CPA Regulation (REG) : Special Issues in Corporate Taxation
Study concepts, example questions & explanations for CPA Regulation (REG)
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Example Questions
Example Question #1 : Liquidating & Non Liquidating Distributions
What is the usual result to the shareholders of a distribution in complete liquidation of a corporation?
Capital gain or loss
Ordinary 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 : Liquidating & Non Liquidating Distributions
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?
$0
$80,000
$50,000
$20,000
$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 : Liquidating & Non Liquidating Distributions
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?
$10,000
$30,000
$20,000
$0
$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 : Liquidating & Non Liquidating Distributions
Which is the usual result to the shareholders of a distribution in complete liquidation of a corporation?
Ordinary gain or loss
Capital gain or loss
Ordinary gain to the extent of cash received
No taxable effect
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 : Liquidating & Non Liquidating Distributions
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?
$10,000
$20,000
$30,000
$0
$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 : Liquidating & Non Liquidating Distributions
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.
Beginning adjusted basis
Cash account
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.
Example Question #1 : Accumulated Earnings Tax
Presto Corp., a calendar year domestic C corporation, is not a personal holding company. For purposes of the accumulated earnings tax, Presto has accumulated taxable income for Year 3. Which step(s) can Presto take to eliminate or reduce any Year 3 accumulated earnings tax?
I. Demonstrate that the “reasonable needs” of its business require the retention of all or part of the Year 3 accumulated taxable income.
II. Pay dividends by April 15, Year 4.
Neither I or II
II only
Both I and II
I only
Both I and II
To minimize the impact of the accumulated earnings tax, a corporation can argue on the basis of “reasonable needs” of business before the IRS, and provide a specific, definite, and feasible plan for the use of such retained earnings. Additionally, dividends paid by the corporate tax return deadline which reduce accumulated earnings will also reduce or eliminate the tax on those earnings.
Example Question #2 : Accumulated Earnings Tax
The accumulated earnings tax can be imposed:
On any entity with more than 100 shareholders.
On personal holding companies.
Only on S corporations.
Regardless of the number of stockholders in a corporation.
Regardless of the number of stockholders in a corporation.
The accumulated earnings tax is directed primarily at regular C corporations. The number of shareholders is irrelevant. Personal holding companies and S corporations are exempt from this tax.
Example Question #9 : Special Issues In Corporate Taxation
The accumulated earnings tax is paid at which rate?
15%
20%
35%
21%
20%
The rate for the accumulated earnings tax is the same as the rate individual taxpayers pay on dividends, or 20%. This is because the accumulated earnings tax is directed at regular corporations who hold an excess of retained earnings instead of being distributed as dividends to shareholders.
Example Question #3 : Accumulated Earnings Tax
When a Subchapter S corporation does not have any _________, the amount distributed to a shareholder will decrease that shareholder’s basis in the stock.
Dividend income
Accumulated earnings and profits
Tax exempt earnings and profits
Capital gains income
Accumulated earnings and profits
When an S Corp does not have any accumulated E&P, the distribution to the shareholder will decrease its basis in the company stock.
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