[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).

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

[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.$150,000
b.$185,000
c.$200,000
d.$60,000

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.

I understand the concept of gain been taxable. Now the question asks for amount of taxable dividend, isn't that to the extent of accumulated and current E&P? thus $185,000 and then the remaining $15,000 return of capital/capital gain?

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

[jonm857]

Bankruptcy is just the greatest.

B - 81
A - 87
R - 73
F - July 5th

[jpowell31]

the gain is allocated to the corporation when the asset is distributed and is therefore added back to the corporations income so think of current E&P as actually being $60k+$50k (then add accumulated, the total of which is greater than the $200k FMV distributed so the whole amount can be considered a dividend)

[jonm857]

@aatoural

The corporation recognizes a gain like it sold the property. My understanding is that the $50,000 gain will then be added to to the corporation's Current E&P, which increases the total Accumulated E&P + Current E&P to $235,000 (125 + 60 + 50).

That means the entire distribution is a dividend because $200,000 is less than $235,000 total Acc. E&P/Current E&P.

Look at pg. 41 in the text and you'll see the positive or negative adjustment to Current E&P for gains and losses.

B - 81
A - 87
R - 73
F - July 5th

[aatoural]

Thanks guys, that way makes more sense to me. Than BEcker's explanation.

Seriously Becker needs to review their MCQ explanations

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

[jonm857]

That's one of the benefits of this forum. I wish I used it more in the past, couldve probably been finished by now haha

B - 81
A - 87
R - 73
F - July 5th

[Reg_Slayer]

w
e
AMERICAN OPPORTUNITY = UNDEGRAD students ONLY, 2500 max
c
e

(100% of the first $2,000 of qualifying expenses, plus 25 percent of the next $2,000)

qualifying expenses afe reduced by things like scholarship and the Coverdell distribution.

after wages of 118.5, SS starts getting witheld.

[Reg_Slayer]

NINJA SIM #5:

Stock dividend Recieved: (2)

“Wai is not required to report any of the stock dividends that she received in Year 5.”

Why not, too small?

[jonm857]

The optional MCQs for Ch. 7 really separates the lawyers from the accountants. These are some tough little cookies here.

B - 81
A - 87
R - 73
F - July 5th

[jonm857]

OMG. This question. Are you kidding me?! Very annoying.

– – – – – – – – –

Chapter 7 of the Federal Bankruptcy Code will deny a debtor a discharge when the debtor:

a. Made a preferential transfer to a creditor.
b. Accidentally destroyed information relevant to the bankruptcy proceeding.
c. Is a corporation or a partnership.
d. Obtained a Chapter 7 discharge 10 years previously.

Explanation
Choice “c” is correct. While a corporation or a partnership may voluntarily or involuntarily be petitioned into a Chapter 7 bankruptcy, a corporation or a partnership is “dissolved,” while an individual is “discharged.”

Choice “a” is incorrect. Making a preferential transfer to a creditor will not cause the debtor to be denied a discharge. The transfer will simply be set aside by the trustee in bankruptcy.

Choice “b” is incorrect. The accidental destruction of information relevant to the bankruptcy will not cause a discharge to be denied. The intentional destruction or failure to keep such records will result in denial.

Choice “d” is incorrect. A Chapter 7 discharge may be obtained once every eight years.

B - 81
A - 87
R - 73
F - July 5th

[jpowell31]

Stinker:

Paul Pappas owns all of the stock of an S corporation which had previously been a C corporation. The S corporation had the following balances at the beginning of its tax year:

Accumulated adjustments account $ 8,000
Accumulated earnings and profits 10,000

Paul's stock basis was $20,000 at the beginning of the tax year. The S corporation made a distribution of $19,000 to Paul during the year. What is Paul's stock basis at the end of the year?
A. $1,000
B. $2,000
C. $11,000
D. $12,000

Paul's basis is reduced by the distribution from accumulated adjustments account, but not by the distribution from accumulated earnings and profits which is taxable income to Paul. The distribution in excess of $18,000 is a tax-free return of capital and reduces Paul's basis ($20,000 – $8,000 – $1,000 = $11,000).

[Reg_Slayer]

@jpowell

I haven't studied distributions in a bit so I forget most of the rules.

What is unusual about this question?

20 beg basis
-9 distribution in excess of AEP that will decrease his basis
=11

[jpowell31]

not unusual just hadn't done it in a while and thought it'd be a good example to share.

[Reg_Slayer]

k good, it was.

[aatoural]

DTan Corp. calculated the following taxes for the current year:
Regular tax liability $ 210,000
Tentative minimum tax 240,000
Personal holding company tax 65,000
What is Tan's total tax liability for the year?
a.$210,000
b.$275,000
c.$305,000 correct
d.$240,000

Why do we add the PHC tax?

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

[Author]

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