Question 1

When current E & P has a deficit and accumulated E & P is positive, the two accounts are netted at the date of the distribution. If a positive balance results, the distribution is a dividend to the extent of the balance.

Accepted Answer

When current E&P (Earnings and Profits) has a deficit and accumulated E&P is positive, the two accounts are indeed netted at the date of the distribution. If the net result is a positive balance, the distribution is considered a dividend to the extent of this positive balance, reflecting the company's ability to pay dividends from its accumulated earnings.

Question 2

Constructive dividends have no effect on a distributing corporation's E & P.

Accepted Answer

Constructive dividends do affect a corporation's Earnings and Profits (E&P) because they are treated as if the corporation had declared and paid a cash dividend, thus reducing the corporation's E&P.

Question 3

If a stock dividend is taxable, the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.

Accepted Answer

When a stock dividend is taxable, the shareholder must include the fair market value of the shares received in their income, and this value becomes the basis of the newly received shares for future gain or loss calculations.

Question 4

In a property distribution, the amount of dividend income recognized by a shareholder is always reduced by the amount of liability assumed by a shareholder.

Accepted Answer

The amount of dividend income recognized by a shareholder is not always reduced by the amount of liability assumed by a shareholder.

Question 5

During the year, Blue Corporation distributes land to its sole shareholder. If the fair market value of the land is less than its adjusted basis, Blue will not be able to recognize a loss on the distribution.

Accepted Answer

In general, corporations cannot recognize a loss on distributions of property (including land) to their shareholders. Losses on such distributions are disallowed under the U.S. Internal Revenue Code.

Question 6

Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.

Accepted Answer

Dividends taxed as ordinary income can be considered investment income, which is relevant when calculating the investment interest expense limitation, allowing taxpayers to deduct interest expenses incurred to produce taxable investment income.

Question 7

Certain dividends from foreign corporations can be qualified dividends for purposes of the preferential rate available to individuals.

Accepted Answer

Certain dividends from foreign corporations can qualify as qualified dividends if the corporations are incorporated in a U.S. possession, in a country that has a comprehensive income tax treaty with the United States, or if the stock related to the dividends is readily tradable on an established securities market in the United States. This allows these dividends to be taxed at the lower capital gains rates rather than ordinary income rates.

Question 8

If stock rights are taxable, the recipient has income to the extent of the fair market value of the rights.

Accepted Answer

When stock rights are considered taxable, the recipient must recognize income equal to the fair market value of those rights at the time they are received, as this value represents an increase in wealth subject to taxation under income tax principles.

Question 9

If there is sufficient E & P, a distribution of nonconvertible preferred stock to common shareholders is taxable.

Accepted Answer

The answer of If there is sufficient E & P,...

Question 10

Constructive dividends do not need to satisfy the legal requirements for a dividend as set forth by applicable state law.

Accepted Answer

Constructive dividends are considered to be a form of distribution to shareholders that may not follow the formal legal requirements of a dividend, such as board approval or adherence to state law, but are treated as dividends for tax purposes because they confer a benefit on the shareholder.

Question 11

If a distribution of stock rights is taxable and their fair market value is less than 15 percent of the value of the old stock, then either a zero basis or a portion of the old stock basis may be assigned to the rights at the shareholder's option.

Accepted Answer

The answer of If a distribution of stock rights is...

Question 12

Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.

Accepted Answer

Corporate distributions are generally presumed to be paid out of a corporation's Earnings and Profits (E&P), and thus treated as dividends for tax purposes, unless it can be demonstrated that the distributions are a return of capital or a capital gain.

Question 13

Property distributed by a corporation as a dividend is subject to a liability in excess of its basis. For purposes of determining gain on the distribution, the basis of the property is treated as being not less than the amount of liability.

Accepted Answer

The answer of Property distributed by a corporation as a...

Question 14

Dividends paid to shareholders who hold both long and short positions do not qualify for the reduced tax rate available to individuals in certain years.

Accepted Answer

Dividends paid to shareholders who hold both long and short positions are considered "unqualified" and do not qualify for the reduced tax rate because the IRS views the strategy as a way to reduce risk rather than a true investment in the company.

Question 15

When current E & P is positive and accumulated E & P has a deficit balance, the two accounts are netted for dividend determination purposes.

Accepted Answer

The answer of When current E & P is positive...

Question 16

A corporate shareholder that receives a constructive dividend cannot apply a dividends received deduction to the distribution.

Accepted Answer

The answer of A corporate shareholder that receives a constructive...

Question 17

A corporation that distributes a property dividend must reduce its E & P by the adjusted basis of the property less any liability on the property.

Accepted Answer

A corporation that distributes a property dividend must reduce its E & P by the fair market value of the property, not the adjusted basis, less any liability on the property.

Question 18

The rules used to determine the taxability of stock dividends also apply to distributions of stock rights.

Accepted Answer

Both stock dividends and distributions of stock rights are generally not taxable to the recipient when they are distributed by a corporation to its shareholders. The tax treatment is similar because both involve the distribution of additional shares or rights to purchase shares, rather than cash or other property.

Question 19

Under certain circumstances, a distribution can generate (or add to) a deficit in E & P.

Accepted Answer

The answer of Under certain circumstances, a distribution can generate...

Question 20

Regardless of any deficit in current E & P, distributions during the year are taxed as dividends to the extent of accumulated E & P.

Accepted Answer

The answer of Regardless of any deficit in current E...

Quiz 19: Corporations: Distributions Not in Complete Liquidation