Question 1. Starling Corporation has accumulated E & P of $60,00

1. Starling Corporation has accumulated E & P of $60,000 on January 1, 2014. In 2014, Starling Corporation had an operating loss of $80,000. It distributed cash of $40,000 to Zoe, its sole shareholder, on December 31, 2014. Starling Corporation’s balance in its E & P account as of January 1, 2015, is:

a. $60,000 deficit.

b. $20,000 deficit.

c. $0.

d. $60,000.

e. None of the above.

2. Robin Corporation distributes furniture (basis of $40,000; fair market value of $50,000) as a property dividend to its shareholders. The furniture is subject to a liability of $55,000. Robin Corporation recognizes gain of:

a. $55,000.

b. $15,000.

c. $10,000.

d. $0.

e. None of the above.

3. Ten years ago, Carrie purchased 2,000 shares in Osprey Corporation for $20,000. In the current year, Carrie receives a nontaxable stock dividend of 20 shares of Osprey preferred. Values at the time of the dividend are: $8,000 for the preferred stock and $72,000 for the common. Based on this information, Carrie’s basis in the stock is:

a. $20,000 in the common and $8,000 in the preferred.

b. $2,000 in the common and $18,000 in the preferred.

c. $18,000 in the common and $2,000 in the preferred.

d. $19,802 in the common and $198 in the preferred.

e. None of the above.

4. Which of the following statements regarding constructive dividends is notcorrect?

a. Constructive dividends do not need to be formally declared or designated as a dividend.

b. Constructive dividends need not be paid pro rata to the shareholders.

c. Corporations that receive constructive dividends may not use the dividends received deduction.

d. Constructive dividends are taxable as dividends only to the extent of earnings and profits.

e. All of the above.

5. Pink Corporation declares a nontaxable dividend payable in rights to subscribe to common stock. Each right entitles the holder to purchase one share of stock for $25. One right is issued for every two shares of stock owned. Jack owns 100 shares of stock in Pink, which he purchased three years ago for $3,000. At the time of the distribution, the value of the stock is $45 per share and the value of the rights is $2 per share. Jack receives 50 rights. He exercises 25 rights and sells the remaining 25 rights three months later for $2.50 per right.

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