1.

Complete the following with respect to dividends and distributions

All _____________________are first _____________________ but not all
___________________ are ____________________________.
All dividends are first distributions but not all distributions are dividends.

2. Fill in the blanks on the following table, just like you did on the assignment

E&P Shareholder Distribution Dividend Return of Capital Capital Gain

Basis
350,000 100,000 480,000
75,000 100,000 70,000
150,000 100,000 180,000
100,000 -0- 170,000
15,000 50,000 170,000
200,000 100,000 250,000
15,000 170,000 50,000

3. A corporation has property valued at $300,000 with a tax basis of $100,000. The corporate tax
rate is 21%. If the corporation distributes the property to its shareholder, complete the
following, USING DOLLAR AMOUNTS

a. Effect on corporate taxable income

Taxable income will increase by the amount of $200,000
b. Effect on corporate E&P
Corporate E&P decreases by $300,000
c. Amount of the distribution to the shareholder
Amount of distribution will be equal to $300,000
d. Basis of property to the shareholder
This will be equal to the amount of distribution i.e. $300,000

4. Famco is owned as follows:

Shareholde Shares Owned Basis of Shares Owned

r
Julie 100 $100,000
Kelly 400 $180,000
Roger 100 $100,000
David 1400 $650,000

In each of the following INDEPENDENT situations, complete the blanks provided (16 total points).
 a. Julie and Roger each propose to redeem 50 shares of stock in exchange for $120,000. That is,
each will redeem 50 shares and each gets $120,000. FAMCO has E&P of $200,000.

Shareholde %Ownership Before %Ownership After Distribution Dollar Amount of

r Or Exchange Income
Julie
Roger

b. Kelly wants to start a new business and proposes to redeem 200 shares in exchange for
$600,000 to allow her to fund the new venture. FAMCO has $700,000 of E&P.

Shareholde %Ownership Before %Ownership After Distribution Dollar Amount of

r Or Exchange Income
Kelly

c. Same as (b), but Kelly is the daughter of Julie and Roger, then:

Shareholde %Ownership Before %Ownership After Distribution Dollar Amount of

r Or Exchange Income
Kelly

5. Terminateco has assets with a FMV of $3.2 Million and a tax basis of $700,000. The corporate
tax rate is 21%. Richard is the only shareholder, and the tax basis of his shares is $500,000. The
capital gains tax rate is 20% for individuals. Terminateco has E&P of $1,200,000. If Terminateco
liquidates by distributing assets to Richard, and each asset has a FMV greater than its tax basis,
then
a. Terminateco gain or loss = $3.2 million * (1-0.21) = $1.975 million
b. Tax paid by Terminateco = $0.525 million
c. Assets distributed to Richard = $2.675 million
d. Richard gain or loss = $1.74 million
e. Tax paid by Richard: 0.435 million
f. Basis of assets received by Richard________________________________________
g. What happens to Terminateco E&P _____________________________

6. Terminateco has assets with a FMV of $3.2 Million and a tax basis of $700,000. The corporate
tax rate is 21%. Rickco, a corporation, is the only shareholder, and the tax basis of its shares is
$500,000 Million. Terminateco has E&P of $1,200,000. If Terminateco liquidates by distributing
assets to Rickco, and each asset has a FMV greater than its tax basis, then
a. Terminateco gain or loss = $3.2 million * (1-0.21) = $1.975 million
b. Tax paid by Terminateco = $0.525 million
c. Assets distributed to Rickco = $2.675 million
d. Rickco gain or loss = $1.7183 million
e. Tax paid by Rickco: 0.45675 million
 f. Basis of assets received by Rickco________________________________________
g. What happens to Terminateco E&P _____________________________

h. Terminateco gain or loss= Gain of $25 million

i. Tax paid by Terminateco_______________________________________________
j. Assets distributed to Rickco___________________________________________
k. Rickco gain or loss___________________________________________________
l. Tax paid by Rickco____________________________________________________
m. Basis of assets received by Rickco________________________________________
n. What happens to Terminateco E&P _____________________________

7. Bob owns a sole proprietorship. The assets have a FMV of $300,000, a tax basis of $100,000, and
the business has liabilities of $20,000. Bob will incorporate the business by transfer of the
assets, with an assumption of the business debt, to a new corporation. Bob will receive 100% of
the stock of this corporation. Complete the following

a. Bob’s Realized Gain or <Loss> = $220,000

b. Bob’s Recognized Gain or <Loss> = Loss of $80,000
c. Tax basis of assets to the corporation: $100,000 - $80,000 = $20,000
d. Tax basis of stock received by Bob = Since recognized gain is nil, tax basis will be zero.

8. If everything is the same as in Problem 7, EXCEPT the business liabilities are $120,000 rather
than $20,000 then

e. Bob’s Realized Gain or <Loss> = $320,000

f. Bob’s Recognized Gain or <Loss> = Gain of $20,000
g. Tax basis of assets to the corporation: $100,000 + $20,000 = $120,000
h. Tax basis of stock received by Bob = $20,000.

9. Complete the following table indicating with a mark (X) whether the item is included in taxable
income, book income, or both for the current period:

Item Included for Book Included for

Tax
Life Insurance Premiums on Owner’s Life X
Proceeds of Life Insurance Policy on X X
Owner
Municipal Bond Income X
Prepaid Rent Income for Next Year X
Sale of Inventory at a Gain X