[jeff]

Welcome to the Q4 2016 CPA Exam Study Group for REG.

If this is your first post in the study group – please post your target exam date (just the time frame to preserve your anonymity), and your past history with this exam (optional, of course).

[aatoural]

Kent Corp. is a calendar year accrual basis C corporation. In Year 1, Kent made a nonliquidating distribution of property with an adjusted basis of $150,000 and a fair market value of $200,000 to Reed, its sole shareholder.
The following information pertains to Kent:
Reed's basis in Kent stock at January 1, Year 1 $ 500,000
Accumulated earnings and profits at January 1, Year 1 125,000
Current earnings and profits for Year 1 (from operations) 60,000
What was taxable as dividend income to Reed for Year 1?
a.$185,000
b.$60,000
c.$200,000
d.$150,000
Explanation
Choice “c” is correct. A dividend paid in property other than money is taxable to an individual taxpayer to the extent of the property's fair market value, but not in excess of the current and accumulated earnings and profits of the distributing corporation. In this case the fair market value of the dividend is $200,000. It is taxable to the extent that Kent had current earnings ($60,000) plus accumulated earnings and profits ($125,000) plus any gain generated on the distribution itself ($50,000); thus the dividend is taxable to the extent of $200,000.

Where in Becker books is this part. I think I never read about also counting the gain generated not the distribution?

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[Teal]

I don't know where it is in Becker, but it is confusing that it says it should not be in excess of the current and accumulated e&p. But then it says to the extent of FMV, so at least you know you could go up to $200k….

FAR (66,68) Aug 26
REG (66) July 25
AUD (66) December 1st
BEC - October 3rd

[MAHMOUD]

@aatoural
while reading your post, I went back to becker “Corporate paying dividend-taxable amount”
section 2/b which say “the receipt shareholder includes the FMV of property in income tax as a dividend (to the extent of E&P)
so after reading that i'm just confused.
I will be grateful if you found the right answer and let us know.
thanks

[Namstut]

Becker Regulation 3, page 44 – pass key at the bottom of the page.

Here is the scoop.

If the corporation distributes appreciated property as a dividend the corporation will recognize gain in excess of the Net Book Value of the property.

FMV – $200,000
NBV – ($150,000)
Corp Gain – $50,000

The corporate gain of $50,000 increases corporate earnings and profits, so now Kent's total E&P $125,000+$60,000+$50,000=$235,000

Therefore, the total dividend distribution of $200,000 is a taxable dividend to Reed.

I hope this helps.

AUD 7/6/16 Passed
BEC 9/3/16
FAR TBD
REG TBD

[Teal]

thanks @namstut! Would Reed's basis ever matter? I haven't gotten to studying this part yet, but was just curious because it appears to be a piece of info we didn't need…

FAR (66,68) Aug 26
REG (66) July 25
AUD (66) December 1st
BEC - October 3rd

[Namstut]

@teal,

Yes, it would matter but only if the dividend distribution was above the basis.

Dividends are taxable dividends to the extent of E&P. If the dividend is above E&P but below shareholder's basis it will be a return of capital, dividend will be a taxable income as capital gain if there is no E&P and no basis.

AUD 7/6/16 Passed
BEC 9/3/16
FAR TBD
REG TBD

[aatoural]

@Namstut – Thank you.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[aatoural]

How come Section 1245 recapture gain is not a separately stated item of income of an S corp but section 1231 g/l is?

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[shadowdodger]

Hey All,

New poster here, so I hope that my question is going in the right place?
I'm working through the REG material in Becker (in section 3 atm), and I came across this question and I have no idea why the answer is what it is:

Parent Corp. owns 15% of Sub Corp. Parent has gross income of $43,000 and allowable deductions of $39,000 before considering any dividends received deduction (DRD). Included in the $43,000 gross income is $8,000 in dividends from Sub.
What is the maximum DRD available to Parent?

a. $3,200
b. $8,000
c. $5,600
d. $2,800

Explanation
Choice “d” is correct. Based on the small ownership percentage, which is below 20%, the applicable DRD rate is 70%. The total dividend is $8,000, and 70% of that is $5,600. This is limited to 70% of the taxable income before the DRD of $4,000 ($43,000 – $39,000). That limitation is $2,800 ($4,000 × 70%). So the full DRD of $5,600 is limited to $2,800.

My understanding is that we normally take the lesser of the DRD% * the TI or the DRD% * the dividend, unless the taking the full DRD will enhance or create a loss.
In this case, because the full deduction of $5,600 would create a loss, why isn't it $5,600?

Thanks!

[aatoural]

@shadowdodger – it might be a typo

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[Josh]

Gross Income (Individual Tax) Question anyone?
In the current year, Robin Byrd received the following dividends:
Smith Corporation, a 10% qualified stock dividend paid in additional common stock (not cash) on the common stock held by Robin $ 400
UnSafe National Bank, cash dividend on bank’s common stock 700
Swann Manufacturing Corporation, a Delaware
corporation, cash dividend on preferred stock 1,200
What amount of dividend income should Robin report in her current-year income tax return?
a $1,600
b $2,300
c $1,100
d $1,900

[aatoural]

Is the answer D?

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[HoosierCPA]

Yeah I would say D as well. I believe non-qualified stock options are taxed so I would exclude the $400

Took the weekend off to decompress. I'll be back at it through the holidays..I think tentatively I am going to sit for my exam mid February so I'll be around here longer then most of you!

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[aatoural]

Yeah, to me the stock dividend only taxable when sold.

@dtatham10 – I'm glad to hear I'll a study partner thru the holidays. Its going to e tough.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[JMG]

Are ACE adjustments always added back for corp AMT? Trying to establish some rules of thumb.

PS – I just noticed that the REG study group has twice the amount of pages as the other study groups. Not sure if that's a good or bad thing lol.

[Author]

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