REG 6 - Other Entity Taxation

Question 1

Simple Trusts

Answer 1

1) Only make distributions out of current income (not principal)
2) Required to distribute all of its current income
3) CANNOT take a charitable contribution deduction
4) $300 exemption to arrive at taxable income

Question 2

Complex Trusts

Answer 2

1) May accumulate current income
2) May distribute out of principal
3) May deduct charitable contributions
4) $100 exemption

Question 3

Gift Tax exclusion

Answer 3

Gifts of $15,000 or less per year per recipient are excluded

*lifetime exclusion is 11,700,000

Question 4

Gifts with unlimited exclusion

Answer 4

1) Payments made DIRECTLY to an education institution
2) Payments made DIRECTLY to a health care provider
3) Charitable gifts
4) Marital deduction

Question 5

Gifts: Present interest vs Future interest

Answer 5

Present interest - qualifies for the annual gift exclusion

Future interest - does not qualify

Question 6

Future interest examples

Answer 6

• Reversions (gifting assets and later getting them back)
• Remainders (future distributions)
• Trust income interests where accumulation of income is mandatory
• present interest without ascertainable value

Question 7

Present interest examples

Answer 7

• Trust income interest where distribution is mandatory
• life estates
• bonds or notes
• unrestricted transfers of life insurance policies

Question 8

Gifts: Compete vs Incomplete

Answer 8

Complete Gifts - subject to gift tax and qualify for the annual exclusion
Incomplete Gifts - not subject to gift tax. Incomplete if gift is conditional or revocable

Question 9

Unrelated business income

Answer 9

Income that is:

• derived from an activity that constiutes a trade or business
• regularly carried on
• not substantially related to the organizations tax exempt purpose

Question 10

Excluded trade or business activities (not taxed)

Answer 10

• Bingo games
• Trade show activities
• Sale of merchandise received as a gift
• Activity where all the work is performed by unpaid volunteers

Question 11

Excluded types of income (not taxed)

Answer 11

• Dividends, interest, investment income
• Royalties
• Rents from real property
• Research income
• Gains and losses on property not held primarily for sale

Question 12

Subpart A of Circular 230 applies to

Answer 12

• Attorney
• CPAs
• “enrolled”
• “registered”

Question 13

What to do and not to do when you become knowledgeable of a client omission under Circular 230

Answer 13

DO:
- Notify client 
- Advise client of the potential penalties
DONT:
- Withdraw until they correct the error
- Notify the IRS

Question 14

Practice by former government employees rules under Circular 230

Answer 14

1) “personally and substantially participated” in a particular matter - can never represent or assist with respect to that matter
2) “official responsibility” - cannot represent within 2 years of leaving government
3) “participated in the development of the rule” - cannot represent within 1 year of leaving government

Question 15

Best practices for tax advisors Circular 230

Answer 15

1) Communicate the terms of the engagement
2) Establish facts, arrive at a conclusion supported by the law and facts
3) Advise the client on the importance of the conclusion (ex. penalty implications)

Question 16

Tax preparer vs. tax practitioner

Answer 16

• Tax practitioner have a license and therefore unlimited representation rights.
• Tax preparer with no credentials generally has no authority to represent clients before the IRS. A tax preparer is anyone who fills out taxes for a fee

Question 17

Signing tax return preparer

Answer 17

Has primary responsibility for the overall accuracy of the return

Question 18

Nonsigning tax return preparer

Answer 18

Not primary responsibility

Question 19

More likely than not standard

Answer 19

> 50% likelihood a tax position holds up in court

Question 20

Reasonable basis

Answer 20

> 20% likelihood a tax position holds up in court

Question 21

Substantial authority standard

Answer 21

> 40% but <50% likelihood a tax position holds up in court

Question 22

Unreasonable Position

Answer 22

A position is deemed unreasonable UNLESS:

1) substantial authority (40-50%) exists, regardless of disclosure
2) reasonable basis (20%) for a disclosed position
3) a tax shelter or reportable transaction would meet the more likely than not standard (50%)

Question 23

Penalty for understatement due to unreasonable position

Answer 23

Greater of:

• $1,000
• 50% of the income the preparer received

Question 24

Penalty for “willful or reckless” conduct

Answer 24

Greater of:

• $5,000
• 75% of the income the preparer received

Question 25

General rule for supporting documentation required for preparer

Answer 25

Not required to obtain supporting documentations UNLESS the preparer has reason to suspect the accuracy of the information provided. Need to make reasonable inquires if the information appears incorrect or incomplete

Question 26

Commonly tested tax return preparer penalties

Answer 26

1) Endorsing and cashing refund checks in forbidden ($545 fee)
2) Preparing returns that understate tax liability (willfully aiding $1,000)
3) Wrongful disclosure of tax information ($250 fee)

Question 27

Appeals Process

Answer 27

1) Attempt to resolve the issue with a revenue agent
2) If agreement cannot be reached at the revenue agent level, the taxpayer receives a 30 day letter which gives them 30 days to request an administrative appeal.
3) If they can still not agree a 90 day letter is issued. Taxpayer has 90 days to pay the deficiency or file a petition with US Tax Court where they don’t have to pay before they go. They can have their case heard at US District Court or US Court of Federal Claims but they’ll have to pay ahead of time then sue IRS for what they paid

Question 28

US Tax Court

Answer 28

• No payment required to get trial
• No Jury, trial is in front of one judge who is a tax law expert
• Issues are either:
  1) Regular decision : a new or unusual case
  2) Memorandum decision: application of existing law

Question 29

US District Courts

Answer 29

• Pay and sue for refund

- Jury trial is an option, judges are not tax experts

Question 30

US Court of Federal Claim

Answer 30

• Pay and sue for refund

- No jury trial option

Question 31

Failure to file penalty

Answer 31

5% of amount due per month

*is both failure to file and to pay penalties are due, failure to file penalty is reduced by the failure to pay penalty

Question 32

Failure to pay penalty

Answer 32

1/2 of 1% per month

Question 33

Negligence penalty with respect to an understatement of tax (not substantial)

Answer 33

20% of the understatement

Question 34

Substantial understatement of tax penalty

Answer 34

20% of the understatement, harder to avoid than the one above

Question 35

Tax returns that you are not avoiding any of the penalties

Answer 35

• Frivolous tax return
• patently improper
• merely arguable, <20%

Question 36

Reasonable basis standard to avoid penalties

Answer 36

Will avoid most penalties if you tax position has >20% chance of succeeding.

• Avoids non substantial negligence penalty without disclosure
• Avoids substantial understatement penalty as long as the taxpayer disclosed the tax return position

Question 37

Reportable Transaction

Answer 37

A transaction identified by the Secretary of US Treasury as potential avoidable or evadible

Question 38

General avoidance of penalties

Answer 38

A taxpayer can generally avoid any penalty by showing that they (“reasonable basis” >20%):

1) had a reasonable cause to support their tax position
2) acted in good faith
3) did not have willful neglect

• DOES NOT APPLY IF:
  1) Tax shelter > 50%
  2) substantial and “undisclosed” understatement 40%-50%

Question 39

How to tell if a understatement of tax is substantial for individuals

Answer 39

An understatement is substantial if it exceeds the greater of:

1) 10% of the correct tax
2) 5,000

Question 40

How to tell if a understatement of tax is substantial for corporations

Answer 40

An understatement for corporations is substantial if it exceeds the lesser of:
1) 10,000,000
The greater of :
2a) 10,000
2b) 10% of the correct tax