Important - Brush up before exam day

Question 1

C corp - Sec 291 recapture applies (20%) only to GAINS on the sale of REAL PROPERTY (Long term business use),
20% recpature should be on the lesser of the recognized gain or depreciation for C Corp

Individuals= Sec1250 unrecaptured, recapture does not apply (Sec 1250 is for individuals)

Answer 1

Recapture does not apply in the event of losses.

Ord Income tax % = 25%
LTCG = preferential rates

Question 2

Non elective deferral=25% of wages (EMPLOYER CONTRIBUTES 25% without any action from EMPLOYEE which means EMPLOYEE does NOT contribute)

Here are key points about the Non-elective deferral SEP IRA:

Employer Contributions Only: The employer is the only party making contributions to the SEP IRA, and they do so on behalf of eligible employees. Employees do not contribute, nor do they elect to make their own contributions.

Contribution Limits: The employer can contribute up to 25% of an employee’s compensation, with a maximum annual limit on the contribution. For 2025, the contribution limit is $66,000 or 25% of the employee’s compensation (whichever is less).

Eligibility: Employees are generally eligible for SEP IRA contributions if they are at least 21 years old, have worked for the employer in at least 3 of the last 5 years, and earned a minimum amount of compensation in those years (the compensation threshold may change each year).

No Employee Deferrals: Unlike some other retirement accounts, such as a 401(k), employees do not defer any of their income into the SEP IRA. All contributions come directly from the employer.

Flexibility for Employers: Employers are not required to contribute every year, which makes SEP IRAs a flexible option for small business owners. The employer can decide each year whether and how much to contribute, based on their financial situation.

Tax Treatment: Contributions made by the employer are tax-deductible for the business, and employees do not pay taxes on the contributions until they withdraw the funds in retirement.

A Non-elective deferral SEP IRA can be a great option for employers who want to provide retirement benefits to employees but without the complexity of employee deferrals and matching contributions required by other retirement plans like 401(k)s.

Answer 2

SEP IRA for self-employed

lesser of :

25% of employee’s comp or net SE income
or a high set amount that is adjusted annually by the IRS(same as 401k limit)

Question 3

Related party transactions when SP<basis of both related parties, use _________to calculate loss (recognized)

(related party loss disallowed)

Answer 3

FMV (recognized loss)

Question 4

1250 property (entire gain will be treated as 1231 gain even though it is taxed at 25%)

Answer 4

True

Question 5

Sec 351 rule where boot is involved and ownership is 80% or more. Gain will be the lesser of _________

Sec 351 controls the taxation of transfers to controlled corporations. No gain or loss is recognized on the property transfers for when shareholders own 80% of voting stock and 80% of non voting stock.

A shareholder who CONTRIBUTES ONLY SERVICES is not counted as part of the controlled group. (Ordinary income =taxable gain for services rendered by a shareholder)

Answer 5

Cash received/boot or realized gain

Question 6

Distributions from C corps are considered __________ to the extent of the C corp’s current or ACCUMULATED E&P.

Any excess distribution is treated as a nontaxable return of capital to the extent of a shareholder’s basis.

Any distribution in excess of both earnings and profits and a shareholder’s basis in the stock of the corp is treated as a CAPITAL GAIN.

None of the distribution comes from NEGATIVE E&P.

Answer 6

Dividend Income (ordinary income)

Corp Distributions are TAXABLE DIVIDENDS first to the extent of current (E&P) and then to the extent of ACCUMULATED E&P.

Current and Accumulated E&P are not netted.

Question 7

The IRS will often reclassify the sale of property to a shareholder at below the FMV as a _______

Answer 7

constructive dividend.

The IRS may reclassify them as dividends to avoid giving the deduction to the corp and to treat them as income to the recipients.

Corps may have an incentive to not classify these as dividends since the transactions listed above could create a deductible expense or a loss, while a dividend income is not a deduction to the corp.

Question 8

C CORP and S CORP - when a Corp distributes assets to its shareholders in a nonliquidating distribution, the corp is treated as having sold the assets for FMV and is subject to _______

Answer 8

TAX on any GAIN.

However, LOSSES are not deductible.

Question 9

Non cash property is included in dividend income at the FMV of the prop on the _________

Answer 9

DATE OF DISTRIBUTION.

Question 10

A stock REDEMPTION that is PROPORTIONATE with respect to the shareholder is treated as a __DIVIDEND__ to the redeeming shareholder.

Answer 10

A stock REDEMPTION that is due to a complete LIQUIDATION of a corp is treated as an EXCHANGE OF STOCK, not as a dividend.

Tax effect of the liquidation of an 80% or more owned subsidiary = Asset transferrred to the PARENT of the liquidating corp generally have a CARRYOVER basis as it received from the SUB.

No gain or loss recognized when liquidating a subsidiary.

Question 11

Type B reorganization, requirements -

(a) the target is acquired using the stock of the acquiring corp’s parent (triangular acquisition).

(b) the acquiring corp must be in control of the target immediately after the acquisition.

Answer 11

Stock of the target corp is acquired solely for the voting stock of either the acquiring corp or its parent.

Question 12

Installments sales not eligible for ___________

Under the installment method, gain is reported as the sales proceeds are collected. The installment method is generally not available for sales of inventory or publicly traded property. This method is ONLY available for GAINS.

Gain is reported as sales proceeds are collected. However, both depreciation recapture and any mortgage in excess of basis must be reported in the year of sale. Gain recognition is also accelerated in certain situations if the seller borrows against the installment obligation or if a related buyer resells the property within 2 years.

Answer 12

LOSSES, (HOT ASSETS)Inventory, sale of merchandise, marketable securities and loss transactions.

EVERYTHING TO BE RECOGNIZED IN YEAR 1 OR IMMEDIATELY IN THE CASE OF LOSSES AND HOT ASSETS

1245 - equipment - subject to 1245 depreciation recapture (ORDINARY INCOME IS NOT ELIGIBLE FOR INSTALLMENT SALES and SHOULD BE RECOGNIZED IN YEAR 1) and therefore, it’s not eligible for installment sales.

Could be partial gain and eligible for installment sales if Sec 1245 property has gain in excess of depreciation recapture

e.g. total realized gain is $290,000
Depreciation = 200,000

Question 13

REORGANIZATION

Type A = Generally, no gain or loss is recognized by the shareholders of the various corps except when they receive CASH or OTHER CONSIDERATION in addition to the stock or securities.

In addition, no gain or loss is recognized by the acquired corps or the acquiring corp pursuant to a tax-free reorganization.

Losses may be recognized by shareholders when shares are exchanged exclusively FOR UNLIKE PROPERTY.

Answer 13

Type A - Mergers or consolidation (A+B=C)
Type B - The acquisition by one corp of another corp’s stock, stock for stock
Type C - The acquisition by one corp of another corp’s assets, stock for assets (at least 80% of the acquiree’s net assets)
Type D - Dividing of the corp into separate operating corporations
Type E - Recapitalizations (to change the capital structure of a single corporation)
Type F - A mere change in identity, form or place of organization (e.g. change in name from Yolo corp to winning corp)
Type G - transfer of assets of an insolvent corp to former creditors as part of a bankruptcy proceeding

Question 14

No GAIN or LOSS is recognized if stock in a corp which is “A PARTY TO A REORGANIZATION” are exchanged solely for stock in that CORP which is a party to a REORGANIZATION.

Answer 14

True. The exchange must be made PURUSANT to a plan of reorganization.

Question 15

CONSTRUCTIVE DIVIDENDS = ORDINARY INCOME (not deductible by the corporation)

The sale of property to a shareholder below the property’s FMV would likely be reclassified as a constructive dividend to the shareholder, not salaries and wages.

Although, the sale of property to an employee by an employer at less than FMV could be considered compensation to the employee, there is no indication here that the shareholder is also an employee of the corp.

Answer 15

1. Excessive salaries paid to shareholder employees (unreasonable compensation)
2. Excessive rents and royalties
3. Loans to shareholders where there is no itent to repay
4. Sale of asset below FMV

Corps may have an incentive to not classify these as dividends since the transactions listed above could create a deductible expense or a loss, while a dividend payment is not a deduction to the corporation.

The IRS may reclassify these as dividends at FMV to avoid giving the deduction to the corporation and to treat them as income to the recipients.

Question 16

GUARANTEED PAYMENT __________

Answer 16

is a fixed payment by a partnership to a partner for services provided or use of capital without regard to the partner’s profit or loss sharing ratio. Guaranteed payments may apply to partners in a partnership not shareholders in a corporation.

Question 17

GOLDEN PARACHUTE

Answer 17

It is a substantial severance package provided for key executives when they are terminated, typically as a result of a merger or takeover of the company. IT IS NOT A CONSTRUCTIVE DIVIDEND.

Question 18

SEC 1244 WORTHLESS STOCK - only the ORIGINAL OWNERS (not the ones who inherited or subsequent buyers) are ALLOWED to treat part or all of a loss on the sale of the stock as an ordinary loss.

MAx Sec 1244 loss limit
Single - $50k
MFJ - $100k

Requirements:

1. Stock issued after Aug 10, 1993
2. Acquired at the original issuance
3. C corp only (not an S corp)
4. Less than $50 million of capital as of the date of stock issuance
5. 80% or more of the value of the corp’s assets used in the active conduct of one or more qualified trades or businesses.

Answer 18

To qualify as small business stock, the aggregate amount received by the corp for the initial stock issued cannot exceed $1 MILLION In this case, the 5 shareholders are all individuals and the corp received a total of (150000*5), so the stock qualifies as Section 1244 small business stock.

A MFJ can deduct upto 100,000 of loss as ORINARY. Beyond this amount would be CAPITAL GAIN.

Available to INDIVIDUAL or who was a PARTNER in a PARTNERSHIP at the time the PARTNERSHIP acquired the QUALIFYING STOCK.PARTNER’S Distributive share of PARTNERSHIP losses includes the loss sustained by the partnership on such stock.

ORDINARY LOSS treatment is not available for STOCK INHERITED, received as a GIFT or PURCHASED from another shareholder.

Maximumexclusion per qualifying shareholder is limited to 100 percent of the greater of:

10 times the taxpayer’s basis in the stock;
or
$10 million ($5 million if MFS).

Question 19

COMPLETE C CORP LIQUIDATION, When a corp directly distributes assets to its shareholders, the CORP recognizes GAIN OR LOSS as if it had sold the assets at FMV.
Corp generally deducts its liquidation expenses (e.g. filing fees and professional fees on its final tax return. CORP LIQUIDATION takes 2 general forms: Either the corp sells the assets and distributes the cash to the shareholders or distributes the assets to the shareholders.

SHAREHOLDER - Recognizes capital gain or loss to the extent the FMV of the assets differs from the shareholders’ AB in the stock of the corp.This occurs because shareholders must treat property received in a complete liquidation of a corp as full payment for their stock.

Answer 19

CORP’S BASIS
= BASIS of the asset
+ liability (e.g. if building is subject to liability)
________________
Corp’s basis

Shareholder’s basis = FMV in the case of complete liquidation.

Question 20

LIQUIDATION OF A SUBSIDIARY BY A PARENT - No gain or loss is recognized in this type of liquidation and the parent assumes the __________ of all assets and liabilities of the subsidiary.

Answer 20

CARRYOVER BASIS as well as any unused NOL Carryover, Capital loss carryover or charitable contribution carryover.

Question 21

CONSOLIDATED RETURN - to be filed by AFFILIATED group of corps only if they CONSENT to such a filing.

AFFILIATED GROUP - means that a common parent directly owns (in sub):
(a) 80% or more of the VOTING POWER of all outstanding stock
(b) 80% or more of the VALUE OF ALL O/S STOCK of EACH corp

REQUIREMENTs to file a consolidated return:
1. Be members of an affiliated group at some time during the tax year
2. Each member of the group must file a consent on Form 1122 (Auth and Consent of Sub corp to be included in consolidated tax return). This election to consolidate on Form 1122 must be made no later than the EXTENDED DUE DATE of the parent corporation’s tax year for the year.

Brother sister corp (holdings by individuals only, no corp involved) CANNOT file consolidated return. Corps in which an INDIVIDUAL (not a corp) owns 80% or more corps may not file.

Answer 21

following NOT allowed to file consolidated returns (denied):

1. S Corp
2. Foreign Corps
3. Most REITs
4. Some INSURANCE companies
5. Most Exempt orgs

Question 22

ADVANTAGES OF CONSOLIDATED CORP

1. CAPITAL LOSSES of own corp offset gains of another
2. OPERATING LOSSES of one corp offset OPERATING profits of another corp
3. DIVDENDS received are 100% ELIMINATED in consolidation because they are INTERCOMPANY dividends

Answer 22

DISADVANTAGES OF CONSOLIDATED CORP

1. Mandatory compliance with complex regulations.
2. In the initial consolidated tax return year, a double counting of inventory can occur if group members had intercompany transactions.
3. Losses from certain intercompany transactions may be deferred.
4. Each member of the group must change its tax year to the same year as the parent corporation. A corporation joining the consolidated group may have to file a short year
   tax return in addition to its inclusion in the consolidated filing in the same tax year when adopting the parent corporation’s tax year.
5. Tax credits may be limited by operating losses of other members.
6. The election to file consolidated returns is binding for future years and may only be terminated by disbanding the group or seeking permission of the Internal Revenue Service.
7. Many states do not allow for the filing of consolidated tax returns, thus companies discover that they file consolidated for federal income tax purposes but must file as a separate
   company for state income tax purposes resulting in additional tax preparation time and expense.

Question 23

Pre-contribution (built in gain) and post-contribution loss allocated to partners will result in the maximum loss to the contributing partner in _____________entity whereas NO such allocation of pre and post allowed in S corp.

PARTNERSHIP
PARTNER’S BASIS = basis in property distributed in a LIQUIDATING DISTBN - same as the partner’s pre-distribution basis

Answer 23

PARTNERSHIP

PARTNER

BUILT IN GAIN
+ GAIN IN excess of BIG *Partner;s share e.g. 20%
___________________
total gain

PARTNERSHIP
gain to the extent of cash distribution - basis

Question 24

When both business folks are required to owe NIIT when one is an active member and another is a passive investor/member. Business should be set up as __________

Active member;s comp/distributions wil be considered as self-employment or salary income and is not subject to NIIT whereas passive member’s distributions will be considered as Investment income/Dividends which will be subject to NIIT if AGI exceeds USD 250,000

Answer 24

C CORP - C CORP is managed by a BOD, which appoints officers to run day to day operations.

If the business is organized as a C corporation, the distributions to the shareholders are taxable dividend income to the shareholders. The dividend income is also subject to the additional 3.8 percent net investment income tax for taxpayers whose AGI exceeds a threshold amount of $200,000 ($250,000 MFJ). If TPs have substantial income from other sources, they probably exceed the threshold amount and will both owe net investment income tax on the dividend income.

Question 25

Ali, Virgil, and Izzy are equal owners of a new business, AVI Company. They expect the business to generate profits as soon as they begin operations but intend to leave the profits in the business and not take any distributions. They are all active participants in the operations of the business and want to receive reasonable compensation and fringe benefits paid by the business.

What entity type would be the most advantageous for tax purposes for Ali, Virgil, and Izzy? _____________
Shareholders in a C Corp can be employees and receive a salary and nontaxable employee fringe benefits from the employer-corp. The C corp would also pay the employer portion (1/2) of social security and medicare or FICA taxes on the shareholder-employee salaries. The salaries, FICA taxes and fringe benefits paid by the C corp are deductible in calculating the corp’s TAXABLE INCOME.

Answer 25

________C CORP

Partners cannot be employees of a partnership and cannot receive a salary or nontaxable employee fringe benefits. Partners instead receive guaranteed payments for services provided to the partnership. Partner fringe benefits that are paid by the partnership are taxable ordinary income to the partner just like guaranteed payments. Since the partners are not employees, the partnership does not pay one-half of the Social Security and Medicare taxes. The guaranteed payments are self-employment income to the partner, so the partner pays all of the Social Security and Medicare taxes (self-employment taxes) on the guaranteed payments. The guaranteed payments and fringe benefits for partners that are paid by the partnership are deductible in calculating the partnership’s ordinary business income.

Question 26

Limited partnership (can assign their int in profits and losses) and a stockholder in a publicly held CORP can__________

Answer 26

______assign their interest in the business.

Question 27

PARTNERSHIP CONVERTS TO AN LLC TAXED AS A PARTNERSHIP (NO CHANGE) - This proposed transaction is simply a change in the legal form of the entity. Because domestic multi-member LLCs are already taxed as partnerships by default, conversion to the partnership form results in no change in the entity’s classification for tax purposes. As such, there is no transaction and no taxable event.

Answer 27

A newly formed LLC elects to be taxed as partnership (NO CHANGE) - This proposed transaction is not a taxable transaction. Domestic multi-member LLCs are, by default, taxed as partnerships. As such, there is no transaction that must occur for the LLC to be treated as a partnership. Because there is no transaction, there is no taxable event.

Question 28

A C corporation must file articles of incorporation or a corporate charter with the state.

A limited liability company (LLC) must file articles of organization with the state.

A limited partnership must file a certificate of limited partnership with the state.

Answer 28

They all require some document to be filed with the state.

Question 29

GENERAL PARTNERSHIP ___________

Answer 29

Can be formed by verbal or written agreement or by conduct. GP is not required to file anything with the STATE.

Question 30

PARTNERSHIP

Answer 30

A partner’s tax basis in property received in a liquidating distribution from a partnership is equal to the partner’s remaining basis in the partnership interest after cash distributions.

a partnership can distribute appreciated property TAX-FREE to its partners (in general, a non liquidating distribution to a partner is nontaxable).

(but a shareholder’s tax basis in property received in a liquidating distribution from an S corporation is equal to the FMV of the property at the date of distribution.)

DB Enterprises only recognizes a gain on the liquidating distribution to Doug of property that has appreciated in value if the business is organized as a C corporation or S corporation, but not if it is organized as a partnership.

An S corporation cannot distribute appreciated property to its shareholders without gain.

When a limited liability company (LLC) is taxed like a partnership (by default, an LLC properly structured and with two or more owners is taxed like a limited partnership with no general partners), a limited liability company can distribute appreciated property to its owners tax-free.

. The tax treatment of the distribution if it is from a partnership is most advantageous for Carmen because the distribution would be totally nontaxable.

For nonliquidating distributions of appreciated property to partners from a partnership, no gain is recognized by the partner or the partnership for the appreciation in the value of the property. The amount of the distribution is the partnership’s adjusted basis in the property rather than the higher fair market value (FMV) of the property at the date of distribution. The distribution is nontaxable to the extent of the partner’s basis in the partnership interest, and the facts provide that Carmen has substantial basis in her ownership interest. The partner’s basis in the partnership interest is reduced by the adjusted basis of the property distributed to the partner.

Question 31

The recipient-taxpayer’s basis in the property received is the $65,000 fair market value (FMV) of the property if the distribution was received from a C corporation and the $50,000 adjusted basis of the property if the distribution was received from a partnership.

Answer 31

Partnership = Adjusted Basis

C corp = FMV

Question 32

Carlos will be a 25 percent owner in a new business being formed, Pearlin Industries, and will have a substantial basis in his ownership interest. He anticipates receiving a property distribution from the business in the near future. The entity’s adjusted basis in the property is $100,000, and the expected fair market value (FMV) of the property when it is distributed is $60,000.

Which of the following types of entity distributions would result in any of the loss from the property’s decline in value being recognized?

Answer 32

S corporation liquidating distribution- If the distribution of depreciated property is a liquidating distribution from an S corporation, the corporation would recognize the $40,000 loss on the difference between the $60,000 FMV and the $100,000 adjusted basis of the property on the date of distribution. The S corporation flows the loss through to the shareholders and allocates the loss pro rata based on ownership, so Carlos’ share of the loss would be $10,000 ($40,000 × 25%).

Question 33

Consent Form 1122

Answer 33

For filing of consolidated income tax return (Affiliated group)

Question 34

Consolidated income

Answer 34

take DRD unrelated (50%)

Question 35

Consolidated returns -

Answer 35

Dividends from SUB = DRD 100% allowed
or inter company dividends are eliminated

Question 36

Foreign derived intangible income

Answer 36

Out and Out

Use outside US and sold to a foreign corp

Question 37

Foreign branch is not a separate legal entity

Answer 37

True

Question 38

Both a limited partnership and a corporation :

Answer 38

1. Can only be created by statute
2. Each must file a copy of its certificate with the proper state agency.

Question 39

Consider after tax amount or income in case of EXPENSE

Answer 39

Tax savings when it comes to tax savings for income

Question 40

Minimum estimated payment per QUARTER is__________

Answer 40

25% of Tax Liability

Question 41

Int expense is _____

Answer 41

Tax deductible

Question 42

C corp
SHAREHOLDER BASIS
(-) Debt relief
+ cash contributed
(-) Cash received
+ Gain recognized
____________________
Tax Basis at the end in shares

Answer 42

Shareholder’s basis = NBV + Cash contributed-Boot received or gain realized?

Corp’s basis = Greater of NBV or liabilities assumed

Question 43

ORDINARY INCOME, FMV (Taxable)

Answer 43

The shareholder receiving common stock for services rendered must recognize the FMV as ORDINARY INCOME.

Question 44

Shareholders must recognize ____________ in a complete liquidation of a corp as full payment for their stock.

Answer 44

CAPITAL GAIN OR LOSS

Question 45

Partnership never recognizes any gain/loss in the case of DSITRIBUTIONS

Answer 45

No gain or loss in both scenarios

1. Liquidating distributions
2. Non liquidating distributions

Question 46

If a partner receives cash distributions > Basis , partner recognizes a capital gain for the excess amount

Answer 46

Hot assets = Inventory, Unrealized receivables, receivables
Ones which can be sold quickly (no adjustment applicable to HOT ASSETS for zero out to get out)

Question 47

Non liquidating distribution also known as ___________

Answer 47

Current distributions or Operating Distributions. Non taxable to Partner and the Partnership

Question 48

Casualty loss due to fire

Answer 48

No gain/loss to be recognized when all proceeds were reinvested in property within 2 years.

No loss is recognized in like kind exchange.

Question 49

C CORP = Sec 291 =20% of gain will be recapture and______________

Answer 49

remaining will be 1231 gain (2 steps involved)

Step 1 : take lesser of gain or depreciation

Question 50

Sec 1231 does not apply to stocks

Answer 50

It’s a capital asset

Question 51

Net capital gain =

Answer 51

Sec 1231 gain and loss + Capital Gain - Capital loss

Question 52

Ord gain + Dep recapture + 1231 pay back

Answer 52

= Ordinary gain (loss)

Question 53

LIKE KIND EXCHANGE : Boot includes both cash and _______

Answer 53

liability or mortgage relief

Question 54

ALLOCATE trustee fee between CORPUS and TAI (Trust accounting income) as per___________

TAI (does not include corpus items) = Trust income int, dividends (including tax-exempt income) less: Expenses attributable to income

TAI = Taxable int income
+ Tax-Exempt Int Income
- (Trustee Fees)
_______________________________
TAI

TAI does not include items allocated to corpus

CORPUS = beginning trust income + capital gains+Trustee fee (50%-50%)

DNI = deducts entire or 100% trustee fee or 100% of trust admin expenses

Answer 54

as stipulated in the TRUST AGREEMENT
or STATE LAW if there is no stipulation.

(generally equally if nothing is mentioned)

TAI includes PASSIVE INCOME (not CAP GAIN as that belongs to CORPUS) + TAX EXEMPT INT

Question 55

Subpart F income, 951(a) = Passive income (Div, int, annuities, royalty income, rental income, gains from sale of foreign property and gain from FX rate

OR includes ACTIVE INCOME Tied to a RELATED PARTY

FOREIGN BASE COMPANY INCOME is considered to be BAD INCOME under SUBPART F since it must be immediately taxed (no deferral or DRD) with respect to each shareholder’s pro rata share of such income.

Types of FOREIGN BASE COMPANY INCOME
1. FOREIGN PERSONAL HOLDING COMPANY INCOME - gnerally passive income
2. FOREIGN BASE COMPANY SALES INCOME - purchase or sale of personal property with a related party when the property is manufactured or sold outside the CFC’s country of inc.
If CFC meaningfully participates in the production of income (e.g. provides susbtantial manufacturing to complete unfinished inventory), then the income is not considered SUBPART F INCOME.
3. FOREIGN BASE COMPANY SERVICES INCOME = From performance of services for or on behalf of a related party when the performance occcurs outside the CFC’s country of inc.

Answer 55

GILTI income is ACTIVE income 951(A)

NI - 10% of avg of tangible adjusted basis of each quarter

50% of GILTI income is taxed as 50% is the deduction allowed.

Foreign Tax Credit: One key feature of GILTI is that U.S. shareholders can claim a foreign tax credit for foreign taxes paid on the GILTI income. However, the credit is limited, meaning that only a portion of foreign taxes paid on GILTI can offset U.S. tax liability.

Question 56

Deduct Selling expenses from ___________

Answer 56

Sale price

Question 57

A STOCK REDEMPTION that is PROPORTIONATE with respect to the shareholder is treated as a _______to the redeeming shareholder

Answer 57

DIVIDEND

Question 58

3 types of TRUST - Grantor, simple and complex. Simple and complex trusts are taxed as separate entities that report income on Form 1041.

A TRUST may be SIMPLE one year and COMPLEX the next.

SIMPLE TRUST
1. only makes distributions out of current income, it CANNOT make distributions from the trust corpus.
2. Required to distribute ALL of its income currently
3. Cannot take a deduction for a charitable contribution
4. Simple trust is entitled to a $300 exemption in arriving at its TI

Answer 58

COMPLEX TRUST

1. A complex trust may accumulate CURRENT INCOME
2. May DISTRIBUTE principlal or CORPUS
3. May deduct CHARITABLE CONTRIBUTIONS
4. Permitted an exemption of $100 in arriving at its taxable income
5. Make annual beneficiary DISTRIBUTIONS that are below the trust’s DNI

Question 59

DNI

Passive income
Tax exempt income
Deduction for admin cost and itemized expenses (100%)

*DO NOT TAKE
capital gain, deduction for distributed income, personal exemption

Answer 59

Taxable Income

Passive income
+ Capital gain
+deduction for admin costs and itemized expenses
+Personal exemption

__________________
TI

*DO NOT INCLUDE Tax exempt income coz it’s not taxable, it’s tax free

Question 60

DEFINED CONTRIBUTION PLAN

1. The amount that can be contributed is DEFINED
2. The employee bears the investment risk
   3.Value of the account fluctuates due to changes in capital mkts or investments
3. The retirement benefit is solely the balance in the employee’s account.
4. DC plans have individual accounts for each employee
   e.g. Sec 401(K) retirement plans are the most common type of employer-sponsored DC plans

Answer 60

DEFINED BENEFIT PLAN
A defined benefit plan, or pension plan, promises employees a specified monthly benefit at normal retirement age.

The promised retirement benefit may be a fixed dollar amount or may depend on a defined formula that considers factors such as age, salary, and years of service.

The employer
sponsors the defined benefit plan and typically will engage investment managers to manage the
defined benefit plan’s investments.

Because the benefit is defined by contract (plan trust agreement)
the employer bears the investment risk.

If sufficient funds are not available to meet the promised
retirement benefit, the employer will have to utilize company earnings to fulfill the promised benefits.

Question 61

S corp

Shareholder basis in the property distributed = FMV at the time of distribution of property

Answer 61

S CORP’s adjusted basis in the property distributed:

FMV-Gain
or
where liability is provided in the question
S corp’s basis will be ________

Greater of
(a) liability OR
(b)AB of property received (FMV-gain)

Question 62

Like kind exchange = BASIS in new property =

Answer 62

FMV of property/truck received less gain relaized or deferred gain

Question 63

The TAXABLE amount of gift/estate transfer tax purposes is the _________ at the date of gift or date of death.

Annual per donee exclusion (2024) is $18,000 for gift purpose only (not applicable for inheritance or estate), not applicable for future interest

Answer 63

FMV

Question 64

KIDDIE TAX

Unearned income(e.g. $3600) - $2,600 = Taxed at parent’s rate

e.g. $1000 taxed at parent’s rate

Answer 64

STEP:If EARNED INCOME More than 1300
STEP:STd deduction should be EARNED INCOME + 450
STEP:NOT TO exceed regular STD DEDN LIMIT 14600

Question 65

FEDERALLY DISASTER AREA = Involuntary conversions

Answer 65

Loss will be recognized (considering basis+clean up cost)

Basis in new building will be PURCHASE PRICE OF NEW BUILDING

Question 66

1250 gain is taxed at 25% (recpature)

Answer 66

1231 gain at LTCG rates of 20%

Question 67

FAMILY MEMBERS under section 267

Answer 67

Spouses, siblings, ancestors and lineal descendants.

Question 68

JV lacks profit motive

Answer 68

GP does not need to formally file paperwork with the state.

Question 69

A partnership is eligible to take Sec 444 election of the IRC to take different tax year for which the deferral period is __________

Answer 69

no longer than 3 months (No valid business reason needed (does not exceed 3 months).

*Valid business reason is required when deferral exceeds 3 months period (or when partnership wants to adopt a different tax year other than the generally required tax year)

*Year end must be the same as that used by a majority of partners

Question 70

Individual partners can make the election to take a ___________ for taxes paid to foreign countries.

Partnership makes other elections such as organizational costs, election to make involutnary conversion gains and 179 expense election

Answer 70

deduction or a FTC

Question 71

Irrevocable trust - subject to gift tax (creditor protection of assets), trustee is responsible for filing tax return

separate taxable entity.

Answer 71

Revocable (also referred to as GRANTOR TRUST)- Not subject to gift tax

1. Grantor can make changes or terminate trust
2. Trust income taxable to grantor
3. Trust assets part of grantor’s estate

Grantor places assets in a trust but maintains a claim to, or control over those assets.

Question 72

Normal due date for filing of a GIFT TAX RETURN is

Answer 72

april 15 of the following year in which the reportable gifts were made.

Question 73

BEAT - Avg gross receipts of $500 million or more for the 3 preceding tax years

Answer 73

Corp must make deductible payments to non-U.S. persons who are related parties

Question 74

Sec 351 transfer is non taxable (80% ownership and property including cash is transferred to the corp and solely in exchange for stock) and applies only to __________
it does not apply to Partnership.

IRC section 351 controls the taxation of transfers to controlled corporations. No gain or loss is recognized to the transferor/shareholders if above conditions are satisfied)

A shareholder who contributes only services is not counted as part of the control group. Gain is recognized by transferor who are not part of the control group e.g. the ones who provided services as they are not falling under non taxable exchange category.

Answer 74

S corp and C Corp.

However, if property is transferred subject to a LIABILITY in excess of the basis in the property, the shareholder must recognize gain on the excess.

Liability - Basis = Gain

Question 75

Pre-contribution gain/loss = allocated to the contributing partner

Answer 75

Post contribution gain/loss = allocated among the partners.

Question 76

Exchanges of tangible business personal property ______________

Answer 76

do not qualify as like-kind exchanges.

ONLY real property qualifies as Like-kind exchange.

Question 77

Grantor trust are not taxed as separate entities by the IRS

Question 78

Exclusion ratio =

Answer 78

After tax contributions/Expected total payments

Question 79

When it comes to tax, take ___

Answer 79

marginal tax rate

Question 80

Joint Venture is similar to that of ______

Answer 80

Partnership?

Question 81

Traditional 401K and Traditional IRA are funded with PRETAX $$.

Answer 81

Roth 401k and ROTH IRA are funded with AFTER -TAX $$

meaning contributions do not reduce taxable income in the year of the contribution.

Question 82

GIFT TAX EXCLUSION, Form 709 : The educational EXCLUSION applies to TUITION ONLY___

Answer 82

NOT TO books, supplies, dormitory fees

Question 83

Statutory periods to acquire replacement property for involuntary conversions:

Answer 83

2 years - destruction or theft of property resulting in insurance recovery
3 years - Govt condemnation or eminent domain award
4 years - Conversion in connection with a federally declared disaster.

Question 84

RELATED PARTY transaction

Answer 84

Loss is disallowed

Gain is allowed. If thechild sells the property within 2 years after ACQUISITION, the taxpayer must immediately recognize any remaining gain upto the proceeds of the subsequent sale

Year 1 recognize = 1000 downpayment + installment amount *(profit %)

Question 85

Upto $100,000 MFJ limit treated as ordinary loss on sec 1244 stock____

Answer 85

anything in excess of $100,000 limit is capital loss

Question 86

Order of Non liquidating or operating partnership distributions

Answer 86

Cash first
Then HOT ASSETS
then other Property

Question 87

Transfer to spouse - within a required ________ is exempt and not subject to the gift tax

Answer 87

3 year period as part of a divorce settlement pursuant to a signed agreement.

Question 88

Because the grantor of a revocable trust retains control over and claim to the trust’s assets, transactions between the grantor and the trust are __________

Answer 88

DISREGARDED for tax purposes.

IRREVOCABLE are classified as either simple or complex trsust.

Transactions between a GRANTOR and irrevocable trust are subject to taxation (e.g. gift tax)

Question 89

Property transferred at the time of divorce would have the ________ of the ex spouse

Answer 89

carryover basis and carryover holding period

Question 90

LLC allows all members to _______

LLC with more than 1 member is taxed as a PARTNERSHIP

Answer 90

PARTICIPATE

Question 91

The Private foundation status of an exempt org will terminate if ______

(foreign is allowed) Trust or corp can be an exempt org

Answer 91

it becomes a public charity

Question 92

Underpayment

Answer 92

preceding year can’t be used because there was a NOL.

Question 93

Concentration risk is the risk of magnified loss due to a lack of diversification.

Answer 93

Because MUTUAL FUND allow for an invesment in a variety of securities, they have lower concentration risk than any individual security.

Question 94

Partnership = if cash distributed exceeds a partner’s outside basis, the excess is taxable as a ___________

Answer 94

Capital Gain

Question 95

UBIT Std specific deduction =

Answer 95

$1,000

34% tax =corporate tax rate

Question 96

S corp

Answer 96

include adopted children (Same as natural born children)

in-laws are not related parties

Question 97

DECREASING TAX RATES
delay income to next year, accelerate deductions to this year

Answer 97

INCREASING TAX RATES
Vice versa

Question 98

DEFINED BENEFIT = LUMPSUM

Answer 98

Once the original owners reach a certain age, they must take a RMD annually or pay an EXCISE TAX. Distributions are taxable as ORD INCOME.

Question 99

A non-grantor trust is a trust where the grantor does not retain significant control or benefits. Conversely, a non-grantor trust is treated as a separate taxable entity, and the trust itself is responsible for paying taxes on its income.

Non-grantor trusts are subject to tax on their income, and they must file Form 1041 to report their income, deductions, and credits.

Income is taxed to the trust unless distributed to beneficiaries.

Answer 99

Example: John establishes a trust and retains the power to revoke the trust at any time.

Because John retains this power, the trust is considered a grantor trust.

All income generated by the trust, such as interest, dividends, and capital gains, is reported on John’s personal tax return.

If the trust earns $10,000 in interest income, John must include this amount in his taxable income.

Question 100

TERMINATING IRREVOCABLE TRUST specifies:

1. A specific length of time has elapsed (e.g. 15 years)
2. An event has occurred (e.g. the grantor’s death)
3. The trust’s purpose has been accomplished (e.g. charitable reason is no longer necessary) or
4. The trustee, all those who may benefit from the trust, and a court have agreed to terminate it.

Answer 100

CORPUS

1. Contributed property
2. STOCK DIVIDENDS AND SPLITS
3. EXPENSES ASSOCIATED WITH ABOVE ITEMS
4. PROCEEDS FROM SALE OF TRUST PROPERTY (INCLUDING CAPITAL GAINS)

Question 101

INCOME BENEFICIARIES

-Interest (taxable and tax exempt)
-CASH DIVIDENDS
-Net rental income
-Net royalty income

Answer 101

REMAINDER BENEFICIARIES

-Trust assets
-Principal (corpus)
-CAPITAL GAIN/LOSSES
-Stock dividends and splits
-INSURANCE PROCEEDS

Question 102

CORPUS (Principal)

Answer 102

-Contributed property
-Capital gains (proceeds from sale of trust property)
-Stock dividends and splits
-Expenses associated with above items

Question 103

Unless the trust agreement specifies otherwise, trustee fees are evenly split between __________

Answer 103

income and the corpus (50%-50%).

Question 104

An irrevocable trust’s taxable income

Gross income
(-) Ordinary deductions
(-) personal exemption
(-) Income distribution deduction
___________________________
Taxable income before DISTRIBUTION DEDUCTION

Answer 104

For a COMPLEX TRUST, the distribution deduction is the lesser of DNI or the amount distributed to beneficiaries.

Question 105

Trust considered as ___________

Answer 105

modified passthrough entity.

Undistributed income is taxed to the trust.

Question 106

Unearned income only = Taxed at parent’s rate less: $2600

Answer 106

(not earned income)

Question 107

RSU

Answer 107

Recognize revenue on vesting date

Question 108

A custodial account that is owned by the beneficiary student is the most heavily weighted of the four assets listed in determining a student’s eligibility for federal financial aid. All of the accounts listed are accounts used to save for higher education and are family assets that are considered in determining a student’s eligibility for federal financial aid.

However, assets owned by the student carry more weight than assets owned by the parents.

Answer 108

Only 5.64 percent of parental assets are expected to be used to help pay for college in determining a student’s federal financial aid, whereas 20 percent of student assets are expected to be used to help pay for college.?

Question 109

DomCo (a domestic corporation) owns 100 percent of ForCo (a foreign corporation),

Because ForCo is a CFC, certain types of income (e.g., passive investment income) earned are subject to immediate taxation.

Answer 109

. A foreign branch is an unincorporated foreign entity. Because ForCo is a foreign corporation, it is a foreign subsidiary.

Question 109

Section 529 qualified tuition programs (QTPs) are programs established by a state, or eligible
educational institution, that allow taxpayers to contribute to an account that prepays qualified
educational expenses (prepaid tuition plan) or to a savings account (educational savings plan).
The earnings in QTPs grow tax-deferred and qualified distributions from the program are
income tax-free. Specific details of QTPs vary significantly between states and institutions. Some
states offer a full income tax deduction for contributions while other states only offer a partial
income tax deduction.

A Section 529 QTP is funded by making gifts and is limited to the annual gift tax exclusion
amount. Presently, the annual exclusion amount is $18,000 (2024). However, Section 529 plans
allow for an individual to gift up to five years of the annual exclusion amount at one time when
contributing to a QTP, which is $90,000 ($18,000 × 5 years). With the use of split gifts, a married
couple can defer up to $? per child ($18,000 × 2 = $36,000 × 5 years). The IRS considers
the lump-sum gift the equivalent of five years of $18,000 (or $36,000) gifts. No additional gifts
are allowed for the five-year period following the lump-sum gift.

Answer 109

Qualified Higher Education Expenses
Tuition, fees, books, supplies, and equipment required for enrollment or attendance at an
eligible postsecondary educational institution.
Room and board for students enrolled at least half-time.

Taxable Portion of Distributions
Distribution of amounts contributed are a non-taxable return of investment in the plan.
Distribution of earnings may be taxable if the total distribution for the year is more than the
qualified education expenses reduced by tax-free educational assistance (e.g., scholarships,
fellowships, grants).

Question 109

Educational Savings Plan

An educational savings plan, unlike a prepaid tuition plan, has no guaranteed benefit. The plan
is invested in the stock market and is subject to market conditions. As a result, the amount of
savings may not be sufficient to cover all the education costs; however, the funds accumulated
may exceed the cost of education, depending on the investment returns.
The assets in an educational savings plan are controlled by the account owner and not the
beneficiary (child).

Regardless of whether the beneficiary chooses to attend college or is unable
to attend, the beneficiary does not have access to the funds.

Answer 109

Prepaid Tuition Plan

A prepaid tuition plan is guaranteed to increase in value at the same rate as college tuition
increases. What is being purchased is a semester, a quarter, or some other unit of measure
of college tuition.

From an investment perspective, the plan is a low-risk, tax-advantaged
investment vehicle, with earnings matching the average increase in tuition.

The hypothetical
earning potential is greater than the interest earned from a savings account or a certificate
of deposit because inflation rates for education tend to exceed historical earnings for
bank deposits.
Prepaid tuition plans are exempt from federal income tax and may be exempt from state and
local income taxes. Typically, the plan is guaranteed by the full faith and credit of the state. The
risk to the owner of a prepaid tuition plan is the potential that the beneficiary may choose a
school in a state other than the one from which the plan was purchased. The plan may still be
used; however, the full cost of tuition in an out-of-state school may not be covered.

Question 110

Negative AEP
Positive EP = Dividend

DO NOT NET OFF -ve AEP and +ve EP

Answer 110

Distributions - current EP = Non taxable return of capital

Question 111

TYPES OF BASE EROSION PAYMENTS -must be made by a domestic US CORP to a RELATED FOREIGN PARTY

Applies to large MNC (gross receipts of $500 million or more)

Answer 111

1. Payments for services
2. int payments
3. Rent payments
4. Royalty payments
5. Payments for the acquisition of depreciable or amortizable property
6. Reinsurance premium payments

Question 112

FDAP - US sourced income of a foreign corp

Answer 112

withholding requirement is 30%

Question 113

Lower after tax cost is beneficial while paying bills

LOWER, bills= TRUE

Answer 113

INCOME = HIGHER after tax cost

Question 114

Payroll, property and sales = apportionment factor

Answer 114

avg of all 3 , state nexus

Question 115

When an employee exercises a _______, the employee receives a payment (CASH PAYMENT) equal to the different FMV of the stock on the exercise date and the FMV of the stock on the date the SAR was granted to the employee. The employee recognizes ORDINARY INCOME for the amount of the cash payment received when the SAR is exercised.

Answer 115

STOCK APPRECIATION RIGHTS, CASH PAYMENT =

FMV of stock on EXERCISE DATE
- FMV of stock on the date SAR was granted
_______________________________________________
Cash payment = ORDINARY INCOME

Question 116

Sec 1231 losses are treated as ordinary losses

Answer 116

True (similar as dep recapture)

Sec 1231 gains are treated as capital gains

Question 117

100% DRD

Answer 117

Dividends paid by a FOREIGN CORP to a 10% or more US corp shareholder

Question 118

Sec 1245

Answer 118

Depreciation Recapture

Question 119

RELATED PARTY (parent, son, related party)

Answer 119

Middle value = zero gain or loss

Question 120

AMT ADJUSTMENTS +/-

Sec 179 expense deduction - NOT an ADJUSTMENT as it is allowed for both (regular tax and AMTI)

Answer 120

PANIC - ACRONYM

+/- AMTI Adjustments

P-PALs
A-Accelerated depreciation (MACRS deprecaition on business use real property and personal property)
N-NOLs
I-Installment method
C-Contracts (Long term)
ADJ ADD BACK (because allowed for Regular tax but not allowed for AMTI , so we add back the adjustment and it will INCREASE AMTI): Taxes (state taxes or sales tax), taxable refunds (if meet tax benefit rule) Std deduction

(Allowed under AMTI, so no adj required?) , charitable deduction, unreimbrsed medical expenses in excess of 7.5%, home mortgage int for 1st and 2nd homes

Gain or loss on sale of business use depreciable property (also an adjustment)

+AMTI
Taxes
Standard deduction

Question 121

LIKE-KIND EXCHANGE

Answer 121

No Boot Received = No gain recognized

ZERO GAIN RECOGNIZED

ENTIRE GAIN will be deferred

REALIZED LOSS is NEVER RECOGNIZED in LIKE-KIND EXCHANGE.

Question 122

LAND = NOT SUBJECT TO depreciation, No DEPRECIATION RECAPTURE HENCE NO ORDINARY INCOME from this distribution.

Answer 122

Shareholder’s share of the taxable corporate gain will be reported as a CAPITAL GAIN.

Question 123

PARTNERSHIP INCOME is TAXABLE to a partner _____________

Answer 123

whether or not it is distributed.

Question 124

An S corporation is subject to the “built-in gains” tax (as well as the “LIFO Recapture” tax and the “Passive Investment Income” tax) only if the S corporation had previously been a C corporation.

In this question, the corporation elected “S” status on the day or incorporation; hence, the corporation was never a C corporation.________________

Answer 124

So, the “built-in gains” tax doesn’t apply to the facts presented.

Question 125

ORDINARY INCOME = Add: TO AAA

Answer 125

Distribution = NON TAXABLE to the extent of AAA (AAA+ORD income)

Taxable as dividends to the extent of AEP and Current EP

Question 126

Choice “C” is correct. A distribution or a sale of an S corporation’s assets may result in a tax on any “built-in gain” at the corporate level. An unrealized “built-in gain” results when the following two conditions occur: (1) a C corporation elects S corporation status, and (2) the fair market value of the corporate assets exceeds the adjusted basis of corporate assets on the election date. The two conditions exist in the facts of the question. The net unrealized built-in gain is the excess of the fair market value of corporate assets over the adjusted basis of corporate assets at the beginning of the year in which the S corporation status is elected.

FMV at January 1

85,000

Adjusted basis at January 1

(40,000)

Excess

45,000

× 21% tax rate

21%

Corporate tax liability

9,450

Note: The gain to the corporation is a total of $55,000 ($95,000 − $40,000). An S corporation generally does not pay tax at the corporate level; however, in this case, there was built-in gain of $45,000 upon the election to become an S corporation, so the related C corporation tax must be paid upon the sale of the asset.