Regulation 3 Class Questions 45. CPA-02134 On January 1, 1993, Kee Corp., a C corporation, had a $50,000 deficit in earnings and profits. For 1993 Kee had current earnings and profits of $10,000 and made a $30,000 cash distributic What amount of the distribution is taxable as dividend income to Kee’s stockholders? 2. $30,000 to its stockholders, b. $20,000 c. $10,000 d. $0 CPA02131 Choice "c"is correct. Taxable dividend income is paid out of the corporation's current or accumulated ‘eamings and profits. Since Kee had a deficit, only current earnings of §10,000 are available for dividends. Choice "a" is incorrect. Taxable dividend income is paid out of the corporation's current or earnings and profits, itis not based solely on the distributed property's fair mar et val (cast Is incorrect. Taxable dividend income is paid out of the corporation's current or accumulated earings and profits, itis not calculated as the difference between current E&P and the cash distributes. Choice "A" is incorrect. Taxable dividend income is paid out of the corporation's cu earnings and profits ent or accumulated 16. CPA-02120 Tank Corp., which had earnings and profits of $500,000, made a noniiquideting distribution of property to its shareholders in 1993 as a dividend in kind. This property, which had an adjusted basis of $20,000 and a fair market value of $30,000 at the date of distribution, did not constitute assets used in the active conduct of Tank's business. How much gain did Tank recognize on this distribution? a. $30,000 b. $20,000 c. $10,000 4. $0 CPA-02120 Choice "c" is correct. The property distributed by Tank is treated as if it were sold to the shareholder at its fair market value on the date of distribution. Tank recognizes gain to the extent of the fair market value ($30,000) over the adjusted basis ($20,000) or $10,000. Choice "a" is incorrect. Gain is computed as the difference between the FMV and adjusted basis of the property. Choice "b* is incorrect. Gain js not equal to the adjusted basis of the property. Choice "d" is incorrect. Gain is rece 3nived.Regulation 3 Class Questions 17. CPA-02026 Elm Corp. is an accrual-basis calendar-year C corporation with 100,000 shares of voting common stock issued and outstanding as of December 28, 1995. On Friday, December 29, 1995, Hall surrendered 2,000 shares of Elm stock to Elm in exchange for $33,000 cash. Hall had no direct or indirect interest in Elm after the stock surrender. Additional information follows: Hall's adjusted basis in 2,000 shares of Elm on December 29, 1995 ($8 per share) $16,000 Elm’s accumulated earnings and profits at January 1, 1995 25,000 Elm’s 1995 net operating loss (7,000) What amount of income did Hall recognize from the stock surrender? $33,000 dividend. $25,000 dividend. $18,000 capital gain $17,000 capital gain. cPA-02026 Choice "a" is correct. Hall's gain is the difference in the $33,000 he received for his stock and his basis of $16,000, for a gain of $17,000 which is a capital gain Choice "a” is incorrect. Because this is a sale of Hall's interest in Elm, this is not a dividend, Choice "b” is incorrect. The accumulated earnings of Elm have no relationship to the stock surrender. Choice "c" is incorrect. The amount of the capital gain calculated on the stock surrender is not based on the end of year amount of accumulated earnings and profit. 18. CPA-02027 Mintee Corp., an accrual basis calendar-year C corporation, had no corporate shareholders when it liquidated in 1996. In cancellation of al their Mintee stock, each Mintee shareholder received in 1996, a liquidating distribution of $2,000 cash and land with tax basis of $5,000 and a fair market value of $10,500. Before the distribution, each shareholders tax basis in Mintee stock was $6,500. What amount of gain should each Mintee shareholder recognize on the liquidating distribution? a. $0 b. $500 © $4,000 4. $6,000 cPA02027 Choice "a" is correct. When a corporation liquidates and distributes assets to shareholders, gain is recognized to the extent that the fair market value of assets distributed to a shareholder exceeds the shareholder's basis in the corporation's stock. Choice "a" is incorrect. In a corporate liquidation, gain is recognized to the extent that fair market value of the assets received exceeds the shareholder's basis in the stock. Choice “b" is incorrect. The gain is figured using the fair market value of assets received, not the basis of the assets received. Choice "c" is incorrect. This is simply the difference in the fair market value of the land and the shareholder's basis in the stock, and is not how the gain is computed, 4 ©2007 DeViyiBeckar Educational Development Cop, Al ght reserved