21. D purchased all of the stock in SB, Inc., in 2013 for $76,000. On December 3

Question

21. D purchased all of the stock in SB, Inc., in 2013 for $76,000. On December 31 of the current year, SB, Inc., made a cash distribution of $135,000 to D. Assuming SB, Inc., has current E&P of $15,000 and accumulated E&P of $40,000, the distribution will be treated as a. Taxable dividend of $135,000 b. Taxable dividend of $55,000 and nontaxable return of investment of $80,000 c. Taxable dividend of $55,000, nontaxable return of investment of $76,000, and a capital gain of $4,000 d. Taxable dividend of $55,000 and capital gain of $80,000.

22. A Corp. wants to throw something to its shareholders this year, but is cash poor. The board decides on a two-for-one stock dividend: common on common. The shareholders of record at the time of the dividend a. Realize a taxable dividend equal in amount to the value of their pre-split shares b. Have the value of their holdings doubled, taxation on which is postponed until the shares are sold c. Double their shares, allocating the pre-split basis in the stock equally among the shares d. Have nontaxable return of all their capital

23. B, who is single and 59 years old, purchased a single premium immediate annu¬ity on January 1 of the current year for $12,000 that will pay him $100 every month for life beginning on January 15. Based on actuarial tables published by the IRS, his life expectancy multiple is 25.0. B’s nontaxable return of capital for the current year is a. $0 b. $1,200 c. $480 d. $720

24. The crucial reason for determining whether an item is deductible as an ex¬pense under § 162 or under § 212 is that a. Production-of-income expenses are not deductible. b. § 162 business expenses usually are deductions for AGI, while § 212 production-of-income expenses usually are miscellaneous itemized deductions. c. § 162 business expenses are deductions from AGI, while § 212 produc¬tion-of-income expenses are deductions for AGI. d. It resolves certain ownership questions.

Explanation / Answer

21. Option a. Cash distribution will be treated as Taxable dividend of $135,000.

Capital gain only arises when the stock is transferred/sold. As in this case Stock has not been sold by D, no capital gain will arise. Hence, option c & d are incorrect.

Also $80,000 cash distribution cannot be treated as non taxable return of investment and same is to be treated as dividend only. Hence, option b is also incorrect.

Full amount of $135,000 is to be treated as dividend and same will be taxable in the hands of D.

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