Answer the following statements true (T) or false (F)
1. If a corporation has no E&P, a distribution is ordinary income to the extent of the shareholder's basis with any excess treated as capital gain.
2. A corporation's E&P is equal to its taxable income for the year.
3. A corporation earns $500,000 of current E&P and has an accumulated deficit of $300,000. The corporation pays a $350,000 distribution to its shareholders this year. $200,000 of the distribution will be taxed as a dividend.
4. If a corporation distributes appreciated property to its shareholders, the corporation will recognize any realized gain.
5. A corporation redeems 10 percent of the stock of each shareholder in a family-owned corporation. The shareholders will recognize capital gains on the sale of their stock back to the corporation.
1. FALSE
The distribution is a return of capital to the extent of the shareholder's basis, and the excess is treated as capital gain.
2. FALSE
Various adjustments are made to taxable income to derive E&P.
3. FALSE
The full $350,000 distribution is taxed as a dividend because there is at least $350,000 of current E&P.
4. TRUE
Distributions of appreciated property from a corporation to a shareholder is treated as if it was sold to the shareholder.
5. FALSE
Since the redemptions are not substantially disproportionate, they will be treated as dividends.
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