I need chapter 16: Corporate operation exam file. It is same series with the file that I attached below. The chapter might be different, but the topic is Corporate operation.

ch18 Student: ___________________________________________________________________________ 1. The "double taxation" of corporate income refers to the taxation of corporate income at both the entitylevel and the shareholder-level. True False 2. A distribution from a corporation to a shareholder will always be treated as a dividend for tax purposes. True False 3. A corporation's "earnings and profits" account is equal to the company's "retained earnings" account on its balance sheet. True False 4. A distribution from a corporation to a shareholder will only be treated as a dividend for tax purposes if the distribution is paid out of current or accumulated earnings and profits. True False 5. Green Corporation has current earnings and profits of $100,000 and negative accumulated earnings and profits of ($200,000). A $50,000 distribution from Green to its sole shareholder will not be treated as a dividend because total earnings and profits is a negative $100,000. True False 6. Green Corporation has negative current earnings and profits of ($100,000) and positive accumulated earnings and profits of $200,000. A $50,000 distribution from Green to its sole shareholder will be treated as a dividend because total earnings and profits is a positive $100,000. True False 7. The term "earnings and profits" is well defined in the Internal Revenue Code. True False 8. Only income and deductions included on a corporation's income tax return are included in the computation of current earnings and profits. True False 9. Cedar Corporation incurs a net capital loss of $20,000 in 20X3 that cannot be deducted on its income tax return but must be carried forward to 20X4. Cedar will deduct the net capital loss in the computation of current earnings and profits for 20X3. True False 10. Terrapin Corporation incurs federal income taxes of $250,000 in 20X3. Terrapin deducts the federal income taxes in computing its current earnings and profits for 20X3. True False 11. Evergreen Corporation distributes land with a fair market value of $200,000 to its sole shareholder. Evergreen's tax basis in the land is $50,000. Assuming sufficient earnings and profits, the amount of dividend reported by the shareholder is $200,000. True False 12. Evergreen Corporation distributes land with a fair market value of $200,000 to its sole shareholder. Evergreen's tax basis in the land is $50,000. Evergreen will report a gain of $150,000 on the distribution regardless of whether its earnings and profits are positive or negative. True False 13. Evergreen Corporation distributes land with a fair market value of $50,000 to its sole shareholder. Evergreen's tax basis in the land is $200,000. Evergreen will report a loss of $150,000 on the distribution regardless of whether its earnings and profits are positive or negative. True False 14. Compensation recharacterized by the IRS as a dividend because it was considered "unreasonable" will affect only the income tax liability of the corporation paying the compensation. True False 15. Unreasonable compensation issues are more likely to arise in audits of privately held corporations rather than publicly traded corporations. True False 16. Stock dividends are always tax-free to the recipient. True False 17. The recipient of a tax-free stock dividend will have a zero tax basis in the stock. True False 18. The recipient of a taxable stock dividend will have a tax basis in the stock equal to the fair market value of the stock received. True False 19. A stock redemption is always treated as a sale or exchange for tax purposes. True False 20. Tammy owns 60 percent of the stock of Huron Corporation. Unrelated individuals own the remaining 40 percent. For a stock redemption to be treated as an exchange under the "substantially disproportionate" rule, Tammy must reduce her stock ownership to below 48 percent. True False 21. Brothers and sisters are considered "family" under the stock attribution rules that apply to stock redemptions. True False 22. 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. True False 23. The "family attribution" rules are automatically waived in a complete redemption of a shareholder's stock. True False 24. 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 will reduce its earnings and profits by $100,000 because of the redemption. True False 25. A distribution in partial liquidation of a corporation is always treated as a sale or exchange by an individual shareholder. True False 26. Which statement best describes the concept of the "double taxation" of corporation income? A. Corporate income is subject to two levels of taxation: the regular tax and the alternative minimum tax. B Corporate income is taxed twice at the corporate level: first when earned and then a second time if . appreciated property is distributed to a shareholder. C Corporate income is taxed when earned by a C corporation and then a second time at the shareholder . level when distributed as a dividend. D. Corporate income is subject to two levels of taxation: at the federal level and a second time at the state level. 27. Which of the following forms of earnings distributions would not be subject to double taxation at the corporate and shareholder level? A. Dividend B. Stock redemption C. Partial liquidation D. Compensation paid to a shareholder/employee of the corporation 28. Which of the following statements best describes the priority of the tax treatment of a distribution from a corporation to a shareholder? A The distribution is a dividend to the extent of the corporation's earnings and profits, then a return of . capital, and finally gain from sale of stock. B The distribution is a return of capital, then a dividend to the extent of the corporation's earnings and . profits, and finally gain from sale of stock. C The distribution is a return of capital, then gain from sale of stock, and finally a dividend to the extent . of the corporation's earnings and profits. DThe shareholder can elect to treat the distribution as either a dividend to the extent of the corporation's . earnings and profits or a return of capital, followed by gain from sale of stock. 29. Which of the following statements best describes current earnings and profits? A. Current earnings and profits is another name for a corporation's retained earnings on its balance sheet. B Current earnings and profits is a precisely defined tax term in the Internal Revenue Code and represents . a corporation's economic income. C Current earnings and profits is an ill-defined tax concept in the Internal Revenue Code and represents a . corporation's economic income. D. Current earnings and profits is a conceptual tax concept with no definition in the Internal Revenue Code. 30. Which of the following statements best describes the role of current and accumulated earnings and profits in determining if a distribution is a dividend? A A distribution will only be a dividend if total earnings and profits (current plus accumulated) is positive . at the time of the distribution. B. A distribution can never be a dividend if current earnings and profits are negative. C A distribution will be a dividend if current earnings and profits for the year are positive, even if . accumulated earnings and profits are negative. D A distribution will never be a dividend if current earnings and profits for the year are negative, even if . accumulated earnings and profits is positive. 31. A calendar-year corporation has positive current E&P of $500 and accumulated negative E&P of $1,200. The corporation makes a $400 distribution to its sole shareholder. Which of the following statements is true? A. The distribution will not be a dividend because total earnings and profits is a negative $700. B. The distribution may be a dividend, depending on whether total earnings and profits at the date of the distribution is positive. C. The distribution will be a dividend because current earnings and profits are positive and exceed the distribution. D. A distribution from a corporation to a shareholder is always a dividend, regardless of the balance in earnings and profits. 32. A calendar-year corporation has negative current E&P of $500 and accumulated positive E&P of $1,000. The corporation makes a $600 distribution to its sole shareholder. Which of the following statements is true? A. $500 of the distribution will be a dividend because total earnings and profits is $500. B. $0 of the distribution will be a dividend because current earnings and profits are negative. C. $600 of the distribution will be a dividend because accumulated earnings and profits is $1,000. D Up to $600 of the distribution could be a dividend depending on the balance in accumulated earnings . and profits on the date of the distribution. 33. Which of these items is not an adjustment to taxable income or net loss to compute current E&P? A. Dividends received deduction B. Tax-exempt income C. Net capital loss carryforward from the prior year tax return D. Refund of prior year taxes for an accrual method taxpayer 34. 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 an installment sale of $25,000. The corporation's current earnings and profits for 20X3 would be: A. $524,000 B. $500,000 C. $354,000 D. $331,000 35. Au Sable Corporation reported taxable income of $800,000 in 20X3 and paid federal income taxes of $272,000. Not included in the computation was a disallowed penalty of $25,000, life insurance proceeds of $100,000, and an income tax refund from 20X2 of $50,000. Au Sable is an accrual basis taxpayer. The corporation's current earnings and profits for 20X3 would be: A. $875,000 B. $653,000 C. $603,000 D. $553,000 36. Oakland Corporation reported a net operating loss of $500,000 in 20X3 and elected to carry the loss forward to 20X4. Not included in the computation was a disallowed meals and entertainment expense of $20,000, tax-exempt income of $10,000, and deferred gain on an installment sale of $250,000. The corporation's current earnings and profits for 20X3 would be: A. $(500,000) B. $(720,000) C. $(510,000) D. $(260,000) 37. 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, and gain of $50,000 from an installment sale that took place in 20X1. The corporation's current earnings and profits for 20X3 would be: A. $1,015,000 B. $965,000 C. $675,000 D. $625,000 38. Abbot Corporation reported a net operating loss of $400,000 in 20X3, which the corporation elected to carry forward to 20X4. Included in the computation of the loss was regular depreciation of $100,000 (E&P depreciation is $40,000), first year expensing under 179 of $50,000, and a dividends received deduction of $10,000. The corporation's current earnings and profits for 20X3 would be: A. $(290,000) B. $(330,000) C. $(400,000) D. $(490,000) 39. 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. The corporation's current earnings and profits for 20X3 would be: A. $424,000 B. $404,000 C. $380,000 D. $344,000 40. 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 earnings and profits for 20X3 would be: A. $(250,000) B. $(260,000) C. $(300,000) D. $(360,000) 41. Bruin Company reports current E&P of $200,000 in 20X3 and accumulated E&P at the beginning of the year of $100,000. Bruin distributed $400,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3? A. $400,000 B. $300,000 C. $200,000 D. $100,000 42. Aztec Company reports current E&P of $200,000 in 20X3 and accumulated E&P at the beginning of the year of negative $100,000. Aztec distributed $300,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3? A. $300,000 B. $200,000 C. $100,000 D. $0 43. Inca Company reports current E&P of negative $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? A. $0 B. $100,000 C. $200,000 D. $300,000 44. Wildcat Corporation reports current E&P of negative $200,000 in 20X3 and accumulated E&P at the beginning of the year of $100,000. Wildcat distributed $300,000 to its sole shareholder on December 31, 20X3. How much of the distribution is treated as a dividend in 20X3? A. $0 B. $100,000 C. $200,000 D. $300,000 45. 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? A. $400,000 dividend B. $100,000 dividend, $200,000 tax-free return of basis, and $100,000 capital gain C. $200,000 dividend and $200,000 tax-free return of basis D. $300,000 dividend and $100,000 tax-free return of basis 46. Longhorn Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of negative $200,000. 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? A. $300,000 dividend B. $100,000 dividend, $100,000 tax-free return of basis, and $100,000 capital gain C. $100,000 dividend and $200,000 tax-free return of basis D. $0 dividend, $100,000 tax-free return of basis, and $200,000 capital gain 47. Husker Corporation reports current E&P of negative $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? A. $200,000 dividend B. $100,000 dividend, $50,000 tax-free return of basis, and $50,000 capital gain C. $100,000 dividend and $100,000 tax-free return of basis D. $0 dividend, $50,000 tax-free return of basis, and $150,000 capital gain 48. Tar Heel Corporation had current and accumulated E&P of $500,000 at 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 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: A. $100,000 dividend and a tax basis in the land of $100,000 B. $100,000 dividend and a tax basis in the land of $90,000 C. Dividend of $90,000 and a tax basis in the land of $100,000 D. Dividend of $90,000 and a tax basis in the land of $90,000 49. Cavalier Corporation had current and accumulated E&P of $500,000 at 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 basis to Cavalier was $50,000. The tax consequences of the distribution to Cavalier in 20X3 would be: A. No gain recognized and a reduction in E&P of $200,000 B. $150,000 gain recognized and a reduction in E&P of $200,000 C. $150,000 gain recognized and a reduction in E&P of $50,000 D. No gain recognized and a reduction in E&P of $50,000 50. Montclair Corporation had current and accumulated E&P of $500,000 at 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 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: A. No gain recognized and a reduction in E&P of $200,000 B. $150,000 gain recognized and a reduction in E&P of $200,000 C. $150,000 gain recognized and a reduction in E&P of $175,000 D. No gain recognized and a reduction in E&P of $175,000 51. Catamount Company had current and accumulated E&P of $500,000 at 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 $200,000 and its tax and E&P basis to Catamount was $250,000. The tax consequences of the distribution to Catamount in 20X3 would be: A. No loss recognized and a reduction in E&P of $250,000 B. $50,000 loss recognized and a reduction in E&P of $250,000 C. $50,000 loss recognized and a reduction in E&P of $150,000 D. No loss recognized and a reduction in E&P of $200,000 52. Paladin Corporation had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Maria Mendez. The land's fair market value was $200,000 and its tax and E&P basis to Paladin was $250,000. Maria assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Paladin in 20X3 would be: A. No loss recognized and a reduction in E&P of $200,000 B. $50,000 loss recognized and a reduction in E&P of $200,000 C. $50,000 loss recognized and a reduction in E&P of $225,000 D. No loss recognized and a reduction in E&P of $225,000 53. Which of the following payments could be treated as a constructive dividend by the IRS? A. End-of-year bonus payment to a shareholder/employee B. Rent paid to a shareholder/lessor C. Interest paid to a shareholder/creditor D. All of these payments could be treated as a constructive dividend by the IRS 54. Which of the following factors would not be considered in determining if compensation paid to a shareholder/employee is reasonable? A. The individual's duties and responsibilities B. What individuals performing in comparable capacities at other companies are paid C. Whether the corporation has a formal compensation policy D. The individual's marginal income tax rate 55. Which of the following statements is not considered a potential answer to the dividend puzzle (why do corporations pay dividends)? A. Paying dividends avoids the double taxation of corporate income B Demanding that managers pay out dividends restricts their investment activities and forces them to . adopt more efficient investment policies C. Paying dividends is a source of investor goodwill D. Dividends are a signal to the capital markets about the health of a corporation's activities 56. Which of the following stock dividends would be tax-free to the shareholder? A. A 2-for-1 stock split to all holders of common stock B. A stock dividend where the shareholder could choose between cash and stock C. A stock dividend to all holders of preferred stock D Both a 2-for-1 stock split to all holders of common stock and a stock dividend to all holders of . preferred stock are tax-free to the shareholder 57. El Toro Corporation declared a common stock dividend to all shareholders of record on June 30, 20X3. Shareholders will receive 1 share of El Toro stock for each 2 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 dividend to Raoul? A. $0 dividend income and a tax basis in the new stock of $100 per share B. $0 dividend income and a tax basis in the new stock of $60 per share C. $0 dividend income and a tax basis in the new stock of $40 per share D. $15,000 dividend and a tax basis in the new stock of $100 per share 58. Wonder Corporation declared a common stock dividend 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 dividend to Diana? A. $0 dividend income and a tax basis in the new stock of $180 per share B. $0 dividend income and a tax basis in the new stock of $67.50 per share C. $0 dividend income and a tax basis in the new stock of $56.25 per share D. $10,800 dividend and a tax basis in the new stock of $180 per share 59. Which of the following individuals is not considered "family" for purposes of applying the stock attribution rules to a stock redemption? A. Parents B. Grandchildren C. Grandparents D. Spouse 60. Which of the following statements is true? A. All stock redemptions are treated as exchanges for tax purposes. B. A stock redemption not treated as an exchange will automatically be treated as a taxable dividend. C. All stock redemptions are treated as dividends if received by an individual. D A stock redemption is treated as an exchange only if it meets one of three stock ownership tests . described in the Internal Revenue Code. 61. Sam owns 70 percent of the stock of Club Corporation. Unrelated individuals own the remaining 30 percent. For a stock redemption of Sam's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Club stock must Sam own after the redemption? A. Any percentage less than 70 percent B. Any percentage less than 56 percent C. Any percentage less than 50 percent D. All stock redemptions involving individuals are treated as exchanges 62. Sara owns 60 percent of the stock of Lea Corporation. Unrelated individuals own the remaining 40 percent. For a stock redemption of Sara's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Lea stock must Sara own after the redemption? A. Any percentage less than 60 percent B. Any percentage less than 50 percent C. Any percentage less than 48 percent D. All stock redemptions involving individuals are treated as exchanges 63. Comet Company is owned equally by Pat and his sister Pam, each of whom hold 100 shares in the company. Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 50 of her shares for $1,000 per share on December 31, 20X3. Pam's income tax basis in each share is $500. Comet has total E&P of $250,000. What are the tax consequences to Pam because of the stock redemption? A. $25,000 capital gain and a tax basis in each of her remaining shares of $500. B. $25,000 capital gain and a tax basis in each of her remaining shares of $100. C. $50,000 dividend and a tax basis in each of her remaining shares of $100. D. $50,000 dividend and a tax basis in each of her remaining shares of $50. 64. Comet Company is owned equally by Pat and his sister Pam, each of whom hold 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. No reduction in E&P because of the exchange. B. A reduction of $50,000 in E&P because of the exchange. C. A reduction of $62,500 in E&P because of the exchange. D. A reduction of $125,000 in E&P because of the exchange. 65. Comet Company is owned equally by Pat and his sister Pam, each of whom hold 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. No reduction in E&P because of the exchange. B. A reduction of $50,000 in E&P because of the exchange. C. A reduction of $40,000 in E&P because of the exchange. D. A reduction of $80,000 in E&P because of the exchange. 66. Viking Corporation is owned equally by Sven and his wife Olga, each of whom hold 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 income 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? A. $75,000 capital gain and a tax basis in each of his remaining shares of $1,000. B. $75,000 capital gain and a tax basis in each of his remaining shares of $2,000. C. $150,000 dividend and a tax basis in each of his remaining shares of $1,000. D. $150,000 dividend and a tax basis in each of his remaining shares of $4,000. 67. Viking Corporation is owned equally by Sven and his wife Olga, each of whom hold 100 shares in the company. Viking redeemed 75 shares of Sven's stock for $2,000 per share on December 31, 20X3. Viking has total E&P of $500,000. What are the tax consequences to Viking because of the stock redemption? A. No reduction in E&P because of the exchange. B. A reduction of $150,000 in E&P because of the exchange. C. A reduction of $187,500 in E&P because of the exchange. D. A reduction of $375,000 in E&P because of the exchange. 68. Corona Company is owned equally by Maria, her sister Carlita, her mother Gabriella, and her grandmother Olivia, each of whom hold 100 shares in the company. Under the family attribution rules, how many shares of Corona stock is Maria deemed to own? A. 100 B. 200 C. 300 D. 400 69. Panda Company is owned equally by Min, her husband Bin, her sister Xiao, and her grandson, Han, each of whom hold 100 shares in the company. Under the family attribution rules, how many shares of Panda stock is Min deemed to own? A. 100 B. 200 C. 300 D. 400 70. 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 100 shares in the company. Under the 318 stock attribution rules, how many shares of Beltway stock is George deemed to own? A. 100 B. 150 C. 200 D. 300 71. 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? A. 100 B. 200 C. 250 D. 300 72. 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? A. 100 B. 200 C. 250 D. 300 73. Tammy owns 100 shares in Star Struck Corporation. The other 100 shares are owned by her husband Tommy. Which of the following statements is true? A A stock redemption that completely terminates Tammy's direct interest in a corporation will be treated . as an exchange for tax purposes. BA stock redemption that completely terminates Tammy's direct interest in a corporation will be treated . as a dividend for tax purposes if Tammy waives the family attribution rules and files a "triple i" agreement with the IRS. CA stock redemption that completely terminates Tammy's direct interest in a corporation will be treated . as an exchange if Tammy waives the family attribution rules and files a "triple i" agreement with the IRS. DA stock redemption that completely terminates Tammy's direct interest in a corporation will be treated . as a dividend if Tammy waives the family attribution rules and files a "triple i" agreement with the IRS. 74. 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%) 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% 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 income 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? A. Henry has dividend income of $50,000 and a tax basis in his remaining shares of $100 per share. B. Henry has capital gain of $25,000 and a tax basis in his remaining shares of $100 per share. C. Henry has dividend income of $50,000 and a tax basis in his remaining shares of $200 per share. D. Henry has capital gain of $25,000 and a tax basis in his remaining shares of $200 per share. 75. General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Inc. in partial liquidation of the company on December 31, 20X3. Tiara, Inc. owns 500 shares (50%) of General Inertia. The distribution was in exchange for 250 shares of Tiara's stock in the company. After the partial liquidation, Tiara continued to own 50% of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Tiara's income 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 amount of dividend or capital gain does Tiara recognize because of the transaction? A. Tiara does not recognize any dividend income or capital gain. B. Tiara recognizes capital gain of $50,000. C. Tiara recognizes dividend income of $50,000. D. Tiara recognizes capital gain of $25,000. 76. Superior Corporation reported taxable income of $1,000,000 in 20X3. Superior paid a dividend of $100,000 to its sole shareholder, Mary Yooper. Superior Corporation is subject to a flat rate tax of 34%. The dividend meets the requirements to be a "qualified dividend" and Mary is subject to a tax rate of 15% on the dividend. What is the total federal income tax imposed on the corporate income earned by Superior and distributed to Mary as a dividend? 77. Erie Corporation reported taxable income of $2,200,000 in 20X3 before any deduction for any payment to its sole shareholder and employee, LaBron Cleveland. Erie paid a bonus of $200,000 to LaBron at year-end. Erie Corporation is subject to a flat-rate tax of 34%. The bonus meets the requirements to be "reasonable" and is therefore deductible by Erie. LaBron is subject to a marginal tax rate of 35% on the bonus. What is the total federal income tax imposed on the corporate income earned by Erie and paid to LaBron as a bonus? 78. St. Clair Company reports positive current E&P of $500,000 in 20X3 and positive accumulated E&P at the beginning of the year of $400,000. St. Clair Company distributed $600,000 to its sole shareholder, Danielle Brush on December 31, 20X3. Danielle's tax basis in her St. Clair stock is $120,000. How much of the $600,000 distribution is treated as a dividend to Danielle and what is her basis in St. Clair stock after the distribution? 79. Austin Company reports positive current E&P of $200,000 and negative accumulated E&P of $300,000. Austin distributed $250,000 to its sole shareholder, Betsy Bevo, on December 31, 20X3. Betsy' tax basis in her stock is $125,000. How much of the $250,000 distribution is treated as a dividend to Betsy and what is her tax basis in Austin stock after the distribution? 80. Elk Company reports negative current E&P of $200,000 and positive accumulated E&P of $300,000. Elk distributed $200,000 to its sole shareholder, Barney Rubble, on December 31, 20X3. Barney's tax basis in his Elk stock is $75,000. What is the tax treatment of the distribution to Barney and what is his tax basis in Elk stock after the distribution? 81. Houghton Company reports negative current E&P of $(500,000) and negative accumulated E&P of $(800,000). Houghton distributed $100,000 to its sole shareholder, Blossom Applegate, on December 31, 20X3. Blossom's tax basis in her Houghton stock is $50,000. What is the tax treatment of the distribution to Blossom and what is her tax basis in Houghton stock after the distribution? 82. Loon, Inc. reported taxable income of $600,000 in 20X3 and paid federal income taxes of $202,000. Not included in the company's computation of taxable income is tax-exempt interest of $30,000, disallowed meals and entertainment expenses of $15,000, and disallowed expenses related to the tax-exempt income of $4,000. Loon deducted depreciation of $200,000 on its tax return. Under the alternative (E&P) depreciation method, the deduction would have been $80,000. Compute the company's current E&P for 20X3. 83. Orchard, Inc. reported taxable income of $800,000 in 20X3 and paid federal income taxes of $272,000. Included in the company's computation of taxable income is gain from sale of a depreciable asset of $200,000. The income tax basis of the asset was $50,000. The E&P basis of the asset using the alternative depreciation system was $75,000. Compute the company's current E&P for 20X3. 84. Walloon, Inc. reported taxable income of $1,000,000 in 20X3 and paid federal income taxes of $340,000. The company reported a capital gain from sale of investments of $150,000, which was partially offset by a $40,000 net capital loss carryover from 20X2, resulting in a net capital gain of $110,000 included in taxable income. Compute the company's current E&P for 20X3. 85. Otter Corporation reported taxable income of $400,000 from operations for 20X3. The company paid federal income taxes of $136,000 on this taxable income. During the year, the company made a distribution of land to its sole shareholder, Emmet Jugg. The land's fair market value was $50,000 and its tax and E&P basis to Otter was $30,000. Emmet assumed a mortgage attached to the land of $10,000. Any gain from the distribution will be taxed at 34%. The company had accumulated E&P of $900,000 at the beginning of the year. Compute Otter's total taxable income and federal income tax paid because of the distribution (assume a tax rate of 34%). Using your solution, compute Otter's current E&P for 20X3. 86. Ozark Corporation reported taxable income of $500,000 from operations for 20X3. During the year, the company made a distribution of land to its sole shareholder, Marcus Twain. The land's fair market value was $100,000 and its tax and E&P basis to Ozark was $125,000. Marcus assumed a mortgage attached to the land of $25,000. Ozark's tax rate is 34%. The company had accumulated E&P of $850,000 at the beginning of the year. Compute Ozark's total taxable income and federal income tax paid because of the distribution. Using your solution, compute Otter's accumulated E&P at January 1, 20X4. 87. Sherburne Corporation reported current earnings and profits for 20X3 of $500,000. During the year, the company made a distribution of land to its sole shareholder, Ted Bozeman. The land's fair market value was $150,000 and its tax and E&P basis to Sherburne was $100,000. Ted assumed a mortgage attached to the land of $25,000. What amount of dividend income does Ted report because of the distribution and what is Ted's income tax basis in the land received from Sherburne? 88. Sunapee Corporation reported taxable income of $700,000 from operations for 20X3. During the year, the company made a distribution of land to its sole shareholder, Jean McCarthy. The land's fair market value was $125,000 and its tax and E&P basis to Sunapee was $75,000. Jean assumed a mortgage attached to the land of $25,000. Sunapee's tax rate is 34%. Compute Sunapee's total taxable income and federal income tax paid because of the distribution. Using your solution, compute Sunapee's current E&P for 20X3. 89. Tappan Company pays its sole shareholder, Carlita Hill, a salary of $200,000. At the end of each year, the company pays Carlita a "bonus" equal to the difference between the corporation's taxable income for the year (before the bonus) and $75,000. For 20X3, Tappan reported pre-bonus taxable income of $800,000 and paid Carlita a bonus of $725,000. On audit, the IRS determined that individuals working in Carlita's position earned on average $300,000 per year. The company had no formal compensation policy and never paid a dividend. How much of Carlita's compensation (salary plus bonus) might the IRS recharacterize as a dividend? Assuming the IRS recharacterizes $500,000 of Carlita's bonus as a dividend, what additional income tax liability does Tappan Company face? (Ignore payroll taxes) 90. Townsend Corporation declared a 1-for-1 stock split to all common stock shareholders of record on December 31, 20X3. Townsend reported current E&P of $400,000 and accumulated E&P of $1,000,000. The total fair market value of the stock distributed was $500,000. Regina Williams owned 1,000 shares of Townsend common stock with a tax basis of $200 per share ($2,000,000 total). The fair market value of the common stock was $300 per share on December 31, 20X3. What is Regina's income tax basis in the new and existing common stock she owns in Townsend, assuming the distribution is tax-free? 91. Sweetwater Corporation declared a stock dividend to all common stock shareholders of record on December 31, 20X3. Shareholders will receive 1 share of Sweetwater common stock for each 5 shares of common stock they already own. Pierre Dorgan owns 500 shares of Sweetwater common stock with a tax basis of $150 per share. The fair market value of the Sweetwater common stock was $90 per share on December 31. What is Pierre's income tax basis in his new and existing common stock in Sweetwater, assuming the distribution is non-taxable? 92. Buckeye Company is owned equally by James and his brother Terrelle, each of whom own 500 shares in the company. Terrelle wants to reduce his ownership in the company, and it was decided that the company will redeem 200 of his shares for $5,000 per share on December 31, 20X3. Terrelle's income tax basis in each share is $1,000. Buckeye has current E&P of $10,000,000 and accumulated E&P of $20,000,000. What is the amount and character (capital gain or dividend) recognized by Terrelle because of the stock redemption? 93. Pine Creek Company is owned equally by Bob and his sister Samantha, each of whom own 1,000 shares in the company. On December 31, 20X3, Pine Creek redeemed 200 of Samantha's shares for $5,000,000 in a transaction treated as an exchange by Samantha. Pine Creek has current E&P of $10,000,000 and accumulated E&P of $30,000,000 (computed without regard to the stock redemption). Assuming Pine Creek did not make any dividend distributions during 20X3, by what amount does the company reduce its E&P because of the redemption? 94. Goose Company is owned equally by Val and her sister Eugenia, each of whom own 500 shares in the company. Val wants to reduce her ownership in the company and have the transaction treated as an exchange for tax purposes. Determine the minimum amount of stock that Goose must redeem from Val for her to treat the redemption as being "substantially disproportionate with respect to the shareholder" and receive exchange treatment. 95. Crystal, Inc. is owned equally by John and his wife Arlene, each of whom own 500 shares in the company. Arlene wants to reduce her ownership in the company, and it was decided that the company will redeem 200 of her shares for $5,000 per share on December 31, 20X3. Arlene's income tax basis in each share is $1,000. Crystal has current E&P of $1,000,000 and accumulated E&P of $3,000,000. What is the amount and character (capital gain or dividend) recognized by Arlene as a result of the stock redemption, assuming only the "substantially disproportionate with respect to the shareholder" test is applied? 96. Crescent Corporation is owned equally by George and his daughter Olympia, each of whom own 100 shares in the company. George wants to retire from the company, and it was decided that the company will redeem all 100 of his shares for $10,000 per share on December 31, 20X3. George's income tax basis in each share is $2,000. Crescent has current E&P of $1,000,000 and accumulated E&P of $5,000,000. What must George do to ensure that the redemption will be treated as an exchange? 97. Tiger Corporation, a privately-held company, has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows: How many shares of stock is Mark deemed to own under the family attribution rules in a stock redemption? 98. Geneva Corporation, a privately-held company, has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows: Madison has a 20 percent interest in the partnership. The remaining 80 percent is owned by unrelated individuals. Madison owns 40% of Packer Corporation. The other 60 percent is owned by her father. How many shares of stock is Madison deemed to own under the family attribution rules in a stock redemption? 99. Half Moon Corporation made a distribution of $300,000 to Arnold Swartz in partial liquidation of the company on December 31, 20X3. Arnold owns 100% of Half Moon Corporation (1,200 shares). The distribution was in exchange for 50% of Arnold's stock in the company (600 shares). At the time of the distribution, the shares had a fair market value of $500 per share. Arnold's income tax basis in the shares was $250 per share. Half Moon had total E&P of $2,000,000 at the time of the distribution. What is the amount and character (capital gain or dividend) of any income or gain recognized by Arnold as a result of the partial liquidation? 100.Yellowstone Corporation made a distribution of $300,000 to Cheney, Inc. in partial liquidation of the company on December 31, 20X3. Cheney, Inc. owns 50 percent of Yellowstone Corporation (1,000 shares). The other 50 percent is owned by an unrelated corporation. The distribution was in exchange for 50% of Cheney's stock in the company (500 shares). At the time of the distribution, the shares had a fair market value of $800 per share. Cheney's income tax basis in the shares was $500 per share. Yellowstone had total E&P of $5,000,000 at the time of the distribution. What is the amount and character (capital gain or dividend) of any income or gain recognized by Cheney as a result of the partial liquidation? ch18 Key 1. TRUE 2. FALSE 3. FALSE 4. TRUE 5. FALSE 6. TRUE 7. FALSE 8. FALSE 9. TRUE 10. TRUE 11. TRUE 12. TRUE 13. FALSE 14. FALSE 15. TRUE 16. FALSE 17. FALSE 18. TRUE 19. FALSE 20. TRUE 21. FALSE 22. FALSE 23. FALSE 24. FALSE 25. TRUE 26. C 27. D 28. A 29. C 30. C 31. C 32. D 33. D 34. C 35. C 36. D 37. D 38. A 39. A 40. D 41. B 42. B 43. C 44. A 45. D 46. B 47. B 48. C 49. B 50. C 51. A 52. D 53. D 54. D 55. A 56. A 57. C 58. C 59. C 60. D 61. C 62. C 63. A 64. B 65. C 66. D 67. B 68. B 69. C 70. C 71. C 72. D 73. C 74. B 75. C Feedback: 76. $355,000 Feedback: 77. $750,000 Feedback: All $600,000 is treated as a dividend because the distribution is less than the company's total earnings and profits of $900,000. Danielle's tax basis in her Erie stock remains $120,000. 78. $600,000 dividend and a tax basis of $120,000. Feedback: Betsy has dividend income of $200,000, an amount equal to the company's current E&P. She reduces her tax basis in the Austin stock by $50,000, the excess of the distribution over the dividend amount. 79. $200,000 dividend and a tax basis in Austin stock of $75,000. Feedback: Barney reports a dividend of $100,000, the accumulated E&P at December 31, 20X3. The excess $100,000 distribution first reduces his basis in Elk stock, and the excess is treated as capital gain from sale of the stock. His tax basis in Elk stock is $0. 80. $100,000 dividend income, $75,000 tax-free return of capital, $25,000 capital gain. His tax basis in the Elk stock is $0. Feedback: No part of the distribution is treated as a dividend because both current and accumulated E&P are negative. The first $50,000 of the distribution is a tax-free return of capital and the remaining $50,000 is treated as gain from sale of stock. Her tax basis in Houghton stock is $0. 81. $0 dividend to Blossom, $50,000 tax-free return of capital, and $50,000 capital gain. Her tax basis in Houghton stock is $0. Feedback: 82. $529,000 Feedback: 83. $503,000 Feedback: 84. $700,000 Feedback: 85. $277,200 Feedback: 86. $500,000 taxable income, $170,000 federal income tax, $1,080,000 accumulated E&P at the beginning of 20X3. Feedback: Ted reports dividend income of $125,000, computed as the fair market value of the land received of $150,000 less the mortgage he assumes of $25,000. Ted's income tax basis in the land equals its fair market value of $150,000. 87. $125,000 dividend and a tax basis of $150,000 in the land. Feedback: 88. Taxable income of $750,000, federal income tax of $255,000, and current E&P of $495,000. Tappan would be denied a deduction for the $500,000, increasing the company's taxable income from $75,000 to $575,000. The company's tax on $575,000 is $195,500. The company's tax on $75,000 is $13,750. The company would owe additional taxes of $181,750. Feedback: The IRS could treat Carlita as receiving a constructive dividend to the extent the "bonus" is considered unreasonable compensation. The IRS could argue that the total "compensation" in excess of what an individual in Carlita's position typically receives as compensation should be recharacterized as a dividend. Carlita's compensation would be $300,000. She would report the disallowed compensation of $625,000 ($200,000 + $725,000 - $300,000) as a dividend. 89. The IRS could recharacterize $625,000 as a dividend. If the IRS recharacterizes $500,000 as a dividend, Tappan's tax liability would increase by $181,750. Feedback: The new common stock is allocated part of the tax basis of the old common stock based on relative fair market value. In a 1 for 1 stock split, Regina would allocate half of the basis of the old common stock of $200 to the new common stock, making her tax basis in the old and new common stock $100 per share. 90. $100 per share Feedback: The new stock is allocated part of the tax basis of the existing common stock based on relative fair market value. After the common stock dividend, Pierre will own 600 shares of Sweetwater common stock (500 + 500/5), each with the same fair market value. His basis in each share of common stock will be $125, computed as (500 shares $150 basis)/600. 91. $125 per share Feedback: Terrelle reduces his ownership in Buckeye Company from 50% to 37.5% (300/800). Terrelle meets the "substantially disproportionate" test to treat the redemption as an exchange. He reduces his ownership below 50%, and his ownership percentage after the redemption is less than 80% of his ownership before the redemption (80% 50% = 40%). As a result, Terrelle recognizes a capital gain of $800,000 ($1,000,000 $200,000). 92. $800,000 capital gain Feedback: Pine Creek reduces its accumulated E&P by the lesser of the cash distributed ($5,000,000) or the percentage of stock redeemed times accumulated E&P at the date of the redemption, after reduction by any dividends paid during the year (200/2,000 $40,000,000 = $4,000,000). 93. $4,000,000 Feedback: Val must reduce her stock ownership in Goose below 40% because of the exchange. The algebraic equation to solve for the number of shares to have redeemed is (500 - X)/(1,000 - X)