R4 NOL and Capital loss limitations + Entity/owner transactions

Question 1

NOL and capital loss

Answer 1

NOL:
- Pre-2017: carryback 2 and carryforward 20

• 2018, 2019 & 2020: carryback 5 and carryforward indefinitely
• 2021 and beyond:
  no carryback and carryforward indefinitely &
  80% taxable income limitation

other points:

• no charitable deduction allowed in the calculation of NOL
• limitations imposed on dividends-received deduction doesn’t apply if it is creating NOL ( loser exception)
• NOL carryover from another year is not allowed to determine NOL of the year
• Cannot deduct capital loss carryback against a net capital gain in determining NOL. carryover is okay

…………………………………………………………..
Capital loss

• corporate: carryback 3 and forward 5 (treat as short term)
• corporate capital gains : taxed at ordinary 21% ( no preferential rate)
• individual capital loss- 3k max against other income,
  no carryback, carryforward indefinitely

Question 2

Contribution to Corp

Formation & distribution

Answer 2

1) Formation:
- not recognized
- T of “HIDE IT”

2) Subsequent transfer of stock
- if doesn’t result in 80% control shareholders are going to get taxed, not Corp

3) Distribution
Dividends - Earnings and Profit ( RE)

• comes from current first-taxable
• then accumulated - taxable
• return of capital to extent of stock basis ( no E&P) : nontaxable, reduces the basis of common stock
• Capital gain ( no E&P and no basis): taxable capital gain

Question 3

Dividends:
From
Current & Accumulated

Answer 3

1) Current E& P +ve
Accumulated E& P +ve
1st current and then accumulated

2) Current E& P +ve
Accumulated E& P -ve
limited to current

3) Current E& P -ve
Accumulated E& P +ve
netted

…………………………..
-Current E& P: pro-rata basis to each distribution

-Accumulated E& P: applied in chronological order

Question 4

Constructive Dividends

Stock Dividends

Answer 4

1) Constructive Dividends:
-Hidden/disguised dividends
-company is trying to get tax deduction, rather than a “double tax” dividend to its shareholders
- not allowed
…………………………………………….

2) Stock Dividends
- GR: not taxable
UNLESS
shareholders have a choice to get stock or cash
- taxed on FMV (if has a choice, no matter what they choose)

Allocation of basis: 
dividing the basis of the old stock by the no of old and new shares(total share)

Question 5

Shareholder taxable amount

Answer 5

1) Individual shareholders:
cash dividend: amount received
property dividends: FMV of property received

2) Corporate shareholders( eligible for dividend-received-deduction 50%, 65% and 100%)
cash dividend: amount received
property dividends: FMV of property received

3) Corporation paying dividend :
GR: doesn’t create taxable event

Exception: distributed appreciated property
FMV
(NBV)
————–
Corp gain - > E&P is increased ( thus taxed) –> dividends to shareholders (taxable out of new E&P)

Question 6

Stock-Redemption

Answer 6

Proportional:
Taxable dividend income

2) disproportional(substantially disproportionate)
- must now own less than 50%
- ownership reduction was at least 20% (own less than 80% of prior holdings)
- capital gain/loss

Question 7

company liquidation ( company dies)

Answer 7

1) corporate sells the asset and distributed 
For Corp 
Sale price
(basis)
------------------
taxable gain/loss  ( 1st tax) 

for shareholders 
proceeds
(stock basis)
---------------------
taxable gain/loss  ( 2nd tax) 

……………………………………………..
2) corporate distributed the assets to shareholders

For Corp 
FMV
(basis)
------------------
taxable gain/loss  ( 1st tax) 

for shareholders 
FMV
(stock basis)
---------------------
taxable gain/loss  ( 2nd tax) 

either way same result, 2 taxes

Question 8

Company survived ( modified form) 
- tax free reorganization

Answer 8

no gain/loss is recognized

for both Corp and shareholders

NBV

Continuity of business in a modified form
- control - at least 80%

Question 9

Worthless Stock

&

Qualified Small Business Stock

Answer 9

1) Worthless stock: Section 1244 stock
- ordinary loss
MFJ: first $100,000
Others: first $50,000
-After that amount will be a capital loss

……………………………

2) Qualified Small Business Stock(QSBS) = gain exclusion
(Gain exclusion)

• individuals who hold>5years of QSBS
  , exclude 100% of the gain

max exclusion is limited to 100% of the greater of:

• 10 times the taxpayer’s basis in the stock OR
• $10m ($5m if MFS)