Chapter 19 Problems
1. (2 points) At the end of the year, Myrna Corporation (a calendar year TP) had current and
accumulated E&P of $32,000. On the last day of the year, it distributed $50,000 to its sole
shareholder, Abby. Abby had a basis in her stock of $10,000. How will the distribution be
treated for tax purposes?
2. (5 points) Complete the following schedule for each case. Assume all shareholders have large
bases in their stock. Also assume the corporation is a calendar year TP and the distribution is
made on the last day of the year.
Accumulated E&P
Current E&P
a. ($200,000)
$70,000
b. 150,000
(120,000)
c. 90,000
70,000
d. 120,000
(60,000)
e. Same as d except that the distribution
Is made on 6/30
Cash Distribution
Dividend
$130,000
___________
210,000
___________
150,000
___________
130,000
___________
Return of Basis
___________
___________
___________
____________
___________
____________
3. (9 points) Heather, an individual, owns all the outstanding stock in Silver Corporation. She has
held the stock for 9 years. Her basis in the shares is $56,000. At the beginning of the year, Silver
had E&P (both accumulated and current) of $76,000. What is the amount of the distribution to
Heather, the gain/loss recognized by the Corporation, the amount of the dividend, and the
effect on the E&P of the following transactions?
a. Silver distributes land to Heather. The land has been held for investment and has a FMV of
$54,000 and an A/B to the corporation of $42,000.
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b.
Assume that the land is subject to a $46,000 mortgage. How would your answer to a.
change?
c.
Assume the facts in a except that the land has a FMV of $54,000 and an A/B of $62,000 on
the date of the distribution.
4. (2 points) Jacob Corcoran bought 10,000 shares of Grebe Corporation stock 2 years for $24,000.
This year, Jacob received a nontaxable stock dividend of 2,000 Grebe shares. He sells the 2,000
shares for $18,000 shortly after receiving them. What is his A/B in the shares and what gain will
he realize and recognize?
5. (4 points) Broadbill Corporation (E&P of $1,650,000) has 1,000 shares of common stock
outstanding. The shares are owned by the following:
Tammy 300 shares
Yvette
400 shares
Jeremy 300 shares.
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Each paid $50/share for the stock four years ago. In the current year, Broadbill distributes
$75,000 to Tammy in redemption of 150 of her shares. Is the distribution a dividend or a sale if:
a. Tammy and Jeremy are mother and son.
b.
Tammy, Yvette, and Jeremy are siblings.
6. (2 points) The gross estate of Raul, decedent, includes tock in Iris Corporation (E&P $8,000,000)
valued at $6,000,000. At the time of his death, Raul owned 60% of the outstanding Iris stock.
His basis in the stock was $840,000. The death taxes and funeral and administration expenses
related to Raul’s estate amount to $2,000,000 and the adjusted gross estate is $16,000,000.
The estate proposes to redeem one-third of the Iris stock for $2,000,000 to pay the death taxes
and final expenses.
a. Does the corporation qualify for §303? Why or what not?
b. What are the tax consequences to the estate if it does elect §303?
7. (6 points) Robert owns 60 of 100 shares of Dazzle Corporation’s stock and 80 of 100 shares of
Razzle Corp. stock. Robert’s basis in his Dazzle shares is $12,000 and his basis in his Razzle
shares is $8,000. Robert sells 30 of his Dazzle shares to Razzle Corporation for $50,000. At the
end of the year of the sale, Dazzle and Razzle have E&P of $25,000 and $40,000 respectively.
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a. How will the sale of the stock be treated for tax purposes? sale or dividend?
b. What is Robert’s basis in his shares of Dazzle and Razzle after the sale?
c. How does the sale effect the E&P of Dazzle and Razzle Corporation?
8.
(4 points) Lynch owns 100 shares of the common stock in IBT Corporation, which
represents 100% of the stock. The corporation distributes 50 preferred shares to Lynch as a
nontaxable stock dividend on the common shares. Lynch’s basis in the common shares
is $10,000. The FMV of the common stock is $30,000. The FMV of the preferred stock
is $20,000. At the time of the distribution, the E&P of the corporation was $80,000.
Six weeks after the distribution, Lynch sells the preferred stock to a third party for
$100,000.
a. What is Lynch’s basis in the preferred shares?
b. What are the tax consequences to Lynch on the sale of the preferred stock?
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