Chapter 18 Corporate Taxation: Nonliquidating Distributions

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1. [LO1] What is meant by the term double taxation of corporate income?

2. [LO1]

3. [LO1] Why might a shareholder who is also an employee prefer receiving a dividend instead of compensation from a corporation?

4. [LO2] What are the three potential tax treatments of a cash distribution to a shareholder? Are these potential tax treatments elective by the shareholder?

5. [LO2] In general, what is the concept of earnings and profits designed to represent?

6. [LO2] How does current earnings and profits differ from accumulated earnings and profits? Is there any congressional logic for keeping the two accounts separate?

7. [LO2] True or False. A calendar-year corporation has positive current E&P of $100 and accumulated negative E&P of $200. A cash distribution of $100 to the corporation’s sole shareholder at year-end will not be treated as a dividend because total E&P is negative $100. Explain.

8. [LO2] True or False. A calendar-year corporation has negative current E&P of $100 and accumulated E&P of $100. A cash distribution of $100 to the corporation’s sole shareholder on June 30 will not be treated as a dividend because total E&P at December 31 is $0. Explain.

9. [LO2] List the four basic adjustments that a corporation makes to taxable income or net loss to compute current E&P. What is the rationale for making these adjustments?

10. [LO2] What must a shareholder consider in computing the amount of a noncash distribution to include in her gross income?

A shareholder must determine the fair market value of the distribution and any liability she will assume on receipt of the property. The shareholder’s dividend amount is the fair market value of the property received less any liability assumed on the property.

11. [LO2] What income tax issues must a corporation consider before it makes a noncash distribution to a shareholder?

12. [LO2] Will the shareholder’s tax basis in noncash property received equal the amount she includes in gross income as a dividend? Under what circumstances will the amounts be different, if any?

13. A shareholder receives appreciated noncash property from his corporation and assumes a liability attached to the property. How does the liability assumption affect the amount of dividend he reports in gross income?

14. A shareholder receives appreciated noncash property from his corporation and assumes a liability attached to the property. How does this assumption affect the amount of gain the corporation recognizes? From the corporation’s perspective, does it matter if the liability assumed by the shareholder exceeds the property’s gross fair market value?

15. [LO2] A corporation distributes appreciated noncash property to a shareholder as a dividend. What impact does the distribution have on the corporation’s earnings and profits?

16. [LO3] Amy is the sole shareholder of her corporation. Rather than have the corporation pay her a dividend, Amy decides to have the corporation declare a “bonus” at year-end and pay her tax-deductible compensation. What potential tax issue may arise in this situation? Which parties, Amy or the corporation or both, are affected by the classification of the payment?

17. [LO4] Why might a corporation issue a stock dividend to its shareholders?

18. [LO4] What tax issue arises when a shareholder receives a nontaxable stock dividend?

19. [LO4] In general, what causes a stock dividend to be taxable to the recipient?

20. [LO5] What are the potential tax consequences to a shareholder who participates in a stock redemption?

21. [LO5] What stock ownership tests must be met before a shareholder receives exchange treatment under the substantially disproportionate change-in-stock-ownership test in a stock redemption? Why is a change in stock ownership test used to determine the tax status of a stock redemption?

22. [LO5] What are the criteria to meet the “not essentially equivalent to a dividend” change-in-stock-ownership test in a stock redemption?

23. [LO5] When might a shareholder have to rely on the not essentially equivalent to a dividend test in arguing her stock redemption should be treated as an exchange for tax purposes?

24. [LO5] Why do you think the tax law imposes constructive stock ownership rules on stock redemptions?

25. [LO5] Which members of a family are included in the family attribution rules? Is there any rationale for the family members included in the test?

26. [LO5] Ilya and Olga are brother and sister. Ilya owns 200 shares of stock in Parker Corporation. Is Olga deemed to own Ilya’s 200 shares under the family attribution rules that apply to stock redemptions?

27. [LO5] Maria has all of her stock in Mayan Corporation redeemed. Under what conditions will Maria treat the redemption as an exchange and recognize capital gain or loss?

28. [LO5] What must a shareholder do to waive the family attribution rules in a complete redemption of stock?

29. [LO5] How does a corporation’s computation of earnings and profits differ based on the tax treatment of a stock redemption to the shareholder (that is, as either a dividend or exchange)?

If30. [LO6] How does the tax treatment of a partial liquidation differ from a stock redemption?

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