394.
Distributions by a corporation to its shareholders are presumed to be a return of capital unless the parties can prove otherwise.

a. True
b. False

395.
A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation’s E & P.

a. True
b. False

396. 3
Distributions that are not dividends are a return of capital and decrease the shareholder’s basis. Once basis is reduced to zero, any excess is taxed as a capital gain.

a. True
b. False

397. 4
Cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will be taxed as dividend income.

a. True
b. False

398. 5
A distribution in excess of E & P is treated as capital gain by shareholders.

a. True
b. False

399. 6
The terms “earnings and profits” and “retained earnings” are identical in meaning.

a. True
b. False

400. 7
To determine E & P, some (but not all) previously excluded income items are added back to taxable income.

a. True
b. False

401. 8
When computing E & P, taxable income is not adjusted for additional first-year depreciation.

a. True
b. False

402. 9
When computing current E & P, taxable income is not adjusted for the deferred gain in a § 1031 like-kind exchange.

a. True
b. False

403. CHAPTER 5—10
An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

a. True
b. False

404. CHAPTER 5—11
Use of MACRS cost recovery when computing taxable income does not require an E & P adjustment.

a. True
b. False

405. CHAPTER 5—12
When a corporation makes an installment sale, for E & P purposes the realized gain is recognized in the year of sale.

a. True
b. False

406. CHAPTER 5—13
A corporation borrows money to purchase State of Texas bonds. The interest on the loan has no impact on either taxable income or current E & P.

a. True
b. False

407. CHAPTER 5—14
Federal income tax paid in the current year must be subtracted from taxable income to determine E & P.

a. True
b. False

408. CHAPTER 5—15
When computing E & P, an adjustment to taxable income is necessary for any domestic production activities deduction.

a. True
b. False

409. CHAPTER 5—16
Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.

a. True
b. False

410. CHAPTER 5—17
The dividends received deduction is added back to taxable income to determine E & P.

a. True
b. False

411. CHAPTER 5—18
A realized gain from an involuntary conversion under § 1033 that is not recognized for income tax purposes has no effect on E & P.

a. True
b. False

412. CHAPTER 5—19
In the current year, Pink Corporation has a § 179 expense of $80,000. As a result, next year, taxable income must be decreased by $16,000 to determine current E & P.

a. True
b. False

413. CHAPTER 5—20
Any loss in current E & P must be treated as occurring ratably during the year.

a. True
b. False

414. CHAPTER 5—21
When current E & P has a deficit and accumulated E & P is positive, the two accounts are netted at the date of the distribution. If a positive balance results, the distribution is a dividend to the extent of the balance.

a. True
b. False

415. CHAPTER 5—22
When current E & P is positive and accumulated E & P has a deficit balance, the two accounts are netted for dividend determination purposes.

a. True
b. False

416. CHAPTER 5—23
Regardless of any deficit in current E & P, distributions during the year are taxed as dividends to the extent of accumulated E & P.

a. True
b. False

417. CHAPTER 5—24
Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.

a. True
b. False

418. CHAPTER 5—25
Dividends paid to shareholders who hold both long and short positions do not qualify for the reduced tax rate available to individuals in certain years.

a. True
b. False

419. CHAPTER 5—26
Dividends taxed as ordinary income are considered investment income for purposes of the investment interest expense limitation.

a. True
b. False

420. CHAPTER 5—27
Certain dividends from foreign corporations can be qualified dividends for purposes of the 15% rate available to individuals.

a. True
b. False

421. CHAPTER 5—28
During the year, Blue Corporation distributes land to its sole shareholder. If the fair market value of the land is less than its adjusted basis, Blue will recognize a loss on the distribution.

a. True
b. False

422. CHAPTER 5—29
In certain circumstances, the amount of dividend income recognized by a shareholder from a property distribution is not reduced by the amount of liability assumed by a shareholder.

a. True
b. False

423. CHAPTER 5—30
Property distributed by a corporation as a dividend is subject to a liability in excess of its basis. For purposes of determining gain on the distribution, the basis of the property is treated as being not less than the amount of liability.

a. True
b. False

424. CHAPTER 5—31
A corporation that distributes a property dividend must reduce its E & P by the adjusted basis of the property less any liability on the property.

a. True
b. False

425. CHAPTER 5—32
Under certain circumstances, a distribution can generate (or add to) a deficit in E & P.

a. True
b. False

426. CHAPTER 5—33
Constructive dividends do not need to satisfy the legal requirements for a dividend as set forth by applicable state law.

a. True
b. False

427. CHAPTER 5—34
Constructive dividends have no effect on a distributing corporation’s E & P.

a. True
b. False

428. CHAPTER 5—35
If a stock dividend is taxable, the shareholder’s basis in the newly received shares is equal to the fair market value of the shares received in the distribution.

a. True
b. False

429. CHAPTER 5—36
A corporate shareholder that receives a constructive dividend cannot apply a dividends received deduction to the distribution.

a. True
b. False

430. CHAPTER 5—37
If a distribution of stock rights is taxable and their fair market value is less than 15 percent of the value of the old stock, then either a zero basis or a portion of the old stock basis may be assigned to the rights, at the shareholder’s option.

a. True
b. False

431. CHAPTER 5—38
A pro rata distribution of nonconvertible preferred stock to common shareholders is not generally taxable.

a. True
b. False

432. CHAPTER 5—39
The rules used to determine the taxability of stock dividends also apply to distributions of stock rights.

a. True
b. False

433. 394.
Distributions by a corporation to its shareholders are presumed to be a return of capital unless the parties can prove otherwise.

a. True
b. False

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