Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

ACCT 621 > Chapter 4 - Organization and Corporate Structure > Flashcards

Chapter 4 - Organization and Corporate Structure Flashcards

1
Q

What is the normal result of a property transaction?

A

Taxpayers recognize a gain/loss when they realize a gain/loss. Usually a taxable transaction.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Realized and recognized gain/loss =

A

Fair market value of the stock received - Tax basis of the property transferred

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Both section 1031 (like-kind exchanges) and section 351 (transfers of property to controlled corporations)…

A

Postpone gain/loss recognition until a substantive change in the taxpayer’s investment occurs (for example: a sale of property or ownership shares to outsiders).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Section 1031 provides for gain/loss deferral when…

A

a taxpayer exchanges certain property for “like-kind property”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are the three reasons Congress granted section 351 tax deferral?

A
  1. Contributing property to a corporation leaves an owner’s economic status unchanged (it only changes the FORM of the investment)
  2. When a shareholder receives only stock in the corporation, the shareholder lacks the cash to pay tax on any realized gain (wherewithal to pay).
  3. Congress believes tax rules should not impede a taxpayer’s judgement about the best choice of entity form for conducting business.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Receiving boot can only trigger…

A

Gain recognition

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Section 351 is ___________ if a transaction satisfies the provision’s requirements.

A

Mandatory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Three requirements for nonrecognition of gain/loss under 351:

A
  1. Property is transferred
  2. In exchange for stock
  3. and the property transferors are in control of the corporation immediately after the exchange
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What if you qualify for 351 but a recognition of gain/loss is desired?

A

The taxpayer must PLAN to fail to meet at least one of the three requirements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Property

A

Assets defined in the broadest legal sense. Property includes the unrealized receivables of a cash basis taxpayer, but NOT services rendered.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

A taxpayer must ______ report as income the FMV of stock and any other consideration as compensation for services rendered.

A

always

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the tax consequences of receiving services in exchange for stock?

A

The income the taxpayer recognizes equals the FMV of the stock received. The FMV is also the stock basis for the taxpayer.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Nonrecognition of gain occurs only when the shareholder receives…

A

Stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

“Stock” includes…

A

Common and most preferred shares. It doesn’t include “non qualified preferred stock”, stock rights, or stock warrants.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Corporate debt or securities received are treated as…

A

boot because they are not shares of stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Define “control”.

A

The property transferors must own stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote AND at least 80% of the total number of shares of all other classes of stock.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

A person contributing both services and property in exchange for corporate stuck must include in taxable income…

A

The value of the stock received for the services but not the value of the stock received for the property, assuming the property transferors control the corporation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Services rendered are recognized as…

A

Ordinary income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

The stock issued for the newly-contributed property must equal or exceed ____% of the value of the old stock already owned

A

10

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

The basis adjustment procedure ensures that the corporation recognizes the gain or loss postponed under 351 when…

A

It sells the contributed asset in a taxable transaction

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

A shareholder that transfers property to a corporation takes a —— basis in the corporate stock instead of a ——- basis.

A

substituted basis instead of a fair market value basis

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Taxpayer’s basis =

A

Basis in the property transferred + Gain recognized - Bood received - Adjustment for loss property

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Corporation’s basis =

(carryover basis)

A

Basis of the property transferred + Gain recognized by the transferor - Adjustment for loss property

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Built-in loss property

A

Property contributed to a corporation under section 351 or as a contribution to capital that has a basis in excess of its FMV. An adjustment is necessary to step down the basis of the property to its FMV. The adjustment prevents the corporation and the contributing shareholder from obtaining a double tax benefit. The corporation allocates the adjustment proportionately among the assets with the built-in loss.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

As an alternative to the corporate adjustment (built-in loss property) the shareholder may elect to…

A

reduce the basis in the stock (section 362e)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Net built-in loss attributable to each asset’s share of the loss =

A

(Loss attributable to the asset/total built-in loss) * net built-in loss

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Alternative option if the corporation is subject to the built-in loss adjustment if BOTH the shareholder and the corporation elect -

A

The shareholder reduces the basis in the corporate stock rather than the corporation’s property. Given capital gain rates that generally are lower than the corporate tax rate, it is frequently desirable for the corporation and individual shareholders to elect this treatment.

28
Q

The built-in loss adjustment places the loss with…

A

Either the shareholder or the corporation, but NOT both

29
Q

A transfer of shares for services is or is not a taxable transaction to a corporation?

A

Is not

30
Q

Can a corporation deduct as a business expense the FMV of the stock it issues in consideration of services?

A

Yes, unless the services are a capital expenditure

31
Q

In a 351 transfer, the shareholder’s holding period for stock received in exchange for a capital asset or a 1231 property…

A

includes the holding period of the property transferred to the corporation - the holding period of the property is “tacked on” to the holding period of the stock

32
Q

The holding period for stock received for any other property except for 1231…

A

beings on the day AFTER the exchange

33
Q

The corporation’s holding period for property acquired in a 351 transfer is…

A

the holding period of the transferor-shareholder regardless of the character of the property in the transferor’s hands.

34
Q

Recapture considerations

A

Sales of depreciable assets with a value that exceed their basis result in ordinary gain up to the accumulated depreciation deducted. The rest of the gain is a 1231 gain.

35
Q

Section 357a provides that when a corporation assumes a liability in a 351 transaction…

A

the liability is not boot received for gain recognition purposes

However, the the liabilities issued by the corporation are treated as boot in determining the basis of the stock received by the shareholder (they would reduce the basis)

36
Q

Exception 1 to 357a: Tax Avoidance or No Bona Fide Business Purpose

A

The liabilities are treated as boot for determining recognized gain.

Effect: taint ALL liabilities transferred even if some do have a bona fide business purpose

Triggers gain recognition of lesser of boot or realized gain

37
Q

Exception 2 to 357a: Liabilities in Excess of Basis

A

The difference is a taxable gain

On the contribution of capital to a corporation, an investor recognizes gain on the exchange to the extent contributed assets carry liabilities with a face amount in excess of the tax basis of the contributed assets.

This rule keeps the investor from holding the investment asset received with a negative basis.

38
Q

“Liabilities” under 357c excludes

A

obligations that would have been deductible to the transferor had those obligations been paid before the transfer

(accounts payable of a cash basis taxpayer are ignored when computing the shareholder’s stock basis)

39
Q

It is possible that both exceptions 1 and 2 apply to the same transfer. In this case _____ predominates

A

Exception 1

40
Q

Corporations recognize ____ gain or loss when they issue shares of stock (including treasury stock) for money or property.

A

No

41
Q

If a civic/government entity contributes property to a corporation to induce the corporation to locate in a particular community, the contributions are…

A

NOT tax-free contributions. Instead, the corporation includes these contributions in the corporation’s gross income and takes a FMV basis in the assets

42
Q

A government tax abatement granted to a corporation for locating in the particular jurisdiction…

A

is NOT taxable. The abatement just reduces future payments and related deductions for state and local taxes and is therefore ignored when granted.

43
Q

A corporation recognizes income if a non shareholder contributes assets to a corporation even if

A

the corporation labels these as contributions to aid construction or capital expenditures, or transfers property in exchanges for goods or services

44
Q

Capital contribution

A

Various means by which a shareholder makes additional funds available to the corporation (placed at the risk of the business) sometimes without the receipt of additional stock. If no stock is received, the contributions are added to the basis of the shareholder’s existing stock investment and do not generate gross income to the corporation

45
Q

Advantages of issuing long-term debt instead of stock:

A
  • Interest on debt is deductible by the corporation (but dividend payments are not)
  • Loan repayments are not taxable to investors unless the repayments exceed basis
46
Q

Property distributions from a corporation to its shareholders are…

A

not tax-free if the corporation has earnings and profits. The government taxes these distributions as dividends to the extent of the earnings and profits.

47
Q

Shareholders enjoy preferential tax treatment on dividend income but no

A

interest income (which is taxed at the shareholder’s ordinary income tax rates)

48
Q

Thin Capitalization

A

Shareholders could make it look like they are “loaning” money to the corporation instead of contributing additional equity to obtain the tax advantages of debt. When the debt owed by a corporation to the shareholders becomes too large in relation to the corporation’s capital structure, the IRS may contend that the corporation is thinly capitalized. In effect, some or all of the debt is reclassified as equity. The immediate result is to disallow any interest deduction to the corporation on the reclassified debt. To the extent of the corporation’s earnings and profits, interest payments and loan repayments on the reclassified debt are treated as dividends to the shareholders.

49
Q

Important characteristics in distinguishing between debt and equity:

A
  • is the debt instrument in proper form?
  • does the debt instrument bear a reasonable rate of interest and have a definite maturity date?
  • does the corporation repay the debt on a timely basis?
  • are payments contingent upon earnings?
  • is the debt subordinated to other liabilities?
  • are the holding of debt proportionate to shares owned?
  • are funds loaned to the corporation used to finance initial operations or capital asset acquisitions?
  • does the corporation have a high ratio of shareholder debt to shareholder equity?
50
Q

Worthlessness

A

Can be a realized loss if the taxpayer can document it. To recognize partial worthlessness dispose of the stock/bond in a taxable sale/exchange. Capital loss treatment as of the last day of the taxable year in which the stock/bond becomes worthless. If they are not capital assets…. worthlessness yields an ordinary loss.

51
Q

Investor loss from worthlessness is disallowed if…

A

the sale/exchange is to a related party (parents, siblings, or children)

52
Q

Affiliated corporations are allowed to take ordinary loss upon worthlessness. To be affiliated…

A

80% control, 90% gross receipts for all taxable years from sources other than passive income (rents, royalties, dividends, and interest)

53
Q

Business Bad Debts

A
  • results in an ordinary loss or NOL
  • ordinary loss deduction allowed for partial worthlessness
  • because corporations do not engages in personal transactions, all of their bad debts qualify as business bad debts and are never given nonbusiness bad debt treatment
54
Q

Nonbusiness Bad Debt

A
  • result in a short-term capital loss
  • can only deduct nonbusiness debts when they become ENTIRELY worthless
55
Q

Section 1244 Stock

A
  • Ordinary loss treatment for losses on the sale of worthless stock of so-called small business corporations
  • Encourages investment of capital in small corporations
56
Q

Ordinary loss treatment for 1244 stock applies only on the first $________ of stock the corporation issues at its creation

A

1 million

If the corporation issues more than $1 million, the corporation designates which shares qualify for 1244

57
Q

Value of 1244 Stock =

A

Adjusted basis - Liabilities Assumed

(on the date issued)

58
Q

The ordinary loss deduction limit in any one year from the disposition of 1244 stock is…

A

$50,000 (single)
$100,000 (married)

Any loss exceeding the limit is treated as a capital loss

59
Q

Who qualifies for ordinary loss treatment of 1244 stock?

A

ONLY the original holder - if the stock is sold/donated it loses its 1244 status

60
Q

When 1244 stock is exchanged for property with an adjusted basis above its FMV…

A

The stock basis must be reduced to the FMV on the date of the exchange

Sale Price - FMV = Ordinary loss
Basis - Sale Price = Total Loss
Total Loss - Ordinary loss = remaining capital loss

61
Q

Disadvantage of issuing debt:

A

Does not qualify under 1244, the taxpayer generally has a short-term capital loss rather than the ordinary loss

62
Q

Section 1202 gives special tax relief for gains recognized on the sale/exchange from a qualified small business corporation

A

The holder of the qualified small business stock excludes a portion of the gain from the sale (100% if acquired after 9/27/2010)

63
Q

Conditions to qualify for 1202 exclusion:

A
  • The non corporate shareholder must have held the stock for more than 5 years and must have acquired the stock as part of an original issue
  • the c-corporation must have had an adjusted basis in its gross assets that did not exceed $50 million on the stock issuance date
  • The corporation must use at least 80% of its assets int eh active conduct of one or more qualified trades or businesses.
64
Q

Each individual shareholder can exclude (1202) gain up to the greater of….

A
  • $10 million
  • 10x the shareholder’s aggregate adjusted basis in the qualified stock disposed of during the taxable year
65
Q

DONT EVER RECOGNIZE A LOSS

A

DONT EVER RECOGNIZE A LOSS

ACCT 621 (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions