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P2-U14 · PART 2 · SOURCE CYCLE 2026-2027
Corporate Distributions and Liquidations
Only cards whose complete question and answer were checked against exact primary-authority evidence appear here.
Q1.How does shareholder Alder generally report a corporate distribution from current or accumulated earnings and profits?
As a dividend
Q2.Alder Corporation pays an employee-shareholder an unreasonably high salary. How may the excessive portion be treated?
As a distribution to the shareholder-employee
Q3.How does a corporation generally measure gain or loss on a liquidating distribution of assets?
As though it sold the assets to the distributee at fair market value
Q4.What can result when a corporation accumulates earnings beyond the reasonable needs of its business?
It may owe a 20% accumulated earnings tax
Q5.Sunburst Products, Inc. is a cash-basis C corporation. During the year, the corporation pays $2,000,000 in salary to Carey, its sole employee-shareholder. The following year, Sunburst Products Inc. is audited by the IRS, and Carey’s salary is deemed to be excessive. In this case, the excessive part of the salary will normally be treated as a: A. Liquidating distribution B. Constructive distribution C. Nontaxable distribution D. Prohibited transaction
Constructive distribution
Q6.Distributions of stock dividends are generally tax-free to shareholders except when: A. The distribution is made at the end of the corporation’s fiscal year. B. The distribution is only made to shareholders. C. The distribution is made by a foreign corporation or by a member of a controlled group of corporations. D. Some shareholders can receive cash or other property, and other shareholders receive stock.
Some shareholders can receive cash or other property, and other shareholders receive stock.
Q7.All of the following statements are correct about a corporation’s accumulated earnings and profit except: A. Any part of a distribution from current-year earnings and profits or accumulated earnings and profits is reported as dividend income to the shareholder. B. Accumulated E&P distributed to a shareholder is taxable as capital gains. C. If a corporation’s current year E&P are less than the total distributions made during the year, part or all of each distribution is treated as a distribution of accumulated E&P. D. Accumulated earnings and profits are E&P that the corporation accumulated before the current year and has not distributed to its shareholders.
Accumulated E&P distributed to a shareholder is taxable as capital gains.