CHAPTER19REVIEWQUESTIONS - ch56

CHAPTER19REVIEWQUESTIONS - ch56 - CHAPTER 19 CORPORATIONS...

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CHAPTER 19 CORPORATIONS: DISTRIBUTIONS NOT IN COMPLETE LIQUIDATION TRUE/FALSE 1. Distributions by a corporation to its shareholders are presumed to be dividends unless the parties can prove otherwise. ANS: T REF: p. 19-3 2. A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation’s E & P and any excess over the basis in the stock investment. ANS: T A distribution is taxed to the extent of E & P. Distributions in excess of E & P are tax-free recoveries of capital to the extent of stock basis. Distributions in excess of stock basis trigger taxable gain (usually capital gain). PTS: 1 REF: p. 19-3 3. Cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will always be taxed as dividend income. ANS: F A positive balance in accumulated E & P at the beginning of the year does not guarantee dividend treatment for distributions. If there is a deficit in current E & P during the year, it may completely offset the positive accumulated E & P balance. If it does, the distributions will not receive dividend treatment. PTS: 1 REF: p. 19-8 | Concept Summary 19-2 4. Any distribution in excess of E & P is treated as a tax-free recovery of capital by shareholders. ANS: F Distributions in excess of E & P are a tax-free recovery of capital to the extent of stock basis. Distributions in excess of basis trigger recognition of capital gain. PTS: 1 REF: Example 1 5. When computing current E & P, taxable income is not adjusted for the deferred gain in a § 1033 involuntary conversion. ANS: T REF: p. 19-4 19-1
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19-2 2008 Comprehensive Volume/Test Bank 6. Of the § 179 expense deducted in the current year, 80% must be added to this year’s taxable income to determine current E & P. ANS: T For E & P purposes, only 20% of § 179 expense is deductible each year over a 5 year period. As a result, when § 179 expense is elected, 80% must be added back to taxable income in the year of election to determine current E & P. PTS: 1 REF: p. 19-6 7. Life insurance premiums (net of the increase in the cash surrender value of the policy) paid by a corporation on the life of an officer must be added to taxable income to determine E & P. ANS: F It has no effect on taxable income, but it decreases current E & P. PTS: 1 REF: p. 19-4 | Example 4 8. When a corporation makes an installment sale, for E & P purposes the realized gain is recognized as payments are received. ANS: F The installment method is not available for E & P purposes. Consequently, the entire gain is recognized in the year of sale. PTS: 1 REF: p. 19-5 | Example 6 9. A corporation borrows money to purchase State of Wisconsin bonds. The interest on the loan has no effect on either taxable income or current E & P. ANS: F The interest does not reduce taxable income, but it does reduce E & P.
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