Q1. Tiny and Tim each own half of the 100 outstanding shares of Flower Corporation. This year, Flower reported taxable income of $6,000 and was subject to a 25 percent tax rate. In addition, Flower received $20,000 of life insurance proceeds due to the death of an employee (Flower paid $500 in life insurance premiums this year). Flower had $5,000 of accumulated E&P at the beginning of the year.
a) What is Flower's current E&P?
b) Flower distributed $6,000 on February 15 and $30,000 on August 1. What total amount of dividends will Tiny and Tim report?
c) What amount of capital gain (if any) would Tiny and Tim report on the distributions in part (b) if their stock basis is $2,000 and $10,000, respectively?
d) What form would Flower use to report nondividend distributions?
e) On what form (line) would Tiny and Tim report nondividend distributions?
Q2. Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 60 shares with a basis of $3,000, and Clyde owns the remaining 40 shares with a basis of $12,000. At year-end, Getaway is considering differ- ent alternatives for redeeming some shares of stock. Evaluate whether each of the following stock redemption transactions will qualify for sale and ex- change treatment.
a) Getaway redeems 10 of Bonnie's shares for $2,000. Getaway has $20,000 of E&P at year-end and Bonnie is unrelated to Clyde.
b) Getaway redeems 25 of Bonnie's shares for $4,000. Getaway has $20,000 of E&P at year-end and Bonnie is unrelated to Clyde.