Property Rules / Corp. Taxes

Question 1

Section 351(a) - Prop. transfers in exchange for stock

Answer 1

No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock (And thereafter there is 80% control)

Question 2

How to compute Shareholder Tax Basis in a stock under 351

Answer 2

Net Book Val. of Property
(LESS) Debt Assumed by Corp
(PLUS) S/h-contributed Boot

(BookVal PLUS boot contribbed by sharehold) LESS (debt corp takes on and/or LESS money corp pays to sharehold)

Question 3

How to compute Shareholder Realized Gain under 351

Answer 3

FMV (LESS) basis in prop.

Question 4

How to compute basis received in non-cash Property from Stockholder under 351

Answer 4

Basis of property received, PLUS ADD ANY MONEY THE CORP PAID to that basis because it ups their basis.

Question 5

Who pays penalty for underpayment of ES taxes?

Answer 5

Electing large corporations. Otherwise u have the 90% PY or 100%/110% CY decision.

Question 6

General rule of gifted property?

Answer 6

Giftee receives rollover basis (so calculate FMVs accordingly along with realized gains from sale – sale gains less basis, Or sale gains less FMV if FMV is lower.

Question 7

What are capital assets?

Name 9?

Answer 7

Investment assets of taxpayers that are NOT inventory.

1) Personal automobile
2) Furniture and fixtures in home of indiv. taxpayer
3) Stocks and securities
4) personal prop. held by taxpayer NOT USED in trade or business
5) Real Prop. not used in trade or business
6) interest in a partnership
7) Goodwill of a corp.
8) Copyrights PURHASED.
9) Other assets held for inv.

Question 8

Related Party Rule

Answer 8

no deducting capital losses on sales of stock between:

1) brothers /sisters
2) husband/wife
3) lineal descendents (incl. grandparents.. not in-laws)
4) Entities that are more than 50% owned by indivs, Corps, Trusts, or Partnerships

Question 9

Example Related Party Sale Formula

Answer 9

Dad sells - 30,000 basis
4 alice- 20,000 FMV
poss gain-on-sale reduction of (10,000)

EG Alice can sell for up to 30K and recognize no gains.
Or 40K, and recognize just 10K of gains.

Basically - FATHER’S basis transfers

Question 10

Wash Sale Rule

Answer 10

When stock or bond is sold for a loss and repurchased within 30 days BEFORE or AFTER sale date (EG still a wash if purch. earlier)

However, new security basis is raised by any disallowed loss.

Question 11

Like-Kind exchange: Allowed vs. non-allowed types of property

Answer 11

Allowed:
“Tangible Property” EG real estate

Disallowed:
Inventory, stock, securities, partnership interests, property in DIF. countries

Question 12

Noncapital Assets

Answer 12

1) Property normally included in INVENTORY or held for sale to customers in course of business
2) Depreciable PERSONAL prop and real estate used in trade or business (SECTION 1231, poss. 1245 or 1250 as well)
3) A/R and Notes Rec. arising from sales or services to a taxpayer’s business
4) Copywrites held by original artist (Except if you sell music it gets capital gains treatment)
5) Treasury Stock (not ordinary asset, not subj. to capital gains)

Question 13

Rules about receiving stock splits?

Answer 13

Receipt of non-taxable stock dividend will require the shareholder to SPREAD the basis of his original shares, over Original Shares and New Shares Received.

Question 14

Gift basis rules:

Answer 14

Gift GENERALLY retains rollover cost basis
(EG mom gives stock w/ basis of $10K and FV $20K, basis is $10K)

Gift taxes PAID add to basis (EG mom pays $2K gift tax so basis now $12K)

Question 15

What is the depreciable basis of a piece of equipment bought for business, comprised of?

Answer 15

Purch price PLUS costs associated with getting asset ready for its intended use.

Question 16

Short-Term cap. gains and losses: Netting Rules

Answer 16

1) If there are short-term capital losses or carryovers, they are first absorbed by short-term gains.
2) Any remaining short-term capital loss, used to absorb Long-term capital gains from the 28% rate (EG Collectibles)
3) Any remaining short-term capital loss, used to offset Long-term Cap. Gains from 25% group (EG un-recaptured Section 1250 Gains)
4) Any remaining short-term capital loss, used to offset Long-term capital gains at the “regular rate” (lower rate) of 15%

Question 17

Long-term Capital Losses against Gains: Netting Rules

Answer 17

1) If there are any long-term capital losses (INCL. carryovers of LT Cap. losses) in the 28% group, they are first offset against any GAINS at the 25% rate group, then the 15% rate group
2) If there are any long-term capital losses (incl. carryback or carryforward,) from 15% rate group, they first treat 28% group then 25% group

With LT Cap Losses, always treat Higher tax rate gains First!

Question 18

How much of an S-Corp distribution an be tax-free?

Answer 18

Up to the extent of the Accumulated Adjustments Account Balance, and then it becomes Taxable Dividend up to current E&P Balance, and then it becomes Taxable Gain beyond the E&P balance.

Question 19

Accumulated Adjustment Account (AAA) - definition and how it works

Answer 19

The tax effects of distributions paid to shareholders of an S corporation that has accumulated earnings and profits since inception (or since electing S status), are computed in the AAA.

AAA is Zero at inception of S-corp.

Increased with (Sep & non-sep-stated) Income and Gains; Decreased by corp distributions, sep/not sep items and losses, life insurance premiums that recognize corp as beneficiary.

AAA never goes below ZERO.

Question 20

Tax Return Dates for:

1) C-Corp YE 6/30/01 ?
2) Partnership YE 9/30/01?
3) Statute of limitation rules for individual returns?

Answer 20

1) 9/15/02
2) 1/15/02
3) THREE YEARS from later of:
a. tax due date
b. date of filing (in case of extensions)