C239 EXAMINATION QUESTIONS AND VERIFIED
ANSWERS
Earnings and Profit (E & P) - A measure of the corporation's ability to pay a dividend from
its current and accumulated earnings without an impairment of capital
301 - requires a shareholder to include in gross income the amount of any corporate
distribution to the extent it is treated as a dividend. Qualified dividends received by a
noncorporate taxpayer are subject to a maximum 20% tax rate.
Constructive Dividend - The manner in which the IRS or the courts might recharacterize
an excessive corporate payment to a shareholder to reflect the true economic benefit conferred
upon the shareholder. As a result of the recharacterization, the IRS or the courts usually recast a
corporate-shareholder transaction as an E&P distribution, deny the corporation an offsetting
deduction, and treat all or a portion of the income recognized by the shareholder as a dividend.
Stock dividend - A dividend paid in the form of stock in the corporation issuing the
dividend
stock rights - Rights issued by a corporation to its shareholders or creditors which permit
the purchase of an additional share(s) of stock at a designated exercise price with the surrender
of one or more of the stock rights.
stock redemption - The acquisition by a corporation of its own stock in exchange for
property. Such stock may be cancelled, retired, or held as treasury stock.
preferred stock bailout - A tax treatment mandated by §306 which prevents shareholders
who receive nontaxable preferred stock dividends from receiving capital gain treatment upon
the sale or redemption of the preferred stock.
306 stock - Preferred stock that is received as a stock dividend or a part of a nontaxable
reorganization. Section 306 stock is subject to the special preferred stock bailout rules when
sold or redeemed. (see preferred stock bailouts)
bootstrap acquisition - An acquisition where an investor purchases part of a corporation's
stock and then has the corporation redeem the remainder of the seller's stock.
Alternative Minimum Tax (AMT) - Tax which applies to individuals, corporations, and
estates and trusts if it exceeds the taxpayer's regular tax. Most taxpayers are not subject to this
tax. This tax equals the amount by which the tentative minimum tax exceeds the regular tax.
Alternative Minimum Taxable Income (AMTI) - The taxpayer's taxable income (1)
increased by the tax preference items and
, (2) adjusted for income, gain, deduction, and loss items that have to be recomputed under the
AMT system.
Personal Holding Company (PHC - A closely held corporation (1) that is owned by five or
fewer shareholders who own more than 50% of the corporation's outstanding stock at any time
during the last half of its tax year and
(2) whose PHC income equals at least 60% of the corporation's adjusted ordinary gross income
for the tax year. Certain corporations (e.g., S Corporations) are exempt from this definition.
Liquidating Distribution - A distribution that (1) liquidates a partner's entire partnership
interest due to retirement, death, or other business reasons or
(2) partially or totally liquidates a shareholder's stock interest in a corporation following the
adoption of a plan at liquidation.
Dissolution - A legal term implying that a corporation has surrendered the charter that it
originally received from the state.
Complete liquidation - Distributions made by a liquidating corporation must either
completely cancel ore redeem all its stock in accordance with a plan of liquidation or be one of
a series of distributions that complexly cancels or redeems all its stock in accordance with a plan
of liquidation.
Plan of liquidation - A written document detailing the steps to be undertaken while
carrying out the complete liquidation of a corporation.
Recognized gain (loss) - The amount of gain or loss actually reported on the tax return
Realized gain (loss) - The gain or loss computed by taking the amount realized from a sale
of property and subtracting the property's adjusted basis.
Recovery of basis doctrine - Rule that allows taxpayers to recover the basis of an asset
without being taxed. Such amounts are considered a return of capital.
Capital recovery - A capital recovery amount is a deduction for depreciation or cost
recovery. It is a factor in the determination of a property's adjusted basis.
Basket purchase - When more than one asset is acquired in a single purchase transaction,
the cost must be apportioned to the various assets acquired. The allocation is based on the
relative FMVs of the assets.
ANSWERS
Earnings and Profit (E & P) - A measure of the corporation's ability to pay a dividend from
its current and accumulated earnings without an impairment of capital
301 - requires a shareholder to include in gross income the amount of any corporate
distribution to the extent it is treated as a dividend. Qualified dividends received by a
noncorporate taxpayer are subject to a maximum 20% tax rate.
Constructive Dividend - The manner in which the IRS or the courts might recharacterize
an excessive corporate payment to a shareholder to reflect the true economic benefit conferred
upon the shareholder. As a result of the recharacterization, the IRS or the courts usually recast a
corporate-shareholder transaction as an E&P distribution, deny the corporation an offsetting
deduction, and treat all or a portion of the income recognized by the shareholder as a dividend.
Stock dividend - A dividend paid in the form of stock in the corporation issuing the
dividend
stock rights - Rights issued by a corporation to its shareholders or creditors which permit
the purchase of an additional share(s) of stock at a designated exercise price with the surrender
of one or more of the stock rights.
stock redemption - The acquisition by a corporation of its own stock in exchange for
property. Such stock may be cancelled, retired, or held as treasury stock.
preferred stock bailout - A tax treatment mandated by §306 which prevents shareholders
who receive nontaxable preferred stock dividends from receiving capital gain treatment upon
the sale or redemption of the preferred stock.
306 stock - Preferred stock that is received as a stock dividend or a part of a nontaxable
reorganization. Section 306 stock is subject to the special preferred stock bailout rules when
sold or redeemed. (see preferred stock bailouts)
bootstrap acquisition - An acquisition where an investor purchases part of a corporation's
stock and then has the corporation redeem the remainder of the seller's stock.
Alternative Minimum Tax (AMT) - Tax which applies to individuals, corporations, and
estates and trusts if it exceeds the taxpayer's regular tax. Most taxpayers are not subject to this
tax. This tax equals the amount by which the tentative minimum tax exceeds the regular tax.
Alternative Minimum Taxable Income (AMTI) - The taxpayer's taxable income (1)
increased by the tax preference items and
, (2) adjusted for income, gain, deduction, and loss items that have to be recomputed under the
AMT system.
Personal Holding Company (PHC - A closely held corporation (1) that is owned by five or
fewer shareholders who own more than 50% of the corporation's outstanding stock at any time
during the last half of its tax year and
(2) whose PHC income equals at least 60% of the corporation's adjusted ordinary gross income
for the tax year. Certain corporations (e.g., S Corporations) are exempt from this definition.
Liquidating Distribution - A distribution that (1) liquidates a partner's entire partnership
interest due to retirement, death, or other business reasons or
(2) partially or totally liquidates a shareholder's stock interest in a corporation following the
adoption of a plan at liquidation.
Dissolution - A legal term implying that a corporation has surrendered the charter that it
originally received from the state.
Complete liquidation - Distributions made by a liquidating corporation must either
completely cancel ore redeem all its stock in accordance with a plan of liquidation or be one of
a series of distributions that complexly cancels or redeems all its stock in accordance with a plan
of liquidation.
Plan of liquidation - A written document detailing the steps to be undertaken while
carrying out the complete liquidation of a corporation.
Recognized gain (loss) - The amount of gain or loss actually reported on the tax return
Realized gain (loss) - The gain or loss computed by taking the amount realized from a sale
of property and subtracting the property's adjusted basis.
Recovery of basis doctrine - Rule that allows taxpayers to recover the basis of an asset
without being taxed. Such amounts are considered a return of capital.
Capital recovery - A capital recovery amount is a deduction for depreciation or cost
recovery. It is a factor in the determination of a property's adjusted basis.
Basket purchase - When more than one asset is acquired in a single purchase transaction,
the cost must be apportioned to the various assets acquired. The allocation is based on the
relative FMVs of the assets.
