Question 1

Which of the following is not a consequence of the double tax on dividends?

		Corporations have an incentive to retain earnings and structure distributions to avoid dividend treatment.
		Corporations have an incentive to invest in noncorporate rather than corporate businesses.
		The cost of capital for corporate investments is increased.
		Corporations have an incentive to finance operations with debt rather than equity.
		All of the above are consequences of the double tax on dividends.

20 points

Question 2

Purple Corporation makes a property distribution to its sole shareholder, Paul. The property distributed is a house (fair market value of $189,000; basis of $154,000) that is subject to a $245,000 mortgage that Paul assumes. Before considering the consequences of the distribution, Purples current E & P is $35,000 and its accumulated E & P is $140,000. Purple makes no other distributions during the current year. What is Purples taxable gain on the distribution of the house?

		$0.
		$21,000.
		$35,000.
		$91,000.
		None of the above.

20 points

Question 3

Puffin Corporation makes a property distribution to its sole shareholder, Bonnie. The property distributed is a car (basis of $30,000; fair market value of $20,000) that is subject to a $6,000 liability which Bonnie assumes. Puffin has no accumulated E & P and $30,000 of current E & P from other sources during the year. What is Puffins E & P after taking into account the distribution of the car?

		$4,000.
		$6,000.
		$10,000.
		$14,000.
		None of the above.

20 points

Question 4

Distributions that are not dividends are a return of capital and decrease the shareholders basis.

True

False

20 points

Question 5

Distributions by a corporation to its shareholders are presumed to be a dividend unless the parties can prove otherwise.

True

False