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FTax SM_ch20_p001-008

2011 Federal Taxation (with H&R BLOCK At Home(TM) Tax Preparation Software CD-ROM)

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* C HAPTER T WENTY * CORPORATE DISTRIBUTIONS, REDEMPTIONS, AND LIQUIDATIONS SOLUTIONS TO PROBLEM MATERIALS DISCUSSION QUESTIONS 20-1 A dividend is a distribution of cash or property by a corporation to its shareholders out of current or accumulated E&P. (See p. 20-2.) 20-2 Basically, E&P equals taxable income increased by nontaxable income and decreased by nondeductible expenses. Earnings and profits is similar to retained earnings, but has significant differences caused by the differences in the treatment of various items for financial accounting purposes as opposed to the items’ tax treatment. (See p. 20-2.) 20-3 Non-taxable items, distributions, taxes, and adjustments to more closely reflect economic income also affect E&P. (See pp. 20-2 through 20-5.) 20-4 Only depreciation computed under the straight-line method reduces E&P. (See pp. 20-2 and 20-5.) 20-5 Only 1 5 of the amount expensed reduces E&P. The remaining 4 5 reduces E&P at a rate of 1 5 per year. (See p. 20-5.) 20-6 A distribution can be taxable as a dividend, even if there is a deficit in accumulated E&P, as long as there is current E&P equal to or greater than the distribution. (See p. 20-5.) 20-7 The distribution amount is the face amount of cash. (See p. 20-7.) 20-8 Both corporate and noncorporate shareholders report the fair market value of the property as a dividend. (See p. 20-7.) 20-9 If property is distributed subject to a liability, the amount of the distribution is reduced by the liability. The basis of the property is unaffected. (See p. 20-8.) 20-10 Constructive dividends are transactions between a corporation and a shareholder which are reclassed as a dividend. They arise on audit by the IRS. (See p. 20-8.) 20-11 A corporation recognizes gain when it distributes property that has a value exceeding its basis. (See p. 20-8.) 20-12 First, E&P is increased by the realized gain. Then E&P is reduced by the fair market value of the property. [See p. 20-8 and §312(b).]
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20-13 A stock dividend is a distribution of the issuing corporation’s own stock. (See p. 20-9.) 20-14 A stock dividend is taxable if the shareholder has a choice between stock and property, if it is disproportionate, or if it is paid to preferred shareholders. Distributions of convertible preferred stock also may be taxable. All other cases are nontaxable. [See p. 20-9 and § 305(b).] 20-15 In a nontaxable dividend, the shareholder’s basis is determined by an allocation of the basis of the old stock between the old and the new stock, based on relative fair market values. If the dividend is taxable, its basis equals its fair market value. (See pp. 20-10 and 20-11 and Reg. § 1.307-1.) 20-16 Nontaxable stock dividends do not affect E&P. Taxable stock dividends are treated as property distributions. [See p. 20-11 and § 312(d)(1).] 20-17 Stock rights provide the holder with the right to purchase stock at a set price during a set time period. They are treated as a stock dividend except that basis is not allocated unless the fair market value of the rights exceeds 15 percent of the value of the stock. Taxpayers may elect to allocate basis in these cases. [See pp.
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