TAXATION OF INDIVIDUALS AND BUSINESS ENTITIES LATEST UPDATE

TAXATION OF INDIVIDUALS AND BUSINESS ENTITIES LATEST UPDATE 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. - CORRECT ANSWER-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. - CORRECT ANSWER-double taxation The corporate tax rate is significantly ______________ than the maximum individual tax rate. - CORRECT ANSWER-lower When a corporation distributes property to shareholders in their capacity as shareholders, the shareholders will characterize the distribution as either _________________________________ or a __________________________________. - CORRECT ANSWER-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. - CORRECT ANSWER-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. - CORRECT ANSWER-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. - CORRECT ANSWER-stock dividends A _____________________________ is any distribution of property made by a corporation to its shareholders out of its earnings and profits account. - CORRECT ANSWER-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 ____________________________________________________________________________. - CORRECT ANSWER-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. - CORRECT ANSWER-current earnings and profits Undistributed earnings and profits from years prior to the current year. - CORRECT ANSWER-accumulated earnings and profits The double taxation of distributed corporate income has been a fundamental principle of the U.S. income tax since ___________. - CORRECT ANSWER-1913 A corporation begins the computation of current E&P with ______________________________ or ____________. - CORRECT ANSWER-taxable income ; loss E&P includes both __________________ and _______________________ income, indicating that Congress intended E&P to represent a corporation's economic income. - CORRECT ANSWER-taxable ; nontaxable Current E&P adjustments: - CORRECT ANSWER-1. certain nontaxable income is included in E&P. 2. certain deductions do not reduce E&P. 3. certain nondeductible expenses reduce E&P. 4. the timing of certain items of income and deductions is modified for E&P calculations because separate accounting methods are required for E&P purposes. A corporation begins the computation of current E&P with ___________________________ or _______________. It then make adjustments required by the Internal Revenue Code (IRC) or the accompanying regulations and IRS rulings. - CORRECT ANSWER-taxable income ; loss Corporations use current and accumulated E&P accounts in determining the amount of ________________________ that are deemed to be dividends. - CORRECT ANSWER-distributions Distributions are designated as dividends in the following order: - CORRECT ANSWER-1. Distributions are dividends up to the balance of current E&P. 2. 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 _________________________________. - CORRECT ANSWER-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. - CORRECT ANSWER-shareholder goodwill ; market price Corporations may also declare a _____________________________________ in which the number of shares outstanding is increased by the ratio of the split. - CORRECT ANSWER-stock split Stock split - CORRECT ANSWER-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. - CORRECT ANSWER-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 ____________________________________________. - CORRECT ANSWER-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. - CORRECT ANSWER-stock redemption Stock redemptions take the form of an exchange in which shareholders give up their ___________________ in the corporation for _______________________________, usually ___________________. - CORRECT ANSWER-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. - CORRECT ANSWER-gain ; loss The IRC states in section 302(b)(2) that a redemption will be treated as an __________________ if the redemption is "substantially disproportionate with respect to the shareholder." - CORRECT ANSWER-exchange Redemptions that are substantially disproportionate objectives: - CORRECT ANSWER-1. immediately after the exchange, the shareholder owns less than 50 percent of the total combined voting power of all classes of stock entitled to vote. 2. The shareholder's percentage ownership of voting stock after the redemption is less than 80 percent of his or her percentage ownership before the redemption. 3.