Distribution is treated as a dividend

Aztec Company reports current E&P of $200,000 in 20X3 and a deficit of

($100,000) in accumulated E&P at the beginning of the year. Aztec
distributed $300,000 to its sole shareholder on January 1, 20X3. How much
of the distribution is treated as a dividend in 20X3?

$200,000

current E&P. = distribution treated as dividend

Inca Company reports a deficit in current E&P of ($100,000) in 20X3 and

accumulated E&P at the beginning of the year of $200,000. Inca distributed
$300,000 to its sole shareholder on January 1, 20X3. How much of the
distribution is treated as a dividend in 20X3?

$200,000

When current E&P negative = accumulated E&P

Bruin Company reports current E&P of $400,000 in 20X3 and accumulated

E&P at the beginning of the year of $198,000. Bruin distributed $600,000 to
its sole shareholder on January 1, 20X3. How much of the distribution is
treated as a dividend in 20X3?

$598,000

Longhorn Company reports current E&P of $100,000 in 20X3 and a deficit of

($200,000) in accumulated E&P at the beginning of the year. Longhorn
distributed $300,000 to its sole shareholder on January 1, 20X3. The
shareholder's tax basis in his stock in Longhorn is $100,000. How is the
distribution treated by the shareholder in 20X3?

$100,000 dividend, $100,000 tax-free return of basis, and $100,000 capital

gain

tax basis = tax-free return of basis

capital gain = distributed - current E&P - tax-free return of basis

Husker Corporation reports a deficit in current E&P of ($200,000) in 20X3 and
accumulated E&P at the beginning of the year of $300,000. Husker
distributed $200,000 to its sole shareholder on December 31, 20X3. The
shareholder's tax basis in her stock in Husker is $50,000. How is the
distribution treated by the shareholder in 20X3?

$100,000 dividend, $50,000 tax-free return of basis, and $50,000 capital

gain

When current E&P is negative = current E&P + accumulated E&P

Beaver Company reports current E&P of $100,000 in 20X3 and accumulated

E&P at the beginning of the year of $200,000. Beaver distributed $400,000
to its sole shareholder on January 1, 20X3. The shareholder's tax basis in her
stock in Beaver is $200,000. How is the distribution treated by the
shareholder in 20X3?

$300,000 dividend and $100,000 tax-free return of basis

Dividend = current E&P + accumulated E&P, tax-free return of basis =

400,000 - 300000
Deemed to own
Lansing Company is owned equally by Jennifer, her husband, Dan, and
DeWitt Corporation, which is owned 50 percent by Jennifer and her sister
Jane. Each of the three shareholders holds 100 shares in the company. Under
the §318 stock attribution rules, how many shares of Lansing stock is DeWitt
Corporation deemed to own?

300

Family attribution rules. DeWitt owns > 50% stock of shareholder

DeWitt owns its own stock, Jennifer's stock, and Dan's stock 100*3 = 300

Corona Company is owned equally by Maria, her sister Carlita, her mother,
Gabriella, and her grandmother Olivia, each of whom holds 100 shares in the
company. Under the family attribution rules, how many shares of Corona
stock is Maria deemed to own?

200

Maria is treated as owning the shares of her mother,

Beltway Company is owned equally by George, his brother Thomas, and a

partnership owned 50 percent by George and his father, Abe. Each of the
three shareholders holds 290 shares in the company. Under the §318 stock
attribution rules, how many shares of Beltway stock is George deemed to
own?

580

George is treated as owning his pro rata shares in Beltway owned by the
partnership.

Under the family attribution rules, George is treated as owning 100 percent
of the partnership. He owns his own shares plus 100 percent of the stock
owned by the partnership.

Lansing Company is owned equally by Jennifer, her husband, Dan, and

DeWitt Corporation, which is owned 50 percent by Jennifer and her sister
Jane. Each of the three shareholders holds 100 shares in the company. Under
the §318 stock attribution rules, how many shares of Lansing stock is Jennifer
deemed to own?

250

owning her husband's shares and 50 percent of the shares owned by the
corporation

Jennifer, + her husband + 50%DeWitt Corporation, = 250

Tax consequences
General Inertia Corporation made a distribution of $50,000 to Henry Tiara
in partial liquidation of the company on December 31, 20X3. Henry owns 500
shares (50 percent) of General Inertia. The distribution was in exchange for
250 shares of Henry's stock in the company. After the partial liquidation,
Henry continued to own 50 percent of the remaining stock in General Inertia.
At the time of the distribution, the shares had a fair market value of $200 per
share. Henry's adjusted tax basis in the shares was $100 per share. General
Inertia had total E&P of $800,000 at the time of the distribution. What are
the tax consequences to Henry because of the transaction?

Henry has capital gain of $25,000 and a tax basis in his remaining shares of
$100 per share.

50000 > Henry

250 share (50% of 500 share) (adj $100 per share) < Exchange> 50000

Capital gain ：50000 – 25000 = 25000 c

500 – 250 = 250 ($100 per share

El Toro Corporation declared a common stock distribution to all

shareholders of record on June 30, 20X3. Shareholders will receive one share
of El Toro stock for each two shares of stock they already own. Raoul owns
300 shares of El Toro stock, with a tax basis of $60 per share. The fair market
value of the El Toro stock was $100 per share on June 30, 20X3. What are the
tax consequences of the stock distribution to Raoul?

$0 dividend income and a tax basis in the new stock of $40 per share.
stock distribution is nontaxable (pro rata) >> 0 dividend income, tax basis

300*60 = 18000

Get one for each 2 own >>> Own300+150 = 450

18000/450 = 40

Viking Corporation is owned equally by Sven and his wife, Olga, each of
whom holds 100 shares in the company. Viking redeemed 75 shares of
Sven's stock in the company on December 31, 20X3. Viking paid Sven
$2,000 per share. His adjusted tax basis in each share is $1,000. Viking has
total E&P of $500,000. What are the tax consequences to Sven because of
the stock redemption?

$150,000 dividend and a tax basis in each of his remaining shares of $4,000.

2000*75= 150000

1000*100 = 100000

100000 / (100 -75) = 4000

Viking Corporation is owned equally by Sven and his wife, Olga, each of
whom holds 120 shares in the company. Viking redeemed 70 shares of
Sven's stock for $1,500 per share on December 31, 20X3. Viking has total
E&P of $540,000. What are the tax consequences to Viking because of the
stock redemption?

A reduction of $105,000 in E&P because of the exchange

redemption = dividend

Sven = owning 100 percent of the corporation's stock after the redemption
through his wife, Olga. As a result, Viking reduces its E&P by the amount
distributed.

Comet Company is owned equally by Pat and his sister Pam, each of whom
holds 100 shares in the company. Comet redeems 50 of Pam's shares on
December 31, 20X3, for $1,000 per share in a transaction that Pam treats as
an exchange for tax purposes. Comet has total E&P of $160,000 on
December 31, 20X3. What are the tax consequences to Comet because of
the stock redemption?

A reduction of $40,000 in E&P because of the exchange.

50/200 = 25%

160,000*25% = 40000

Comet Company is owned equally by Pat and his sister Pam, each of whom
holds 100 shares in the company. Comet redeems 50 of Pam's shares on
December 31, 20X3, for $1,000 per share in a transaction that Pam treats as
an exchange for tax purposes. Comet has total E&P of $250,000 on
December 31, 20X3. What are the tax consequences to Comet because of
the stock redemption?

A reduction of $50,000 in E&P because of the exchange.

Less 50*1000=50000 <-> 250,000 *25% = 62500

Comet Company is owned equally by Pat and his sister Pam, each of whom holds 145
shares in the company. Pam wants to reduce her ownership in the company, and it was
decided that the company will redeem 73 of her shares for $1,460 per share on
December 31, 20X3. Pam's adjusted tax basis in each share is $600. Comet has total
E&P of $320,000. What are the tax consequences to Pam because of the stock
redemption?
$62,780 capital gain and a tax basis in each of her remaining shares of $600
Redemption = Exchange (1460-600)*73 = 62780
substantially disproportionate test(33%ownership after tredemption < 50 % and 40 %
remaining shares retain a basis of $600 per share

Catamount Company had current and accumulated E&P of $565,000 on December 31,
20X3. On December 31, the company made a distribution of land to its sole
shareholder, Caroline West. The land's fair market value was $214,000 and its tax and
E&P adjusted tax basis to Catamount was $282,500. The tax consequences of the
distribution to Catamount in 20X3 would be:
Sara owns 60 percent of the stock of Lea Corporation.

Catamount Company had current and accumulated E&P of $565,000 on

December 31, 20X3. On December 31, the company made a distribution of
land to its sole shareholder, Caroline West. The land's fair market value was
$214,000 and its tax and E&P adjusted tax basis to Catamount was
$282,500. The tax consequences of the distribution to Catamount in 20X3
would be:

No loss recognized and a reduction in E&P of $282,500.

$565,000 - $282,500.

not recognize loss on the distribution and reduces E&P by the land.

Wonder Corporation declared a common stock distribution to all shareholders

of record on September 30, 20X3. Shareholders will receive three shares of
Wonder stock for each five shares of stock they already own. Diana owns 300
shares of Wonder stock with a tax basis of $90 per share (a total basis of
$27,000). The fair market value of the Wonder stock was $180 per share on
September 30, 20X3. What are the tax consequences of the stock
distribution to Diana?

$0 dividend income and a tax basis in the new stock of $56.25 per share.

stock distribution = pro rata = nontaxable = $0 dividend i

300/5*3 = 180, 180+300 =480

27000/480 = $56.25 per share.

Tax consequences(Land Fair value
Tar Heel Corporation had current and accumulated E&P of $500,000 on
December 31 20X3. On December 31, the company made a distribution of
land to its sole shareholder, William Roy. The land's fair market value was
$100,000 and its tax and E&P adjusted tax basis to Tar Heel was $25,000.
William assumed a mortgage attached to the land of $10,000. The tax
consequences of the distribution to William in 20X3 would be:

Dividend of $90,000 and an adjusted tax basis in the land of $100,000

Dividend = Land fair value – mortgage , Land = Land fair value

Montclair Corporation had current and accumulated E&P of $500,000 on

December 31, 20X3. On December 31, the company made a distribution of
land to its sole shareholder, Molly Pitcher. The land's fair market value was
$200,000 and its tax and E&P adjusted tax basis to Montclair was $50,000.
Molly assumed a liability of $25,000 attached to the land. The tax
consequences of the distribution to Montclair in 20X3 would be:

$150,000 gain recognized and a reduction in E&P of $175,000.

recognizes gain = FMV – Tax basis

reduction E&P = FMV − Liability

Cavalier Corporation had current and accumulated E&P of $500,000 on
December 31 20X3. On December 31, the company made a distribution of
land to its sole shareholder, Tom Jefferson. The land's fair market value was
$200,000 and its tax and E&P adjusted tax basis to Cavalier was $50,000.
The tax consequences of the distribution to Cavalier in 20X3 would be:

$150,000 gain recognized and a reduction in E&P of $200,000.

recognizes gain = FMV – Tax basis

reduction E&P = FMV − Liability

Catamount Company had current and accumulated E&P of $535,000 on

December 31, 20X3. On December 31, the company made a distribution of
land to its sole shareholder, Caroline West. The land's fair market value was
$235,000 and its tax and E&P adjusted tax basis to Catamount was
$267,500. The tax consequences of the distribution to Catamount in 20X3
would be:

No loss recognized and a reduction in E&P of $267,500.

If FMV < tax basic

Reduction = tax basic

Current E&P
Packard Corporation reported taxable income of $1,000,000 in 20X3 and paid
federal income taxes of $340,000. Included in the taxable income
computation was a dividends received deduction of $5,000, a net capital loss
carryover from 20X2 of $10,000 utilized in 20X3, and gain of $50,000
recognized on the collection of cash from an installment sale that took place
in 20X1. The corporation's current E&P for 20X3 would be:

$625,000.

current E&P for 20X3

=taxable income - paid + dividends deduction + capital loss 20X2 – gain

20X1

= $1,000,000 − $340,000 + $5,000 + $10,000 − $50,000

= 625,000.

This year Truckit reported taxable income of $160,000 and received $20,000
of municipal interest. Truckit paid $55,000 in entertainment expenses and
$15,000 in fines and penalties. Truckit had $50,000 of accumulated E&P at
the beginning of the year. What is current E&P for Truckit?

Current E&P

= taxable income + municipal interest - entertainment expenses - fines and

penalties
= $160,000 + $20,000 − $55,000 − $15,000

= $110,000.

Grand River Corporation reported taxable income of $700,000 in 20X3 and

paid federal income taxes of $238,000. Not included in the computation was
a disallowed meals and entertainment expense of $2,400, tax-exempt
income of $1,400, and deferred gain on a current-year transaction treated as
an installment sale of $27,000. The corporation's current E&P for 20X3 would
be:

$488,000

Current E&P

= taxable income - paid federal income taxes - entertainment expenses +

tax-exempt income + deferred gain

= $700,000 − $238,000 − $2,400 + $1,400 + $27,000 = $488,000.

Grand River Corporation reported taxable income of $500,000 in 20X3 and

paid federal income taxes of $170,000. Not included in the computation was
a disallowed meals and entertainment expense of $2,000, tax-exempt
income of $1,000, and deferred gain on a current-year transaction treated as
an installment sale of $25,000. The corporation's current E&P for 20X3 would
be:

$354,000

$500,000 − $170,000 − $2,000 + $1,000 + $25,000 = $354,000

Greenwich Corporation reported a net operating loss of $800,000 in 20X3,

which the corporation elected to carry forward to 20X4. The computation of
the loss did not include a disallowed fine of $50,000, life insurance
proceeds of $500,000, and a current-year charitable contribution of $10,000
that will be carried forward to 20X4. The corporation's current E&P for 20X3
would be:

($360,000)

-net operating loss - disallowed fine + life insurance - charitable contribution

= ($800,000) − $50,000 + $500,000 − $10,000 = ($360,000)

Madison Corporation reported taxable income of $400,000 in 20X3 and
accrued federal income taxes of $136,000. Included in the computation of
taxable income was regular depreciation of $200,000 (E&P depreciation is
$60,000) and a net capital loss carryover of $20,000 from 20X2 utilized in
20X3. The corporation's current E&P for 20X3 would be:

$400,000 − $136,000 + $200,000 − $60,000 + $20,000 = $424,000

A calendar-year corporation has deficit in current E&P of ($500) and positive

accumulated E&P of $1,000. The corporation makes a $600 distribution to its
sole shareholder. Which of the following statements is true?

Up to $600 of the distribution could be a dividend depending on net E&P

(current plus accumulated E&P) on the date of the distribution.
F

Big-gain Corporation distributes land with a fair market value of $220,000 to

its sole shareholder. Big-gain's adjusted tax basis in the land is $115,000.
Big-gain will not be taxed on a gain on the distribution if it has a deficit of
($250,000) in E&P.

Evergreen Corporation distributes land with a fair market value of $50,000 to

its sole shareholder. Evergreen's adjusted tax basis in the land is $200,000.
Evergreen will deduct a tax loss of $150,000 on the distribution regardless of
whether its E&P is positive or negative.

The "family attribution" rules are automatically waived in a complete

redemption of a shareholder's stock.

A corporation's "E&P" account is equal to the company's "retained earnings"

account on its financial balance sheet.

The recipient of a tax-free stock distribution will have a zero tax basis in the stock
received in the distribution.
A stock redemption is always treated as a sale or exchange for tax purposes.

Diego owns 30 percent of Azul Corporation. Azul Corporation owns 50

percent of Verde Corporation. Under the attribution rules applying to stock
redemptions, Diego is treated as owning 15 percent of Verde Corporation.

Only taxable income and deductible expenses are included in the

computation of current E&P.

Battle Corporation redeems 20 percent of its stock for $100,000 in a stock

redemption that is treated as an exchange by the shareholders. Battle's E&P
at the date of the redemption is $200,000. Battle must reduce its E&P by
$100,000 because of the redemption.