Chapter 18 Corporate Taxation: Nonliquidating Distributions

1. [LO1] What is meant by the term double taxation of corporate income?
2. [LO1]
3. [LO1] Why might a shareholder who is also an
employee prefer receiving a dividend instead of compensation from a
corporation?

4. [LO2] What are the three potential tax treatments
of a cash distribution to a shareholder?
Are these potential tax treatments elective by the shareholder?

5. [LO2] In general, what is the concept of earnings
and profits designed to represent?
6. [LO2] How does current
earnings and profits differ from accumulated
earnings and profits? Is there any congressional
logic for keeping the two accounts separate?

7. [LO2] True or False. A calendar-year corporation has positive
current E&P of $100 and accumulated negative E&P of $200. A cash distribution of $100 to the
corporation’s sole shareholder at year-end will not be treated as a dividend
because total E&P is negative $100.
Explain.
8. [LO2] True or False. A calendar-year corporation
has negative current E&P of $100 and accumulated E&P of $100. A cash
distribution of $100 to the corporation’s sole shareholder on June 30 will not
be treated as a dividend because total E&P at December 31 is $0. Explain.
9. [LO2] List the four basic adjustments that a
corporation makes to taxable income or net loss to compute current
E&P. What is the rationale for
making these adjustments?
10. [LO2]
What must a shareholder consider in computing the amount of a noncash
distribution to include in her gross income?
A shareholder must determine the fair
market value of the distribution and any liability she will assume on receipt
of the property. The shareholder’s
dividend amount is the fair market value of the property received less any
liability assumed on the property.
11. [LO2] What income tax issues must a corporation
consider before it makes a noncash distribution to a shareholder?

12. [LO2] Will the shareholder’s tax basis in noncash
property received equal the amount she includes in gross income as a
dividend? Under what circumstances will
the amounts be different, if any?
13. A shareholder receives appreciated
noncash property from his corporation and assumes a liability attached to the
property. How does the liability assumption
affect the amount of dividend he reports in gross income?

14. A
shareholder receives appreciated noncash property from his corporation and
assumes a liability attached to the property.
How does this assumption affect the amount of gain the corporation
recognizes? From the corporation’s
perspective, does it matter if the liability assumed by the shareholder exceeds
the property’s gross fair market value?
15. [LO2]
A corporation distributes appreciated noncash property to a shareholder as
a dividend. What impact does the
distribution have on the corporation’s earnings and profits?
16. [LO3]
Amy is the sole shareholder of her corporation. Rather than have the corporation pay her a dividend,
Amy decides to have the corporation declare a “bonus” at year-end and pay her
tax-deductible compensation. What
potential tax issue may arise in this situation? Which parties, Amy or the corporation or
both, are affected by the classification of the payment?
17. [LO4]
Why might a corporation issue a stock dividend to its shareholders?
18. [LO4]
What tax issue arises when a shareholder receives a nontaxable stock
dividend?
19. [LO4]
In general, what causes a stock dividend to be taxable to the recipient?

20. [LO5]
What are the potential tax consequences to a shareholder who
participates in a stock redemption?
21. [LO5]
What stock ownership tests must be met before a shareholder receives
exchange treatment under the substantially disproportionate
change-in-stock-ownership test in a stock redemption? Why is a change in stock ownership test used
to determine the tax status of a stock redemption?

22. [LO5] What are the criteria to meet the “not essentially equivalent to a dividend”
change-in-stock-ownership test in a stock redemption?
23. [LO5]
When might a shareholder have to rely on the not essentially equivalent to a dividend test in arguing her
stock redemption should be treated as an exchange for tax purposes?
24. [LO5]
Why do you think the tax law imposes constructive stock ownership rules on
stock redemptions?
25. [LO5]
Which members of a family are included in the family attribution
rules? Is there any rationale for the
family members included in the test?
26. [LO5]
Ilya and Olga are brother and sister.
Ilya owns 200 shares of stock in Parker Corporation. Is Olga deemed to own Ilya’s 200 shares under
the family attribution rules that apply to stock redemptions?
27. [LO5]
Maria has all of her stock in Mayan Corporation redeemed. Under what conditions will Maria treat the
redemption as an exchange and recognize capital gain or loss?

28. [LO5] What must a shareholder do to waive the
family attribution rules in a complete redemption of stock?

29. [LO5] How does a corporation’s computation of
earnings and profits differ based on the tax treatment of a stock redemption to
the shareholder (that is, as either a dividend or exchange)?
If30. [LO6]
How does the tax treatment of a partial liquidation differ from a stock
redemption?