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C3A DIVIDENDS
Practice Problems

A1. Effect of (Property) Distributions on Recipients

1. Robin Corporation has E&P of $60,000. It distributes land with a fair market value of $50,000 (adjusted basis of $30,000) to its sole shareholder, Charles. The land is subject to a liability of $10,000, which Charles assumes. Charles has a taxable dividend of $______. The basis of the land to Charles is $_________.
Dividend=FMV(50,000)-Liability(10,000)=$40,000
Land basis of Charles= Land FMV= $50,000

2. Ten percent of Tan Corporation is owned by Red Corporation. Tan Corporation has ample E&P to cover distributions made during the year. One distribution made to Red Corporation consists of a vacant lot with adjusted basis of $5,000 and a fair market value of $3,000. Red has a taxable dividend of $________, and its basis in the lot becomes $________.
Taxable dividend of Red Corp= FMV=$3,000
Basis in the lot of Red Corp=$3,000 because the basis of distributed property is the FMV of the property

A2. Effect of (Property) Distributions on the Distributing Corporation (Recognition of Gain or Loss)

3. A corporation distributes land (basis of $10,000 and fair market value of $30,000) to a shareholder. The corporation recognizes a gain of $_________.
Rcognized Gain= 30,000(FMV of Land)-10,000(Basis)=$20,000

4. Assume the property in Example 3 has a fair market value of $10,000 and a basis of $30,000. Does the corporation recognize a loss on the distribution?
No the Corp does not

5. Assume the land in Example 3 is subject to a liability of $35,000. Does the corporation recognize a gain on the transaction?
Yes, The corp recoginzed a gain
The recoginzed gain=35,000(Liability)-30,000(basis)=$5,000

A3. Effect on (Property) Distributions on the Distributing Corporation (Effect of Distributions on E&P)

6. Crimson Corporation distributes property (basis of $10,000 and fair market value of $20,000) to Brenda, its shareholder. Crimson Corporation recognizes a ______of $_____ which is added to its E&P. E&P is then ________ by $________, the fair market value of the property. Brenda has dividend income of $___________.
The disribution reduce E&P by the amount of disributed or by the greater of the FMV or AB of the property distributed. E&P increased by the recognized gian on the property dividend

Recognized Gain= 20,000(FMV)-10,000(Baisi)=$10,000, this 10,000 was added to the E&P
E&P was decreased by $20,000 by FMV of the property
Brenda has dividend income of 20,000, this is the FMV of the property

7. Assume the same facts as in Example 6, except the fair market value of the property is $15,000 and the adjusted basis in the hands of Crimson Corporation is $20,000. Because the loss is not recognized and the adjusted basis is greater than the fair market value, E&P is __________ by $___________. Brenda reports dividend income of $_________.
E&P is increased by recognized gain on property dividend.
E&P was reduced by 20,000
Brenda has dividend income of 15,000(FMV)

8. Assume the same facts as in Example 7, except the property is subject to a liability of $6,000. E&P is now reduced by $_________. Brenda has dividend income of $______, and her basis in the property is $_________.
20,000(AB)-6,000(Liability)= $14,000, so the E&P reduced by 14,000
Dividend=15,000(amount of ditribution)-6,000(liability)= $9,000
Basisi of Brenda is the FMV = 15,000

9. Teal Corp. has accum. E&P of $10,000 at the beg. of the current tax yr. During the yr, it has current E&P of $15,000. At the end of the yr it distributes cash of $30,000 to its sole shareholder, W. Teal's E&P at the end of the yr is zero. The beg E&P of $10,000 is increased by the current E&P of $_____ and reduced $________ by the dividend distribution. The remaining distribution ($______ ) to W does/does not reduce E&P!
The E&P of 10,000 is increased by the current E&P of 15,000 and reduced 25,000 by the divided distribution. The remaining distribution 5,000 to W does no reduce E&P

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