CPA Regulation Reg Quiz: Account For Corporate Distributions

What this quiz covers

This quiz focuses on Account For Corporate Distributions, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Regulation Reg.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. $15,000, limited to current E&P only.
2. $25,000, limited to total current plus accumulated E&P. (correct answer)
3. $50,000, because cash distributions are fully dividends.
4. $0, because the shareholder has sufficient basis.

Explanation: IRC §301(c)(1) treats distributions as dividends to the extent of current and accumulated earnings and profits. Summit's total E&P is $25,000 ($15,000 current plus $10,000 accumulated), so$25,000 of the $50,000 distribution is dividend income. The remaining$25,000 is treated under §301(c)(2) as a return of capital, reducing the shareholder's stock basis from $30,000 to$5,000. Answer A incorrectly uses only current E&P. Answer C incorrectly treats the entire distribution as a dividend. Answer D incorrectly ignores E&P because of sufficient basis. The ordering rule requires dividend treatment to the extent of total E&P before basis recovery.

Question 2

1. $18,000 dividend income under IRC §301.
2. $5,000 return of capital reducing stock basis to zero and$13,000 capital gain. (correct answer)
3. $18,000 return of capital reducing stock basis to$(13,000)$.
4. $13,000 ordinary income and$5,000 dividend income.

Explanation: S corporation distributions without accumulated E&P are governed by IRC §1368(b), providing tax-free return of capital to the extent of stock basis. Xylem's $18,000 distribution first reduces the shareholder's stock basis from$5,000 to zero (tax-free), with the excess $13,000 treated as gain from the sale of property under §1368(b)(2), which is capital gain. Answer A incorrectly allows full basis offset when basis is only$5,000. Answer C incorrectly allows negative basis. Answer D incorrectly characterizes the income types. The correct treatment follows the statutory ordering: basis reduction first, then capital gain for any excess.

Question 3

1. $50,000 is a dividend under IRC §301(c)(1). (correct answer)
2. $22,000 is a return of capital and$28,000 is a dividend.
3. The distribution is governed by IRC §302 and treated as a stock redemption.
4. $50,000 is a return of capital because the shareholder has sufficient basis.

Explanation: Under IRC §301, corporate distributions are taxed based on the corporation's earnings and profits (E&P), with distributions first treated as dividends to the extent of current and accumulated E&P. Yarrow has 65,000 in E&P and distributes 50,000 cash, which is less than the available E&P, making the entire distribution taxable as a dividend under §301(c)(1). The shareholder's $22,000 basis in the stock is irrelevant for determining dividend treatment, as basis only matters after E&P is exhausted. Option B incorrectly applies the ordering rules by treating part of the distribution as return of capital when E&P exceeds the distribution amount. Option C is incorrect because this is a non-redemptive distribution governed by §301, not a stock redemption under §302. Option D misunderstands the §301 ordering rules by prioritizing basis recovery over E&P. When analyzing corporate distributions, always compare the distribution amount to available E&P first—if E&P covers the entire distribution, it's all dividend income regardless of shareholder basis.

Question 4

1. $8,000, because dividends do not affect stock basis.
2. $0, because the distribution includes a return of capital that reduces basis to zero. (correct answer)
3. $(7,000)$, because basis is reduced below zero before gain is recognized.
4. $15,000, because basis increases by the amount of dividend income.

Explanation: IRC §301 establishes the treatment of distributions in a specific order that affects stock basis. Timber's $60,000 distribution is first treated as a$45,000 dividend to the extent of E&P, which does not reduce stock basis. The remaining $15,000 is a return of capital under §301(c)(2), reducing the shareholder's basis from$8,000 to zero, with $7,000 treated as capital gain under §301(c)(3). Answer A incorrectly states dividends don't affect basis calculations. Answer C incorrectly allows negative basis. Answer D incorrectly increases basis for dividends. The shareholder's basis after the distribution is zero, as basis cannot go below zero for stock.

Question 5

1. $30,000 capital loss ($150,000 amount realized minus $180,000 basis). (correct answer)
2. $60,000 dividend income and$30,000 capital loss.
3. $0, because losses are not recognized in liquidations.
4. $30,000 ordinary loss because liquidations create ordinary items.

Explanation: IRC §331 treats amounts received in complete liquidation as payment in exchange for stock, allowing capital gain or loss recognition. The shareholder receives securities worth $150,000 in exchange for stock with basis of$180,000, resulting in a 30,000 capital loss. The corporation's E&P of 60,000 is irrelevant in complete liquidations, as the entire transaction is treated as a stock sale. Answer B incorrectly applies dividend treatment in a liquidation. Answer C incorrectly denies loss recognition. Answer D incorrectly characterizes the loss as ordinary. Complete liquidations under §331 generate capital gain or loss based on the difference between amount realized and stock basis.

Question 6

1. $25,000 dividend income because a corporate distribution is presumed to be a dividend.
2. $18,000 return of capital reducing basis to zero and$7,000 capital gain. (correct answer)
3. $25,000 capital gain because E&P is zero.
4. $7,000 return of capital and$18,000 dividend income.

Explanation: IRC §301 requires distributions to be treated as dividends only to the extent of current and accumulated E&P. With Juniper's E&P at zero, the entire $25,000 distribution is governed by §301(c)(2) and (c)(3). First,$18,000 reduces the shareholder's stock basis to zero as a tax-free return of capital under §301(c)(2). The remaining $7,000 exceeding basis is treated as gain from the sale of stock under §301(c)(3), which is capital gain. Answer A incorrectly assumes all distributions are dividends. Answer C incorrectly treats the entire amount as capital gain. Answer D reverses the correct ordering. The statutory scheme prioritizes E&P, then basis reduction, then gain recognition.

Question 7

1. $30,000 dividend income under IRC §301 to the extent of the corporation’s earnings and profits.
2. $30,000 capital gain because all S corporation distributions are capital gain.
3. $30,000 return of capital reducing stock basis to$8,000, with no gain recognized. (correct answer)
4. $30,000 ordinary income because distributions from an S corporation are wages.

Explanation: S corporation distributions without accumulated E&P are governed by IRC §1368(b), which provides tax-free treatment to the extent of stock basis. Harbor's $30,000 distribution to a shareholder with$38,000 stock basis is entirely a tax-free return of capital, reducing the shareholder's basis from $38,000 to$8,000. No gain is recognized because the distribution does not exceed basis. Answer A incorrectly applies C corporation dividend rules requiring E&P. Answer B incorrectly characterizes all S corporation distributions as capital gain. Answer D incorrectly treats S corporation distributions as wages. The key principle is that S corporation distributions without E&P reduce basis first before generating gain.

Question 8

1. $0; no loss is recognized on a nonliquidating distribution of property. (correct answer)
2. $15,000 loss, equal to FMV$65,000 minus basis $80,000.
3. $25,000 gain, equal to basis$80,000 minus FMV $65,000.
4. $40,000 gain, limited to E&P.

Explanation: IRC §311(a) provides the general rule that a corporation recognizes no gain or loss on the distribution of property to shareholders with respect to its stock. However, §311(b) creates an exception requiring gain recognition on appreciated property. Since Kite's property has declined in value (FMV $65,000 < basis$80,000), the general rule of §311(a) applies and no loss is recognized. Answer B incorrectly allows loss recognition. Answer C incorrectly calculates a gain on depreciated property. Answer D incorrectly limits recognition to E&P. The policy prevents corporations from selectively recognizing losses through distributions while retaining appreciated property.

Question 9

1. IRC §1368.
2. IRC §302. (correct answer)
3. IRC §331.
4. IRC §721.

Explanation: IRC §302 governs stock redemptions and establishes tests to determine whether a redemption qualifies for sale or exchange treatment versus dividend treatment under §301. The redemption of 10% of the shareholder's stock must be analyzed under §302(b) tests, including substantially disproportionate redemption and not essentially equivalent to a dividend. Answer A (§1368) applies to S corporations, not C corporations. Answer C (§331) applies to complete liquidations. Answer D (§721) applies to partnership contributions. Since the shareholder still owns 90% after redemption, careful analysis under §302 is required to determine if exchange treatment is available.

Question 10

1. $90,000, the corporation’s adjusted basis in the property.
2. $60,000, limited to the shareholder’s stock basis.
3. $140,000, the property’s fair market value. (correct answer)
4. $100,000, limited to corporate E&P.

Explanation: Under IRC §301(d), a shareholder's basis in property received in a corporate distribution equals the property's fair market value on the distribution date. The shareholder receives property with FMV of $140,000, which becomes the shareholder's basis regardless of the corporation's basis ($90,000) or the shareholder's stock basis ($60,000). This FMV basis rule ensures proper measurement of future gain or loss when the shareholder disposes of the property. Answer A incorrectly uses the corporation's basis. Answer B incorrectly limits basis to stock basis. Answer D incorrectly limits basis to E&P. The distribution itself is taxed under §301(c) based on E&P and stock basis, but the property basis is always FMV.

Question 11

1. $80,000 dividend income under IRC §301 to the extent of E&P.
2. $10,000 reduces stock basis to zero and$70,000 is capital gain. (correct answer)
3. $80,000 return of capital with stock basis reduced to$(70,000)$.
4. $70,000 ordinary income and$10,000 capital gain.

Explanation: S corporation distributions without accumulated E&P follow IRC §1368(b), providing tax-free treatment to the extent of stock basis. River's $80,000 distribution to a shareholder with only$10,000 stock basis results in $10,000 tax-free return of capital reducing basis to zero, with the excess$70,000 treated as gain from the sale of property (capital gain) under §1368(b)(2). Answer A incorrectly applies C corporation dividend rules. Answer C incorrectly allows negative basis. Answer D incorrectly splits the excess between ordinary income and capital gain. The entire excess over basis is capital gain for S corporation distributions without E&P.

Question 12

1. $0, because liabilities assumed eliminate corporate recognition.
2. $70,000 gain, equal to FMV$200,000 minus basis $130,000.
3. $90,000 gain, because the amount realized is treated as at least the liability assumed ($220,000) minus basis $130,000. (correct answer)
4. $20,000 loss, equal to basis$130,000 minus FMV $200,000 net of liability.

Explanation: IRC §311(b) requires gain recognition on distributed appreciated property, with special rules when liabilities exceed fair market value. When the liability ($220,000) exceeds FMV ($200,000), the amount realized is treated as the greater of FMV or liability assumed. Umber recognizes gain of $90,000, calculated as$220,000 (liability) minus $130,000 (basis). Answer A incorrectly allows no recognition. Answer B incorrectly uses only FMV. Answer D incorrectly allows loss recognition on a distribution. The rule prevents tax avoidance through distributions of encumbered property and ensures gain recognition on appreciated property leaving corporate solution.

Question 13

1. $0, because corporations do not recognize gain on nonliquidating distributions of property.
2. $32,000 gain, equal to FMV$50,000 minus basis $18,000. (correct answer)
3. $22,000 gain, equal to FMV net of liability ($40,000) minus basis $18,000.
4. $10,000 gain, equal to liability assumed minus basis.

Explanation: IRC §311(b) requires a corporation to recognize gain on the distribution of appreciated property as if the property were sold to the shareholder at fair market value. Eagle must recognize gain equal to the FMV of $50,000 minus its basis of$18,000, resulting in $32,000 gain. The$10,000 liability assumed by the shareholder does not reduce the amount realized by the corporation for purposes of §311(b). Answer A incorrectly states the general rule that corporations don't recognize gain, which has exceptions for appreciated property. Answer C incorrectly reduces FMV by the liability. Answer D incorrectly uses only the liability in the gain calculation. The policy rationale is to prevent corporations from distributing appreciated property to avoid corporate-level gain.

Question 14

1. IRC §302. (correct answer)
2. IRC §301.
3. IRC §331.
4. IRC §1368.

Explanation: IRC §302 governs stock redemptions and determines whether a redemption is treated as a sale or exchange (capital gain treatment) or as a distribution under §301 (potentially dividend treatment). The redemption of 30% of the shareholder's stock, reducing ownership from 100% to 70%, must be tested under §302(b) to determine if it qualifies for exchange treatment. Answer B (§301) applies to distributions, not redemptions. Answer C (§331) applies to complete liquidations, not partial redemptions. Answer D (§1368) applies to S corporation distributions, not C corporation redemptions. The §302 tests include complete termination, substantially disproportionate redemption, and not essentially equivalent to a dividend.

Question 15

1. $70,000 is dividend income under IRC §301 because distributions are always dividends to the extent of corporate income.
2. $45,000 reduces stock basis to zero and$25,000 is recognized as capital gain. (correct answer)
3. $45,000 reduces stock basis to zero and$25,000 is treated as ordinary income.
4. No gain is recognized; the entire $70,000 reduces stock basis to$(25,000)$.

Explanation: S corporation distributions without accumulated E&P are governed by IRC §1368(b), which provides that distributions reduce stock basis first. The $70,000 distribution to a shareholder with$45,000 stock basis results in $45,000 of tax-free return of capital, reducing basis to zero. The excess$25,000 distribution beyond basis is treated as gain from the sale or exchange of property under §1368(b)(2), which is capital gain. Answer A incorrectly applies C corporation rules requiring E&P for dividend treatment. Answer C incorrectly characterizes the excess as ordinary income rather than capital gain. Answer D incorrectly suggests basis can go negative, which is not permitted for S corporation stock basis.

Question 16

1. $0, because recognition is deferred until the shareholder sells the property.
2. $50,000 gain, equal to FMV$60,000 minus basis $10,000. (correct answer)
3. $15,000 gain, limited to E&P.
4. $50,000 dividend to the shareholder, which is also the corporation’s recognized gain.

Explanation: IRC §311(b) requires a corporation to recognize gain on the distribution of appreciated property as if sold to the shareholder at fair market value. Pine must recognize gain of $50,000, calculated as FMV of$60,000 minus adjusted basis of 10,000. The amount of E&P (25,000) does not limit the corporation's recognized gain. Answer A incorrectly applies the general no-recognition rule that has exceptions. Answer C incorrectly limits gain to E&P amount. Answer D confuses the shareholder's dividend with the corporation's gain. The policy ensures that appreciation is taxed at the corporate level before assets leave corporate solution.

Question 17

1. The entire $120,000 is a dividend under IRC §301(c)(1).
2. $90,000 is a dividend,$30,000 is a return of capital reducing stock basis, and no gain is recognized. (correct answer)
3. The distribution is analyzed under IRC §302 and treated as a sale or exchange to the extent of basis.
4. $90,000 is a return of capital and$30,000 is a dividend because E&P is applied after basis.

Explanation: IRC §301 governs the tax treatment of corporate distributions to shareholders with respect to their stock. The distribution of 120,000 cash must be analyzed against Apex's current and accumulated E&P of 90,000 and the shareholder's stock basis of 50,000. Under §301(c)(1), distributions are treated as dividends to the extent of E&P, so 90,000 is dividend income. The remaining 30,000 exceeds E&P and is treated under §301(c)(2) as a return of capital, reducing the shareholder's stock basis from 50,000 to 20,000, with no gain recognized. Answer A incorrectly treats the entire distribution as a dividend despite E&P being only 90,000. Answer C incorrectly invokes §302 redemption rules when this is a §301 distribution. Answer D incorrectly applies basis reduction before E&P, reversing the statutory ordering rules.

Question 18

1. $70,000, because cash distributions are dividends in full.
2. $55,000, limited to current and accumulated E&P. (correct answer)
3. $50,000, limited to shareholder stock basis.
4. $0, because the distribution exceeds basis and therefore is capital gain only.

Explanation: IRC §301(c)(1) treats corporate distributions as dividends to the extent of current and accumulated earnings and profits. Granite's 70,000 cash distribution is analyzed against its E&P of 55,000, resulting in $55,000 of dividend income to the shareholder. The remaining$15,000 is treated under §301(c)(2) as a return of capital, reducing the shareholder's stock basis from $20,000 to$5,000. Answer A incorrectly treats the entire distribution as a dividend. Answer C incorrectly limits dividends to stock basis. Answer D incorrectly states no dividend treatment applies. The ordering rule requires dividend treatment to the extent of E&P before any basis recovery.

Question 19

1. IRC §302. (correct answer)
2. IRC §301.
3. IRC §331.
4. IRC §351.

Explanation: IRC §302 governs the tax treatment of stock redemptions, determining whether they qualify for sale or exchange treatment (capital gain) or are treated as distributions under §301 (potentially dividends). The complete redemption of all shares for $500,000 cash must be analyzed under §302(b)(3) for complete termination of interest, which generally qualifies for exchange treatment. Answer B (§301) applies to distributions, not redemptions. Answer C (§331) applies to corporate liquidations, not redemptions of individual shareholders. Answer D (§351) applies to transfers to corporations in exchange for stock. The complete termination typically receives favorable capital gain treatment unless attribution rules apply.

Question 20

1. No income; the distribution reduces stock basis to $0 with no gain recognized. (correct answer)
2. $52,000 dividend income under IRC §301.
3. $52,000 capital gain because basis cannot be reduced to zero.
4. $52,000 ordinary income because S corporation distributions are taxable wages.

Explanation: S corporation distributions without accumulated E&P are governed by IRC §1368(b), providing tax-free treatment to the extent of stock basis. Maple's $52,000 distribution exactly equals the shareholder's$52,000 stock basis, resulting in a complete return of capital that reduces basis to zero with no income recognition. This is the optimal outcome for S corporation distributions. Answer B incorrectly applies C corporation dividend rules. Answer C incorrectly generates capital gain when distribution equals basis. Answer D incorrectly characterizes S corporation distributions as wages. The key principle is that S corporation distributions are tax-free to the extent of the shareholder's basis in stock.