SM Ch05 SWFT.docx

SM Ch05 SWFT.docx

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SMCh05SWFT

CHAPTER5

CORPORATIONS:

EARNINGS&PROFITSANDDIVIDENDDISTRIBUTIONS

SOLUTIONSTOPROBLEMMATERIALS

Status:

Q/P

Question/

Learning

Present

inPrior

Problem

Objective

Topic

Edition

Edition

*1LO2DefinitionofearningsandprofitsUnchanged1

2LO1TaxationofcorporatedistributionsUnchanged2

3LO2EffectofselectedtransactionsinadjustingUnchanged3

taxableincome（fordeterminingE&P）

4LO5EffectofselectedsituationsinaddingtoorNew

generatingadeficit

5LO2ComparisonofaccountingmethodsunderUnchanged5

E&Pandincometax

6LO3Effectofdistribution,taxabledividendUnchanged6

orreturnofcapital,inselectedsituations

7LO3Planningcorporatedistributions:

beginningNew

orendoftaxyear

8LO4RationaleforreducedtaxrateondividendsUnchanged8

*9LO1,2,3,FactorsaffectingtaxtreatmentofUnchanged9

4,5distributiontoshareholder

10LO5FactorsaffectingtaxtreatmentofdistributionUnchanged10

todistributingcorporation

11LO5PurposeofpropertydividendversuscashNew

dividend

12LO5Propertydistribution:

choiceofpropertyUnchanged12

13LO5ImpactofpropertydistributionsonUnchanged13

corporation

14LO5EffectofpropertydistributionsonNew

corporation

15LO6NecessityofdividenddistributiontomeetUnchanged15

statelegalrequirementsindetermining

taxtreatment

*16LO6ReasonablecompensationandconstructiveUnchanged16

dividends

17LO6SelectedfactorsindeterminingUnchanged17

reasonablenessofcompensation

18LO4,8ChoicebetweendividendanddeductibleUnchanged18

payment

19LO6,8UnreasonablecompensationUnchanged19

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20LO6,8Unreasonablecompensation;waystoUnchanged20

drawfundsfromcorporation

21LO7ElectiontoreceivecommonorpreferredModified21

stockdividend

22LO7RationaleunderlyingtaxtreatmentofstockUnchanged22

distributions

23LO7ExplaintaxeffectsofnontaxablestockUnchanged23

rights;taxablestockrights

24LO1,4AmountofdividendincomeUnchanged24

25LO2Amountoftaxableincome;balanceinE&PUnchanged25

26LO1,2,3DeficitinE&PfollowedbysaleonUnchanged26

installmentmethod;taxationofdividend

distribution

*27LO2ComputeE&PUnchanged27

*28LO2EffectofspecifiedtransactionsontaxableModified28

income;onE&P

*29LO2EffectofincometaxrefundonE&PUnchanged29

30LO1,3Amountofdividendincome;deficitinUnchanged30

currentE&Pwithpositivebalancein

accumulatedE&P

31LO1,3Dividenddistribution;effectonE&PModified31

32LO1,3Dividenddistribution;effectonE&PUnchanged32

33LO1,3Dividenddistribution;effectonE&PUnchanged33

*34LO1,3Cashdistributions;determinationoftaxableModified34

amount

35LO1,3Cashdistributions;determinationoftaxableUnchanged35

amount

36LO4ChoosinglowtaxondividendorinvestmentModified36

interestexpensededuction

37LO4HoldingperiodrequirementforqualifiedUnchanged37

dividend

38LO1,5Propertydistribution;effectofgain,loss,Unchanged38

liability,anddifferingbasis

39LO1,5TaxtreatmenttoshareholderandtoUnchanged39

corporationondistributionofproperty

subjecttoliabilityinexcessofbasis

40LO1,5TaxtreatmenttoindividualshareholderModified40

andtodistributingcorporationof

propertysubjecttoaliability

41LO1,3TaxationofdividendwhenE&PhasModified41

positivebalancebutcorporationhas

currentloss

42LO1,5PropertydistributionwhereFMVislessModified42

thanadjustedbasis

*43LO1,2,3,EffectofdistributionsUnchanged43

4,5

*44LO1,2,5Propertydividend;liabilityassumedbyModified44

shareholder;determinationofE&P;

distributionoflossproperty

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45LO5Propertydistributiontocorporateshare-Unchanged45

holder,basisinexcessofFMV;liability

assumedbyshareholder

46LO6BonafideloantoshareholderUnchanged46

47LO6ConstructivedividendsUnchanged47

48LO7BasisoftaxablepreferredstockdividendUnchanged48

49LO7Stockdividend;basisallocation;gainonsaleModified49

*50LO7Stockrights;basisallocation;gainonsaleUnchanged50

51LO4,8ChoosingbetweenadividendandaModified51

deductiblepayment

52LO1,3,8SourceofdividenddistributionUnchanged52

*Thesolutiontothisproblemisavailableonatransparencymaster.

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1Salaryreimbursement（Oswald）agreementModified1

2DividendinanticipationofcorporatesaleUnchanged2

3EffectoflargedividendoncorporateshareholderUnchanged3

4EffectofachangeinaccountingmethodonE&PUnchanged4

5InternetactivityUnchanged5

6InternetactivityUnchanged6

7InternetactivityUnchanged7

CHECKFIGURES

24.Dividendincome$200,000each,Masonreducesbasisinstockto$12,000,Sarahreducesstockbasistozeroandcapitalgain$12,000.

25.a.$1,380,000.

25.b.$2,240,000.

26.$500,000taxabledividend;$300,000capitalgain.

27.$330,200.

28.a.$10,000;noeffect.

28.b.（$24,000）;$22,400.

28.c.Noeffect;$120,000.

28.d.$6,000;$14,000.

28.e.（$45,000）;$45,000.

28.f.（$100,000）;$80,000.

28.g.Noeffect;（$20,000）.

28.h.（$80,000）;（$10,000）.

28.i.Noeffect;（$80,000）.

29.Subtract$12,000in2012;add$7,000in2013.

30.$100,000taxabledividend,$60,000capitalgain.

31.Returnofcapital$50,000.

32.Taxabledividend$80,000andreturnofcapital$40,000.

33.a.Taxabledividend$30,000each.

33.b.（$145,000）accumulatedE&Pbalance.

34.a.$70,000;$60,000.

34.b.$30,000;$180,000.

34.c.$150,000;$0.

34.d.$60,000;$70,000.

34.e.$90,000;$40,000.

35.Mikedividendincome$237,500,$62,500reducesbasisinstockandcapitalgain$112,500onsale;Stevedividend$42,500and$57,500reductioninbasis.

37.$1,000ordinaryincome.

38.a.Silver$12,000gain;Heather$54,000dividend,$54,000landbasis;endingE &P$34,000.

38.b.Silver$12,000gain;Heather$12,000dividend,$54,000landbasis;endingE &P$0.

38.c.Silver$12,000gain;Heather$8,000dividend;endingE&P$80,000;Heatherlandbasis$54,000.

38.d.Heather$54,000dividendand$54,000landbasis;SilverendingE &P$14,000.

38.e.Silver$12,800taxablegain;Heather$14,000dividendand$14,000furniturebasis;endingE&P$70,800.

39.a.$150,000.

39.b.$0.

40.LimereducesE&Pby$230,000;Harrytaxabledividend$180,000andlandbasis$300,000.

41.$28,000dividendand$12,000returnofcapital.

42.Roydividend$55,000andbasisinland$55,000;Cornflower$0lossrecognizedandE&Preduced$70,000.

44.a.$70,000.

44.b.$202,500.

44.c.$140,000.

44.d.$128,500taxabledividend;E&Pis$202,500.

45.a.Dividendincome$20,000,dividendsreceiveddeduction$16,000,basis$100,000inland.

45.b.$80,000.

48.Preferredstockbasisis$40,000;holdingperiodstartsatreceipt.

49.$14,000long-termcapitalgain.

50.Long-termcapitalgainonsale$1,935andnewstockbasis$7,560.

51.a.$3,900.

51.b.$10,200.

51.c.Kristenisbetteroffwithbonus;Egretisbetteroffwithbonus.

51.d.Paybonus.

DISCUSSIONQUESTIONS

1.“Earningsandprofits”isthefactorthatfixestheupperlimitontheamountofdividendincomeshareholdersrecognizeasaresultofadistributionfromthecorporation.Itrepresentsthecorporation’seconomicabilitytopayadividendwithoutimpairingitscapital.‘‘Earningsandprofits”issimilartotheaccountingconceptof“retainedearnings.”However,E&PandretainedearningsdifferbecauseE&Piscomputedusingtaxruleswhileretainedearningsiscomputedusingfinancialaccountingrules.Forexample,astockdividendthatdecreasestheretainedearningsaccountdoesnotdecreaseE&P.E&Pisincreasedforallitemsofincome.Itisdecreasedfordeductibleandnondeductibleitems,suchascapitallosses,incometaxes,andexpensesincurredtoproducetax-exemptincome.p.5-3andConceptSummary5.1

2.Atleastsixfactorsimpactthetaxtreatmentofcorporatedistributions.Thesefactorsare:

Theavailabilityofearningstobedistributed.

Thebasisofthestockinthehandsoftheshareholder.

Thecharacterofthepropertybeingdistributed.

Whethertheshareholdergivesupownershipinreturnforthedistribution.

Whetherthedistributionisliquidatingornonliquidatingincharacter.

Whethertheassetsdistributedaresubjecttoanyliabilitiesorwhethertheshareholderassumesanyliabilitiesinthedistribution.

Whetherthedistributionisa“qualifieddividend”forpurposesofthereducedtaxrateondividendincome.

p.5-2

3.a.Taxableincomefor2013isincreasedbytheamountofthecapitallosscarryoverbecausethelossreducedE & Pin2012.

b.Taxableincomeisreducedbythenondeductiblemealexpenses.

c.TodeterminecurrentE & Pfor2012,taxableincomeisincreasedbytheinterestreceivedonmunicipalbonds.

d.Taxableincomeisreducedbythenondeductiblelobbyingexpenses.

e.Taxableincomeisred