R5 - Flow Through Entity Taxation - Multi Jurisdiction

Question 1

What are the rules for property contributions to an S corp to be nontaxable to the taxpayer?

Answer 1

• Contribution of property (not services)
• Solely in exchange for stock
• After the transfer, shareholder (or group) has control of 80% of the corporation through stock

Question 2

If a company terminates their S corp status, when can they re-elect it?

Answer 2

Fifth year from current year

Question 3

What is the effective date of the election of an S-Corp?

Answer 3

If the election is made before March 15th, it can be retroactively applied to the beginning of this year, otherwise, will be effective January 1 of next year

Question 4

How is is shareholders basis in S-Corp calculated?

Answer 4

Initial Basis 
\+Income (ALL)
\+additional contributions 
-distributions to shareholders
-Loss/deductions 

Unlike partnerships, does not include any portion of debt in basis

Question 5

When does the holding period of a partnership interest acquired in exchange for a contributed capital asset begin?

Answer 5

The partners holding period of the capital asset.

Question 6

What is a partner’s basis in a partnership when contributing property with a liability assumed by the partnership?

Answer 6

The basis of the property

LESS the portion of the liability assumed by the partnership.

Question 7

What is the gain and basis if a partner contributes capital to form a partnership, and mortgage is assumed by p-ship giving partner negative net basis?

Answer 7

Basis = $0
Gain = excess liability assumed by p-ship.

Partner is being RELIEVED of liability. That is gain.

Question 8

What type of taxable income is recognized when services are exchanged for a capital interest in a partnership

Answer 8

Ordinary income, based on FMV of partnership.
EX: Kelly received 10% of p-ship based on contributed services. P-Ship has adjusted basis of $70K and FMV of $100K. Ordinary income for $10K.

Question 9

What is the voting approval % required to form and dissolve a S-Corp?

Answer 9

100% approval required to form,

50% approval required to dissolve (voting and non voting)

Question 10

What is an unrealized built in gain on assets of an S-Corp?

Answer 10

• C-Corp elects S-Corp status
• FMV of corporate assets exceed adjusted basis
• If these conditions are met, and assets are sold within 5 years of becoming S-corp, have to pay C-Corp tax rates on gain.
• FMV at time of conversion less basis = amount subject to corporate tax
• Pays highest corporate tax rate (21%)

Question 11

What is the extent of losses of an S-Corp that can be flowed through to personal return?

Answer 11

Deduct losses up to basis and direct loans to entity.

Excess losses are carried forward indefinitely

Question 12

Rental real estate income (or loss) - SCH E
Interest & Dividend income - SCH B 
Royalties - SCH E
Long/Short/1231 gain or loss - SCH D
Charitable Contributions - SCH A 
Section 179 Depr

Answer 12

What are separately stated items which flow through an S-Corp on a K-1 to each SH?

Interest EXPENSE is ordinary

Question 13

What is the difference of how corp income to SH is recognized for a S-Corp vs. a C-Corp?

Answer 13

S-Corp - based on ordinary income - not distributions

C-Corp - based on dividends distributed to SH (to extent of + E&P)

Question 14

What is the treatment of Sect. 1244 Stock (worthless stock)?

Answer 14

Ordinary loss (instead of capital loss) up to $50K ($100K MFJ).

Question 15

If a partnership makes a non-liquidating distribution of property, what is the tax payers basis?

Answer 15

LESSER OF:
Land’s basis is hands of p-ship
Remaining basis of P-Ship

Taxpayer has basis of $4K in P-Ship. Receives land with FMV of $10K and basis of $7K. Taxpayer’s basis becomes $4K.

Question 16

How are non-liquidating distributions treated for p-ship?

Answer 16

• GR: Non -taxable
• Partner’s basis is first reduced by cash received and then by adjusted basis of property received.
• Distribution cannot take basis below $0.
• Cash received in excess of basis is taxable as cap gain.

Question 17

What are hot assets in a partnership distribution?

Answer 17

Unrealized receivables and appreciated inventory
GR: Partner who sells partnership interest has recognized capital gain or loss. Exception is on any gain related to hot assets are treated as ordinary income.

Question 18

In what situation would a loss be recognized in dissolution of a p-ship?

Answer 18

Only if money or hot assets are received and value is less than basis.
If only property is distributed, do not recognize loss until property is sold to outside party..

Question 19

What is a binding contract between IRS and taxpayer in which IRS agrees not to seek transfer pricing adjustment for intercompany sales?

Answer 19

Advanced Pricing Agreement Program

Question 20

When do transfer pricing issues exist?

Answer 20

Intercompany sales. US taxpayer shares costs with an affiliate that is not subject to US income tax and does not file consolidated return.
IRS will test to make sure sales of tangible property are comparable to sales to outside parties.

Question 21

What is the apportionment factor to apportion business income among states?

Answer 21

Percentage of corporation’s average property, payroll, and sales within a state.

Question 22

Owning or leasing tangible or real property
Sending employees into a state for training or work
soliciting sales in a state
Providing installation, maintenance, to customers
accepting or rejecting sales orders within the state

Answer 22

What activities may trigger nexus in a different state?

Question 23

What causes increases and decreases to AAA?

Answer 23

Increases:
-Ordinary business income
-Separately stated income (other than tax exempt)
Decreases:
-Ordinary business losses
-Separately stated losses
-Non-deductible expenses
-Distributions

Question 24

What are the eligibility requirements for an S-Corp?

Answer 24

-100 US people, & only common stock

• Must be individuals, estates or trusts or 501C3
• Cannot be nonresident alien
• Cannot be corporation or partnership
• Family members can be treated as one shareholder - lineal descendants of common ancestor, current or former spouses (cousins, nieces and ex-husbands OK).

-S-corp can own C-Corp, but cannot consolidate with them

Question 25

What increases foreign derived intangible income?

Answer 25

Sales to non-US persons

for property for use outside the US

Question 26

What is the substantial presence test for foreign person?

Answer 26

• Not present in US for at least 31 days during current year and at least 183 days for 3 year period.
• If you don’t meet this test and do not hold a green card, will not be treated as a US resident