ACC 464 Assignment 4 Solutions
CHAPTER 5 CORPORATIONS: DIVIDEND DISTRIBUTIONS
DISCUSSION QUESTIONS
6. (LO 1, 2, 3, 4, 5) A variety of factors should be considered, including: • What is the E & P of Orange
Corporation? • Has E & P been accurately determined for tax purposes? • How much E & P is allocated to
each shareholder’s distribution? • How will the distribution affect Orange Corporation’s E & P? • Is the
distribution in partial or complete liquidation of Orange Corporation? • Does the distribution qualify as a
stock redemption for tax purposes? • What is the tax basis to the shareholders of Orange Corporation stock?
Also important is the nature of the shareholder. In the case of a corporate shareholder (Fuchsia Corporation
in this situation), a dividends received deduction is available. In contrast, an individual shareholder may
qualify for a reduced tax rate.
7. (LO 5) A variety of factors should be considered, including: • Is the distributed property appreciated or
depreciated? • What is the character of the property being distributed? • Is the distributed property secured
by debt? • Is the distribution in complete liquidation of Orange Corporation? • Does the distribution qualify
as a stock redemption for tax purposes?
8. (LO 5) Orion’s board of directors may have decided to distribute a property dividend in lieu of cash for
various reasons. For example, the shareholders could want a particular property that is held by the
corporation, or the corporation may be strapped for cash but still wants to distribute a dividend to its
shareholders.
9. (LO 5) Distributing Machine A would produce a nondeductible loss of $7,000, distributing Machine B would
generate no gain or loss, and distributing Machine C would trigger a taxable gain of $8,000 for Raven
Corporation. To preserve the loss on Machine A, Raven should sell Machine A and then distribute the cash to
