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Taxation of Individuals and Business
Entities Chapter 18 Exam
When a corporation distributes property to shareholders in their capacity as shareholders, the shareholders will characterize the distribution as either _________________________________ or a __________________________________. - ✔✔dividend income ; return of capital Shareholders include the portion characterized as _______________________________________ in their gross income. In contrast, a return of capital is considered not income, but rather a ____________________________________ in the shareholder's tax basis in their stock. - ✔✔dividend income ; reduction If the return of capital ____________________ the tax basis in the stock, then the excess distribution is taxed as a _________________________ from the sale of the shares. - ✔✔exceeds ; capital gain Corporate distributions of "property" usually take the form of cash, but distributions can also consist of other tangible or intangible property. Special rules apply when a corporation distributes its own stock, in the form of __________________________________________, to its shareholders. - ✔✔stock dividends
A _____________________________ is any distribution of property made by a corporation to its shareholders out of its earnings and profits account. - ✔✔dividend Corporations must keep two separate E&P accounts: one for the current year, called
__, and one for undistributed earnings and profits accumulated in all prior years, called
__________________. - ✔✔current earnings and profits ; accumulated earnings and profits. A year-to-year calculation maintained by a corporation to determine if a distribution is a dividend. Earnings and profits are computed for the current year by adjusting taxable income to make it more closely resemble economic income. - ✔✔current earnings and profits Undistributed earnings and profits from years prior to the current year.
- ✔✔accumulated earnings and profits The double taxation of distributed corporate income has been a fundamental principle of the U.S. income tax since ___________. - ✔✔ 1913
Distributions are designated as dividends in the following order: - ✔✔1. Distributions are dividends up to the balance of current E&P.
- Distributions in excess of current E&P are dividends up to the balance in accumulated E&P. As a general rule, a shareholder's tax basis in noncash property received as a dividend equals the property's _________________________________. - ✔✔fair market value A publicly held corporation is likely to distribute additional shares of stock to promote _________________________________________________, or to reduce the _______________________________________ of its outstanding shares. - ✔✔shareholder goodwill ; market price Corporations may also declare a _____________________________________ in which the number of shares outstanding is increased by the ratio of the split. - ✔✔stock split Stock split - ✔✔a stock redemption in which a corporation exchanges a ratio of shares of stock for each share held by the shareholder
In a nontaxable stock distribution, each shareholder allocates a portion of their tax basis from the stock on which the distribution was issued to the newly issued stock based on the relative _____________________________________________ of the stock. - ✔✔fair market value In the case of a simple distribution of common stock or a stock split where the stock distributed is identical to the stock from which the distributions is made, the new per-share tax basis is the __________________________________ divided by the total number of ____________________________________________. - ✔✔original tax basis ; shares held A ______________________________________ is an acquisition by a corporation of its stock from a shareholder in exchange for property, whether the stock so acquired cancelled, retired, or held as treasury stock. - ✔✔stock redemption Stock redemptions take the form of an exchange in which shareholders give up their ___________________ in the corporation for _______________________________, usually ___________________. - ✔✔stock ; property ; cash If the form of the transaction is respected, shareholders compute ________________ or _______________ by comparing the amount realized with their tax basis in the stock exchange. - ✔✔gain ; loss
shareholder for purposes of determining whether the shareholder has met the ______________________________________ ownership tests. - ✔✔shareholder ; change-in-stock The purpose of the attribution rules it to ________________ shareholders from __________________________ stock ownership to either family members who have similar economic interests or entities controlled by the shareholder to avoid have a ___________________________________________ characterized as a dividend. - ✔✔prevent ; dispersing ; stock redemption Owners or beneficiaries of entities can be ______________________to own shares of stock owned by the entity itself. - ✔✔deemed Shareholders are deemed to own a pro rata share of their corporation's stock holdings, but only if they own at least _________________________ of the value of the corporation's stock. - ✔✔50 percent If the tax law characterizes the distribution as a __________________________, the corporation may not deduct the amount paid in computing its taxable income. In addition, the shareholder must include ______________________________ of the dividend received in gross income. - ✔✔dividend ; gross amount The nondeductibility of the distribution to the shareholder, creates ______________________________ of the corporation's income, first
at the corporate level and then at the shareholder level. - ✔✔double taxation The corporate tax rate is significantly ______________ than the maximum individual tax rate. - ✔✔lower
