30. LO.1, 4 At the start of the current year, Blue Corporation (a calendar year taxpayer) has accumulated E & P of $100,000. Blue’s current E & P is $60,000, and at the end of the year, it distributes $200,000 ($100,000 each) to its equal shareholders, Pam and Jon.
Pam’s stock basis is $11,000; Jon’s stock basis is $26,000. How is the distribution treated for tax purposes?
31. LO.1, 2 Cardinal Corporation, a calendar year taxpayer, receives dividend income of $250,000 from a corporation in which it holds a 10% interest. Cardinal also receives interest income of $35,000 from municipal bonds. (The municipality used the proceeds from the bond issue to construct a library.) Cardinal borrowed funds to purchase the municipal bonds and pays $20,000 of interest on the loan. Excluding these items, Cardinal’s taxable income is $500,000.
a. What is Cardinal Corporation’s taxable income after these items are taken into account?
b. What is Cardinal Corporation’s accumulated E & P at the start of next year if its beginning balance this year is $150,000?
32. LO.1, 2, 3 On September 30, Silver Corporation, a calendar year taxpayer, sold a parcel of land (basis of $400,000) for a $1 million note. The note is payable in five installments, with the first payment due next year. Because Silver did not elect out of the installment method, none of the $600,000 gain is taxed this year.
Silver Corporation had a $300,000 deficit in accumulated E & P at the beginning of the year. Before considering the effect of the land sale, Silver had a deficit in current
E & P of $50,000.
Sam, the sole shareholder of Silver, has a basis of $200,000 in his stock. If Silver distributes $900,000 to Sam on December 31, how much income must he report for tax purposes?
33. LO.2 Sparrow Corporation (a calendar year, accrual basis taxpayer) had the following transactions in 2013, its second year of operation.
Taxable income $330,000
Federal income tax liability paid 112,000
Tax-exempt interest income 5,000
Meals and entertainment expenses (total) 3,000
Premiums paid on key employee life insurance 3,500
Increase in cash surrender value attributable to life insurance premiums 700
Proceeds from key employee life insurance policy 130,000
Cash surrender value of life insurance policy at distribution 20,000
Excess of capital losses over capital gains 13,000
MACRS deduction 26,000
Straight-line depreciation using ADS lives 16,000
Section 179 expense elected during 2012 100,000
Dividends received from domestic corporations (less than 20% owned) 25,000
Sparrow uses the LIFO inventory method, and its LIFO recapture amount increased by $10,000 during 2013. In addition, Sparrow sold property on installment during 2012.
The property was sold for $40,000 and had an adjusted basis at sale of $32,000. During 2013, Sparrow received a $15,000 payment on the installment sale. Finally, assume that no additional first-year depreciation was claimed. Compute Sparrow’s current E & P.
34. LO.1, 2 In each of the following independent situations, indicate the effect on taxable income and E & P, stating the amount of any increase (or decrease) in each as a result of the transaction. Assume that E & P has already been increased by taxable income.
E & P Increase (Decrease)
a. Realized gain of $80,000 on involuntary conversion of building ($10,000 of gain is recognized). _____________ _____________
b. Mining exploration costs incurred on May 1 of current year; $24,000 is deductible from current-year taxable income. _____________ _____________
c. Sale of equipment to unrelated third party for $240,000; basis is $120,000 (no election out of installment method; no payments are received in current year). _____________ _____________
d. Dividends of $20,000 received from 5% owned corporation, together with dividends received deduction (assume that taxable income limit does not apply). _____________ _____________
e. Domestic production activities deduction of $45,000 claimed in current year. _____________ _____________
f. Section 179 expense deduction of $100,000 in current year. _____________ _____________
g. Impact of current-year § 179 expense deduction in succeeding year. _____________ _____________
h. MACRS depreciation of $80,000. ADS depreciation would have been $90,000. _____________ _____________
i. Federal income taxes of $80,000 paid in current year. _____________ _____________
35. LO.1, 3 Black Corporation and Tom each own 50% of Tan Corporation’s common stock. On January 1, Tan has a deficit in accumulated E & P of $200,000. Its current E & P is $90,000. During the year, Tan makes cash distributions of $40,000 each to Black and Tom.
a. How are the two shareholders taxed on the distribution?
b. What is Tan Corporation’s accumulated E & P at the end of the year?
36. LO.1, 3 Complete the following schedule for each case. Unless otherwise indicated, assume that the shareholders have ample basis in the stock investment.
E & P Beginning of Year Current E & P Cash
Distributions (All on Last
Day of Year)
a. ($200,000) $ 70,000 $130,000 $________ $________
b. 150,000 (120,000) 210,000 ________ ________
c. 90,000 70,000 150,000 ________ ________
d. 120,000 (60,000) 130,000 ________ ________
e. Same as (d), except that the distribution of $130,000 is made on June 30 and the corporation uses the calendar year for tax purposes. ________ ________
37. LO.1, 3 Larry, the sole shareholder of Brown Corporation, sold his Brown stock to Ed on July 30 for $270,000. Larry’s basis in the stock was $200,000 at the beginning of the year. Brown had accumulated E & P of $120,000 on January 1 and has current E & P of $240,000. During the year, Brown made the following distributions: $450,000 of cash to
Larry on July 1 and $150,000 of cash to Ed on December 30. How will Larry and Ed be taxed on the distributions? How much gain will Larry recognize on the sale of his stock to Ed?
38. LO.4 In November of the current year, Emerald Corporation declared a dividend of $2 per share (the shareholder record date is December 15). Assume that Emerald has sufficient current E & P to cover the dividend payment. If Judy purchases 500 shares of Emerald stock on December 5 and sells the stock on December 25, how is she taxed on the $1,000 dividend?
39. LO.1, 5 Heather, an individual, owns all of the outstanding stock in Silver Corporation.
Heather purchased her stock in Silver nine years ago, and her basis is $56,000. At the beginning of this year, the corporation has $76,000 of accumulated E & P and no current E & P (before considering the effect of the distributions as noted below). What are the tax consequences to Heather (amount and type of income and basis in property received) and Silver Corporation (gain or loss and effect on E & P) in each of the following situations?
a. Silver distributes land to Heather. The land was held as an investment and has a fair market value of $54,000 and an adjusted basis of $42,000.
b. Assume that Silver Corporation has no current or accumulated E & P prior to the distribution. How would your answer to (a) change?
c. Assume that the land distributed in (a) is subject to a $46,000 mortgage (which Heather assumes). How would your answer change?
d. Assume that the land has a fair market value of $54,000 and an adjusted basis of $62,000 on the date of the distribution. How would your answer to (a) change?
e. Instead of distributing land in (a), assume that Silver decides to distribute equipment used in its business. The equipment has a $14,000 market value, a $1,200 adjusted basis for income tax purposes, and a $5,200 adjusted basis for E & P purposes. When the equipment was purchased four years ago, its original fair market value was $18,000.
40. LO.1, 5 Lime Corporation, with E & P of $500,000, distributes land (worth $300,000, adjusted basis of $350,000) to Harry, its sole shareholder. The land is subject to a liability of $120,000, which Harry assumes. What are the tax consequences to Lime and to Harry?
41. LO.1, 3 At the beginning of the year, Penguin Corporation (a calendar year taxpayer) has accumulated E & P of $55,000. During the year, Penguin incurs a $36,000 loss from operations that accrues ratably. On October 1, Penguin distributes $40,000 in cash to Holly, its sole shareholder. How is Holly taxed on the distribution?