Question

QUESTION 17

1. During the current year, Z Corporation accrued income and expenses as follows:

   Gross income from Business             $1,000

   Dividends on Apple Stock   300

   Interest on State Bonds 300

   Capital Gain    300

   Total   2,400

   Deductible Business Expenses 1,290

   Non-Capital Expenses,

                               Non Deductible under 162(e)              270

                           Capital Losses      438

   Total    1,998

   Net $   402

   	a.	For the calculation of earnings and profits (E&P), net capital loss is currently deductible.
   	b.	Accrued corporate tax does not reduce E&P.
   	c.	The DRD on the Apple dividend at 70% is deducted for E&P purposes.
   	d.	All of the above
   	e.	None of the above.

QUESTION 18

1. On December 1 of the current year (the declaration date), Z’s board of directors vote to pay a $600 distribution by mailing checks on December 31 of the current taxable year (the payment date) to shareholders of record on December 15 (the record date). The checks are actually received by shareholders on January 2. Shareholder C is an individual with a stock basis of $120. C sells his stock on December 10 for $1,620.

   	a.	The distribution by the corporation will still be taxable to shareholder C.
   	b.	The distribution by the corporation will be taxable to the purchaser from shareholder C.
   	c.	C’s sale of the stock will generate capital gain.
   	d.	b and c.
   	e.	None of the above.

QUESTION 19

1. Corporation Z has an accumulated deficit of $100 in E&P as of December 31 of the preceding year. In addition, corporation Z is operating at a loss for the current year. Z has a valuable asset which if sold will generate a gain sufficient to eliminate the current year’s deficit in E&P and cause there to be positive earnings and profits. Rather than sell the asset in the current year and distribute the proceeds to shareholders as a dividend, Z borrows against the asset and distributes the loan funds to the shareholders. In the following year, Z sells the asset and pays off the loan.

   	a.	There is a dividend in the current year because the borrowing and the delaying of the sale is a sham.
   	b.	The distribution will be a return of capital and potential gain to shareholders.
   	c.	a and b.
   	d.	None of the above.

QUESTION 20

1. Corporation Z distributes $200 total in cash to shareholder C and $200 total in cash to shareholder D during the current year at quarterly intervals, $50 in cash per quarter per shareholder. At the end of the preceding taxable year Z’s accumulated E&P was $0. In the current taxable year, Z's taxable income and current E&P is $200.

   	a.	The first two quarterly installments of $50 to each shareholder are dividends.
   	b.	$25 of each quarterly distribution is a dividend to each shareholder.
   	c.	There are no dividends to either shareholder.
   	d.	None of the above.

Answer 1

QUESTION 17:.

Answer :- a.

For the calculation of earnings and profits (E&P), net capital loss is currently deductible.

QUESTION 18:.

Answer :- d.

b and c.

QUESTION 19:.

Answer :C

a and b

Since there was a deficit of $100 in the prior year, and at the same time, the current year is a net operating loss; therefore, there is no dividend in the current year. The distribution will be a return of capital and potential gain to shareholders since the asset is sold, and the gain earned will be distributed apart from the capital to the shareholders.

QUESTION 20:.

Answer :- a.

The first two quarterly installments of $50 to each shareholder are dividends.