Federal Taxation XI: S-Corp Tax, Estate/Gift Tax

Question 1

S-Corp Tax Characteristics (7)

Answer 1

1. S s/h taxed on portion of income/loss, regardless of dist
2. No imposition of corporate AMT, PHC, or accumulated earnings taxes
3. Adj basis of s/h stock adj at year end
4. S/H recognize gains when value of distributions exceeds adjusted basis in stock
5. 2% or more s/h are not eligible to benefit from many fringe benefit exclusions
6. 2% or more s/h can deduct premiums paid on health ins (in his/her name) as deduction for AGI as long as s/h has earned income from SC that exceeds total of all premiums paid
7. S/H who work for SC are employees subject to payroll taxes, but not SE taxes

Question 2

Default rules for S-Corps are C-Corp rules (6):

Answer 2

1. no special provision for contribution of property to SC
2. can elect to amortize organizational exp
3. property dist take outside basis of FMV
4. dist of built-in gain/loss property do not have any special implications for contributing s/h
5. dist of appreciated property causes recognition of gain at corporate level
6. no E&P calculation

Question 3

S-Corp Eligible Entity

Answer 3

1. no foreign corp
2. certain members of affiliated groups, parents of subsidiaries, financial institutions not eligible
3. SC may own 80% or more equity interest in C Corp
4. SC may own qualified subchapter S Subsidiary

Question 4

S-Corp Shareholder

Answer 4

1. can be parent corp, but not subsidiary unless of another SC
2. Estates (bankruptcy or testamentary) can be shareholders
3. Trust can be s/h if grantor or testamentary
4. special stock voting trusts and qualified S trusts can be s/h
5. small business electing trusts/exempt entities are allowed as s/h

Question 5

S-Corp Sharheholder limit

Answer 5

No more than 100 s/h

1. members of family/estate are 1 s/h
2. each beneficiary of a s/h trust is separate s/h
3. co-owners of stock each count as 1 s/h

Question 6

S-Corp Stock Requirements

Answer 6

Only one class of stock

1. if shares vary only in voting rights, not considered two classes of stock
2. convertible debt does not violate requirement unless and until it is converted into a 2nd class of stock
3. uninsured treasury stock does not violate

Question 7

S-Corp Election

Answer 7

Requires unanimous consent of shareholders

Question 8

S-Corp Termination

Answer 8

1. voluntary termination through majority vote
2. involuntary termination through violation of eligibility requirement
3. involuntary termination due to violation on limit on passive investment income exceeding 25% for 3 cons. yrs.

Question 9

S-Corp Reporting Operations

Answer 9

1. May use cash basis unless “tax shelter”
2. Taxable income reported separately for each shareholder on K-1
3. not entitled to most special corporate deductions (DRD)
4. do not pay AMT, PHC or accumulated earnings taxes
5. make most tax elections (instead of s/h making them)

Question 10

S-Corp Adjusted Stock Basis Calculation

Answer 10

Initial Basis
Plus:  Additional Contributions
 	Shareholder's share of:  
   Corporate Income
   Exempt Income
Less:  Distributions from AAA/OAA (in following order):
   cash
   inventory and receivables
   other property
Nondeductible Expenses
Corporate Losses

Question 11

S-Corp Loss Limitations

Answer 11

1. Adjusted basis of stock limits loss deductions b/c basis can not be below 0
2. Adj basis of loans to corp can be used for loss deductions once adj basis of stock is 0, but later increases in basis are used to restore basis of debt before basis of stock
3. s/h may only deduct losses to extent they are “at risk” for investments in corp
4. passive loss limits may also limit loss deductions depending on nature of corporate business and s/h participation in mgmt.
5. unused losses are carried forward indefinitely

Question 12

S-Corp Distributions in Excess of Adj Basis

Answer 12

taxed as capital gains. includes cash plus value of any property distributed

Question 13

Built-in gain property

Answer 13

for purposes of tax on an SC, is appreciated property (value in excess of adj. basis) as of beginning of first year of S status

never imposed on corp that has always been SC

Question 14

Gifts: Joint Ownership

Answer 14

creation of joint ownership interest without equal consideration from each co-owner is considered a gift of the excess contribution to the owner making a smaller contribution

Question 15

Transfers that are not considered Gifts (3)

Answer 15

1. Medical/Education paid directly to provider/school
2. Political Contributions
3. Satisfaction of an obligation

Question 16

Gifts: Annual Exclusion

Answer 16

$14K per done per year - eliminates modest gifts from application of the gift tax

Question 17

Present Interest

Answer 17

right to income or to enjoy property currently

Question 18

Integration of Gift/Estate Tax

Answer 18

Transfer taxes are integrated so that taxable gifts affect tax base for estate tax.

Question 19

Unlimited Deductions for estate/gift taxes

Answer 19

1. Spouse

2. Charity

Question 20

Unified Credit

Answer 20

provides that the first $5.34M of transfers from an estate/gifts will not trigger a tax liability

Question 21

Gifts: Marital Deduction

Answer 21

1. Unlimited
2. Deduction amount = Transfer less exclusion
3. Does not apply to gifts to spouse who is not US citizen, but $145K exclusion applies

Question 22

Federal Gift Tax Formula

Answer 22

Current Gifts
 - 1/2 of split gifts
\+ 1/2 of split gifts by spouse
- ANNUAL EXCLUSION
Less Marital and Charitable Deductions

= Current Taxable Gifts
+ Prior Taxable Gifts

= Cumulative Taxable Gifts
x Tax Rates

= Cumulative Tax
- Current Tax on Prior Taxable Gifts less remaining Unified Credit

= Gift Tax Payable

Question 23

Gross Estate vs. Probate Estate

Answer 23

Probate estate = collection of decedent’s possessions for legal purposes

Gross estate = value of these possessions for legal purposes

Question 24

Estate: Valuation of Property

Answer 24

Property included in gross estate is FMV at date of death or alternative valuation date (6 mo after death or on date property is disposed of)

Question 25

Estate: Special Use Valuation

Answer 25

Allows realty to be valued at a current use that does not result in best/highest FMV.

1. Available only to business conducted by decedent’s family
2. Constitutes substantial portion of gross estate
3. Property passes to qualifying heir of decedent
4. Cannot exceed $1,090,000

Question 26

Specific Inclusion in Gross Estate: Life Insurance

Answer 26

Proceeds included in gross estate if:

1. decedent had incidents of ownership, such as right to designate beneficiary
2. decedent’s estate or executor is beneficiary of the insurance policy

Question 27

Specific Inclusion in Gross Estate: Jointly Owned Property

Answer 27

1. value of decedent’s interest as tenant in common included in gross estate
2. jointly owned property by husband/wife (right of survivorship or tenancy in the entirety) - 50% of value of property included in estate of first spouse to die
3. jointly owned property with right of survivorship (unmarried) - portion of property includible = proportion of consideration decedent provided to acquire property

Question 28

Specific Inclusion in Gross Estate: Retained Interests

Answer 28

Property transferred where the decedent retained an interest or a power

1. retained life estate or power to alter, amend, revoke a transfer
2. power to designate possession or enjoyment of property/income

Question 29

Life Interest

Answer 29

interest in property that is retained for the life of the transferor.

Question 30

Specific Inclusion in Gross Estate: Transfers within 3 yrs of death

Answer 30

Certain gifts includable:

1. Transfers with retained interests, revocable transfers, transfers of life insurance
2. Property is included at date of death value
3. Gift tax paid on the gift is included in the estate for any gifts made within 3 years of death (“gross up” provision)

Question 31

Estate: Marital Deduction

Answer 31

To qualify:

1. spouse must receive property outright and be able to control its ultimate destination
2. Qualified terminal interest property (QTIP) will qualify for the deduction
3. No marital deduction for non-citizen spouses

Question 32

Estate: Other Deductions

Answer 32

1. Debts of Estate
2. Final Expenses (funeral, attorney, accountant)
3. Casualty/Theft Losses
4. Charitable Contributions

Question 33

Terminable Interest

Answer 33

fails due to a contingency or the passage of time (decedent grants spouse right to occupy a residence until such time as spouse remarries)

Question 34

Estate Tax Computation

Answer 34

1. add adjusted taxable gifts
2. apply current tax rates to total transfers
3. reduce tentative transfer tax by gift taxes paid/payable
4. subtract unified/other credits

Question 35

Federal Estate Tax Formula

Answer 35

Property Included in Gross Estate
- Expenses, Debts, and Losses

= Adjusted Gross Estate
- Marital and Charitable Deductions

= Taxable Estate
+ Adjusted Taxable Gifts (post 1976)

= Estate Tax Base
x Tax Rates

= Tentative Tax

• Gift Taxes on post 1976 gifts
• Unified Credit
• Foreign Death Tax Credit
• Taxes on prior transfers

= Estate Tax Payable

Question 36

Generation-Skipping Tax

Answer 36

supplemental tax that prevents avoidance of transfer taxes by skipping one generation of recipions