes a non-liquidating distribution of appreciated property to its shareholders, the corporation recognizes a taxable gain. The property is viewed to have been sold to its shareholders for its fair market value at the date of the distribution. Corporations do not recognize losses from non-liquidating distributions of property. Since Tank Corp.’s basis in the property was $20,000 and the fair market value of the property was $30,000, the corporation must recognize a gain of $10,000.

Question 3

Fox, the sole shareholder in Fall, a C corporation, has a tax basis of $60,000. Fall has $40,000 of accumulated positive earnings and profits at the beginning of the year and $10,000 of current positive earnings and profits for the current year. At year end, Fall distributed land with an adjusted basis of $30,000 and a fair market value (FMV) of $38,000 to Fox. The land has an outstanding mortgage of $3,000 that Fox must assume. What is Fox's tax basis in the land?
	A. $38,000
	B. $35,000
	C. $30,000
	D. $27,000

Answer 3

A. For dividends, the amount distributed is the fair market value of the property received less any liabilities assumed by the shareholder, or $35,000 ($38,000 − $3,000). Fox would have $35,000 of dividend income since earnings and profits is at least this amount. However, the basis in the property received as a taxable dividend is always the fair market value of the property, or $38,000.

Question 4

Dahl Corp. was organized and commenced operations in 1930. At December 31, 2013, Dahl had accumulated earnings and profits of $9,000 before dividend declaration and distribution.
On December 31, 2013 Dahl distributed cash of $9,000 and a vacant parcel of land to Green, Dahl’s only stockholder. At the date of distribution, the land had a basis of $5,000 and a fair market value of $40,000.

What was Green's taxable dividend income in 2013 from these distributions?
	A.  	$9,000
	B.  	$14,000
	C.  	$44,000
	D.  	$49,000

Answer 4

C. Corporate distributions to shareholders are taxed to shareholders as dividend income to the extent that the distribution does not exceed current and accumulated earnings and profits. Distributions in excess of current and accumulated earnings and profits are treated as returns of capital. The distribution of appreciated property increases a corporation’s earnings and profits increase by the amount of the difference between the distributed property’s fair market value and the corporation’s adjusted basis in the distributed property.

Thus, while Dahl Corp. had earnings and profits totaling $9,000 before the dividend declaration and distribution, the corporation’s earnings and profits increased by $35,000, the land’s $40,000 fair market value less its adjusted basis of $5,000, to $44,000 due to the distribution of the land.

Green received $49,000 of property in the distribution - $9,000 in cash and land with a fair market value of $40,000. The amount of the distribution classified as dividend income is limited to the corporation’s earnings and profits. Thus, Green would report $44,000 of dividend income from the distribution.

Question 5

T/F: If both current and accumulated E&P are negative, then a distribution is a tax-free return of capital.

Answer 5

True.
In the case where the current and accumulated E&P are positive, but not more than the amount that is distributed, the amount above the E&P is a tax-free return of capital.

Question 6

T/F: A constructive dividend is a tax-free return of capital.

Answer 6

False.
A constructive dividend is a payment to a shareholder that, although not formally declared as a dividend, is regarded as a dividend. Property distributions to shareholders will often be treated as a constructive dividend.

Question 7

T/F: Distributions first reduce accumulated E&P on the distribution date.

Answer 7

False.
If both current and accumulated E&P are positive, then the distribution is taxed as a dividend. Distributions are first taken from current E&P by allocating E&P up to the distribution date. Once current E&P is depleted, then distributions reduce accumulated E&P.

Question 8

T/F: The federal income tax reduces taxable income to determine earnings and profits.

Answer 8

True

Question 9

T/F: Charitable contributions that exceeded the taxable income limit for regular tax cannot be used to reduce taxable income to determine earnings and profits.

Answer 9

False.
The excess amount of charitable contributions are a timing difference that can be either positive or negative in calculating the corporation’s earnings and profits.

Question 10

A corporation was completely liquidated and dissolved this year. The filing fees, professional fees, and other expenditures incurred in connection with the liquidation are:
A. Deducted in full by the dissolved corporation.
B. Deducted in full by the shareholders of the dissolved corporation.
C. Treated as capital losses by the dissolved corporation.
D. Not deductible by the corporation or the shareholders.

Answer 10

A. Expenses related to a liquidation are deductible by the liquidating corporation.

Filing, professional fees (accounting and legal) and other expenditures incurred in connection with liquidations and dissolutions are fully deductible for the dissolving corporation.

Question 11

What is the usual result to the shareholders of a distribution in complete liquidation of a corporation?
A. No taxable effect.
B. Ordinary gain to the extent of cash received.
C. Ordinary gain or loss.
D. Capital gain or loss.

Answer 11

D. In a complete liquidation, shareholders generally recognize capital gains and losses from corporate distributions. The amount of assets received by a shareholder is treated as full payment in exchange for the stock.

The capital gain or loss recognized by a shareholder equals the total distribution less the shareholder’s basis.

Question 12

How does a non-corporate shareholder treat the gain on a redemption of stock that qualifies as a partial liquidation of the distributing corporation?
A. Entirely as a capital gain.
B. Entirely as a dividend.
C. Partly as a capital gain and partly as a return of capital.
D. Entirely as a tax-free transaction.

Answer 12

A. Non-corporate shareholders treat the gain on a redemption of stock that qualifies as a partial liquidation of the distributing corporation as a capital gain, just as if they had sold their stock. Corporate shareholders receive dividend treatment on a partial liquidation.

Question 13

What is the usual result to the shareholders of a distribution in complete liquidation of a corporation?
A. No taxable effect.
B. Ordinary gain to the extent of cash received.
C. Ordinary gain or loss.
D. Capital gain or loss.

Answer 13

D. Shareholders of a distribution in complete liquidation of a corporation receive capital gain or loss treatment just as if they hold their stock.

Question 14

S Corporation was a wholly-owned subsidiary of P Corporation. Both corporations were domestic C corporations. P received a liquidating distribution of property (worth $250 and a basis of $135) from S in cancellation of the stock. What amount of gain will P recognize if P had a basis of $100 in the S stock before the receipt of the property?
	A.  	$ 0
	B.  	$ 35
	C.  	$150
	D.  	$250

Answer 14

A. If stock of a subsidiary is liquidated by its parent company, any realized gain on the transaction is, in general, not recognized. The realized gain to parent is $150 ($250 property received - $100 basis). The recognized gain is zero.

Question 15

ABC has 200 shares of voting common stock outstanding. XYZ has decided to acquire 90 percent of the ABC stock solely in exchange for 50 percent of its voting stock. ABC will become XYZ’s subsidiary after the transaction. Which of the following statements is true?
A. XYZ must acquire 100 percent of ABC for the transaction to qualify as a reorganization.
B. The transaction is a reorganization.
C. XYZ must issue at least 60 percent of its stock for the transaction to qualify as a reorganization.
D. ABC must surrender assets to XYZ to qualify as a reorganization.

Answer 15

B. The 80% control test is met since 90% of ABC’s voting stock is being acquired. XYZ is using its voting stock as required for B reorganizations.

As this reorganization is a Type B: Stock for Stock transaction, the reorganization is tax-free.

Question 16

Corporations A and B combine in a qualifying reorganization, and form Corporation C, the only surviving corporation.

This reorganization is tax-free to the
Shareholders
Corporation

Answer 16

Yes, yes
Corporate reorganizations generally are tax-free for both shareholders and the corporation.

In this case, the reorganization would be viewed as a Type A: Merger or Consolidation, which qualifies for tax-free treatment for both shareholders and the corporation.

This response correctly indicates that the transaction would be tax-free for both shareholders and the corporation and, therefore, it is correct.

Question 17

Pursuant to a plan of corporate reorganization adopted in July 2014, Gow exchanged 500 shares of Lad Corp. common stock that he had bought in January 2014 at a cost of $5,000 for 100 shares of Rook Corp. common stock having a fair market value of $6,000.

Gow's recognized gain on this exchange was
	A.  	$1,000 long-term capital gain.
	B.  	$1,000 short-term capital gain.
	C.  	$1,000 ordinary income.
	D.  	$0.

Answer 17

D. If taxpayer receives stocks or securities under a plan of reorganization from a corporation included in the reorganization, the taxpayer does not recognize a gain or loss from the transaction. However, if the taxpayer receives boot, the transaction is taxable up to the amount of the boot.

Since Gow received the Rook Corp. stock solely in exchange for his Lad Corp. stock under a plan of reorganization and did not receive any boot, the transaction would be tax-free for Gow.

Question 18

P corporation acquired the assets of its wholly-owned subsidiary, S corporation, under a plan that qualified as a tax-free complete liquidation of S. Which of the following of S's unused carryovers may be transferred to P?
	A.  	Excess charitable contributions.
	B.  	Net operating loss.
	C.  	Both of the above are transferred.
	D.  	None of the above are transferred.

Answer 18

C. Tax attributes of the subsidiary transfer to the parent after a tax-free liquidation of the subsidiary into the parent.

Question 19

T/F: In a “C” reorganization, the acquiring firm must acquire substantially all of the assets of the target in exchange for solely voting stock of the acquiring firm.

Answer 19

True

Question 20

T/F: A shareholder who receives debt in exchange for stock in a merger will always be able to defer gain on the disposition of the stock if the merger qualifies as a reorganization.

Answer 20

False.
The shareholders of the acquired firm can only defer gains and losses to the extent they receive equity of the acquiring corporation. Note, that both voting and/or non-voting stock can be used in Type A reorganization.

Question 21

T/F: In order to qualify as a partial liquidation, the corporation must completely terminate all business activities for five years.

Answer 21

False.
Partial Liquidation : A contraction of the corporate business. Hence, the determination for sale treatment is made by looking for a contraction at the corporate level.

Question 22

T/F: The stock attribution rules do not apply to any redemption in complete termination of a shareholder’s stock in a corporation.

Answer 22

False.

They DO apply.

Question 23

T/F: Shareholders recognize gain or loss on a liquidating distribution.

Answer 23

True

Question 24

T/F: The adjusted basis of the property received by a shareholder in a liquidating distribution is the fair market value reduced by the amount of liabilities assumed by the shareholder.

Answer 24

False.
The gain or loss is determined by subtracting the adjusted basis of the stock from the fair market value of the distribution, reduced by any taxes paid by the corporation for the liquidation.

Question 25

T/F: A partial liquidation is treated as a sale only by non-corporate shareholders.

Answer 25

True

Question 26

T/F: Stock owned by a taxpayer’s spouse, children, grandchildren, and parents is attributed to the taxpayer when determining if a redemption qualifies as a sale.

Answer 26

True

Question 27

T/F: In order to qualify as a substantially disproportionate redemption of a shareholder’s stock, the shareholder must own less than 50% of the voting shares after the redemption.

Answer 27

True