Chapter 20

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

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CHAPTER 20—CORPORATE DISTRIBUTIONS, REDEMPTIONS, AND LI- QUIDATIONS TRUE/FALSE 1. ANS: F Accumulated E&P will differ from retained earnings due to the different treatment of various items for financial accounting purposes as opposed to an item's tax treatment. PTS: 1 REF: pp. 20-2 and 20-3 and § 312 2. It is possible for a corporation to pay a taxable dividend even though there is a deficit in accumulated ANS: T PTS: 1 REF: p. 20-5 and Reg. § 1.316-2(a) 3. Corporations can distribute appreciated land held for investment as a dividend without recognizing any income. ANS: F Under § 311, corporations will recognize gain. PTS: 1 REF: p. 20-7 and § 311 4. Normally, a stock dividend is nontaxable as long as it does not change the proportionate interests of the shareholders. ANS: T Since the shareholder's interest after the stock dividend remains unchanged, he has received nothing, and consequently the transaction is not taxable. PTS: 1 REF: p. 20-9 5. T was granted one right for each share of stock that she owned. She was required to allocate basis to the stock rights. T was unwilling to exercise the rights to buy new stock because of the outlook for the company, and consequently they lapsed. Despite her views on the company's future, she continued to hold her original stock. She is not allowed to deduct a loss equal to the basis assigned to the rights. ANS: T The basis allocated to the rights is returned to the original stock. PTS: 1 REF: pp. 20-11 and 20-12 and Reg. § 1.307-1(a) 6. A shareholder must allocate a portion of the basis of stock owned to stock rights received as a dividend when the rights are received. ANS: F
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The allocation is not necessary if the fair market value of the rights is less than 15 percent of the value of the stock. PTS: 1 REF: pp. 20-11 and 20-12 and Reg. § 1.307-l(a) 7. A loss is deductible when stock rights acquired in a tax-free distribution are allowed to expire. ANS: F No loss is recognized because basis is not allocated unless the rights are sold or exercised. PTS: 1 REF: Example 15, pp. 20-11 and 20-12, § 307(a), and Reg. § 1.307-l(a) 8. Stock redemptions cannot qualify as "not essentially equivalent to a dividend." ANS: F The "not essentially equivalent to a dividend" exception seemed to have been effectively canceled be- cause of the decision handed down by the Supreme Court in U.S. v. Davis. However, some taxpayers in subsequent litigation not involving a sole shareholder have been able to demonstrate that a "mean- ingful reduction" in their interest in the corporation occurred. PTS:
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