Corporation Tax

Question 1

P corporation acquired the assets of its wholly‐owned subsidiary, S corporation, under a plan that qualified as a tax‐free complete liquidation of S. Can it transfer carryover charitable contributions or net operating loss?

Answer 1

Yes it can transfer. that is 1 of Tax attributes of the subsidiary transfer to the parent after a tax‐free liquidation of the subsidiary into the parent.

Question 2

Type A reorganization

Answer 2

Asset for Stock:

• Target’s asset exchanged for acquirer’s stock. Target not exist anymore.
• Requirement: at least 50% of consideration exchange into stock.
• Gain from stock will be defered

Question 3

Type B reorganization

Answer 3

stock for stock

• Target’s stock exchange for voting stock from acquirer.
• Target still exist, got owned by at least 80% by acquirer
• Gain will be deferred like Type A reorganization.

Question 4

Type C reorganization

Answer 4

Asset for stock:

• Target’s substantially all of asset’s exchanged for acquired’s Stock
• Substantial meaning 90% of net asset or 70% of gross asset.

Question 5

Type D

Answer 5

Spin off

Or Split up

Question 6

A contributed property to exchange for C’s stock.
A’s Property basis: $40K
Property FMV: $82
Property have a mortgage: $10K which corp assume
What A basis in C’s stock
What Corp’s basis in the building

Answer 6

A basis in C’s stock = property basis less any debt assumed by the corp= 40 - 10 = $30

Corp basis in building = the greater of (1) adjusted NBV + gain recognized by transferor or (2) debt assumed by the corp. Therefore, property basis = $40. In the 2nd scenario when debt assumed by the corp is more than the adjusted basis and the gain recognized or cash contributed, the Corp’s basis will be debt assumed by the Corp.

Question 7

80% voting stock immediate after a transfer, what is tax implication on shareholders ?

Answer 7

Tax free transfer happen when immediately after transfer control shareholders own more than 80% voting stock, otherwise, taxable gain will be recognize
i.e. A , sole shareholder transfer land with basis of $40, FMV of $100 to corp&raquo_space;Non-taxable transaction, corp basis in land = $40. One year later, B contribute equipment exchange for 10% stock, equipment basis $10, FMV $100» as 10% < 80%, it’s taxable transfer, B recognized gain of $90, Corp basis in equipment is $100.

Question 8

What type of business required to file tax using accrual basis method.

Answer 8

1. Business that have inventory
2. Tax shelter
3. Certain farming corp
4. C corporations, trusts with unrelated trade or business income and partnership having a c corp as a partner provided the business >$5 Mil annual gross receipts for 3 year period.

Question 9

Shareholder contribute only service can be counted toward control group?

Answer 9

no

Question 10

Goodwill depreciation period

Answer 10

15 year straight line.

Question 11

What is the limite of deductible charitable contribution for corporation? the excess of deductible amount can be carry forward for how many year.

Answer 11

10% of taxable income after adding back dividend-received deduction.
Excess charitable contribution carried forward to 5 years

Question 12

Accrued donations deductible

Answer 12

As long as the Board’s authorized contribution:

1. before the end of taxable year
2. it was paid by the 15th of the 4th month after the end of taxable year (filing deadline not include extension).

Question 13

Dividend received deduction depend of the ownership %

Answer 13

1. Ownership 0% to < 20% : DRD 70%
2. Ownership 20% to < 80%: DRD 80%
3. Ownership 80% or more : DRD 100%
4. DRD is 100% if received from the same affiliated group or receive from small business investment.

Stock required to be owned more than 45 days

Deduction not apply to preferred stock

Attention: when calculating DRD, the deduction is limited to the modified taxable income which is taxable income before

1. the DRD
2. Carryback (NOL, Capital loss
3. Domestic production activities deduction. . I.e. CY loss from operation (not include dividend income) of ($10) , div rec’d $100 from unrelated corp. DRD = .7*(100-10)= $6.3.

Question 14

Organization cost amortization

Answer 14

Amort period = 180 months (amortize by month, i.e start the corp in July 1, Y1 meaning the org cost amortization expense cover 6 month.

Question 15

Report rent income for accrual corp.

Answer 15

Rent income for accrual corp = rent actual receive + increase of AR
i.e. AR beg =10
AR end = 20
Rent received 50
rental income to record on tax return = 50 + (20-10)= 60

Question 16

Capital loss deduction.

Answer 16

Capital loss only is used to offset capital gain. not used to reduce ord. income.
Capital loss can carryback 3 year and carryforward 5 year to offset capital gain.

Question 17

Gift expenses allowed

Answer 17

Gift per individual limit to $25.

Question 18

Bad debt tax reporting method.

Answer 18

corp required to use direct charge off method

Question 19

Personal Holding Company definition.

How phc calculate the undistributed income

Answer 19

personal holding company is corp:

1. required to distribute net earning. Otherwise penalty will be imposed.
2. No accumulated earnings tax as net earnings are required to distribute.
3. Personal Holding companies are corp when more than 60% of the adjusted gross income consist of net rent, royalty ,interest and dividend ( from unrelated domestic corp).
4. A shareholder is considered to own stock held by family member including brothers, sisters, ancestors and lineal descendants(children).

Note: To calculate the undistributed income: deducted federal income tax

Question 20

Illegal business (i.e. weed selling business). How to report income and expenses

Answer 20

Income can be netted with cost of sale. But no related business expenses will be deducted due to illegality of the business.

Question 21

How corp can reduce accumulated earning tax?

How to calculate the acc. earning tax?

Answer 21

1. Paid out dividend by the filing deadline in the following year(4/15)
2. Prove business need which required the co to accumulate earnings .

Calculate the accumulated earning tax:
Taxable income
Less: Fed Income tax
Less: $250,000 (minimum accumulated earnings credit)

Question 22

Consent dividend

Answer 22

Consent dividend is agreement between shareholder and the corp, whereby the s/h pick up the amount on their personal income without actual distribution being made.

That is consider dividend paid on the corp’s books.

Question 23

No underpayment penalty will be imposed when?

Answer 23

when the tax for the year is less than $1,000.

Question 24

Consolidated return

Answer 24

To be entitled to file a consolidated return, all the corporation in the group

1. Must have been a members of an affiliated group at some time during the tax year
2. Must have file a consent (the act of filing a consolidated return qualified as consent)

An affiliated group means that a common parents owns :
80% or more of the voting power and value of all outstanding stock

Question 25

Corp that are denied the filing of consolidated return privilege include.

Answer 25

1. S-corp
2. Foreign Corp
3. Most real estate investment trusts (REITs)
4. Some insurance company
5. Most exempt organizations.

Question 26

Dividend received deduction limitation for consolidated corps

Answer 26

X reported $120,000 loss which include $10,000 dividend from Y (X & Y file consolidated TR). Y report $140,000 income which included $30,000 of dividend received from less than 20% owned stock investment. What is the group consolidated loss for the year.
Answer:
$10,000 dividend from Y is excluded as X& Y consolidate, that makes loss of 130,000(= -120,000-10,000). Add Y income, to get to income of $10,000.
The dividend received deduction on the $30,000 div received by Y is limited by 30% of the consolidated taxable income bef dividend received deduction which is .3x10,000 = 3,000. Therefore the net income after dividend deduction is 7,000 = 10,000 - 3,000 .

Question 27

AMT income exemption

Answer 27

The normal exemption amount for corp is $40,000. It must be reduced by 25% of the amount by whixh AMTI exceed $150,000, causing the exemption amount to be completely phased out when AMTI is $310,000 or more

Question 28

Taxability of distribution

Answer 28

1. Net operating Income
   Less: Distribution
   Less: Non-deductible expense

Question 29

AMT Income adjustments

Answer 29

1. Adjustment for gain loss from sale
2. Long term contract : Difference between revenue calculated under completed contract method and revenue calculated under the % of completion method
3. Installment sale: acrual method used to record profit instead of installment sale method
4. Depr adjustment for property placed into service after 1986 and before 1999 (1986-1999)

Question 30

Preferences mean in AMT calculation (PPP)

Answer 30

Preference is excludible for regular tax purpose but added back for AMT purpose.

1. Percentage depletion
2. Private activity bond
3. Pre 1987 acrs depreciation

Question 31

ACE = Adjustment to current earning (MOLDD) multiplied by 75%

Negative adjustment rule?

Answer 31

1. Municipal bond
2. Organizational expense amortization is added back
3. Life insurance proceeds on key employee added back.
4. Depreciation (added or substracted)
5. Dividend- received deduction (added back)

Negative adjustment rule: The ACE adjustment can be negative. but the amount of the negative adjustment in a particular tax year cannot be greater than the cumulative net positive ACE adjustment (prior positive adjustment less prior negative adjustment)

Question 32

Minimum tax Credit: against future regular tax

Answer 32

1. Forward forever
2. A corp that pays AMT in one year may use this AMT as a credit in future years against the corp’s regular income tax liability

Question 33

AMT fomula

Answer 33

1. Taxable income
2. Add: preference items
3. = Unadjusted AMT taxable income
4. ACE adjustments time 75%
5. = AMT income
6. Less NOL (not exceed 90% of AMT income)
7. Less exemption: $40,000 (reduced 25% for any excess of $150,000)

Question 34

Corp’s capital loss carryback or carryover

Answer 34

Corp capital loss carryback or carryover treated as short term capital loss to offset capital gain and 1231 gain

Question 35

How much of distribution in excess of the accumulated earning and profit and current earning considered dividend?

Answer 35

Only the amount of distribution in the extent of AEP and current earning considered dividend

Question 36

Corp liquidate, gain or loss from distributed property based on FMV or cost basis of the property?

Answer 36

When a corp liquidate and distribute asset to shareholders, gain is recognized to the extent that FMV distributed to shareholder exceeds shareholder’s basis

Question 37

Distributions taxability

Answer 37

1. Current E&P (by year end) -> Taxable dividend
2. Accu. E&P -> Taxable dividend
3. Return of capital (no E&P) -> tax free and reduce basis of common stock
4. Capital gain distribution (no E&P no basis) -> capital gain .

Question 38

Multiple distributions in a year

Answer 38

1. Current E&P (as earnings made through out the year), distribution to the extent of CY E&P is prorated through out the year.
2. Acc. E&P, first come first served, based on chronological order of distribution

i.e. distributions of $100 total equally distributed each quarter from a Corp with CY E&P of $80, Acc. E&P of $10. Each quarter distribution is $25. Answer: the first $20 distribution of each quarter will come from CY E&P, Acc E&P, first come first served, $5 from 1st and 2nd distribution will come from Acc E&P, the rest $5 from 3rd and 4th will be tax free return of capital.

Question 39

Distribution in complete liquidation of a corporation taxable to shareholder as capital gain (loss) or ordinary

Answer 39

Shareholder own stock, so property paid to shareholder as liquidation distribution considered payment of their stock, therefore the shareholder must recognize capital gain or loss equal to the difference between the FMV and the basis of the stock.

Question 40

Stock dividend taxable or not

Answer 40

Stock dividend generally not taxable unless shareholder has a choice of receiveing cash or other property.

Question 41

Distribution to preferred shareholder vs. common stockholder

Answer 41

Preferred shareholder are paid in full before common shareholders receive dividends

Question 42

Liquidating distribution of property from subsidiary to parent corp taxability

Answer 42

No gain or loss recognized by either the parent corp or the sub corp when the parent own at least 80% of the stock.

Question 43

Basis of stock when shareholder contribute property with mortgage.
1. Jones contributed property NBV $100, have mortgage of $60, the property FMV $120, received $10 from the corp.

2. Carey contributed property NBV $20, FMV $50, mortgage $20, Carey contributed $30 cash to the corp.
3. Token contributed $10 cash , property worth $40, basis $5, mortgage 20.

Answer 43

Basis of share
Jones Carey Token
Net book value 100 20 5
Less: debt relief (60) (20) (20)
Cash contributed 0 30 10
Cash received (10) 0
Gain recognized 10 0 5

Basis of share 40 30 0

Question 44

Penalty for C-corp payment estimated tax late

Answer 44

If the Corp is not a large corp, use 100% prior year method for estimated taxes.

Late payment penalty is half of a percent for each month (fraction of a month considered 1 month) up to a max 25%.

Late payment penalty exception: if 90% of the tax was paid on time and the remaining amount is paid by the extended due date. No penalty.

Question 45

S corp status effective date

Answer 45

To be effective for the current taxable year, the S corp election must be made by the 15th day of the third month of the taxable year. If the election is made after that date, it becomes effective on the first day of the next taxable year, Jan 1, next year.

Question 46

Revoke S status

Answer 46

S corp status can be revoked if shareholder owning more than 50% of the total number of issued and outstanding shares consent. The specific percentage of voting and nonvoting shareholder is not considered, just the total.

Question 47

Build in gain for property contributed when forming a C corp. Later C become S corp.

Answer 47

Build-in Gain determine at the time the S election become effective. The appraised valued of the property at that time if exceeding basis, the difference will result in build in gain which is taxable at 35% highest corp tax rate.

Question 48

Distribution and loss in current year exceed s corp shareholder basis. What order for the distribution and loss to exhaust shareholder’s basis .

Answer 48

Distribution first, then loss.
I.e. Basis beginning $500, distribution CY is 300, loss is 250.
Basis of 500 less distribution of 300= 200.
loss of 250, only 200 deductible, 50 will be carried over to next year.

Question 49

S-corp election termination related to passive investment income and previously C corp status

Answer 49

S corp that are former C Corp with undistributed C corp earnings and profits are restricted to less than or equal to 25% of the total E&P is passive investment income realized without terminating their S election.

Question 50

A company terminated s corp status. When can the company reelect S status?

Answer 50

Until the 5th year from the year of termination.

Question 51

Termination of partnership status

Answer 51

A partnership terminate for income tax purpose when 50% or more of its interest change hands within 12 months .

Question 52

What happening to the remaining partner when the partnership got terminated?

Answer 52

Tax law treats this as a distribution of the prior partnership’s assets followed by a recontribution of the (deemed) distributed assets to the new partnership.

Question 53

Basis of partner’s interest when partner contributed services.

Answer 53

If a person received an interest in the capital of a partnership in exchange for services provided to the partnership. The basis of the interest is the FMV of the the interest acquired.
I.e. Don received a 10% interest in the capital of Rev partnership for services rendered. Partnership net asset have basis of $350, FMV of $500. Don basis in partnership is $50 (10% of FMV).

Question 54

when the holding period of a partnership interest acquired in exchange for a contributed capital asset begins.

Answer 54

The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date the partner’s holding period of the capital asset began.

Question 55

In the absence of an election to adopt an annual accounting period, what is the required tax year for a partnership?

Answer 55

Per IRC Section 706(b), a partnership tax year must have the same taxable year of the partners that, in the aggregate have interest greater than 50%, which is determined based on the testing date, which is the first day of the partnership’s tax year.
Exceptions: (1) If there is no “majority-interest” tax year, then the tax year is the tax year of all of the principal partners of the partnership (who owning 5% or more of the income or capital of the partnership). (2)If the partnership is still unable to determine a tax year using the general rule or the first exception, then the tax year that cause the least aggregate deferral of income to the partners must be adopted.

Question 56

Non-liquidating distribution of partnership capital assets. What gain or loss will be recognized?

Answer 56

No gain or loss will be recognized. The basis of the property distributed is the value of the distribution.
I.e. Partnership A distribute machine FMV of $100 with basis of $70 to its partners. $70 will be reduced from basis of partners.

Question 57

Who elect the method of depreciation in partnership and what method is allowed?

Answer 57

The partnership elect the depreciation method and any method approved by the IRS.

Question 58

Section 444, choosing a tax year different from their required tax year.

Answer 58

The referenced tax year is where the deferral period is not longer than three months (i.e. the number of months between the beginning of the tax year and the end of the required tax year).

Question 59

In a liquidating partnership, partner B have a basis of $100, received cash distribution of $10, land with basis of $70 and FMV of $100. What was the partner’s land basis after the distribution.

Answer 59

Basis of $100 less cash received of $10 equal $90, that is the partner’s basis in land. The FMV is irrelevant. Neither partner or the partnership recognize any gain or loss from the distribution.