Ch14 | Test Bank + Answers – Corporate Nonliquidating And

Essentials of Federal Taxation, 11e (Spilker)

Chapter 14 Corporate Nonliquidating and Liquidating Distributions

1) The "double taxation" of corporate income refers to the fact that corporate income is taxed at both the entity level and the shareholder level.

2) A distribution from a corporation to a shareholder will always be treated as a dividend for tax purposes.

3) A corporation's "earnings and profits" account is equal to the company's "retained earnings" account on its balance sheet.

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 and/or accumulated earnings and profits.

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.

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 at the end of the year will be treated as a dividend because total earnings and profits is a positive $100,000.

7) The term "earnings and profits" is well-defined in the Internal Revenue Code.

8) Only income and deductions included on a corporation's income tax return are included in the computation of current earnings and profits.

9) Cedar Corporation incurs a net capital loss of $20,000 in year 1 that cannot be deducted on its income tax return but must be carried forward to year 2. Cedar will deduct the net capital loss in the computation of current earnings and profits for year 1.

10) Terrapin Corporation incurs federal income taxes of $250,000 in year 1. Terrapin deducts the federal income taxes in computing its current earnings and profits for year 1.

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.

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.

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.

14) Stock distributions are always nontaxable to the recipient.

15) The recipient of a nontaxable stock distribution will have a zero tax basis in the stock received in the distribution.

16) The recipient of a taxable stock distribution will have a tax basis in the stock equal to the fair market value of the stock received.

17) A stock redemption is always treated as a sale or exchange for tax purposes.

18) 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.

19) Brothers and sisters are considered "family" under the stock attribution rules that apply to stock redemptions.

20) 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.

21) The family attribution rules are automatically waived in a complete redemption of a shareholder's stock.

22) 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 as a result of the redemption.

23) A distribution in partial liquidation of a corporation is always treated as an exchange by an individual shareholder.

24) A liquidation of a corporation always is a taxable event to the shareholders of the liquidating corporation.

25) The tax basis of property received by a noncorporate shareholder in a complete liquidating will be the property's fair market value.

26) A liquidating corporation always recognizes gain realized in a complete liquidation.

27) A liquidating corporation always recognizes loss realized in a complete liquidation where none of the shareholders is a corporation.

28) Which statement best describes the concept of the double taxation of corporate 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.

29) 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.

D) The 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.

30) 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 for the year.

C) Current earnings and profits is a partially defined tax concept in the Internal Revenue Code and represents a corporation's economic income for the year.

D) Current earnings and profits is a conceptual tax concept with no definition in the Internal Revenue Code.

31) Which of the following statements best describes the role of current and accumulated earnings and profits in determining if at least a portion of a distribution is a dividend?

A) A distribution will be a dividend only to the extent total earnings and profits (current plus accumulated) is positive at the time of the distribution.

B) No part of a distribution will be a dividend if current earnings and profits is negative.

C) A distribution will be at least in part a dividend if current earnings and profits for the year is positive, even if accumulated earnings and profits is negative.

D) No part of a distribution will be a dividend if current earnings and profits for the year is negative, even if accumulated earnings and profits is positive.

32) 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 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 is positive and exceeds the distribution.

D) A distribution from a corporation to a shareholder is always a dividend, regardless of the balance in earnings and profits.

33) 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 is 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.

34) Which of these items is not an adjustment to taxable income 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) All of these choices are adjustments.

35) Grand River Corporation reported taxable income of $500,000 in year 1 and paid federal income taxes of $105,000. Not included in the computation was a disallowed meals 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 year 1 would be:

A) $524,000.

B) $500,000.

C) $419,000.

D) $395,000.

36) Au Sable Corporation reported taxable income of $800,000 in year 2 and paid federal income taxes of $168,000. Not included in the computation was a disallowed penalty of $25,000, and life insurance proceeds of $100,000. Included in the computation of taxable income is a deduction for the bargain element of exercised nonqualified stock options of $50,000. The corporation's current earnings and profits for year 2 would be:

A) $875,000.

B) $757,000.

C) $707,000.

D) $657,000.

37) Oakland Corporation reported a net operating loss of $500,000 in year 1. Not included in the year 1 taxable income computation was a disallowed 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 year 1 would be:

A) $(500,000).

B) $(720,000).

C) $(510,000).

D) $(260,000).

38) Packard Corporation reported taxable income of $1,000,000 in year 3 and paid federal income taxes of $210,000. Included in the year 3 taxable income computation was a dividends received deduction of $5,000, a net capital loss carryover from year 2 of $10,000, and gain of $50,000 from an installment sale that took place in year 1. The corporation's current earnings and profits for year 3 would be:

A) $1,015,000.

B) $965,000.

C) $805,000.

D) $755,000.

39) Abbot Corporation reported a net operating loss of $400,000 in year 1. Included in the year 1 taxable income computation were regular depreciation of $100,000 (E&P depreciation is $40,000), and a dividends received deduction of $15,000. The corporation's current earnings and profits for year 1 would be:

A) $(325,000).

B) $(340,000).

C) $(400,000).

D) $(355,000).

40) Madison Corporation reported taxable income of $400,000 in year 2 and accrued federal income taxes of $84,000. Included in the year 2 taxable income computation were regular depreciation of $200,000 (E&P depreciation is $60,000), first-year expensing under §179 of $100,000, and a net capital loss carryover of $20,000 from year 1. The corporation's current earnings and profits for year 2 would be:

A) $556,000.

B) $536,000.

C) $640,000.

D) $476,000.

41) Greenwich Corporation reported a net operating loss of $800,000 in year 1. Not included in the year 1 taxable income computation were 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 year 2. The corporation's current earnings and profits for year 1 would be:

A) $(250,000).

B) $(260,000).

C) $(300,000).

D) $(360,000).

42) Bruin Company reports current E&P of $200,000 in year 1 and accumulated E&P at the beginning of the year of $100,000. Bruin distributed $400,000 to its sole shareholder on January 1, year 1. How much of the distribution is treated as a dividend in year 1?

A) $400,000.

B) $300,000.

C) $200,000.

D) $100,000.

43) Aztec Company reports current E&P of $200,000 in year 1 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, year 1. How much of the distribution is treated as a dividend in year 1?

A) $300,000.

B) $200,000.

C) $100,000.

D) $0.

44) Inca Company reports current E&P of negative $100,000 in year 1 and accumulated E&P at the beginning of the year of $200,000. Inca distributed $300,000 to its sole shareholder on January 1, year 1. How much of the distribution is treated as a dividend in year 1?

A) $0.

B) $100,000.

C) $200,000.

D) $300,000.

45) Wildcat Corporation reports current E&P of negative $200,000 in year 1 and accumulated E&P at the beginning of the year of $100,000. Wildcat distributed $300,000 to its sole shareholder on December 31, year 1. How much of the distribution is treated as a dividend in year 1?

A) $0.

B) $100,000.

C) $200,000.

D) $300,000.

46) Beaver Company reports current E&P of $100,000 in year 1 and accumulated E&P at the beginning of the year of $200,000. Beaver distributed $400,000 to its sole shareholder on January 1, year 1. The shareholder's tax basis in her stock in Beaver is $200,000. How is the distribution treated by the shareholder in year 1?

A) $400,000 dividend.

B) $100,000 dividend, $200,000 nontaxable return of basis, and $100,000 capital gain.

C) $200,000 dividend and $200,000 nontaxable return of basis.

D) $300,000 dividend and $100,000 nontaxable return of basis.

47) Longhorn Company reports current E&P of $100,000 in year 1 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, year 1. The shareholder's tax basis in his Longhorn stock is $100,000. How is the distribution treated by the shareholder in year 1?

A) $300,000 dividend.

B) $100,000 dividend, $100,000 nontaxable return of basis, and $100,000 capital gain.

C) $100,000 dividend and $200,000 nontaxable return of basis.

D) $0 dividend, $100,000 nontaxable return of basis, and $200,000 capital gain.

48) Husker Corporation reports current E&P of negative $200,000 in year 1 and accumulated E&P at the beginning of the year of $300,000. Husker distributed $200,000 to its sole shareholder on December 31, year 1. The shareholder's tax basis in her stock in Husker is $50,000. How is the distribution treated by the shareholder in year 1?

A) $200,000 dividend.

B) $100,000 dividend, $50,000 nontaxable return of basis, and $50,000 capital gain.

C) $100,000 dividend and $100,000 nontaxable return of basis.

D) $0 dividend, $50,000 nontaxable return of basis, and $150,000 capital gain.

49) Tar Heel Corporation had current and accumulated E&P of $500,000 at December 31, year 1. 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 year 1 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.

50) Cavalier Corporation had current and accumulated E&P of $500,000 at December 31, year 1. 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 year 1 would be (assume a 0 percent marginal tax rate for Cavalier):

A) No gain recognized and a reduction in E&P of $200,000.

B) $150,000 tax and E&P gain recognized and a reduction in E&P of $200,000.

C) $150,000 tax and E&P gain recognized and a reduction in E&P of $50,000.

D) No gain recognized and a reduction in E&P of $50,000.

51) Montclair Corporation had current and accumulated E&P of $500,000 at December 31, year 1. 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 year 1 would be (assume a 0 percent marginal tax rate for Montclair):

A) No gain recognized and a reduction in E&P of $200,000.

B) $150,000 tax and E&P gain recognized and a reduction in E&P of $200,000.

C) $150,000 tax and E&P gain recognized and a reduction in E&P of $175,000.

D) No gain recognized and a reduction in E&P of $175,000.

52) Catamount Company had current and accumulated E&P of $500,000 at December 31, year 1. 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 year 1 would be:

A) No loss recognized and a reduction in E&P of $250,000.

B) $50,000 tax and E&P loss recognized and a reduction in E&P of $250,000.

C) $50,000 tax and E&P loss recognized and a reduction in E&P of $150,000.

D) No loss recognized and a reduction in E&P of $200,000.

53) Paladin Corporation had current and accumulated E&P of $500,000 at December 31, year 1. 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 year 1 would be:

A) No loss recognized and a reduction in E&P of $200,000.

B) $50,000 tax and E&P loss recognized and a reduction in E&P of $200,000.

C) $50,000 tax and E&P loss recognized and a reduction in E&P of $225,000.

D) No loss recognized and a reduction in E&P of $225,000.

54) Which of the following stock distributions would be nontaxable to the shareholder?

A) A stock distribution of one common share for every common share owned by shareholders.

B) A stock distribution where the shareholder could choose between cash and stock.

C) A stock distribution to all holders of preferred stock.

D) Both a stock distribution of one common share for every common share owned by shareholders and a stock distribution to all holders of preferred stock are nontaxable to the shareholder.

55) El Toro Corporation declared a common stock distribution to all shareholders of record on June 30, year 1. Shareholders will receive one share of El Toro stock for each two 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, year 1. What are the tax consequences of the stock distribution 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.

56) Wonder Corporation declared a common stock distribution to all shareholders of record on September 30, year 1. 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, year 1. What are the tax consequences of the stock distribution 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.

57) 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.

58) 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 the tests specified in the Internal Revenue Code.

59) 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.

60) Sara owns 80 percent of the stock of Lea Corporation. Unrelated individuals own the remaining 20 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 80 percent.

B) Any percentage less than 50 percent.

C) Any percentage less than 64 percent.

D) All stock redemptions involving individuals are treated as exchanges.

61) Comet Corporation is owned equally by Patrick 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, year 1. 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 as a result 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.

62) Comet Corporation is owned equally by Patrick and his sister Pam, each of whom hold 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, year 1, 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, year 1. What are the tax consequences to Comet as a result of the stock redemption?

A) No reduction in E&P as a result of the exchange.

B) A reduction of $50,000 in E&P as a result of the exchange.

C) A reduction of $62,500 in E&P as a result of the exchange.

D) A reduction of $125,000 in E&P as a result of the exchange.

63) Comet Corporation is owned equally by Patrick and his sister Pam, each of whom hold 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, year 1, 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, year 1. What are the tax consequences to Comet as a result of the stock redemption?

A) No reduction in E&P as a result of the exchange.

B) A reduction of $50,000 in E&P as a result of the exchange.

C) A reduction of $40,000 in E&P as a result of the exchange.

D) A reduction of $80,000 in E&P as a result of the exchange.

64) 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, year 1. Viking paid Sven $2,000 per share. His income tax basis in each share is $1,000. Viking has total E&P (current plus accumulated) of $500,000. What are the tax consequences to Sven as a result 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.

65) 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, year 1. Viking has total (current plus accumulated) E&P of $500,000. What are the tax consequences to Viking as a result of the stock redemption?

A) No reduction in E&P as a result of the exchange.

B) A reduction of $150,000 in E&P as a result of the exchange.

C) A reduction of $187,500 in E&P as a result of the exchange.

D) A reduction of $375,000 in E&P as a result of the exchange.

66) 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.

67) 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.

68) 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.

69) 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.

70) 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.

71) 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 under any circumstance.

B) A 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.

C) A 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.

D) None of these choices are true.

72) General Inertia Corporation made a distribution of $50,000 to Henry Tiara in partial liquidation of the company on December 31, year 1. Henry owns 500 shares (50 percent) 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 percent 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 as a result 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.

73) General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Inc., in partial liquidation of the company on December 31, year 1. Tiara, Inc., owns 500 shares (50 percent) 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 percent 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 as a result 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.

74) Which of the following statements does not describe a tax consequence to shareholders in a complete liquidation?

A) All complete liquidations are taxable to the shareholders.

B) Complete liquidations are taxable to all individual shareholders.

C) Complete liquidations are taxable to all corporate shareholders owning stock of the liquidated corporation representing less than 80 percent or more of voting power and value.

D) Complete liquidations are tax deferred to corporate shareholders owning stock of the liquidated corporation representing 80 percent or more of voting power and value.

75) Jalen transferred his 10 percent interest to Wolverine Company as part of a complete liquidation of the company. In the exchange he received land with a fair market value of $100,000. Jalen's basis in the Wolverine stock was $50,000. The land had a basis to Wolverine Company of $80,000. What amount of gain does Jalen recognize in the exchange and what is his basis in the land he receives?

A) $50,000 gain recognized and a basis in the land of $100,000.

B) $50,000 gain recognized and a basis in the land of $80,000.

C) No gain recognized and a basis in the land of $80,000.

D) No gain recognized and a basis in the land of $50,000.

76) Red Blossom Corporation transferred its 40 percent interest to Tea Company as part of a complete liquidation of the company. In the exchange Red Blossom received land with a fair market value of $500,000. The corporation's basis in the Tea Company stock was $300,000. The land had a basis to Tea Company of $600,000. What amount of gain does Red Blossom recognize in the exchange and what is its basis in the land it receives?

A) $200,000 gain recognized and a basis in the land of $600,000.

B) $200,000 gain recognized and a basis in the land of $500,000.

C) No gain recognized and a basis in the land of $600,000.

D) No gain recognized and a basis in the land of $300,000.

77) Paladin Corporation transferred its 90 percent interest to Furman Company as part of a complete liquidation of the company. In the exchange, Paladin received land with a fair market value of $1,000,000. The corporation's basis in the Furman Company stock was $400,000. The land had a basis to Furman Company of $200,000. What amount of gain does Paladin recognize in the exchange and what is its basis in the land it receives?

A) $600,000 gain recognized and a basis in the land of $1,000,000.

B) $600,000 gain recognized and a basis in the land of $400,000.

C) No gain recognized and a basis in the land of $400,000.

D) No gain recognized and a basis in the land of $200,000.

78) Katarina transferred her 10 percent interest to Spartan Corporation as part of a complete liquidation of the company. In the exchange she received land with a fair market value of $200,000. Katarina's basis in the Spartan stock was $100,000. The land had a basis to Spartan Company of $50,000. What amount of gain does Spartan recognize in the exchange and what is Katarina's basis in the land she receives?

A) $100,000 gain recognized by Spartan and a basis in the land of $200,000.

B) $150,000 gain recognized by Spartan and a basis in the land of $200,000.

C) No gain recognized by Spartan and a basis in the land of $100,000.

D) No gain recognized by Spartan and a basis in the land of $50,000.

79) Which of the following statements best describes the recognition of loss on property transferred to shareholders in complete liquidation of a corporation?

A) The liquidated corporation always recognizes loss on the distribution of property in complete liquidation of the corporation.

B) The liquidated corporation never recognizes loss on the distribution of property in complete liquidation of the corporation.

C) The liquidated corporation recognizes loss on the distribution of property in complete liquidation of the corporation if the property is distributed to individuals who are not related parties to the corporation.

D) The liquidated corporation recognizes loss on the distribution of property in complete liquidation of the corporation only if the property is distributed to individuals who are related parties to the corporation.

80) Billie transferred her 20 percent interest to Jean Company as part of a complete liquidation of the company. In the exchange she received land with a fair market value of $200,000. Billie's basis in the Jean stock was $100,000. The land had a basis to Jean Company of $400,000. What amount of loss does Jean recognize in the exchange and what is Billie's basis in the land she receives? Billie is not considered a related party to Jean Company.

A) $200,000 loss recognized by Jean and a basis to Billie in the land of $200,000.

B) $200,000 loss recognized by Jean and a basis to Billie in the land of $400,000.

C) No loss recognized by Jean and a basis to Billie in the land of $200,000.

D) No loss recognized by Jean and a basis to Billie in the land of $400,000.

81) Robin transferred her 60 percent interest to Cardinal Company as part of a complete liquidation of the company. In the exchange she received land with a fair market value of $800,000. Robin's basis in the Cardinal stock was $900,000. The land had a basis to Cardinal Company of $1,000,000. What amount of loss does Cardinal recognize in the exchange and what is Robin's basis in the land she receives? The distribution was non-pro rata to Robin, a related person.

A) $200,000 loss recognized by Cardinal and a basis to Robin in the land of $1,000,000.

B) $200,000 loss recognized by Cardinal and a basis to Robin in the land of $800,000.

C) No loss recognized by Cardinal and a basis to Robin in the land of $1,000,000.

D) No loss recognized by Cardinal and a basis to Robin in the land of $800,000.

82) Packard Corporation transferred its 100 percent interest to State Corporation as part of a complete liquidation of State. In the exchange Packard received land with a fair market value of $300,000. Packard's basis in the State stock was $600,000. The land had a basis to State Company of $500,000. What amount of loss does State recognize in the exchange and what is Packard's basis in the land it receives?

A) $200,000 loss recognized by State and a basis in the land of $300,000.

B) $200,000 loss recognized by State and a basis in the land of $500,000.

C) No loss recognized by State and a basis in the land of $300,000.

D) No loss recognized by State and a basis in the land of $500,000.

83) Superior Corporation reported taxable income of $1,000,000 in year 1. Superior paid a dividend of $100,000 to its sole shareholder, Mary Yooper. The dividend meets the requirements to be a "qualified dividend" and Mary is subject to a tax rate of 15 percent 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?

84) St. Clair Corporation reports positive current E&P of $500,000 in year 1 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, year 1. 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?

85) Austin Corporation 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, year 1. Betsy's 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?

86) Elk Corporation 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, year 1. 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?

87) Houghton Corporation 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, year 1. 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?

88) Loon Inc. reported taxable income of $600,000 in year 1 and paid federal income taxes of $126,000. Not included in the company's computation of taxable income is tax-exempt interest income of $30,000, disallowed meals expense 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 year 1.

89) Orchard, Inc., reported taxable income of $800,000 in year 1 and paid federal income taxes of $168,000. Included in the company's computation of taxable income is gain from the sale of a depreciable asset for $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 year 1.

90) Walloon Inc. reported taxable income of $1,000,000 in year 2 and paid federal income taxes of $210,000. 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 year 1, resulting in a net capital gain of $110,000 included in taxable income. Compute the company's current E&P for year 2.

91) Otter Corporation reported taxable income of $400,000 before the distribution described below. 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. Compute Otter's current E&P for year 1.

92) Ozark Corporation reported taxable income of $500,000 from operations for year 1. 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. 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 as a result of the distribution. Using your solution, compute Ozark's accumulated E&P at January 1, year 2.

93) Sherburne Corporation reported current earnings and profits for year 1 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 as a result of the distribution and what is Ted's income tax basis in the land received from Sherburne?

94) Sunapee Corporation reported taxable income of $700,000 from operations for year 1. 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. Compute Sunapee's total taxable income and federal income tax paid as a result of the distribution. Using your solution, compute Sunapee's current E&P for year 1.

95) Townsend Corporation declared a one-for-one stock distribution to all common stock shareholders of record on December 31, year 1. 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 ($200,000 total). The fair market value of the common stock was $300 per share on December 31, year 1. What is Regina's income tax basis in the new and existing common stock she owns in Townsend, assuming the distribution is nontaxable?

96) Sweetwater Corporation declared a stock dividend to all common stock shareholders of record on December 31, year 1. Shareholders will receive one share of Sweetwater common stock for each five 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 nontaxable?

97) 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, year 1. 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 as a result of the stock redemption?

98) 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, year 1, 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 year 1, by what amount does the company reduce its E&P as a result of the redemption?

99) 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.

100) 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, year 1. 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?

101) 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, year 1. 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?

102) 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? 

103) Geneva Corporation, a privately held company, has one class of voting common stock, of which 1,000 shares are issued and outstanding. Madison has a 20 percent interest in the Brewer partnership. The remaining 80 percent is owned by unrelated individuals. Madison owns 40 percent of Packer Corporation. The other 60 percent is owned by her father. The shares of Geneva are owned as follows:

How many shares of stock is Madison deemed to own under the family attribution rules in a stock redemption?

104) Half Moon Corporation made a distribution of $300,000 to Arnold Swartz in partial liquidation of the company on December 31, year 1. Arnold owns 100 percent of Half Moon Corporation (1,200 shares). The distribution was in exchange for 50 percent 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?

105) Yellowstone Corporation made a distribution of $300,000 to Cheney Inc. in partial liquidation of the company on December 31, year 1. 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 percent 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?

106) Gary and Laura decided to liquidate their jointly owned corporation, Amelia Inc. After liquidating its remaining inventory and paying off its remaining liabilities, Amelia had the following tax accounting balance sheet.

Under the terms of the agreement, Gary will receive the $100,000 cash in exchange for his interest in Amelia. Gary's tax basis in his Amelia stock is $30,000. Laura will receive the building and land in exchange for her interest in Amelia. Laura's tax basis in her Amelia stock is $60,000.

What amount of gain or loss does Amelia recognize in the complete liquidation?

107) Gary and Laura decided to liquidate their jointly owned corporation, Amelia Inc. After liquidating its remaining inventory and paying off its remaining liabilities, Amelia had the following tax accounting balance sheet.

Under the terms of the agreement, Gary will receive the $100,000 cash in exchange for his interest in Amelia. Gary's tax basis in his Amelia stock is $30,000. Laura will receive the building and land in exchange for her interest in Amelia. Laura's tax basis in her Amelia stock is $60,000.

What amount of gain or loss does Gary recognize in the complete liquidation?

108) Gary and Laura decided to liquidate their jointly owned corporation, Amelia, Inc. After liquidating its remaining inventory and paying off its remaining liabilities, Amelia had the following tax accounting balance sheet.

Under the terms of the agreement, Gary will receive the $100,000 cash in exchange for his interest in Amelia. Gary's tax basis in his Amelia stock is $30,000. Laura will receive the building and land in exchange for her interest in Amelia. Laura's tax basis in her Amelia stock is $60,000.

What amount of gain or loss does Laura recognize in the complete liquidation and what is Laura's tax basis in the building and land after the complete liquidation?

109) Mike and Michelle decided to liquidate their jointly owned corporation, Pennsylvania Corporation. After liquidating its remaining inventory and paying off its remaining liabilities, Pennsylvania had the following tax accounting balance sheet.

Under the terms of the agreement, Mike will receive the $200,000 cash in exchange for his 40 percent interest in Pennsylvania. Mike's tax basis in his Pennsylvania stock is $50,000. Michelle will receive the building and land in exchange for her 60 percent interest in Pennsylvania. Her tax basis in the Pennsylvania stock is $100,000.

What amount of gain or loss does Pennsylvania recognize in the complete liquidation?

110) Mike and Michelle decided to liquidate their jointly owned corporation, Pennsylvania Corporation. After liquidating its remaining inventory and paying off its remaining liabilities, Pennsylvania had the following tax accounting balance sheet.

Under the terms of the agreement, Mike will receive the $200,000 cash in exchange for his 40 percent interest in Pennsylvania. Mike's tax basis in his Pennsylvania stock is $50,000. Michelle will receive the building and land in exchange for her 60 percent interest in Pennsylvania. Her tax basis in the Pennsylvania stock is $100,000.

What amount of gain or loss does Mike recognize in the complete liquidation? 

111) Mike and Michelle decided to liquidate their jointly owned corporation, Pennsylvania Corporation. After liquidating its remaining inventory and paying off its remaining liabilities, Pennsylvania had the following tax accounting balance sheet.

Under the terms of the agreement, Mike will receive the $200,000 cash in exchange for his 40 percent interest in Pennsylvania. Mike's tax basis in his Pennsylvania stock is $50,000. Michelle will receive the building and land in exchange for her 60 percent interest in Pennsylvania. Her tax basis in the Pennsylvania stock is $100,000.

What amount of gain or loss does Michelle recognize in the complete liquidation and what is her tax basis in the building and land after the complete liquidation?

112) Oriole Inc. decided to liquidate its wholly owned subsidiary, Tiger Corporation. Tiger had the following tax accounting balance sheet.

a. What amount of gain or loss does Tiger recognize in the complete liquidation?

b. What amount of gain or loss does Oriole recognize in the complete liquidation?

c. What is Oriole's tax basis in the building and land after the complete liquidation?