394. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIBUT
394. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIBUT
Distributions by a corporation to its shareholders are presumed to be a return of capital unless the parties can prove otherwise.
a. True
b. False
395. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB 2
A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation’s E & P.
a. True
b. False
396. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB 3
Distributions that are not dividends are a return of capital and decrease the shareholder’s basis. Once basis is reduced to zero, any excess is taxed as a capital gain.
a. True
b. False
397. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB 4
Cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will be taxed as dividend income.
a. True
b. False
398. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB 5
A distribution in excess of E & P is treated as capital gain by shareholders.
a. True
b. False
399. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB 6
The terms “earnings and profits” and “retained earnings” are identical in meaning.
a. True
b. False
400. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB 7
To determine E & P, some (but not all) previously excluded income items are added back to taxable income.
a. True
b. False
401. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB 8
When computing E & P, taxable income is not adjusted for additional first-year depreciation.
a. True
b. False
402. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB 9
When computing current E & P, taxable income is not adjusted for the deferred gain in a § 1031 like-kind exchange.
a. True
b. False
403. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB10
An increase in the LIFO recapture amount must be added to taxable income to determine E & P.
a. True
b. False
404. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB11
Use of MACRS cost recovery when computing taxable income does not require an E & P adjustment.
a. True
b. False
405. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB12
When a corporation makes an installment sale, for E & P purposes the realized gain is recognized in the year of sale.
a. True
b. False
406. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB13
A corporation borrows money to purchase State of Texas bonds. The interest on the loan has no impact on either taxable income or current E & P.
a. True
b. False
407. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB14
Federal income tax paid in the current year must be subtracted from taxable income to determine E & P.
a. True
b. False
408. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB15
When computing E & P, an adjustment to taxable income is necessary for any domestic production activities deduction.
a. True
b. False
409. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB16
Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.
a. True
b. False
410. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB17
The dividends received deduction is added back to taxable income to determine E & P.
a. True
b. False
411. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB18
A realized gain from an involuntary conversion under § 1033 that is not recognized for income tax purposes has no effect on E & P.
a. True
b. False
412. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB19
In the current year, Pink Corporation has a § 179 expense of $80,000. As a result, next year, taxable income must be decreased by $16,000 to determine current E & P.
a. True
b. False
413. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB20
Any loss in current E & P must be treated as occurring ratably during the year.
a. True
b. False
414. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB21
When current E & P has a deficit and accumulated E & P is positive, the two accounts are netted at the date of the distribution. If a positive balance results, the distribution is a dividend to the extent of the balance.
a. True
b. False
415. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB22
When current E & P is positive and accumulated E & P has a deficit balance, the two accounts are netted for dividend determination purposes.
a. True
b. False
416. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB23
Regardless of any deficit in current E & P, distributions during the year are taxed as dividends to the extent of accumulated E & P.
a. True
b. False
417. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB24
Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.
a. True
b. False
418. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB25
Dividends paid to shareholders who hold both long and short positions do not qualify for the reduced tax rate available to individuals in certain years.
a. True
b. False
419. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB26
Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.
a. True
b. False
420. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB27
Certain dividends from foreign corporations can be qualified dividends for purposes of the 15% rate available to individuals.
a. True
b. False
421. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB28
During the year, Blue Corporation distributes land to its sole shareholder. If the fair market value of the land is less than its adjusted basis, Blue will recognize a loss on the distribution.
a. True
b. False
422. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB29
In certain circumstances, the amount of dividend income recognized by a shareholder from a property distribution is not reduced by the amount of liability assumed by a shareholder.
a. True
b. False
423. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB30
Property distributed by a corporation as a dividend is subject to a liability in excess of its basis. For purposes of determining gain on the distribution, the basis of the property is treated as being not less than the amount of liability.
a. True
b. False
424. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB31
A corporation that distributes a property dividend must reduce its E & P by the adjusted basis of the property less any liability on the property.
a. True
b. False
425. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB32
Under certain circumstances, a distribution can generate (or add to) a deficit in E & P.
a. True
b. False
426. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB33
Constructive dividends do not need to satisfy the legal requirements for a dividend as set forth by applicable state law.
a. True
b. False
427. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB34
Constructive dividends have no effect on a distributing corporation’s E & P.
a. True
b. False
428. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB35
If a stock dividend is taxable, the shareholder’s basis in the newly received shares is equal to the fair market value of the shares received in the distribution.
a. True
b. False
429. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB36
A corporate shareholder that receives a constructive dividend cannot apply a dividends received deduction to the distribution.
a. True
b. False
430. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB37
If a distribution of stock rights is taxable and their fair market value is less than 15 percent of the value of the old stock, then either a zero basis or a portion of the old stock basis may be assigned to the rights, at the shareholder’s option.
a. True
b. False
431. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB38
A pro rata distribution of nonconvertible preferred stock to common shareholders is not generally taxable.
a. True
b. False
432. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB39
The rules used to determine the taxability of stock dividends also apply to distributions of stock rights.
a. True
b. False
433. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB40
If stock rights are taxable, the recipient has income to the extent of the fair market value of the rights.
a. True
b. False
434. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB41
The tax treatment of corporate distributions at the shareholder level does not depend on:
a. The character of the property being distributed.
b. The earnings and profits of the corporation.
c. The basis of stock in the hands of the shareholder.
d. Whether the distributed property is received by an individual or a corporation.
e. None of the above.
435. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB42
Scarlet Corporation (a calendar year taxpayer) has taxable income of $150,000, and its financial records reflect the following for the year.
| Federal income taxes paid | $55,000 |
| Net operating loss carryforward deducted currently | 35,000 |
| Gain recognized this year on an installment sale from a prior year | 22,000 |
| Depreciation deducted on tax return (ADS depreciation would have been $5,000) | 20,000 |
| Interest income on Iowa state bonds | 4,000 |
Scarlet Corporation’s current E & P is:
a. $127,000.
b. $107,000.
c. $97,000.
d. $57,000.
e. None of the above.
436. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB43
Blue Corporation, a cash basis taxpayer, has taxable income of $700,000 for the current year. Blue elected $80,000 of § 179 expense. It also had a related party loss of $30,000 and a realized (not recognized) gain from an involuntary conversion of $85,000. It paid Federal income tax of $185,000 and a nondeductible fine of $20,000. Blue’s current E & P is:
a. $465,000.
b. $529,000.
c. $614,000.
d. $630,000.
e. None of the above.
437. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB44
Platinum Corporation, a calendar year taxpayer, has taxable income of $500,000. Among its transactions for the year are the following:
| Collection of proceeds from insurance policy on life of corporate | |
| officer (in excess of cash surrender value) | $75,000 |
| Realized gain (not recognized) on an involuntary conversion | 10,000 |
| Nondeductible fines and penalties | 40,000 |
Disregarding any provision for Federal income taxes, Platinum Corporation’s current E & P is:
a. $455,000.
b. $535,000.
c. $545,000.
d. $625,000.
e. None of the above.
