REG 4 Flashcards
What is the initial basis of a partner’s interest?
Cash (Amount contributed)
+ Property (Adjusted basis (NBV))
- % Liabilities (Liabilities assumed by other partners)
+ Services (FMV (and taxable to partner))
+ % Liabilities (Liabilities assumed by incoming partner)
= Beginning Capital Account
What is the basis of contributed property to the partnership?
The basis of contributed property to the partnership is the partner’s basis increased by any gain recognized by the partner on the contribution.
State the holding period for a partner’s interest.
The holding period for a partner’s interest is equal to the holding period of the property contributed if the property were a capital asset or Section 1231 asset in the hands of the partner. If the property were an ordinary income asset (i.e., inventory), the holding period starts on the date of contribution to the partnership.
What is the formula for a partner’s basis in his partnership interest?
Basis = Capital account + Partner’s share of partnership recourse liabilities
When does a partnership cease to exist, for tax purposes?
- When operations cease
- When 50% or more of the total interest (capital and profits) in the partnership is sold or exchanged within a 12-month period
- When there are fewer than two partners (the partnership becomes a sole proprietorship)
What is the treatment of guaranteed payments to a partner?
A guaranteed payment is a deduction on the partnership tax return and it flows through to the partners as part of ordinary business expenses on the K-1.
Then, because the partner is not considered an employee, the payment must be included as self-employment income on the partner’s return.
What is the limit on the deductibility of a partnership loss to a partner?
- Partnership loss deduction to a partner is limited to his adjusted basis in the partnership increased by any partnership liabilities that he is personally liable for (called the “at risk” provision).
- Any unused loss can be carried forward and used in a future year when basis becomes available.
- The partner may also be subject to passive loss limitations.
How are the partnership income and losses reported?
- Net business income or loss
- Guaranteed payments to partners
- Net “active” rental income or loss
- Net “passive” rental income or loss
- Interest income
- Dividend income
- Capital gains and losses
- Charitable contributions
- Section 179 “bonus depreciation”
- Investment interest expense.
- Partner’s health insurance premiums
- Retirement health plan contributions
- Tax Credits
All reported on Schedules K and K-1.
Numbers 1, 2, 11, and 12 reported also on Form 1065.
How are partnership losses treated at the partner level?
A partner reports losses on his tax return to the extent he has basis.
A partner’s loss in excess of his basis will be a carryforward indefinitely (and remain suspended until basis becomes available).
When a partnership is terminated, what basis does the partner assume for distributed property?
- Upon termination of a partnership, a partner’s basis in the property distributed from the partnership is equal to the partner’s basis in his/her partnership interest reduced by any money actually received.
- The holding period of the property includes the partnership’s holding period.
What are the filing requirements (Form 1041) and estimated tax requirement for the annual estate income tax return?
Form 1041 must be filed if annual income is $600 or more.
Additionally:
-Estate gets a personal exemption, $600
-Estate is exempt from estimated tax payments for a period of 2 years
Define distributable net income (DNI).
Estate (trust) gross income (including capital gains
- Estate (trust) deductions
= Adjusted total income
+ Tax exempt income
- Capital gains, generally allocated to corpus
= Distributable net income (DNI)
What is the income distribution deduction?
The income distribution deduction is the lesser of:
Actual distribution to beneficiary
OR
DNI (less tax-exempt income)
Define gross estate.
The gross estate is the fair market value at the date of death (or at the earlier of distribution or six months after the date of death if the alternate valuation date is elected) of all the decedent’s worldwide property, including real property, personal tangible property, and intangible property. The gross estate also includes the fair market value of the decedent’s share of jointly held property.
Identify some nondiscretionary deductions for an estate.
Examples of nondiscretionary deductions for an estate:
- Medical expenses
- Administrative expenses
- Outstanding debts of decedent
- Claims against the estate
- Funeral expenses
- Indebtedness of property
- Certain taxes (including state death taxes)
Define the applicable credit for 2012 and state the amount.
The applicable credit is the estate and gift tax calculated on total lifetime and deathtime transfers of up to $5,120,000 (2012). For 2012, the tax credit is $1,772,800. The amount of credit shelters lifetime and deathtime transfers (gift or estate) of up to $5,120,000.
State the formula for determining the estate tax.
Gross estate -Nondiscretionary deductions -Discretionary deductions =Taxable estate \+Adjusted taxable gifts = Tentative tax base at death x Uniform tax rates = Tentative estate tax - Gift tax paid = Gross estate tax - Applicable credit = Estate tax due
What is the annual exclusion for gifts?
Each year a person can give any number of people up to $13,000 (2012) each without gift tax ramifications.
Unlimited exclusions:
- Amounts directly paid on behalf of a donee:
- Tuition paid directly to an educational organization
- Fees paid directly to a health care provider for medical care of the donee
- Charitable gifts
- Marital deduction
What is the difference between present and future interest gifts?
- The postponement of a right to use, possess, or enjoy the property distinguishes a future interest from a present interest.
- A present interest qualifies for the annual exclusion ($13,000)
- A future interest (or a present interest without ascertainable value) does not qualify for the annual exclusion.
Identify how the tax due on current gifts is determined.
- Gross gifts in a calendar year (at FMV)
Less: Exclusion of $13,000 per donee per year
Less: Unlimited marital deduction of gift to donor’s spouse
Less: Charitable gifts
= Taxable gifts this year
Plus: Taxable gifts of prior years
= Cumulative lifetime gifts - Tax on cumulative gifts (calculate)
Less: Gift tax paid on prior gifts
Less: Applicable credit
= Tax due on current gifts
Distinguish between the two types of trusts.
Simple Trusts:
- Distribution is made out of current income only
- Income is taxable to beneficiary
- All DNI must be distributed
- No deduction is allowed for charitable contributions
- Exemption is $300
Complex Trusts:
- Distributions may be out of principal (corpus)
- Income may be accumulated within the trust (no DNI distribution requirement)
- Deductions are allowed for charitable contributions
- Exemption is $100
List the various “authorities” for purposes of determining whether there is substantial authority for the income tax treatment of an item.
a. The Internal Revenue Code and other federal statutes.
b. U.S. Treasury regulations
c. IRS Revenue rulings and procedures; tax treaties; and U.S Treasury Department explanations of such treaties
d. Federal court cases
e. Congressional intent set forth in committee reports, statements of managers included in conference committee reports, and bill manager’s floor statements
f. Explanations prepared by the Joint Committee on Taxation (the “Blue Book”)
g. Private letter rulings and technical advice memoranda
h. Actions on decisions and general counsel memoranda
i. IRS information or press releases and notices, announcements, and other administrative pronouncements
What is a “listed transaction?”
The term “listed transaction” means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary of the U.S. Department of the Treasury as a tax avoidance transaction.
What is a reportable transaction?
The term “reportable transaction” means any transaction which the Secretary of the U.S. Treasury Department has determined as having a potential for either tax avoidance (the legal use and application of the tax laws and cases in order to reduce the amount of tax due) or tax evasion (efforts by illegal means and methods to not pay taxes).
What is the “reasonable basis” standard?
Reasonable basis is a relatively high standard of tax reporting and is significantly higher than not frivolous or patently improper. The reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim.
If a return position is reasonably based on one or more acceptable authorities, the return position will generally satisfy the reasonable basis standard even though the position may not satisfy the substantial authority standard.
What is the “substantial authority” standard?
An objective standard involving application of the law to relevant facts; less stringent than the “more likely than not” standard.
Substantial authority exists only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting the contrary treatment.
There is substantial authority for the tax treatment of an item if the treatment is supported by controlling precedent of a U.S. Court of Appeals to which the taxpayer has a right of appeal with respect to the item.
The taxpayer’s belief that there is substantial authority for the tax treatment of an item is not relevant.
What is a tax shelter?
The term “tax shelter” means any (i) partnership or other entity, (ii) investment plan or arrangement, or (iii) other plan or arrangement if a significant purpose of such partnership, entity, plan, or arrangement is the avoidance or evasion of federal income tax.
List the various penalties which the IRS can impose on a tax return preparer who understates the taxpayer’s income tax liability.
Penalty for Understatement of Taxpayer’s Liability Due to an Unreasonable Position by the Tax Return Preparer
Penalty for Understatement of Taxpayer’s Liability Due to Willful or Reckless Conduct of the Tax Return Preparer.
Penalty for Aiding and Abetting Understatement of Tax.
List the paid income tax preparer’s responsibilities to the client and to the IRS.
- Providing to the client a completed copy of tax return.
- Signing the tax return or refund claim.
- Indicating on the return or refund claim the tax identification number of the tax return preparer.
- Retaining tax return records (copies or lists) properly and for at least 3 years.
- Filing with the IRS yearly information returns regarding other tax return preparers employed by the tax return preparer.
- Not negotiating the client’s IRS refund check.
- Diligently determining the client’s eligibility for the earned income credit.
- Not disclosing, except as permitted by law, client tax return information.
- Not using, except as permitted by law, client tax return information for any purpose other than to prepare a tax return.
List the exceptions to the penalty and/or fine for wrongful disclosure and/or wrongful use of tax return information.
- Disclosures allowed by any provision of the IRC and disclosures pursuant to a court order.
- Use in preparing state and local tax returns and declaration of estimated tax.
- Disclosures and uses permitted by U.S. Treasury regulations (disclosure and use for quality and peer reviews, computer processing, and administrative orders).
- Consent of the client
What is “Circular 230?”
Circular 230 is an IRS publication containing the U.S. Treasury regulations governing the authority of a tax practitioner to practice before the IRS, the duties and restrictions relating to practice before the IRS, the sanctions for violation of the regulations, and the rules applicable to IRS disciplinary proceedings.
Under what situations before the IRS may a tax practitioner charge a contingent fee?
a. IRS examination (audit);
b. Claim solely for a refund of interest and/or penalties; or
c. A judicial proceeding arising under the Internal Revenue Code.
If a conflict of interest exists, under what circumstances may a tax practitioner represent the clients for which there is a conflict of interest?
The practitioner may represent both (all) clients if…
(1) The practitioner reasonably believes that he/she can competently represent the clients,
(2) No state or federal law prohibits such representation, and
(3) Each affected client waives the conflict of interest and with respect to the waiver so confirms in writing with thirty days after so waiving.
What are the requirements for advertising?
- No false or misleading advertising.
- Each solicitation must identify the solicitation as such.
- If applicable, identify the source of the information used to choose the recipient.
- If advertising by radio and/or TV, keep for at least thirty-six months a recording of the actual broadcast transmission.
- If advertising by direct mail and/or e-commerce, keep for thirty-six months a copy of the communication and a listing of those to whom the communication was sent.
