481. CHAPTER 5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB88 Thistle Corporation declares a nontaxable dividend payable in rights to subscribe to common stock. One right and $25 entitle the holder to subscribe to one share of stock. One right is issued for each share of stock held. Annette, a shareholder, owns 200 shares of stock that she purchased five years ago for $3,000. At the date of distribution of the rights, the market values were $50 per share for the stock and $25 for a right. Annette received 200 rights. She exercises 160 rights and purchases 160 additional shares of stock. She sells the remaining 40 rights for $1,080. What are the tax consequences to Annette?
481. CHAPTER
5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB88
Thistle Corporation declares a nontaxable dividend payable in rights to
subscribe to common stock. One right and $25 entitle the holder to subscribe to
one share of stock. One right is issued for each share of stock held. Annette,
a shareholder, owns 200 shares of stock that she purchased five years ago for
$3,000. At the date of distribution of the rights, the market values were $50
per share for the stock and $25 for a right. Annette received 200 rights. She
exercises 160 rights and purchases 160 additional shares of stock. She sells
the remaining 40 rights for $1,080. What are the tax consequences to Annette?
482. CHAPTER
5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB89
Gold Corporation has accumulated E & P of $2 million as of January 1 of the
current year. During the year, it expects to have earnings from operations of
$1,680,000 and to distribute $900,000 in cash to shareholders. Gold Corporation
also expects to sell an asset for a loss of $2 million. Thus, it anticipates
incurring a deficit of $320,000 for the year. What can Gold do to minimize the
amount of dividend income to its shareholders?
483. CHAPTER
5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB90
Timothy owns 100% of Forsythia Corporation’s stock. Corporate employees and
annual salaries include Timothy ($300,000); Richard, Timothy’s son ($80,000);
Rita, Timothy’s daughter ($100,000); and Sandy ($120,000). The operation of
Forsythia Corporation is shared about equally between Timothy and Sandy (an
unrelated party). Richard and Rita are full-time college students at a
university about 150 miles away. Forsythia Corporation has substantial E &
P but has not distributed a dividend for the past five years. Discuss problems
related to the salary arrangement for Forsythia Corporation.
484. CHAPTER
5—CORPORATIONS: EARNINGS PROFITS AND DIVIDEND DISTRIB91
Briefly describe the reason a corporation might distribute a property dividend
to a shareholder in lieu of a cash distribution. Describe the tax effects of
the property distribution on the shareholder and on the corporation.
485. CHAPTER
6—CORPORATIONS: REDEMPTIONS AND LIQUIDATIONS Question TF
The Code treats corporate distributions that are a return froma shareholder’s investment as sales or exchanges and corporate
distributions that are a return of a
shareholder’s investment as dividends.
a.
True
b. False
486. CHAPTER
6—CORPORATIONS: REDEMPTIONS AND LIQUIDATIONS Question 2
For tax purposes, all stock redemptions are treated as dividend distributions.
a.
True
b. False
487. CHAPTER
6—CORPORATIONS: REDEMPTIONS AND LIQUIDATIONS Question 3
Noncorporate shareholders generally prefer a nonqualified stock redemption over
a qualifying stock redemption due to the availability of the dividends received
deduction.
a.
True
b. False
488. CHAPTER
6—CORPORATIONS: REDEMPTIONS AND LIQUIDATIONS Question 4
A shareholder’s basis in property received in a stock redemption is the
property’s fair market value.
a.
True
b. False
489. CHAPTER
6—CORPORATIONS: REDEMPTIONS AND LIQUIDATIONS Question 5
A shareholder’s holding period of property acquired in a stock redemption
begins on the date of the distribution.
a.
True
b. False
490. CHAPTER
6—CORPORATIONS: REDEMPTIONS AND LIQUIDATIONS Question 6
Vireo Corporation redeemed shares from its sole shareholder pursuant to a
written agreement between the parties that clearly identified the transaction
as a stock redemption (and not a dividend distribution). Since the agreement is
binding under state law, the shareholder will receive sale or exchange
treatment with respect to the redemption.
a.
True
b. False
Trending now
This is a popular solution!
Step by step
Solved in 5 steps with 1 images
