Current E&P Computation. Water Corporation reports $500,000 of taxable income for the current year. The following additional information is available:
For the current year, Water reports an $80,000 long-term capital loss and no capital gains.
Taxable income includes $80,000 of dividends from a 10%-owned domestic corporation.
Water paid fines and penalties of $6,000 that were not deducted in computing taxable income.
In computing this year’s taxable income, Water deducted a $20,000 NOL carryover from a prior tax year.
Water claimed a $10,000 U.S. production activities deduction.
Taxable income includes a deduction for $40,000 of depreciation that exceeds the depreciation allowed for E&P purposes.
2. Comparison of Dividends and Redemptions. Bailey is one of four equal unrelated shareholders of Checker Corporation. Bailey has held Checker stock for four years and has a basis in her stock of $40,000. Checker has $280,000 of current and accumulated E&P and distributes $100,000 to Bailey.
What are the tax consequences to Checker and to Bailey if Bailey is an individual and the distribution is treated as a dividend?
In Part a, what would be the tax consequences if Bailey were a corporation?
What are the tax consequences to Checker and to Bailey (an individual) if Bailey surrenders all her stock in a redemption qualifying for sale treatment?
In Part c, what would be the tax consequences if Bailey were a corporation?
Which treatment would Bailey prefer if Bailey were an individual? Which treatment would Bailey Corporation prefer?
3. Compare the tax consequences to the shareholder and the distributing corporation of the following three kinds of corporate distributions: ordinary dividends, stock redemptions, and complete liquidations.