MODULE 39 TAXES: CORPORATE

639

d
i
bers of the group. Answer (a) is incorrect because inter- ~~(c) The requirement is to determine the amount of v
company dividends are eliminated in the consolidation pro- ~~ 20~9 distributions classified as dividend income to i
cess and are excluded from the return. Answers (c) and (d) Locke's shareholders. A corporation's distributions to d
are incorrect because an affiliated group of includible corpo- shareholders on their stock are treated as a dividend to the e
rations is also a controlled group and is therefore limited to extent of a corporation's current earnings and profitsaiidior n
one alternative minimum tax exemption and one accumu- a cumula ed earnings and profits. He e, the $80,000 ~ d
lated earnings credit. tn uted to shareholders would be treated as a dividend to the
extent of Locke's current ($20,000) and accumulated (
$3000) earnings and profits, or $50,000. $
77. (d) The requirement is to determine the stock own- 2
ership requirement that must be satisfied to enable Dana 0
Corp. to elect to file a consolidated tax return that includes • (c) The requirement is to determine the balance of 0
Seco Corp. For Dana and Seco to qualify for filing a con- Chicago Corp.'s accumulated earnings and profits (AEP) at ,
solidated tax return, Dana must direct1y own stock possess- January 1,2010. The AEP beginning balance of $100,00""0 0
0
ing at least 80% of the total voting power, and at least 80% would be reduced by the 2009 deficit of ($140,000), result- 0
of the total value of Seco stock. ing in a deficit of ($40,000). Since distributions only pay
out a corporation's positive AEP, and neither create nor -
increase a deficit in AEP, the AEP deficit of ($40,000) is not
78. (c) The requirement is to determine the correct affected by the $30,000 distributed to shareholders.
statement regarding the filing of consolidated returns. The $
election to file consolidated returns is limited to affiliated 1
corporations. Affiliated corporations are parent-subsidiary 84. (c) The requirement is to determine the amount of 8
corporations that are connected through stock ownership gain recognized by Salon, Inc. as a result of the distribution 5
wherein at least 80% of the combined voting power and of property and liability to its sole shareholder. Generally, a ,
value of all stock (except the common parent's) is directly corporation must recognize gain when it distributes appreci- : 0
owned by other includible corporations. Answer (a) is in- ated property to a shareholder. e gain IS measured by w r 0
correct because brother-sister corporations are not affiliated treating the corporation as if it had sold the property to the . I. 0
corporations. Answer (b) is incorrect because no advance shareholder for its fair market value. However, if there is a liability on the
permission is required. Answer (d) is incorrect because an property that is assumed by the shareholder =
affiliated group's election to file consolidated returns is in- and the amount of liability exceeds the property's fair mar-
dependent of its issuing financial statements on a consoli- ·ket value, then the amount of liability is used to measure the ~ J u $
dated basis. gain. Here, Salon's recognized gain would total $10,000 1
liability - $3,000 basis = $7,000. 5
,
79. (b) The requirement is to determine the amount of 0
gain for 2010 that Subsidiary should take into account as a S. (c) The requirement is to determine the amount 0
result of the 2009 sale of land to Parent. Since Parent and received from Kent Corp. that is taxable as dividend 0
Subsidiary are filing consolidated tax returns, the $20,000 of income )
gain to Subsidiary in 2009 is not recognized, but instead is to Reed for 2009. The term "dividend" means any
deferred and recognized when the land is sold outside the distribu- i
affiliated group in ~f"l.<L1UiJ~i~ ~. property made by a corporation to its shareholders s
E. Dividends and Oistrfbutions (1 ~) ~ts current earnings and profits nd/or ccumulated
earnings and profits. For distributions of prope"rty other a
than
O. (b) The requirement is to determine Westwind's cash, the amount of distribution is the property's fair n
accumulated earnings and profits at year-end. Here, West- market o
wind had a beginning deficit of $45,000, had current earn- value reduced b any liabilities that are assumed or liabili- n
ings and profits of $15,000, and distributed $12,000 cash ties to which the property is subject. In this case, the t
during the year. As a result, Westwind's beginning deficit amount a
of $45,000 would be reduced by the $3,000 of current earn- of distribution made by Kent Corp. to Reed is the x
ings and profits that were not distributed; resulting in a defi- property's a
cit f $42,000 at the end of the year. fair market value of $200,000. This $200,000 of b
distribution l
1. (a) The requirement is to determine Cable's ac- is taxable as dividend income to Reed to the extent of e
cumulated earnings and profits (AEP) at the end of the year. Kent
Cable's beginning AEP of $100,000 would be increased by Corp.'s current earnings and profits ($60,000) and
its earnings and profits for the current tax year (CEP). The accumu- r
starting point for computing Cable's CEP would be its tax- lated earnings and profits ($125,000), a total of $185,000. e
able income of $50,000. Taxable income would be reduced Note that this answer assumes that the gain that was t
by the $5,000 of federal income taxes paid, and would also recog- u
be reduced by the $1,000 of current year charitable contri- nized by Kent Corp. on the distribution ($200,000 FMV - r
butions which would not be allowed as a deduction in com- $150,000 adjusted basis = $50,000) has already been in- n
puting taxable income because of the 10% of taxable income cluded in the amount provided as Kent's current earnings
limitation. Additionally.Clil' would be reduced by the cur- and profits for 2009. This assumption can be made o
rent year net capital loss of $2,000 which would not be al- because f
lowed as a deduction in computing current year taxable in- the item indicates "Current earnings and profits for
come because a corporation cannot deduct a net capital loss. 2009," R
As a result, Cable's CEP is $50,000 - ($5,000 + $1,000 + not "Current earnings and profits before the e
$2,000) = $42,000, and its AEP at the end of the current year distribution." e
is $100,000 + $42,000 = $142,000. Also, note that the portion of the distribution that is not a d
's stock basis, and reduces stock basis from

$500,000 to $485,000.

6. (c) The requirement is to determine