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Exam 10: Corporations: Earnings Profits and Distributions

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Question 61

True/False

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When current E & P has a deficit and accumulated E & P is positive,the two accounts are netted at the date of the distribution.If a positive balance results,the distribution is a dividend to the extent of the balance.

A) True
B) False

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Question 62

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

A) True
B) False

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Question 63

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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 Puffin's E & P after taking into account the distribution of the car?

Sylvia owns 25% of Cormorant Corporation.Cormorant sells diamonds to retail jewelry businesses.While Cormorant has a deficit in accumulated E & P of $56,000 at the beginning of the year,its current E & P is $500,000.Since the company had a successful year,Cormorant pays a $36,000 distribution to each of the company's four shareholders on December 15.Three shareholders receive cash,but Cormorant distributes a diamond (adjusted basis of $40,000 and a fair market value of $36,000)to Sylvia in lieu of cash.Determine the effect of distributing the diamond on Cormorant's and on Sylvia's taxable income.What is Sylvia's basis in the diamond? Was the distribution good tax planning on the part of Cormorant? Why or why not?

Rust Corporation distributes property to its sole shareholder,Andre.The property has a fair market value of $350,000,an adjusted basis of $205,000,and is subject to a liability of $220,000.Current E & P is $500,000.With respect to the distribution,which of the following statements is correct?

The dividends received deduction has no impact on E & P.