Determining a corporation’s earnings and profits (E&P)
Dividends Questions
- What is the starting point for determining a corporation’s earnings and profits (E&P)?
- What are the two categories of E&P?
- A corporation has current E&P (CEP) of $40,000 in its first year of existence. It distributes $15,000 to it shareholders (SHS). How much of the distribution is treated as a dividend to the shareholders?
- What is the corporation’s accumulated E&P (AEP) on day 1 of the second year?
- A sole shareholder has an adjusted basis in shares of $17,000. The corporation has CEP of $50,000 and AEP of $10,000. The corporation makes a distribution to the shareholder at the end of the year of $80,000. How is the distribution treated for tax purposes for the shareholder?
- Indicate whether each of the following increase s (INC), decreases (DEC) or has no effect (N/E) on a corporation’s E&P. Be specific as to amounts:
a) Refund of federal tax of $8,000.
b) payment of a fine to the local government $2,000.
c) receives proceeds on life insurance when a corporate officer dies %100,000.
d) uses in calculating its taxable income a dividends received deduction of $80,000.
e) makes a charitable contribution of $1,000 but is limited to deducting $800
f) uses a capital loss carryforward of $27,000 against capital gains from the current year
g) spent $50,000 on entertaining clients during the year
h) incurred a capital loss of $7,000 on the sale of a municipal bond
i) included in taxable income is an installment payment of $9,000 from a sale of property two years ago. The sale was reported on the installment method.
j) Engaged in a tax deferred like kind exchange with an independent party. The gain realized was $24,000. There was no boot received in the transaction.
k) A corporation distributes land worth $100 with an adjusted basis of $30,000.
l) Would the answer to the previous question change, and if so how, if the land was subject to a mortgage of $5,000?
m) Spends $250 on a meal with a business client where business was discussed. Assume the documentation is proper.
n) A corporation distributes as a dividend and worth $300 with an adjusted basis of $450.
o) A corporation owns a hunting lodge that is used to entertain clients. Similar property usually rents for $8,000 per week. The president uses the lodge with his family and next-door neighbor for two weeks and reimburses the corporation $1,000. - A corporation has CEP of $100,000. It started the year with an AEP deficit of ($750,000). On June 30 it made a distribution of $20,000 to the sole shareholder. The shareholder’s basis in the shares prior to the distribution was $25,000. What are the tax consequence to the shareholder of the distribution?
- A calendar year corporation has AEP at the beginning of the year of $40,000. The CEP before distributions for the current year was a deficit of ($120,000). The corporation makes a distribution to the sole shareholder of $12,000 on March 31 of the current year. How is the distribution treated to the shareholder?
- A corporation has an AEP deficit at the beginning of the year of $100,000. For the current year it had a CEP deficit of ($30,000). It makes a distribution of $9,000 in the current year. What is the AEP at the beginning of the next year?
- Sam receives as a distribution real property worth $50,000. The property is subject to a mortgage of $15,000. The corporation has CEP of $3 million.
a) Does Sam have a taxable dividend, and if so how much is it?
b) What is Sam’s basis in the land?
c) What is Sam’s holing period in the land? - A corporation owns land with a fair market value of $200,000. The adjusted basis is also $200,000. It distributes the land to its shareholder. The corporation has $5 million of CEP.
a) Does the corporation recognize gain or loss on the distribution of the land, and if so how much is it?
b) What happens to the corporations CEP as a result of the distribution? - Assume the corporation in question 11 had an adjusted basis in the land of $150,000. Fair market value was still $200,000. Do the answers to questions (a) and (b) in the prior question change, and if so how?
- Assume the corporation’s adjusted basis in the land was $215,000, and fair market value was still $200,000. Do the answers to questions (a) and (b) of question 11 change, and if so how?
- Megan owns 200 of the 1,000 shares of Seabeach Corp. her basis is $10,000. The corporation declares a 10% stock dividend to the common stock holders.
a) How many shares does Megan receive?
b) What is Megan’s basis in the new shares received?
c) What is Megan’s holding period in the new shares received? - Would the answer change, and if so how, if Megan was given a choice to take the additional shares or their cash equivalent?
- Suppose instead Megan and the other common stock holders received100 shares of nonvoting common shares as a dividend. Immediately after the distribution Megan’s old common shares were worth $90,000 and the new nonvoting shares were worth $10,000.
a) What is Megan’s basis in the new shares received?
b) What is Megan’s holding period in the new shares received?
c) Is the distribution taxable to Megan? - Theo owns 300 shares of Cratic corp. His basis in the shares is $7,000. He is given by the corporation rights to buy additional shares. At the time of the distribution the rights are worth $15,000 and Theo’s shares are worth $200,000.
a) Does Theo have gross income as a result of the distribution and if so how much is it?
b) What is the basis of the rights to Theo? - Does the answer to the previous question change, and if so how, if the value of Theo’s stock at the time of the distribution was $60,000?
- What three things can Theo do with the rights?
- If the rights expire without any action on Theo’s part what if anything happens to any basis Theo might have in the rights?
Sample Solution
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