General Tax Knowledge

Question 1

How are the COD exclusions tested for partnerships?

Answer 1

The exceptions under 108(a)(1)(A), including for bankruptcy and insolvency, are tested at the partnership level.

Question 2

What is the concern with a corporation paying interest on its debt using its stock (or related person stock)?

Answer 2

It’s non-deductible - see 163(l)

Question 3

Code Section 245A

Answer 3

Allows a 10% or greater corporate U.S. shareholder a DRD with respect to the foreign source portion of a dividend received from a specified 10% owned foreign corporation if (i) the holding period in 246(c) is met and (ii) it’s not a “hybrid dividend” per 245A(e)).

Question 4

What will happen in M&A deals with the new NOL rules?

Answer 4

Buyers that generate NOLs will want to carry them back to get refunds, but if the agreements give the seller a right to a tax refund, they may have to negotiate to give the seller part.

Question 5

What is the impact of the CARES Act on businesses losses?

Answer 5

It removes the 80% income limitation on use of losses for tax years beginning before 2021, and permits net operating losses (NOLs) arising in 2018, 2019 and 2020 to be carried back five years.

Question 6

What is the impact of the CARES Act on interest deductibility under Section 163(j)?

Answer 6

Eases the limitation from 30% to 50% of EBITDA for tax years beginning in 2019 and 2020, and permits businesses to elect to use their 2019 EBITDA to determine their 2020 business interest deduction. For partnerships, the 50% limitation will apply to income earned in 2020 (but not 2019), and for 2019, 50% of the excess business interest allocated from the partnership to the partner will be treated as business interest paid in 2020 (and not subject to the business interest deduction limitation) and the remaining 50% will continue to be subject to the 30% limitation but can be carried forward.

Question 7

What are the “economic impact payments” under the CARES Act?

Answer 7

$1,200 per individual ($2,400 for joint return filers), and $500 per child, in a one-time advance tax credit to be paid immediately. Phases out for incomes above $75,000 and $150,000, for individuals and joint return filers, respectively.

Question 8

What is the tax treatment of a conversion of convertible notes into stock for a U.S. holder?

Answer 8

No gain or loss on conversion, except for cash received in lieu of fractional shares and any shares received for accrued interest. Will receive COB less cash received (other than cash attributable to fractional shares and accrued interest). Gets tacked on holding period.

Question 9

What are Classes VI and VII on the allocation schedule, and does the buyer care if $0 is allocated to VI?

Answer 9

Class VI is all Section 197 intangibles except goodwill and going concern. Class VII is goodwill and going concern. Buyer should not care because all Class VI and VII assets are 15 year amortizable assets, but buyer could care if the allocation does not technically follow the IRS by not allocating to FMV (subject to the fact that the parties have discretion to decide what is FMV).

Question 10

What are the exceptions to CODI recognition?

Answer 10

• Title 11 bankruptcy
• Insolvency
• Qualified farm indebtedness
• Qualified real property business debt
• Lost deductions
• Purchase price adjustments
• Contributions to capital
• Equity for debt

Question 11

What are the requirements to avoid CODI recognition in a Title 11 case?

Answer 11

Discharge of debt must occur (and be documented) pursuant to a plan approved by the court.

Unlike the non-bankruptcy insolvency exception, this exception is not limited to the extent to which debtor is insolvent.

Question 12

What are the requirements to avoid CODI recognition based on insolvency?

Answer 12

Exclusion is limited to extent to which debtor is insolvent.

Insolvency = excess of liabilities over fair market value of assets immediately before discharge.

Both of those prongs are subject to substantial uncertainty.

Question 13

What is the price of avoiding CODI recognition under the insolvency and Title 11 exceptions?

Answer 13

Taxpayer must reduce favorable tax attributes. Election to reduce depreciable assets first. The effect is really a deferral of taxable income, in most cases.

Question 14

What is the exception for CODI recognition for capital contributions?

Answer 14

Shareholder contributes debt to capital. Corporation recognizes CODI measured by difference between amount of debt forgiven and basis that shareholder had in the debt.

Question 15

What is the exception for CODI recognition for debt-for-equity exchanges?

Answer 15

Shareholder exchanges debt for equity. Corporation recognizes CODI by difference between amount of debt forgiven and FMV of stock delivered to shareholder. This exception has been extended to partnerships.

Question 16

What are the consequences of a debt-for-debt exchange?

Answer 16

If both old and new debt qualify as securities (generally, a term of five years or more), then the exchange can qualify as a 368 recapitalization. If not, the holder will recognize gain or loss. The old debt is deemed retired for the issue price of the new debt, for purposes of calculating CODI.

Question 17

How is a foreclosure treated?

Answer 17

Foreclosure is treated as a taxable sale of the property by the debtor.

If the debt is non-recourse, all of the debt discharged is treated as proceeds on sale, which may result in gain or loss. Foreclosure can result in phantom gain attributable to prior depreciation deductions. Since this is not CODI, the CODI exceptions do not apply.

If debt is recourse, the amount discharged that exceeds the FMV of the asset is CODI. Since this is CODI, it is eligible for the CODI exceptions (if they apply).

Question 18

Does it matter whether you use an LLC or LP?

Answer 18

No, except that in some foreign jurisdictions, an LLC is not respected as a partnership (it may be treated as a corporation), so you might want to use an LP.

Question 19

Does a GP have to own an economic interest in an LP?

Answer 19

If the only partners are the GP and one other partner, then you might want to give the GP an economic right so as to ensure that it is respected as a partnership (and so you might give them a 1% or 0.1% interest). But if there are already two or more partners, the GP does not need to own an economic interest.

Question 20

Can you convert into a C corporation to take advantage of Section 1202?

Answer 20

Yes.

The key is that the entity must qualify as QSBS when its stock is “originally issued.” If it’s an LLC or partnership, a conversion to corporation will result in a new issuance of corporate stock, so you are good so long as it qualifies as QSBS then.

If it’s an S corporation, you can’t just revoke the election because there’s no new issuance of stock and therefore it wasn’t QSBS when the stock was originally issued. You could contribute the assets into a new C corporation. Alternatively, if you have a Qsub, you could revoke that election, since that is treated as contribution by the S corporation of the Qsub’s assets to the Qsub.

Question 21

For tax purposes, is there any difference in an investor buying shares directly from a corporation versus buying from another shareholder?

Answer 21

Generally no (basis and holding period would be the same). The only difference would be if the stock otherwise qualifies for QSBS treatment, where it needs to be received at original issuance.

Question 22

Does 357(c) apply in a consolidated group?

Answer 22

No - See Treas. Reg. 1.1502-80(d).

Question 23

How is NWC defined (if in accordance with GAAP)

Answer 23

Cash, cash equivalents, inventory, accrued revenue, prepayments, and accounts receivable, less accounts payable and other current liabilities.

Question 24

What is an S-4?

Answer 24

A registration for issuance of stock (of a public issuer) in connection with a business combination.

Question 25

What are the levels of confidence for a tax opinion?

Answer 25

Non-frivolous - 10-20%
Reasonable basis - 20-35%
Substantial authority - 35 - 40%
More likely than not - 51%
Should - 70-85%
Will - 85 - 90% or more

Question 26

Section 6662

Answer 26

Imposes a 20% penalty on that portion of any underpayment attributable to certain triggers (negligence, disregard of rules, “substantial understatement” of income tax, and certain other misstatements).

Per 6664, there is a defense if for any portion for which there was reasonable cause and taxpayer acted in good faith.

Question 27

What is a substantial understatement?

Answer 27

If the amount of the understatement exceeds the greater of— (i) 10% of the tax required to be shown on the return for the taxable year, or (ii) $ 5,000

Question 28

What is the defense against a “substantial understatement”?

Answer 28

That portion for which (i) there was “substantial authority” or (ii) there is disclosure (on IRS Form 8275) and a reasonable basis for the position.

Question 29

What are reasons for getting a tax opinion?

Answer 29

To avoid penalties:
○ If there is substantial authority for a position, the 20% penalty for substantial understatements will not apply.
○ To avoid penalties on tax shelters and reportable transactions, the opinion must be at MLTN.
○ To be an opinion that gets the taxpayer out of penalties, the preparer has to comply with requirements, including under 6662 and 6664

Comfort opinion:
○ Gives comfort to taxpayer
○ Gives comfort to other parties in the transaction

It’s a contractual condition

FIN 48 /UTP - MLTN

Reduces risk that IRS will audit or question transaction?

Provides a roadmap to a reviewing court in determining that there is authority for a transaction.

Question 30

Is Section 368 elective?

Answer 30

Jim thinks that it’s probably not elective. If you meet the requirements, you will have a 368 (and that may be the case even if you don’t file an information statement or formally adopt a plan that includes 368 language - many things could be considered a “plan”).

Question 31

Does Section 368 apply to other-than-corporate entities (partnerships, disregards)?

Answer 31

No, only to corporations for tax purposes. But it does apply to foreign corporations.

Question 32

Under 368, which are the asset reorganizations?

Answer 32

A, C, and forward triangular (a)(2)(D)

Consider that target does not survive

Question 33

Under 368, which are the stock reorganizations?

Answer 33

B, and reverse triangular (a)(2)(E)

consider that target survives

Question 34

What ruling applies where vested stock is substituted for restricted stock?

Answer 34

Rev. Rul. 2007-49

Question 35

For purposes of Section 368, what constitutes “stock”?

Answer 35

Any equity interest.

Does not include rights, warrants, or options to purchase stock.

Debt that is convertible into stock is treated as debt until holder actually converts.

If vested stock is substituted for restricted stock, see Rev. Rul. 2007-49

NQ PFd constitutes good continuity of interest (i.e., a proprietary interest is reserved). However, most NQ Pfd (other than P NQ Pfd received in exchange for T NQ Pfd) is boot at the shareholder level.

Question 36

Section 354

Answer 36

No gain or loss is recognized by a shareholder when they give up their stock/securities for stock/securities of a corporation that is a party to a 368 reorganization

Question 37

In a 368 reorganization, how is cash received in lieu of a fractional share treated?

Answer 37

Treated as received for the fractional share deemed redeemed therefore (i.e., is an exception to general boot in gain rule).

Question 38

Section 368(a)(2)(C)

Answer 38

A transaction otherwise qualifying as an A, B, or C will not be disqualified if P transfers all or part of the T assets or T stock it acquires to a controlled subsidiary of P.

Successive transfers are okay. § 1.368-2(k).

This is effectively a statutory limitation on the step transaction doctrine.

Question 39

What are the consequences of a Section 368 to the target shareholders?

Answer 39

Per 354, no gain/loss if they receive stock/securities.

Per 356, boot is taxed to extent of gain. No loss is recognized even if there is boot. Gain recognized is analyzed under 302.

Per 358, basis in stock received is carried over from stock surrendered, adjusted by boot.

Question 40

What are the consequences of a Section 368 to the target corporation?

Answer 40

Per 361, no gain or loss to target when it transfer assets or stock in exchange for stock of P.

Per 358, basis for stock received is that of assets transferred, adjusted by boot.

Per 361, no gain or loss to T when it liquidates and distributes P stock.

Per 361, T is not taxed on boot it receives in exchange for assets so long as it distributes the boot.

If T liquidates and distributes unwanted assets, it recognizes gain. §361(c)(2).

Question 41

What are the consequences of a Section 368 to the purchaser?

Answer 41

Per 1032, no gain/loss when P issues stock in exchange for T’s assets or stock.

Per 362, basis in any property P receives is COB adjusted by gain recognized.

Question 42

What is the “signing date” rule?

Answer 42

For purposes of determining the stock/cash ratio in a 368 reorganization, you can use the value of the consideration as of the close of the last business day before signing so long as there is a “binding contract” providing for “fixed consideration.”

Question 43

Does COI still apply to reorganizations?

Answer 43

COI only applies to “A” reorganizations and really applies to the consideration requirement (38 - 50% in stock).

It’s okay if former T shareholders sell P stock immediately after transaction (even if pursuant to pre-existing contract) if sold to unrelated party, even if pursuant to a preexisting contract.

Also okay to sell immediately to P or related party, as long as sale was not previously negotiated and P initiates an open market stock repurchase program.

Question 44

If a re-organization is a C and D, how will it be treated/tested?

Answer 44

Treated and tested as a D.

368(a)(2)(A).

Question 45

If P acquires T stock in a B and then liquidates T as part of same plan, how will that be treated/tested?

Answer 45

Treated/tested as a C.

See Rev. Rul. 67-274.

Question 46

How is NQ Pfd treated in a 368?

Answer 46

It’s good stock for purposes of continuity, but in most cases will be boot to shareholder (except where P NQ Pfd is received in exchange for T NQ Pfd).

Question 47

Rev. Rul. 73-54

Answer 47

Payment or assumption by P of T’s valid 368 reorganization expenses is not boot.

Question 48

What is control for purposes of 368(c)?

Answer 48

At least 80% of total combined voting power of all classes entitled to vote and at least 80% of value of each class of nonvoting stock.

Question 49

Would you ever do a direct “A” or 368(a)(2)(D) FTM?

Answer 49

Better not to, in case it doesn’t qualify (and therefore produces two layers of tax).

Better to do a RTM followed by a cross-chain forward merger into a merger sub (in which case it has to qualify as a FTM) or a RTM followed by an upstream merger into P or followed by a forward cross chain merger into a DRE of purchaser (in which case it is tested as an A).

Question 50

Rev. Rul. 2001-46

Answer 50

If you do a 368(a)(2)(E) RTM and then a cross-chain forward merger into a merger sub of P (as an integrated transaction), it will be tested/treated as a FTM.

If you do a 368(a)(2)(E) RTM and then an upstream merger into P (or a forward cross-chain merger into a DRE of P), it will be tested/treated as an A (if done as an integrated transaction).

Question 51

How are lending fees treated for tax purposes?

Answer 51

It can either be a “fee” for tax purposes, or it reduces the issue price, in which case it is OID. Within reason, such treatment is elective and different lenders have different preferences.

Question 52

If a S corporation shareholder dies, is there a step up in the tax basis in the assets inside the S corporation?

Answer 52

No. Only with respect to the stock. That SUB will likely result in a capital loss on the liquidation of the S corporation, which might be usable to offset any deemed gain on a liquidation or sale of corporate assets (if the liquidation does not occur in a year after the sale).

Question 53

What is the long-term capital gains rate?

Answer 53

15% for most. 0% is taxable income is low enough. 20% if taxable income is greater than about $460K (filing single). The NIIT ma y also apply.

Question 54

In what circumstances are capital gains taxed at greater than 20%

Answer 54

1. Sale of 1202 QSBS - taxed at maximum 28% rate.
2. Net capital gains from selling collectibles (such as coins or art) - taxed at maximum 28% rate.
3. Portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

Question 55

How are short term capital gains taxed?

Answer 55

Net short term capital gains are taxed at ordinary income tax rates. The NIIT may also apply.

Question 56

What is the ordering rule for capital gains?

Answer 56

First, short term gain and loss are netted against each other, and long term gain and loss are netted against each. If there is any remaining loss, it can be netted against any remaining gain for that year. Any remaining capital loss can be used to offset $3000 of ordinary income, and the rest can be carried forward.

Question 57

What is a “wash sale”?

Answer 57

If you repurchase the same or substantially identical securities within 30 days before or after your sale, or enter into a contract to acquire such stock or securities. Loss is disallowed.

Ordinarily, stock of one company isn’t considered substantially identical to stock of another company for purposes of the wash sale rule.