P2-U14 · PART 2 · SOURCE CYCLE 2026-2027
Corporate Distributions and Liquidations
How to complete this unit
This unit uses 15 source-gated recall cards and 15 admissible practice questions. Complete the sequence in order; the unreleased wiki prose remains outside the learner path.
- 1 · LearnBuild the rule
Answer each recall prompt before opening it. Then learn the exact rule, test the controlling facts through four quick challenges, explore common questions, and finish with one own-words teach-back.
- 2 · ApplyUse it in context
Complete at least 15 mapped questions over two sessions. Review the explanation even when the answer is correct.
- 3 · ProveTest readiness
Use the Part 2 mock under time pressure. Return here for every flagged or missed concept before the next attempt.
Verified recall questions
Only cards whose complete question and answer were checked against exact primary-authority evidence appear here. Stable unit ownership gathers this lesson across 1 textbook collection.
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:
Constructive distribution
Q6.Distributions of stock dividends are generally tax-free to shareholders except when:
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:
Accumulated E&P distributed to a shareholder is taxable as capital gains.
Q8.When are stock distributions deductible by a corporation?
Stock distributions are not deductible by the corporation.
Q9.Ten years ago, Yamato purchased 100 shares of Rock Star Music, Inc. for $10 per share. In 2025 Rock Star Music, Inc. completely liquidated and distributed $20,000 to Yamato in exchange for all of his stock. Yamato must report this distribution as:
$19,000 of long-term capital gain.
Q10.Abdullah is a 20% shareholder of Langley Corporation. The corporation distributes $75,000 of cash and a delivery truck to Abdullah. The truck has a $40,000 adjusted basis and a $60,000 FMV. What gain or loss, if any, must Langley Corporation recognize on this distribution?
$20,000 gain.
Q11.Midwestern Grain, Inc. distributes an industrial compressor with an adjusted basis of $1,000 and a fair market value of $4,000 subject to a liability of $6,000 to Benjamin, a 5% shareholder. Benjamin personally assumes the $6,000 loan. What is the gain or loss, if any, Midwestern Grain must recognize as a result of the distribution?
$5,000 gain.
Q12.Distributions of stock rights or stock options are generally tax-free to shareholders. Which scenario would cause a distribution of stock rights to be taxable to a shareholder?
If a shareholder has a choice to receive cash instead of stock rights.
Q13.Cambrian Insurance, Inc. is a C corporation that is planning to permanently shut down its operations. Which form must be filed with the IRS within 30 days after the corporation adopts a plan to dissolve?
Form 966
Q14.Masami owns 800 shares of Techbomb Software, Inc. Masami purchased the shares five years ago, and her basis in the stock is $20,000. Techbomb Software completely liquidates on November 30, 2025, and distributes $56,000 in two liquidating payments to Masami. She received $16,000 on December 30, 2025, and $40,000 on January 27, 2026. How much gain or loss does Masami recognize in 2025 and 2026?
No gain or loss in 2025 and a $36,000 gain in 2026.
Q15.Six years ago, Sabine purchased 100 shares of Vitality Vitamins, Inc. stock for $50 per share. In 2025, the corporation ceased operations and liquidated. After paying its outstanding liabilities, Vitality Vitamins distributed $10,000 of cash and appreciated property worth $90,000 to its shareholders. Sabine's portion of the distributed assets and cash was $12,000. What amount of taxable income must she report from this liquidating distribution?
$7,000 long-term capital gain.
Ready to move on?
- ▸ Explain at least 80% of these 15 rules without opening the answer, twice on different days.
- ▸ Score 80% across 15 or more mapped questions over two sessions, not one memorized round.
- ▸ Complete a timed Part 2 mock and return to this unit if its concepts remain flagged or missed.
Use these checks to choose your next study action. They do not predict a PSI scaled score.