[jeff]

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Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[Anonymous]

1 is D – I messed up on this one too – it asks what amount should be included in taxable income.

[Anonymous]

2–Dahl Corp. was organized and commenced operations in 1930. At December 31, 2013, Dahl had accumulated earnings and profits of $9,000 before dividend declaration and distribution.

On December 31, 2013 Dahl distributed cash of $9,000 and a vacant parcel of land to Green, Dahl's only stockholder. At the date of distribution, the land had a basis of $5,000 and a fair market value of $40,000.

What was Green's taxable dividend income in 2013 from these distributions?

A. $9,000

B. $14,000

C. $44,000

D. $49,000

[CPAfit]

@bucky 1-C $3,000

[CPAfit]

@bucky 2- A $9,000

[REGTaker]

I object! Trick questions aren't allowed the day before my test! 🙂

[Anonymous]

Sorry, not sorry @REGTaker.

[REGTaker]

2-$44K

[CPAfit]

@bucky for question 1 I thought we would apply the dividend reduction rule: 0-20% ownership = 70% dividend reduction. So that makes taxable dividend income = $3,000. I don't know if this question is wrong or there is a different rule due to the fact it says “10%-owned taxable domestic corporation.”

[Anonymous]

2 is C – Corporate distributions to shareholders are taxed to shareholders as dividend income to the extent that the distribution does not exceed current and accumulated earnings and profits. Distributions in excess of current and accumulated earnings and profits are treated as returns of capital. The distribution of appreciated property increases a corporation's earnings and profits increase by the amount of the difference between the distributed property's fair market value and the corporation's adjusted basis in the distributed property.

Thus, while Dahl Corp. had earnings and profits totaling $9,000 before the dividend declaration and distribution, the corporation's earnings and profits increased by $35,000, the land's $40,000 fair market value less its adjusted basis of $5,000, to $44,000 due to the distribution of the land.

Green received $49,000 of property in the distribution – $9,000 in cash and land with a fair market value of $40,000. The amount of the distribution classified as dividend income is limited to the corporation's earnings and profits. Thus, Green would report $44,000 of dividend income from the distribution.

[Anonymous]

@zubairs – you always add the total amount of dividends received into Income, then you can deduct the DRD later. This one should have a 70% DRD.

[REGTaker]

@Zubairs–Taxable income is calculated BEFORE the DRD. Uggg. So $1,000 is includable in taxable income then you take the DRD of $700 (.70*1000). Tricky, tricky tricky.

[Anonymous]

3–Ridge Corp., a calendar year C corporation, made a nonliquidating cash distribution to its shareholders of $1,000,000 with respect to its stock. At that time, Ridge's current and accumulated earnings and profits totaled $750,000 and its total paid-in capital for tax purposes was $10,000,000. Ridge had no corporate shareholders. Ridge's cash distribution

I. Was taxable as $750,000 of dividend income to its shareholders.

II. Reduced its shareholders' adjusted bases in Ridge stock by $250,000.

A. I only.

B. II only.

C. Both I and II.

D. Neither I nor II.

[REGTaker]

I feel like #3 is a trick, but I co with C, both.

[CPAfit]

@bucky 3-C Both I & II

[Anonymous]

3 is no trick – C is correct!

[Author]

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