Federal Taxation Ch.19 Homework

30. LO.1, 4 At the start of the current year, Blue Corporation (a calendar year taxpayer)

has accumulated E & P of $100,000. Blue’s current E & P is $60,000, and at the end of

the year, it distributes $200,000 ($100,000 each) to its equal shareholders, Pam and Jon.

Pam’s stock basis is $11,000; Jon’s stock basis is $26,000. How is the distribution treated

for tax purposes?

33. LO.2 Sparrow Corporation (a calendar year, accrual basis taxpayer) had the following

transactions in 2013, its second year of operation.

Taxable income $330,000

Federal income tax liability paid 112,000

Tax-exempt interest income 5,000

Meals and entertainment expenses (total) 3,000

Premiums paid on key employee life insurance 3,500

Increase in cash surrender value attributable to life insurance premiums 700

Proceeds from key employee life insurance policy 130,000

Cash surrender value of life insurance policy at distribution 20,000

Excess of capital losses over capital gains 13,000

MACRS deduction 26,000

Straight-line depreciation using ADS lives 16,000

Section 179 expense elected during 2012 100,000

Dividends received from domestic corporations (less than 20% owned) 25,000

Sparrow uses the LIFO inventory method, and its LIFO recapture amount increased by

$10,000 during 2013. In addition, Sparrow sold property on installment during 2012.

The property was sold for $40,000 and had an adjusted basis at sale of $32,000. During

2013, Sparrow received a $15,000 payment on the installment sale. Finally, assume that

no additional first-year depreciation was claimed. Compute Sparrow’s current E & P.

F

42. LO.1, 2, 3, 4, 5 Cerulean Corporation has two equal shareholders, Eloise and Olivia.

Eloise acquired her Cerulean stock three years ago by transferring property worth

$700,000, basis of $300,000, for 70 shares of the stock. Olivia acquired 70 shares in Cerulean

Corporation two years ago by transferring property worth $660,000, basis of

$110,000. Cerulean Corporation’s accumulated E & P as of January 1 of the current year

is $350,000. On March 1 of the current year, the corporation distributed to Eloise property

worth $120,000, basis to Cerulean of $50,000. It distributed cash of $220,000 to Olivia.