Important - Brush up before exam day Flashcards
C corp - Sec 291 recapture applies (20%) only to GAINS on the sale of REAL PROPERTY (Long term business use),
Sec1250 recapture does not apply (it’s for ind)
Recapture does not apply in the event of losses.
Ord Income tax % = 25%
LTCG = preferential rates
Related party transactions when SP<basis of both related parties, use _________to calculate loss
FMV
1250 property (entire gain will be treated as 1231 gain even though it is taxed at 25%)
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.
Cash received/boot or realized gain
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.
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.
The IRS will often reclassify the sale of property to a shareholder at below the FMV as a _______
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.
C CORP - when a C 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 _______
TAX on any GAIN.
However, LOSSES are not deductible.
Non cash property is included in dividend income at the FMV of the prop on the _________
DATE OF DISTRIBUTION.
A stock REDEMPTION that is PROPORTIONATE with respect to the shareholder is treated as a __DIVIDEND__ to the redeeming shareholder.
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.
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.
Stock of the target corp is acquired solely for the voting stock of either the acquiring corp or its parent.
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.
Inventory, sale of merchandise, marketable securities and loss transactions.
1245 - equipment - subject to 1245 depreciation recapture and therefore, it’s not eligible for installment sales.
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.
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
Type D - Dividing of the corp into separate operating corporations
Type E - Recpapitalizations
Type F - A mere change in identity, form or place of organization
CONSTRUCTIVE DIVIDENDS
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.
- Excessive salaries paid to shareholder employees (unreasonable compensation)
- Excessive rents and royalties
- Loans to shareholders where there is no itent to repay
- 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.
GUARANTEED PAYMENT __________
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.
GOLDEN PARACHUTE
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.
