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REGULATION > R4 > Flashcards

R4 Flashcards

1
Q

What is the impact of a payment of dividend in cash vs payment of property on the Corp TI and Shareholder TI?

A

payment in cash –> corp TI = no impact, Shareholder TI = nothing

Payment of property –> Corp TI = gain (as if prop was sold @ FV), Shareholder TI = nothing

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1
Q

How do you calc the gain for a liquidating distribution at shareholder level? (EX) Shareholder basis before liquidation = $6,500,

Liquidation = $2k cash and land (basis of 5k and FMV of $10.5K)

A

Gain is recognized to the extent that FMV of assets distributed to shareholder exceeds the Shareholders basis in corporation stock

Basis of 6.5 - 2k cash - 10.5 FMV = 6 capital gain

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2
Q

What is Sec 1244 stock loss? Who is it apply to and how much is deductible?

A

Section 1244 stock = qualified small business stock

Loss resulting from sale/exhange/worthlenessnes = ord losses up to $50k to ORIGINAL OWNERS ONLY

any excess is capital loss

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3
Q

In a corp liquidation, at what value does the corporation recognize a gain or loss?

A

Corporation must recognize gain or loss as if it sold the assets for the fair market value

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4
Q

if in a corp distribution of prop –> the prop FMV < amt of liab assumed, how is the gain calculated?

Distribution:
Land (basis of 20, FMV of 60)
Nonrecourse liab = 70

A

The propertys FMV is assumed to be the amount of liab assumed –> FMV - basis = gain

Since FMV of prop (60) < Liab (70) –> New FMV = 70

70 - 20 (basis) = $50 gain

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5
Q

When a parent (owning over 80%) liquidates its subsidiary –> how do you calc the G/L rec by parent and sub?

A

NO G/L rec by either

Parent assumes basis of sub assets

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6
Q

When a C corp distributes assets in a NONliquidating distribution - how are G/L calc?

A

The corp treats as if sold for FMV –> Gain = FMV - basis

LOSSES are NOT deductible

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7
Q

How is a C corporation formed?

A

Filing articles of incorporation with state and rec as legal sep entity from owners(shareholders)

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8
Q

How is LLC formed?

A

Filing articles of organization with state and recognized as legal sep entity from owners. Can be taxed as corp/pship or sole proprietorship

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9
Q

How is LP formed?

A

Organized by writing agreement and MUST file certificate of limited pship to state

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10
Q

How is GP form?

A

Written agreement known as pship b/n two or more partners or may be formed by oral agreement - no requirement to formally org under state law with corp

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11
Q

What is the basis of prop recognized by corp from shareholder?

A

GREATER OF:

  1. Shareholder basis of property

OR

  1. Debt assumed by corp
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12
Q

If a shareholder contributes property to corp for common stock - when will the shareholder not rec g/l?

A

Both must be met:
1. 80% test = immediately after –> control group must own at least 80% of stock (nonvoting and voting)

  1. No Receipt of boot = transfer solely in exchange for stock
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13
Q

What is the formula for shareholders basis in corp CS if 80% rule is met

A

Adjusted basis of prop transferred
+FMV services rendered
+ Gain rec by shareholder
- Cash Rec
- Liab assumed by the corp (GR: Corp take 100%)
+Cash contributed
———————————————
Basis in stock

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14
Q

What GAAP income items are NOT included in Gross income for tax? (2)

A

Interest income from state/muni bonds

Proceeds from life insurance on the life of Key person officer

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15
Q

What is the difference between bad debts of Accrual basis and cash basis method?

A

Accrual basis - Uses specific charge off method (direct write-off) NOT allowance method for tax

Cash basis - bad debt is not deductible

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16
Q

What is the deduction for organizational and start up costs? What are the eligible costs included?

A

Can deduct up to $5K of org costs and $5k of start up costs up to $50k of expenses

Anything in excess of $5k expenses are amortized over 180 months

Included costs = fees paid for legal services in drafting corporate charter, bylaws, mins, fees for accounting, fees for state of incorporation

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17
Q

How is goodwill/intangibles treated?

A

Amortized on SL basis over 15 years

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18
Q

What is the Dividend REceived deduction and what is requirement and the thresholds?

A

Corporate sharehold must own investee stock for 26 days in 91 day pd

Percentage to deduction amount

0-20% (unrelated) –> 50% DRD
20-80% –> 65% DRD
80% + –> 100% DRD

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19
Q

What is the exception of the DRD?

A

if the DRD will create NOL –> can only take up to 50/65% of TI –> take up to full amount

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20
Q

What entites are not eligible for the DRD?

A

Personal Service Corporations
Personal Holding companies
Personally Taxed S corps

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21
Q

What is the max amount of Charitable contributions eligible for deduction for corporations?

A

10% of Gross income

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22
Q

What is the Formula for Corporate Tax income?

A

Gross income (including dividend income)
- deductions (NOT: CC deduction, DRD, Captial loss CBCK)
——————————————–
(A) GI before special deductions
- CC deduction (Max = 10% * A, 5 yr cfwd)
___________________________________
(B) TI before DRD
- DRD (limited to DRD% of B)
__________________________________
Tax income or loss ( CBCK 5 yrs, CFWD indefinitely (2018 - 2020)… 2021 and onwards –> NO CBCK and unlimited CFWD (offsetting 80% TI)

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23
Q

What are the 4 types of dividend distributions from Corporations are are they taxable?

A
  1. From Current E&P (by y/e) –> taxable dividen
  2. From Accumulated E&P (distribution date) –> Taxable dividend
  3. ROC to extent of stock basis (no E&P) –> nontaxable, reduces basis of CS
  4. Capital Gain distribution (no E&P/no basis) –> Taxable Capital gain
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24
Q

How are Current E&P dividends allocated compared to Accumulated E&P?

A

Current is allocated on pro rata basis to each distribution - regardless of actual date of distribution

Accum applied in chronological order (beg with earliest distribution)

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25
Q

What amount of Stock dividends are taxable?

A

GR: NOT Taxable
EXCEPTION: unless shareholder has choice of receiving cash or other property –> FMV on distribution date

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26
Q

How do you calc basis of stock dividend?

A

Total amount value before stock divided
______________________________________________________
New number of shares

27
Q

What are the two forms of a corporation liquidation?

A
  1. Corporation sells assets and distributes cash to shareholders
  2. Corporation distributes assets to shareholders
28
Q

When corporation sells assets and distributes cash to shareholders - what is the G/L taxable to

  1. Corporation
  2. Shareholder
A
  1. Corporation = SP- basis = G/L
  2. Shareholders = Proceeds - Stock basis = G/L
29
Q

When corp distributes assets to shareholders - what is the G/L taxable to

  1. Corporation
  2. Shareholder
A
  1. Corporation= FMV - Basis = G/L
  2. FMV - Stock Basis = G/L
30
Q

What are the requirements for a Personal Holding company?

A

Corporation more than 50% owned by 5 or fewer individuals and having 60% adj ord gross income consisting of

Net rent
Interest that is taxable ONLY
Royalties (not mineral, oil, gas, copyright)
Dividends from unrelated domestic corporation

31
Q

If a C corp distributes a nonliquidating appreciating property (FMV > Basis) how is the gain impact E&P?

A

The FMV - Basis is a gain that is added to the current E&P

32
Q

If there is a NOL before the DRD - what is the amount calc as the DRD?

A

DRD = X%(depending on ownership) * Dividends received and increases NOL

33
Q

If services are contributed in formation of a corporation - what is shareholder/corp basis? are there g/l rec?

A

Shareholder recognizes ord income in the amt of services provided.

Shareholder basis in corp = FMV services

Corp no basis in services

34
Q

What is the result of assets contributed with mortgage to a corporation on shareholder basis and corp basis in prop?

A

Shareholder basis in corp stock =

Basis in prop
LESS: Liab assumed by corp (debt relief)
(if liab > basis in prop –> excess = gain, basis = 0)

Corp basis in prop = GREATOR OF:

  1. Debt assumed OR
  2. shareholders OG basis in prop
35
Q

When do you take the deduction for a bad debts expense? what is the reconciliation from book to tax income?

A

only take the deduction if written off NOT allowance

Add expense back to Book income and deduct actual amount written off

36
Q

When will life insurance premiums be deductible? what is the reconciliation from book to tax income?

A

Only if the company is NOT the beneficiary (i.e employee is beneficiary)

IF company beneficiary –> not deductible –> Add back from BI to TI
IF company NOT beneficiary –> deductible –> no reconciliation bc it was already taken as an expense on BI

37
Q

When are warranties deductible for tax? what is the reconciliation from book to tax income?

A

Warranties are deducted for actual Costs not expense

Add back expense for warranty costs and deduct actual costs incurred to Book income

38
Q

What is the M-1 Reconciliation and what return is this recorded?

A

This is a reconciliation from book income to tax income

Filed in the corporate tax return

39
Q

How do corporations treat capital loss/gains?

A

Capital Gains and losses are netted to single G/L –>

If net gain –> Taxed @ ord income –> included in taxable income
IF loss –> No deduction in the current year (CBSCK 3 years and 5 yr CFWD)

40
Q

When are Federal and state income taxes deducted for taxable income? What is the reconciliation from book to tax?

A

Federal income taxes are NOT deductible –> add back to Book income

State income tax are deductible –> no change to book or tax

41
Q

How are muni bond interest income and interest paid on debt for muni bond treated for tax purposes? What is the reconciliation from book to tax?

A

NEITHER are included as tax income/expense

Subtract any muni bond income recorded

Add back any interest paid on them

42
Q

How much entertainment expense are allowable for tax?

A

NONE –> add back to Book

43
Q

What is the difference in book depreciation and taxable depreciation?

A

GAAP is only on Book

MACRS is for tax

44
Q

When are taxable dividends paid out by a corp?(2)

A
  1. If they have Net income in current year
  2. Accum E&P at BOY
45
Q

If there are negative current E&P and Positive Accum E&P –> what is the netting process?

A

Net them and that is that amount that is a taxable dividend

46
Q

When assets are distributed by a corporation –> what is the value?

A

Assets distributed come out at FMV

Gain on distribution to corp for FMV - basis

If gain –> gain will increase corp E&P

47
Q

What are examples of organizational costs of a biz?

A
  1. Legal services to draft corporate charters, by-laws, and articles of incorporation,
  2. Accounting and consulting services incurred
  3. expenses of initial meetings of directors and shareholders
48
Q

What is the deduction for organizational and start up costs?

A

up to $5k of org costs in the year that the business begins

Reduced by every dollar over $50k —> remaining amort of 15 years

If first year is over $55k –> no $5k immediate and only Total/180 *date of ops began

49
Q

What are examples of non deductible org costs?

A
  1. Stock issuance costs
  2. Printing of stock certificates
  3. underwriter fees
  4. commissions to the broker
50
Q

How would you calc the DRD for this:

20% ownership

Income 160, dividend income 100, deductions 170

A

Income (100)
+ dividend income (160)
- deductions (170)
________________________________________
Tax income before DRD 90k

90*65% =$58.5k

51
Q

What is a stock redemption and what is the goal of it?

A

Redemption of stock = sale of stock back to the issuing corporation

Goal is that the shareholder wants the sale to produce a long term capital gain (if held over 1 year)

52
Q

What are the 2 special rules around redemptions and what happens if the rules are not met?

A

Rules:

  1. After the redemption, the shareholder must own less than 50% of the stock
  2. % drop in total ownership must be more than 20% (Drop in ownership Divided by the beginning ownership has to be more than 20%)

If the rules are not met –> entire proceeds received upon redemption are treated as dividend to shareholder

53
Q

If the redemption of stock by shareholder qualifies as a partial liquidation, how is the the redemption classified?

A

As an exchange qualifying as a capital gain or loss

54
Q

What is a complete liquidation? Who gets taxed?

A

Shareholders receive corporate assets in exchange for canceling shares of stock

Double taxation - 1. Corp tax is paid on appreciated assets being distributed
2. shareholders are taxed @ FV of assets being distributed compared to basis of stock

55
Q

How is the G/L calc on corporate liquidation? How are losses classified?

A

If hot assets –> ord income

If no hot assets –> Capital

FV of prop distributed on date of distribution
- basis

Capital loss

56
Q

If a liquidating distribution of a corporation is through assets with a mortgage - what is the gain?

A

The FMV of prop cannot be less than the mortgage

Use greater of FMV or Mortgage in calc below

FMV(or mortgage) - Basis = Gain to corp

57
Q

If an asset is subject to a liability how does the shareholder become taxed on it?

What is the shareholder basis?

A

Reduces Fair value of asset by amount of liab before being taxed

Basis = greater of basis in asset OR mortgage assumed

58
Q

What is the definition of a tax return preparer?

A

Any person who prepares for compensation or who employs one or more persons to prepare for compensation (any tax return required under IRC

59
Q

If the 80% rule is met on the formation of a C Corp - Gain Realized and Gain Recognized for shareholders contributing prop?

A

Gain realized = FMV of prop - Basis of prop

Gain rec = Realized gain up to boot (cash rec from corp)

60
Q

If an partner in a pship owns more than 50% of the pship sells stock to the pship for less than basis - what amount of the loss is capital loss?

A

NONE - the partner owns over 50% –> Related party –> RP loss is not deductible

61
Q

What entities are denied the privilege of filing a consolidated return? (5)

A
  1. S Corp
  2. foreign corp
  3. REIT
  4. Insurance comp
  5. exempt orgs
62
Q

What entities are able to file a consolidated return?

A

given to affiliated groups of corps (ownership through common parent that owns at least 80% of one of the corps and 80% value in other)

63
Q

in order to have a tax-free reorganization, what is the control % that is needed?

A

80%

64
Q

When a corporation is completed liquidated/ dissolved –> how are the filing fees/other fees incorp with liquidation handled?

A

Can deduct all liquidation expenses in final tax return

65
Q

Who needs to approve a voluntarily dissolution of corporation?

A

Board members and stockholders

66
Q
A

REGULATION (8 decks)

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