Chapter C4 Corporate Nonliquidating Distributions

13) Identify which of the following
statements is false.
A) For E&P dividend distribution
purposes, property as defined in Sec. 317(a) includes money.
B) The function of E&P is to provide a
measure of a corporation’s economic ability to pay dividends.
C) At formation, a corporation’s E&P
depends on the amount of capital contributed by the shareholders.
D) Adjustments to taxable income when
computing E&P do not include tax-exempt interest.

14) Identify which of the following
increases Earnings & Profits.
A) a capital contribution
B) life insurance proceeds payable to the
spouse
C) tax-exempt interest income
D) All of the above increase E&P of a
corporation.

15) Current E&P does not
include
A) tax-exempt interest income.
B) life insurance proceeds where the
corporation is the beneficiary.
C) federal income tax refunds from prior
years.
D) All of the above are included.

16) Grant Corporation sells land (a
noninventory item) with a basis of $57,000 for $100,000. Nichole will be paid
on an installment basis in five equal annual payments, starting in the current
year. The E&P for the year of sale will be increased as a result of the
sale (excluding federal income taxes) by
A) $0.
B) $8,600.
C) $43,000.
D) $100,000.

17) Boxer Corporation buys equipment in
January of the current year with a seven-year class life for $15,000. The
corporation expensed the $15,000 under Sec. 179. The deduction in the year of
purchase for E&P purposes due to the acquisition and expensing of the
equipment is
A) $1,500.
B) $3,000.
C) $14,000.
D) $15,000.

18) For purposes of determining current
E&P, which of the following items cannot be deducted in the year
incurred?
A) charitable contribution in excess of
the 10% limitation
B) capital losses in excess of capital
gains
C) life insurance premiums (in excess of
the increase in cash surrender value for the policy) paid on the lives of key
employees
D) dividends-received deduction.

19) Identify which of the following
statements is true.
A) Section 179 property must be expensed
ratably over a five-year period when computing E&P.
B) Losses on property sales to related
parties are not deductible when computing E&P.
C) Distributions made out of accumulated
E&P are allocated ratably between multiple distributions made during the
tax year.
D) All of the above are false.

20) Poppy Corporation was formed three
years ago. Poppy’s E&P history is as follows:

Year

Current E&P

Distributions

2005
2006
2007

$6,000
5,000
1,000

$4,000
1,000
-0-

Poppy Corporation’s accumulated E&P on
January 1 will be
A) $0.
B) $7,000.
C) $5,000.
D) $12,000.

21) Dixie Corporation distributes $31,000
to its sole shareholder, Sally. At the time of the distribution, Dixie’s
E&P is $25,000 and Sally’s basis in her Dixie stock is $10,000. Sally’s
basis in her Dixie stock after the distribution is
A) $4,000.
B) $10,000.
C) $25,000.
D) $31,000.

22) Crossroads Corporation distributes
$60,000 to its sole shareholder Harley. Crossroads has earnings and profits of
$55,000 and Harley’s basis in her stock is $20,000. After the distribution,
Harley’s basis is
A) $5,000.
B) $15,000.
C) $20,000.
D) $60,000.