Accounting Questions: Tax, Profit, Shares, Dividend Distribution

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Question

MULTIPLE CHOICE QUESTIONS

1. M Corp had taxable income and earnings and profits of over $20 million per year when Ed bought 100 shares for $1000. It has since had losses of more than $1 million per year ($.50 per share) for two years, and the value of Ed’s stock has dropped to $950. Despite this rocky situation, M Corp distributed a dividend of $1 per share. The most likely result of this $100 distribution to Ed is:
(a) Aloss of $50 and basis in the stock of $850.
(b) No income and a reduction of basis in the stock down to $900.
(c) Dividend income of $100 and no effect on the stock basis.
(d) Dividend income of $50 and no effect on the stock basis.

2. Z Corp operated at no profit or loss for tax purposes in its first year of operation. It nevertheless distributed $20,000 to its shareholders, as a result of a loan taken out by pledging property that had been contributed to it. The effect of this distribution on the shareholders will be:
(a) A dividend of $20,000
(b) A capital gain of $20,000
(c) A reduction in stock basis of up to $20,000, with ordinary income to the extent $20,000 exceeds basis
(d) A reduction in stock basis of up to $20,000, with capital gain to the extent $20,000 exceeds basis.

3. Z Corp, in its first year of operation, has income of $50,000, subject to estimated federal income tax payments of $7,500. It distributes $50,000 to its shareholders. At the beginning of the next taxable year, its e&p is
(a) Zero.
(b) A deficit of $7,500
(c) $50,000
(d) $42,500

4. Z Corp has $100,000 of accumulated e&p at the beginning of the taxable year. It has a projected taxable income of $50,000 this year, on which it expects to pay $7,500 in federal income taxes. It declares and pays a dividend of$.50 per share on each of its 45,000 shares. The income projections prove correct. What is the result of the distribution to the shareholders, and what is the corporation’s accumulated e&p as of the beginning of next year? Assume that Z Corp’s shareholders all have substantial basis in their shares.
(a) A $50,000 total dividend distribution ($1 of income per share), and an accumulated e&p increase to $150,000.
(b) A $22,500 total dividend distribution ($.50 per share), and an accumulated e&p decreased to $77, 500.
(c) A $15,000 total dividend distribution ($.50 per share, reduced by $.16 2/3 per share to 33 1/3 per share), and an accumulated e&p increase to $135,000.
(d) A total dividend distribution of $22,500. ($.50 per share), and an accumulated e&p increase to $120,000.

5. Z Corp has $100,000 of accumulated e&p at the beginning of the taxable year. It has a projected taxable income of $50,000 this year, on which it expects to pay $7,500 in federal income taxes. It declares and pays a dividend of $1 per share on each of its 45,000 shares. The income projections prove correct. What is the result of the distribution to the shareholders, and what is the corporation’s accumulated e&p as of the beginning of next year? Assume that Z Corp’s shareholders all have substantial basis and their shares.
(a) A $50,000 total dividend distribution and no change in accumulated e&p.
(b) A $42,500 total dividend distribution and no change in accumulated e&p.
(c) A $45,000 total dividend distribution and an accumulated e&p of $97,500.
(d) A $45,000 total dividend distribution and an accumulated e&p increase to $105,000.

Please use the following fact pattern for Questions 6 – 9.
Z Corp has $100,000 of accumulated e&p at the beginning of the taxable year. It has a projected taxable income of $50,000 this year, on which it expects to pay $7,500 in federal income taxes. It declares and pays a dividend of $5 per share on each of its 30,000 shares. The income projections prove correct.

6. What is the result of the distribution to the shareholders and the corporation? What is the corporation’s accumulated e&p as of the beginning of the next year? Assume that Z Corp’s shareholders all have substantial basis in their shares.
(a) A total dividend distribution of $150,000 and an accumulated e&p reduced to -$15,000.
(b) A total dividend distribution of $142,500, a return of capital distribution of $7,500, and accumulated e&p reduced to zero.
(c) A total dividend distribution of $142,500, a return of capital distribution of $7,500, and accumulated e&p reduce to -$15,000.
(d) A total dividend distribution of $150,000 and accumulated earnings reduced to zero.

7. If a shareholder held a single share with a basis of $100 before the distribution, what is the shareholder’s basis in the stock after the distribution?
(a) $95 ($100 less $5 of distribution).
(b) $96.41 ($100 plus $1.66 share of income less $0.25 share of taxes less $5 of distribution).
(c) $100 (basis is not adjusted for distributions).
(d) $99.75 ($100-$0.25).

8. There are two distributions: $100,000 is paid on March 31, and $50,000 is paid on September 30. What is the aggregate result of the distribution to the shareholders who are holding on March 31 and on September 30? Assume that Z Corp’s shareholders all have substantial basis in their shares.
(a) March 31 – a total dividend of $95,000 and return of capital of $5,000; and September 30 - a total dividend of $47,500 and return of capital of $2,500.
(b) March 31 – a total dividend of $100,000;and September 30 – a total dividend of $42,500 and $7,500 return of capital.
(c) March 31 --- a total dividend of $96,000 and $4,000 return of capital; and September 30 – a total dividend of $36,600 and $13,400 return of capital.
(d) March 31 – a total dividend of $100,000; and September 30 – a total dividend of $50,000.

9. There are two classes of stock: preferred and common. 10,000of the shares are common stock on which dividends are regularly declared only after dividends have been paid on the preferred stock. Thus a distribution of $100,000 was made on the 20,000 shares of preferred stock, and a distribution of $50,000 was made on the common stock, at the end of the fiscal year. What is the result of the distributions to the shareholders? Assume that Z Corp's shareholders all have substantial basis in their shares.
(a) Preferred stock –a total dividend of $95,000 and return of capital of $5,000; common stock – a total dividend of $47,500 and a return of capital of $2,500.
(b) Preferred stock –a total dividend of $100,000;common stock –a total dividend of $42,500 and a $7,500 return of capital.
(c) Preferred stock–a total dividend of $96,000 and a $4,000 return of capital; common stock –a total dividend of $36,600 and a $13,400 return of capital.
(d) Preferred stock –a total dividend of $100,000; common stock –a total dividend of $50,000.

10. Z Corp has $100,000 of accumulated e&p at the beginning of the taxable year. It has a projected taxable income of $50,000 this year. It declares and pays a dividend of $5 per share on each of its 30,000 shares at the end of the first quarter of its fiscal year. The income projections prove incorrect, so the corporation earns$100,000 in the year of the distribution and pays $20,000 in federal income taxes. All of the earnings are attributable to specific events occurring after the distribution. What is the result of the distribution to the shareholders and the corporation? Assume that Z Corp's shareholders all have substantial basis in their shares. What is the corporation's accumulated e&p as of the beginning of the next year?
(a) Total dividend of $150,000; accumulated e&p of $100,000.
(b) Total dividend of $80,000; accumulated e&p of $100,000.
(c) Total dividend of $150,000; accumulated e&p of $30,000.
(d) Total dividend of $100,000 and return of capital of $50,000; accumulated e&p of $100,000.

11. Z Corp has $140,000 of accumulated e&p at the beginning of the taxable year. It has a projected taxable income of $50,000 this year. It declares and pays a dividend of $5 per share on its 20,000 class A common shares midway through its taxable year. Its other 10,000 shares are in class B common stock on which dividends are regularly declared only after dividends have been declared and paid on the other, class A, common stock and certain performance goals are met. This later stock received its $5 dividend at the end of the corporation's fourth quarter. But this time, the income projections prove incorrect, and the corporation loses$30,000 in the year of the distribution, mostly attributable to specific events occurring after the first distribution on the class A shares but before the distribution to the class B shares. What is the result of the distribution to the shareholders and the corporation? Assume that Z Corp's shareholders all have substantial basis in their shares. What is the corporation's accumulated e&p as of the beginning of the next year?
(a) Total dividend distribution of$100,000 to class A; total dividend distribution of $10,000 and return of capital of $40,000 to class B; no accumulated e&p.
(b) Total dividend distribution of $93,333 to the class A shareholders and $6,777 return of capital; total dividend distribution of $46,777 to the class B shareholders, with $3,333 return of capital; no accumulated e&p.
(c) Total dividend distribution of $110,000, distributed proportionately to the class A and class B shareholders; with a deficit in e&p of $30,000.
(d) Total dividend distribution of $150,000, distributed proportionately to the class A and B shareholders, with a deficit in e&p of $40,000.

12. Z Corp has accumulated e&p of $100,000 and, without taking into account distribution in question here, current e&p of $500,000. It distributes to shareholders property that it holds with a basis of $10,000 and a fair market value of $110,000. What is the result to the shareholders and to Z Corp of this distribution? Assume a 35% tax rate unless otherwise indicated.
(a) Total dividend of $100,000 and no net effect on e&p ($600,000 accumulated as of beginning of next year).
(b) Total dividend of $100,000; $65,000 increase in current e&p on gain($100,000-$35,000 in taxes) to $565,000, reduced by distribution to$455,000; accumulated e&p of $555,000 at beginning of next year.
(c) Total dividend of $110,000; $65,000 increase in current e&p on gain ($100,000-$35,000 in taxes) to $565,000, reduced by distribution to $455,000; accumulated e&p of $555,000 at beginning of next year.
(d) Total dividend of $75,000 ($110,000-$35,000 in taxes); accumulated e&p of $525,000.

13. Z Corp has accumulated e&p of $100,000 and, without taking into account the distribution in question here, current e&p of $50,000. It distributes to shareholders property that it holds with a basis of $120,000 and a fair market value of $40,000. What is the result to the shareholders and to Z Corp of this distribution? Assume that Z Corp's shareholders all have substantial basis in their shares.
(a) Loss of $80,000; dividend of $120,000; accumulated e&p deficit of $50,000 as of beginning of next year.
(b) No loss, dividend of$40,000; accumulated e&p of$30,000 as of beginning of next year.
(c) Loss of $80,000; dividend of $70,000 with return of capital of $50,000; zero e&p as of beginning of next year.
(d) No loss, dividend of $120,000; accumulated e&p of $30,000 as of beginning of next year.

14. Z Corp has accumulated e&p of $100,000, and distributed property that, unencumbered, would sell for $100,000, for which it paid $100,000. It was subject to a liability of $30,000. What is the effect of this distribution on the shareholders and on Z Corp?
(a) A dividend distribution of $70,000 and a reduction in e&p by $70,000.
(b) A dividend distribution of $70,000, income of $30,000 to Z Corp, and a net reduction in e&p of $40,000.
(c) A dividend distribution of $100,000 and a reduction in e&p of $100,000.
(d) A dividend distribution of $100,000 and areduction in e&p of $70,000.

15. What is the basis of the properties distributed to shareholders in problems 13 and 14 above, respectively?
(a) $110,000 and $120,000.
(b) $110,000 and $40,000.
(c) $10,000 and $120,000.
(d) $10,000 and $40,000.

Please use the following fact pattern for Questions 16 – 21.
In a transaction that otherwise qualifies as a section 351 transaction, A transfers property with a fair market value of $100, a basis of $30, subject to a debt of $20, and takes back only stock with a fair market value of $80. The debt was an ordinary purchase money debt, incurred 10 years ago when A acquired the property. The corporation assumes the debt, and is expected to pay on it, as anticipated by section 357(d).

16. How much gain will A recognize?
(a) $80.
(b) None.
(c) $20.
(d) $10.

17. What will be A’s basis in the stock she received?
(a) $30.
(b) $20.
(c) Zero.
(d) $10.

18. What will be the corporation’s basis in the transferred asset?
(a) $10.
(b) $50.
(c) $20.
(d) $30.

19. What will be the tax consequence to A and to the corporation when the corporation makes a payment of $5 principal on the assumed debt?
(a) No income to A; no basis increase or deduction to the corporation.
(b) Deemed distribution of $5 to A; no basis increase or deduction to the corporation.
(c) No income to A; basis increase of $5 for the corporation.
(d) No income to A; deduction of $5 for the corporation.

20. What if the debt to which the property was subject had been $45?
(a) A would have gain of $15; corporation would take with basis of $30.
(b) A would have no gain; corporation would have basis of $15.
(c) A would have gain of $15; corporation would have basis of $45.
(d) A would have gain of $45; corporation would have basis of $45.

21. What if the debt had been an account payable, and A was a cash basis taxpayer?
(a) Same answer as Question 20.
(b) Same answer as Questions 16 - 18, but the corporation can deduct when it pays.
(c) A has $15 of gain, corporation takes with a basis of $30, and corporation can deduct when it pays.
(d) No gain to A, no basis reduction on A’s stock, and a corporate deduction when the debt is paid.

22. Max has a small business that produces high quality prints of Power Point® and other presentation papers. He is a cash method taxpayer. At the end of the year, his balance sheet shows the following:
• Computer system (AB 0, FMV 6),
• Accounts receivable (AB 0, FMV 10),
• Accounts payable (4).
Max decides to incorporate and transfers all the assets, with the corporation assuming the obligation to pay the trade creditors. Which statement most accurately describes the result for Max?
(a) Liabilities exceed basis, so Max recognizes a section 357(c) gain of 4.
(b) The general default rule of section 357(a) applies whenever there is an incorporation.
(c) The debt will cause all gain of 16 to be recognized, under section 357(b).
(d) Max will not recognize any section 357(c) gain, and his basis will not be reduced on account of the assumption of the accounts payable obligation.

Please use the following fact pattern for Questions 23 – 31.
Bob owns all of the stock of Small Corporation, which he bought five years ago with a basis of $5,000. He causes the corporation to liquidate, that is, to distribute to him its only assets not needed to pay expenses and taxes, a piece of vacant land worth $7,000 and cash of $11,000.

23. The result of the liquidation transaction to Bob is:
(a) Cannot tell without knowing more about the corporation's earnings and profits.
(b) Gain of $7,000.
(c) Gain of $13,000.
(d) Gain of $11,000.

24. After the liquidation of Small Corporation, Bob’s basis in the land he receives is:
(a) $19,000.
(b) $7,000.
(c) $12,000.
(d) $5,000.

25. If Small Corporation paid $1,500 for their land, what result on liquidation?
(a) Gain of $5,500.
(b) No gain or loss in respect of Small’s assets on the liquidation of Small.
(c) Small’s gain calculation will not be made until Bob sells the land.
(d) Insufficient information to determine.

26. If the land was purchased for $1,500 and was worth $7,000 but was subject to a liability of $2,000 at the time of the liquidation, what result to Bob on the liquidation described above?
(a) Gain of $12,500.
(b) Gain of $11,000.
(c) Gain of $20,000.
(d) Gain of $13,500.

27. If the land was purchased for $1,500 and was worth $7,000 but was subject to a liability of $2,000 at the time of the liquidation, what result to Small Corporation on the liquidation described above?
(a) Gain of $3,500 and debt discharge income of $2,000.
(b) Gain of $7,500.
(c) Gain of $5,500.
(d) Gain of $3,500.

28. If the land was purchased for $1,500 and was worth $7,000 but was subject to a liability of $8,300 at the time of the liquidation, what result to Small Corporation on the liquidation described above?
(a) Gain of $6,800.
(b) Gain of $1,300.
(c) Gain of $5,500.
(d) Cannot compute without knowing whether debt is recourse or nonrecourse.

29. If the land was purchased for $1,500 and was worth $7,000 but was subject to a liability of $8,300 at the time of the liquidation, what result to Bob when he receives the land and the cash in the liquidation described above?
(a) Gain of $11,000.
(b) Gain of $13,000.
(c) Cannot determine from the facts given, but may be gain of $4,700 or of $6,000.
(d) None of the above is correct.

30. If the corporation paid $10,000 in cash for the land, what is the result of the liquidation to the corporation?
(a) Loss would be recognized but for section 267.
(b) Gain of $8,000.
(c) Loss of $3,000.
(d) No gain or loss to Small Corporation on Small Corporation's assets on its liquidation.

31. If Bob had contributed the property to Small Corporation after having paid $10,000 in cash for it and because it had been designated as a good site for Small Corporation's next venture, what result to the corporation on liquidation?
(a) Loss would be recognized but for section 267.
(b) Gain of $8,000.
(c) Loss of $3,000.
(d) Depends upon when the contribution was made.

Please use the following fact pattern for Questions 32 – 38.
X Corp owns 1% of the common stock of one of its suppliers, with a total basis $1 million and a fair market value of $10 million. It receives a dividend of $50,000 with respect to the stock.

32. What are the tax consequences of this dividend?
(a) $50,000 in income, $35,000 DRD, no change in basis.
(b) $50,000 in income, $40,000 DRD, basis reduction of $40,000.
(c) $50,000 in income, $35,000 DRD, basis reduction of $35,000.
(d) $5,000 in income, no basis reduction.

33. What if X Corp's holding had been of 25% of the stock?
(a) $50,000 in income, $35,000 DRD, no basis reduction.
(b) $50,000 in income, $50,000 DRD, no basis reduction.
(c) $50,000 in income, $40,000 DRD, no basis reduction.
(d) $50,000 in income, $45,000 DRD, no basis reduction.

34. What would the result be if the stock had been preferred stock, and the dividend paid was $200,000?
(a) Dividend income of $200,000; DRD of $160,000, basis reduction of $160,000.
(b) Dividend income of $200,000, DRD of $140,000; basis reduction of $140,000.
(c) Cannot tell on the facts given.
(d) Dividend income of $200,000; DRD of $130,000, basis reduction of $130,000.

35. What if X Corp had owned 85% of the distributing corporation?
(a) No dividend income.
(b) Dividend income of $50,000, DRD of $50,000, basis reduction of $50,000.
(c) Dividend income of $50,000, DRD of $50,000, no basis reduction.
(d) Dividend income of $40,000; DRD of $40,000, basis reduction of $40,000.

36. What if Corp X had had a $9,000 taxable loss (before taking into account any dividend income, DRD or net operating loss carryforward) and also had a net operating loss carryforward to that year of $15,000 and received a dividend of $30,000?
a) Dividend income of $30,000; DRD of $30,000; no basis reduction.
(b) Dividend income of $30,000; DRD of $24,000; no basis reduction.
(c) Dividend income of $30,000; DRD of $21,000; no basis reduction.
(d) Dividend income of $30,000, DRD of $14,700; no basis reduction.

37. What if X Corp had $50,000 of other taxable income (before taking into account the dividend, any available DRD, or any available net operating loss carryover) and had a net operating loss carryover to the year of the distribution of $15,000 and received a dividend of $30,000?
(a) Dividend income of $30,000; DRD of $30,000; no basis reduction.
(b) Dividend income of $30,000; DRD of $24,000; no basis reduction.
(c) Dividend income of $30,000; DRD of $21,000; no basis reduction.
(d) Dividend income of $30,000, DRD of $14,700; no basis reduction.

38. What if Corp X had borrowed $900,000 to buy the stock, and had paid $45,000 in interest on this debt in this year?
(a) Dividend income of $50,000; DRD of $35,000; no basis reduction.
(b) Dividend income of $50,000; DRD of $3,500; no basis reduction.
(c) Dividend income of $50,000; DRD of $5,000; no basis reduction.
(d) Dividend income of $50,000; DRD of $0; no basis reduction.

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1. M Corp had taxable income and earnings and profits of over $20 million per year when Ed bought 100 shares for $1000. It has since had losses of more than $1 million per year ($.50 per share) for two years, and the value of Ed’s stock has dropped to $950. Despite this rocky situation, M Corp distributed a dividend of $1 per share. The most likely result of this $100 distribution to Ed is:
(a) Aloss of $50 and basis in the stock of $850.
(b) No income and a reduction of basis in the stock down to $900.
(c) Dividend income of $100 and no effect on the stock basis.
(d) Dividend income of $50 and no effect on the stock basis.

Answer
C Dividend income of $100 and no effect on the stock basis...

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