CPA Regulation (REG) : Liquidating & Non-Liquidating Distributions
Study concepts, example questions & explanations for CPA Regulation (REG)
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Example Questions
Example Question #1 : Special Issues In Corporate Taxation
What is the usual result to the shareholders of a distribution in complete liquidation of a corporation?
Ordinary gain or loss
Capital gain or loss
No taxable effect
Ordinary gain to the extent of cash received
Capital gain or loss
Capital gains and losses are the result of changes in the value of an investment. If there is a liquidation and the assets received in liquidation differ in value from the shareholder’s original investment value (= basis), the difference would result in a capital gain or loss.
Example Question #2 : Special Issues In Corporate Taxation
On January 1 of the current year, Hobbes Corp., an accrual-basis calendar-year C corporation, had $30,000 in accumulated earnings and profits. For the current year, Hobbes had current earnings and profits of $20,000, and made two $40,000 cash distributions to its shareholders, one in March and one in August. What amount of the distributions is classified as dividend income to Hobbes’ shareholders?
$20,000
$50,000
$80,000
$0
$50,000
Distributions from current and accumulated earnings and profits (E&P) qualify as dividend income; distributions in excess of current and accumulated E&P are regarded as returns of capital. Here, there was $50,000 in current and accumulated E&P ($20,000 current, $30,000 accumulated). This is the maximum amount of the $80,000 in distributions that can be classified as dividend income.
Example Question #3 : Special Issues In Corporate Taxation
On January 1, Year 1, Peele Corp., a C corporation, had a $50,000 deficit in earnings and profits. For Year 1, Peele had current earnings and profits of $10,000 and made a $30,000 cash distribution to its stockholders. What amount of the distribution is taxable as dividend income to Peele’s stockholders?
$20,000
$10,000
$0
$30,000
$10,000
Distributions from current and accumulated earnings and profits (E&P) qualify as dividend income; distributions in excess of this are regarded as returns of capital. Here, there was only $10,000 in current E&P, and there was a deficit for accumulated E&P, meaning the $10,000 is the maximum amount of the $30,000 distribution that can be classified as dividend income.
Example Question #4 : Special Issues In Corporate Taxation
Which is the usual result to the shareholders of a distribution in complete liquidation of a corporation?
No taxable effect
Capital gain or loss
Ordinary gain to the extent of cash received
Ordinary gain or loss
Capital gain or loss
Shareholders treat property received in complete liquidation of a corporation as full payment for their stock. Therefore, the shareholder must recognize capital gain or loss equal to the difference between the FMV and the basis.
Example Question #5 : Special Issues In Corporate Taxation
At the beginning of the year, a C Corp had a $50,000 deficit in its earnings and profits account. For the year, the Corp had current earnings and profits of $10,000 and made a $30,000 cash distribution to its stockholders. What amount of the distribution is taxable s dividend income to its shareholders?
$0
$10,000
$20,000
$30,000
$10,000
Taxable dividend income is paid out of a corporation’s current or accumulated earnings and profits. Since the corp had a deficit, only the current earnings and profits of $10,000 are available for dividends.
Example Question #6 : Special Issues In Corporate Taxation
Upon the dissolution of a partnership, the basis of any “in-kind” property distributed to a former partner will be the same as the partner’s _________ in the partnership.
Cash account
Beginning adjusted basis
Ending adjusted basis
Fair market value
Ending adjusted basis
Upon the dissolution of a partnership, the basis of any “in-kind” property distributed to a former partner will be the same as the partner’s adjusted basis in the partnership.
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