Question

Manistee Corporation reported taxable income of $1,200,000 this year and paid federal income taxes of $408,000. Not included in the computation was disallowed entertainment expenses of $25,000, tax-exempt interest of $20,000, and a net capital loss of $50,000 incurred this year. Manistee is an accrual basis taxpayer. The corporation’s current earnings and profits this year would be: Multiple Choice

$1,200,000

$1,145,000

$787,000

$737,000

Boulder Company reports current E&P of $500,000 this year and accumulated negative E&P at the beginning of the year of $200,000. Boulder distributed $400,000 to its sole shareholder on December 31 of this year. How much of the distribution is treated as a dividend this year? Multiple Choice

$400,000

$200,000

$300,000

$0

Force Corporation is owned equally by Luke and his sister Leia, each of whom own 200 shares in the company. Force redeemed 100 shares of Luke’s stock in the company on December 31 of this year paying Luke $1,000 per share. Luke’s income tax basis in each share is $500. Force has total E&P of $800,000. What are the tax consequences to Luke as a result of the stock redemption? Multiple Choice

$50,000 capital gain and a tax basis in each of his remaining shares of $500.

$50,000 capital gain and a tax basis in each of his remaining shares of $1,000.

$100,000 dividend and a tax basis in each of his remaining shares of $500.
$100,000 dividend and a tax basis in each of his remaining shares of $1,000.

Answer 1

Question No. (1) -

Answer -

Computation of Corporation's Current Earnings and Profits

	Particulars	Explanation	Amount ($)
I.	Taxable Income	Given in question	1200000
II.	Federal income taxes paid	Given in question	408000
III.	Disallowed entertainment expense	Given in question	25000
IV.	Tax-exempt interest	Given in question	20000
V.	Net Capital loss	Given in question	50000
Corporation's Current Earnings and Profits		I - II - III + IV - V	737000

Hence, Option - (D) is Correct.

.

Question No. (2) -

Answer -

Particulars	Amount ($)	Explanation
Distribution is treated as a dividend this year	400000	A distribution will be a dividend if current earnings and profits for the year are positive, even if accumulated earnings and profits are negative. Distributions are first treated as paid out of current earnings and profits.

Hence, Option - (A) is Correct.

.

Question No. (3) -

Answer -

The tax consequences to Luke as a result of the stock redemption -

	Explanation
$50000 capital gain and a tax basis in each of his remaining shares of $500.	The redemption will be treated as an exchange because Luke reduces his ownership percentage from 50% (200/400) to 33% (100/300). Luke is not treated as owning any of the stock owned by his sister. Luke reports capital gain of $50000 (that is $100000 - $50000).

Hence, Option - (A) is Correct.