626 MODULE 36 TAXES: CORPORATE
excess of a shareholder's stock basis treated ascapital gain,
Therefore, $750,000 of the distribution to Ridge's share-
holders was taxable as a dividend, with the remaining
$250,000 treated as a nontaxable return of stock basis.
87. (d) The requirement is to determine the amount of
loss recognized by Tour Corporation on the nonliquidating
distribution of property to shareholders. Although a gain
would be recognized, no loss can be recognized on nonliqui-
dating corporate distributions to shareholders.
88. (c) The requirement is to deter~ne the amount
taxable as a dividend to Kee's shareholders for 2009, Cor-
porate distributions of property to shareholders on their
stock are taxed as dividends to the extent of accumulated
and/or current earnings and profits. Even though a corpora-
tion has an accumulated deficit in earnings and profits for
prior years ($50,000 in this case), a distribution will never-
theless be taxed as a dividend to the extent of the corpora-
tion's earnings and profits for the current taxable year when
measured at the end of the year. Thus, the $30,000 distribu-
tion will be taxed as a dividend to the extent of the current
earnings and profits for 2009 of $10,000,
89. (c) The requirement is to determine the amount of
taxable dividend income resulting from Dahl Corp.ls distri-
bution of cash and land to Green. The amount of distribu-
tion received by Green equals the amount of cash ($9,000)
plus the FMV of the land ($40,000), a total of $49,000. This
$49,000 will be taxable as dividend income to Green to the
extent that it is paid out of Dahl Corp.' s current and accu-
mulated earnings and profits. Dahl had accumulated earn-
ings and profits of $9,000 before consideration of the
dividend declaration and distribution. Since a distributing
corporation recognizes gain on the distribution of appre-
ciated property, Dahl must recognize a gain of $40,000-
$5,000 = $35,000 on the distribution of the land. This
$35,000 of gain increases Dahl Corp.'s available earnings
and profits from $9,000 to $44,000. Thus; Green's $49,000
distributionwill be taxed as a dividend to the extent of
$44,000. ' E.4. Complete Liquidations
90. (b) The requirement is to determine the amount of
the taxable dividend for an individual shareholder on a prop-
erty distribution. A distributee shareholder is considered to
have received a dividend equal to the fair market value of
the property distributed less any liabilities assumed. In this
case, Rowe received a taxable dividend of $7,000 ($12,000-
$5,000).
91. (d) The requirement is to determine the amount of
dividend income taxable to the shareholder- If a corporation
sells property to a shareholder for less than fair market
value, the shareholder is considered to have received a con-
structive dividend to the extent of the difference between the
fair market value of the property and the price paid. Thus,
the shareholder's dividend income is $80,000 - $50,000 =
$30,000.
92. (a) Distributions of property to shareholders reduce
earnings and profits (E&P) by the greater of the property's
adjusted basis, or its FMV at date of distribution, E&P must
be adjusted by any gain recognized to the distributing corpo-
ration, and any liabilities to which the property being dis-
tributed is subject. Gelt Corporation would recognize a gain
of $7,500 on the distribution (i.e., $14,000 FMV - $6,500
basis). The adjustments to E&P (before tax) would be I
E&P
Gain recognized $ 7,500
Distribution of property (FMV) , (14,000)
Distribution of liability 5.000
Net decrease in E&P (before tax)
E.3. Stock Redemptions
93. (c) The requirement is to determine the tax effect of
Mark's stock redemption. Since the redemption is a com-
plete redemption of all of Mark's stock ownership, the re-
demption proceeds of $500,000 qualify for exchange treat-
ment. Thus, Mark will report a 'capital gain of $500,000 -
$300,000 = $200,000.
94. (a) The requirement is to determine how the gain
resulting from a stock redemption should be treated by a
noncorporate shareholder if the redemption qualifies as a
partial liquidation of the distributing corporation. A corpo-
rate stock redemption is treated as an exchange, generally
resulting in capital gain or loss treatment to a shareholder if
the redemption meets anyone of five tests, Redemptions
qualifying for exchange treatment include (1) a redemption
that is not essentially equivalent to a dividend, (2) a re-
demption that is substantially disproportionate, (3) a re-
demption that completely terminates a shareholder's interest,
(4) a redemption of a noncorporate shareholder in a partial
liquidation, and (5) a redemption to pay death taxes. If none
of the above five tests are met, the redemption pr ceeds are
generally treated as a dividend.
i
95. (b) The requirement is to determine the amount of
interest and legal and accounting fees that were incurred in
connection with Kara Corp.'s stock repurchase that is de-
ductible for 2009. No deduction is allowed for any amount
paid or incurred by a corporation in connection with the
redemption of its stock, except for interest expense on loans
to repurchase stock. Thus, the $100,000 of interest expense
on loans used to repurchase stock is deductible, while the
$400,000 of legal and accounting fees incurred in connec-
tion with the repurchase of stock is not deductible.
96. (a) The requirement is to determine the correct
statement regarding the expenses incurred in completely
liquidating and dissolving a corporation. The general ex-
penses incurred in the complete liquidation and dissolution
of a corporation are deductible by the corporation as ordi-
nary and necessary business expenses. These expenses in-
clude filing fees, professional fees, and other expenditures
incurred in connection with the liquidation and dissolution.
97. (d) The requirement is to determine the usual result
to the shareholders of a distribution in complete liquidation
of a corporation. Amounts received by shareholders in
complete liquidation of a corporation are treated as received
in exchange for stock, generally resulting in capital gain or
loss because the stock was held as an investment. Because
liquidating distributions are generally treated as received in a
taxable exchange, any property received by shareholders
will have a basis equal to fair market value,
98. (d) The requirement is to determine whether the
unused carryovers for excess charitable contributions and
net operating loss of a wholly owned subsidiary'carryover to
a parent corporation as a result of a tax-free complete liqui-
dation of the subsidiary. When a parent corporation corn-
$ (1,500)