ACC 570
CH 19 HOMEWORK SOLUTIONS PART A – CORPORATE DISTRIBUTIONS
33.
Jade Corporation’s current E & P is computed as follows:
Taxable income
Federal income tax liability
Interest income from tax-exempts
Disallowed portion of meals and entertainment expenses
Life insurance premiums paid, net of increase in
cash surrender value ($3,500 – $700)
Proceeds from life insurance policy, net of cash
surrender value ($130,000 – $20,000)
Excess capital losses
Excess of MACRS depreciation over E & P
depreciation ($26,000 – $16,000)
Allowable portion of 2007 § 179
expenses (20%  $100,000)
Organizational expense amortization
Dividends received deduction (70%  $25,000)
LIFO recapture adjustment
Installment sale gain
Current E & P
$330,000
(112,000)
5,000
(1,500)
(2,800)
110,000
(13,000)
10,000
(20,000)
600*
17,500
10,000
(3,000)**
$331,133
*[($9,000 organizational expenses balance after deducting $5,000 in 2009 / 180 months
amortization period)  12 months in 2010]
**{[($40,000 sales price – $32,000 adjusted basis)/$40,000 sales price]  $15,000}
34.
a.
b.
c.
d.
e.
f.
g.
h.
i.
Taxable Income
Increase (Decrease)
$20,000
($36,000)
No effect
$9,000
($60,000)
($60,000)
No effect
($90,000)
No effect
E & P Increase
(Decrease)
No effect
$33,900*
$140,000
$21,000**
$60,000
$48,000***
($12,000)†
($10,000)††
($50,000)
*Although mining exploration costs are deductible in full under the income tax, they are
amortized over 120 months when computing E & P. Since $300 per month is
amortizable ($36,000/120 months), $2,100 is currently deductible for E & P purposes
($300 × 7 months). Thus, of the $36,000 income tax deduction, $33,900 is added back
to E & P ($36,000 – $2,100 deduction allowed).
**The receipt of a $30,000 dividend generates a dividends received deduction of
$21,000 with a net effect on taxable income of a $9,000 increase. For E & P
purposes, the dividends received deduction is added back.
***Only 20% of current-year § 179 expense is allowed for E & P purposes. Thus, 80% of
the amount deducted for income tax purposes is added back.
†In each of the four succeeding years, 20% of the § 179 expense is allowed as a
deduction for E & P purposes.
††ADS
straight-line depreciation is allowed for E & P purposes; thus, E & P is decreased
by $10,000 (the excess of ADS depreciation over the amount allowed under MACRS).
36.
a.
b.
Amount
Taxable
Return of
Capital
$ 70,000
$60,000
Taxed to the extent of current E & P.
$70,000
Accumulated E & P and current E & P netted on the
date of distribution.
$140,000
c.
$150,000
$ -0-
Taxed to the extent of current and accumulated E
& P.
d.
$ 80,000
$50,000
Accumulated E & P and current E & P are
netted
on the date of distribution. There is a dividend to the
extent of any positive balance.
e.
$100,000
$30,000
When the result in current E & P is a deficit for the
year, the deficit is allocated on a pro rata basis to
distributions made during the year. On June 30,
E & P is $100,000 [current E & P is a deficit of
$20,000 (i.e., 1/2 of $40,000) netted with accumulated
E & P of $120,000].
43.
Sandpiper owns 25% of Owl. Owl distributes land (FMV=50; basis=80), subject to 40k
debt.
a.
Sandpiper Corporation has dividend income of $10,000 [$50,000 (fair market value of
the land) – $40,000 (liability on the land)]. The $10,000 dividend creates an $8,000
dividends received deduction under § 243. Consequently, only $2,000 of the dividend is
subject to tax. Sandpiper Corporation has a basis of $50,000 in the land.
b.
Owl Corporation may not deduct the loss on the land. Its E & P is reduced by $40,000
[the $80,000 basis of the land (which is greater than the fair market value) – the
$40,000 liability on the land]. Balance is now $120,000.
47.
Of 1,000 shares in Cardinal, Hubert owns 300; father owns 100; uncle owns 100.
Redbird Corp. owns 400 & Hubert owns 80% of Redbird.
H (300)
HF (100)
HU (100)
80%
Redbird (400)
Yellow Pship
48.
Cardinal (1,000 total shares)
a.
Hubert owns 720 shares, 300 shares directly and 420 shares indirectly, in
Cardinal Corporation. Hubert constructively owns the stock of his father (100
shares) and 80% of the 400 shares, or 320 shares, owned by Redbird
Corporation. Ancestors other than parents are not related parties under § 318;
thus, Hubert is not deemed to own the shares of the uncle.
b.
The stock attribution rules do not apply to the stock held by a corporation if the
shareholder owns less than 50% of the stock in the corporation. Thus, Hubert
would only own 400 shares, 300 shares directly and 100 shares owned by his
father.
c.
Hubert would now own 750 shares in Cardinal, the 720 shares as computed in
part a., above, plus 30 shares as a result of his 30% interest in Yellow
Partnership [100 (shares owned by Yellow Partnership) × 30% (Hubert’s interest
in Yellow)].
Shawn owns 200 of 1,000 sh. in Hawk & 70% of Vulture; Vulture owns 600 shares of
Hawk. Hawk Corp. redeems 100 shares for $125,000 (basis in his shares is $150 each).
Hawk’s E&P is $700,000.

$125,000 dividend income.
Before the redemption: 620 (200 + 70%[600]) of 1,000 shares (62%);
After the redemption, 520 of 900 shares (57.8%)
50% test failed.
80% test failed (57.8% > 80%[62%]).

The basis in the 100 shares redeemed ($15,000) attaches to Sheldon’s basis in the
Hawk Corporation stock he still owns. Result is $30,000 basis in his 100 remaining
shares.

Since the redemption is treated as an ordinary dividend distribution, Hawk’s E & P is
reduced to $575,000 ($700,000 – $125,000).
49.
Lana owns 400 of 1,000 shares of Stork ($200 per share basis). Mother owns 200
shares; Grandfather owns 400 shares. Wants to redeem @ $1,000 per share. Minimum
number to qualify as a redemption (sale)?




Ownership before redemption: 60% (400 direct + 200 mom / 1,000 total)
Maximum ownership after redemption:
o < 50% total &
o < 80% of her preredemption % (i.e., < 48%)
Minimum redemption is 231 shares
o (600 – x ) / (1,000 – x) = .48
o X = 231

50.

After the redemption, your ownership interest of 47.98% [369 shares (169 shares
direct + mom’s 200 shares) ÷ 769 shares

Results
o LTCG of $184,800 [$231,000 (redemption proceeds) – $46,200 (basis)].
o Reduction of Stork Corporation’s E & P of $207,900 [$900,000 (E & P
preredemption) × 23.1% (percentage of shares outstanding represented by
shares redeemed)].
Thrush has 3,000 shares. Ownership is: John = 1,300; father = 1,000; sister = 700.
Thrush redeems all of John’s 1,300 shares.
Tests:
Before: John has constructive ownership of 77% (2,300 of 3,000 shares)
After: John has constructive ownership of 59% (1,000 of 1,700 shares)
Numerical tests for disproportionate distribution failed (50% & 80%).
a.
The redemption cannot qualify as a complete termination redemption. The family
attribution waiver does not apply because John did not file the required
notification agreement with his tax return in the redemption year.
b.
While an acquisition by John of stock in Thrush by bequest or inheritance is not a
prohibited interest, an acquisition by purchase is a prohibited interest. Even if the
other requirements for the family attribution waiver are satisfied (e.g., John files
the required agreement with the IRS), John has acquired a prohibited interest
within the 10-year postredemption period. Thus, the redemption cannot qualify
as a complete termination redemption.
c.
The redemption can qualify as a complete termination redemption. Retaining a
creditor interest is not a prohibited interest. Thus, if the other requirements for
the family attribution waiver are satisfied, the redemption completely terminates
John’s ownership interest in Thrush.