Question

43. For purposes of determining current E&P, which of the following items cannot be deducted in the year incurred?

A) charitable contribution in excess of the 10% limitation

B) capital losses in excess of capital gains

C) life insurance premiums (in excess of the increase in cash surrender value for the policy) paid on the lives of key employees

D) dividends-received deduction

44. Successful Corporation distributes $75,000 to its sole shareholder Agatha. Successful has earnings and profits of $65,000 and Agatha's basis in her stock is $20,000. After the distribution, Agatha's basis is

A) $10,000.       

B) $15,000.

C) $20,000.

D) $60,000.

45. Which of the following requirements must be met for a redemption to be treated as substantially disproportionate?

A) The shareholder must own less than 50% of the outstanding stock (in terms of voting power) after the redemption.

B) After the redemption, the shareholder must own less than 80% of his percentage ownership of voting stock prior to the redemption.

C) After the redemption, the shareholder must own less than 80% of his percentage ownership of common stock (voting and nonvoting) prior to the redemption.

D) All of the above must be met.  

Answer 1

Ans 43: Option D: Dividend distributed in itself is not deducted to arrive at Current E&P. Rather dividend distributed is used for the computation of cumulative E&P. If the dividend distribution is less than Current E&P, the excess of Current E&P over dividend is added to last year closing accumulated E&P, and where there is a deficit, the Accumulated E&P gets reduced to that extent.

Ans 44: Option A: While calculating the cost basis in stock it should be noted that any income increases the basis in stock and any distribution decreases the same. Hence in the given case Agastha's basis in stock after distribution would be = $20,000 + $65,000 - $75,000 = $10,000

Ans 45: Option D: All the three conditions A to C must be met for a redemption to be classified as substantially disproportionate.