volunteer corporation reported taxable income B u s i n e s s F i n a n c e
1) Jayhawk Company reports current E&P of $452,500 and a deficit in accumulated E&P of ($412,500). Jayhawk distributed $597,500 to its sole shareholder, Christine Rock, on the last day of the year. Christine’s tax basis in her Jayhawk stock is $98,500. (Leave no answer blank. Enter zero if applicable. Negative amount should be indicated by a minus sign.)
a. How much of the $597,500 distribution is treated as a dividend to Christine?
b. What is Christine’s tax basis in her Jayhawk stock after the distribution?
c. What is Jayhawk’s balance in accumulated E&P on the first day of next year?
2) Gator Inc. reported taxable income of $1,700,000 this year and paid federal income taxes of $357,000. Included in the company’s computation of taxable income is gain from the sale of a depreciable asset of $91,000. The income tax basis of the asset was $182,000. The E&P basis of the asset using the alternative depreciation system was $304,800. Compute the company’s current E&P. (Negative amount should be indicated with a minus sign.)
3) Volunteer Corporation reported taxable income of $510,000 from operations this year. During the year, the company made a distribution of land to its sole shareholder, Rocky Topp. The land’s fair market value was $84,500 and its tax and E&P basis to Volunteer was $56,500. Rocky assumed a mortgage attached to the land of $16,900. The company had accumulated E&P of $866,000 at the beginning of the year.
a. Compute Volunteer’s total taxable income and federal income tax.
b. Compute Volunteer’s current E&P.
c. Compute Volunteer’s accumulated E&P at the beginning of next year.
d. What amount of dividend income does Rocky report as a result of the distribution?
e. What is Rocky’s income tax basis in the land received from Volunteer?
4) Flintstone Company is owned equally by Fred Stone and his sister Wilma, each of whom hold 2,500 shares in the company. Wilma wants to reduce her ownership in the company, and it was decided that the company will redeem 560 of her shares for $26,000 per share on December 31 of this year. Wilma’s income tax basis in each share is $8,750. Flintstone has current E&P of $10,420,000 and accumulated E&P of $50,690,000.
a. What is the amount and character (capital gain or dividend) recognized by Wilma as a result of the stock redemption, assuming only the “substantially disproportionate with respect to the shareholder” test is applied?
b. What is Wilma’s income tax basis in the remaining 1,940 shares she owns in the company?
c. Assuming the company did not make any dividend distributions this year, by what amount does Flintstone reduce its E&P as a result of the redemption?
5) Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 60 shares with a basis of $4,500, and Clyde owns the remaining 40 shares with a basis of $15,000. At year-end, Getaway is considering different alternatives for redeeming some shares of stock. Evaluate whether each of the following stock redemption transactions will qualify for sale and exchange treatment. (Leave no answer blank. Enter zero if applicable.)
- Getaway redeems 10 of Bonnie’s shares for $4,500. Getaway has $32,000 of E&P at year-end and Bonnie is unrelated to Clyde.
- Getaway redeems 38 of Bonnie’s shares for $9,000. Getaway has $32,000 of E&P at year-end and Bonnie is unrelated to Clyde.
- Getaway redeems 5 of Clyde’s shares for $5,000. Getaway has $32,000 of E&P at year-end and Clyde is unrelated to Bonnie.
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