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CPA > REG Study Unit 9 > Flashcards

REG Study Unit 9 Flashcards

1
Q

Formation of a corporation

A

Non-taxable event
No gain/loss on contribution of property to corporation for stock
Immediately after exchange, contributors must control corporation.

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2
Q

Section 351

A

Requires that no gain/loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and immediately after the exchange, person(s) control the corporation. Nonrecognition treatment is mandatory, not elective.

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3
Q

Control of a corporation

A

80% ownership by votes and shares of each class of nonvoting stock.
Nonqualified preferred stock is boot, not qualified property for control test.
No gain/loss recognized during corporate formation.

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4
Q

Solely for Stock

A

Nonrecognition required to extent shareholder receives stock in exchange for property.
True even if shareholder receives some boot.

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5
Q

Stock exchanged for services

A

Does not count toward 80% of ownership.
FMV of the stock is gross income to the shareholder.
Shareholder’s basis in the stock is its FMV

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6
Q

Nonqualified perferred stock

A

Treated as boot received and is not counted as stock toward 80% ownership test.

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7
Q

Boot

A

Gain recognized to extent money/other non-stock property received in exchange

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8
Q

Liabilities

A

Shareholders transfers liabilities, in addition to property
Transferred factory with associated mortgage.
Contribution of liability treated as recognized gain to extent it exceeds adjusted basis of all property contributed.

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9
Q

Shareholder basis

A

Adjusted basis of property contributed, adjusted for boot received and gain recognized.
Boot received would reduce basis in stock.
Recognized gain would increase basis.
Holding period of stock is the holding period of the property exchanged for stock is added to the holding period of the stock.
AB in contributed property-Boot Received (money,including liability relief, property received FMV+Gain recognized (by shareholder)=Basis instock of issuing corporation.

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10
Q

Basis Boot

A

Generally equal to FMV
Corporation basis in property-adjusted carryover basis, corporation assumes same basis as shareholder.
Carryover basis increased for gain recognized by shareholder.
Initial depreciable basis.
Holding period is tacked.
AB in property to shareholder+Gain recognized by shareholder=Basis in property to corporation.

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11
Q

Earnings and Profits (E&P)

A

Tax accounting equivalent of retained earnings.
Measures ability of company to pay dividend
Two types: Current and accumulated.

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12
Q

Current E&P

A

E&P for current year.

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13
Q

Accumulated E&P

A

Excess current E&P added to balance after accounting for corporate distributions.
Any distributions in excess of current E&P reduce balance.
Current E&P-Distributions=Increase (decrease) to accumulated E&P

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14
Q

Calculation of E&P

A

Begins with taxable income, then positive/negative adjustments made.

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15
Q

Positive Adjustments to E&P

A

Some exempt income, deductions, and deferred income. Transactions that enables corporation to make higher distributions.
Examples: Municipal bonds, injury compensation, life insurance proceeds, DRD, capital and NOL carryover, depreciation in excess of straight line, income per completed contract method, and deferred income from an installment sale.

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16
Q

Negative adjustments to E&P

A

Some nondeductible items for taxable income and recognized deferred income. Items which impose some type of hardship on corporation and limit its ability to distribute earnings.
Examples: life insurance premiums, penalities, fines, municipal bond expense, excessive compensation, federal income taxes, portion of meals and entertainment, and prior-year(s)installment sales.

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17
Q

Excluded Transactions from E&P

A

E&P and taxable income do not require any adjustment.

Examples include unrealized gains and losses, gifts, state tax refunds, and contributions to capital.

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18
Q

*Distributions

A

Any transfer of property by a corporation to any shareholder with respect to shares.
Money, bonds, stock in other corporations, any other property including receivables.

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19
Q

*Distribution Amount

A 
Money
\+Obligations (FMV)
\+Property (FMV)
-Related liabilities, recourse or not
=Distribution amount
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20
Q

*Corporate Loss Distribution

A

Unrecognized. No loss realized on an ordinary distribution of property (AB>FMV) may be recognized.
Shareholder takes a FMV basis in the property

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21
Q

*Corporate Gain Distribution

A

Gain on distribution must be recognized as if property were sold. Will increase earnings and profits.

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22
Q

*Shareholders Distribution Treatment

A

Dividend
Recovery of capital
Capital gain
Determining which to apply depends on corporation’s E&P balance and shareholder’s stock basis.

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23
Q

*Dividend Treatment

A

Amount of distribution is dividend to extent of E&P.

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24
Q

*Multiple distributions

A

Made at different times in year and current E&P not sufficient to cover. Pro rata portions of each distribution are from current E&P.

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25
Q

*Insufficient E&P

A

Both are insufficient to cover total distributions.

Accumulated E&P allocated to distributions in chronological order.

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26
Q

*Capital Recovery

A

Return of funds invested in corporation.

Any amount of a distribution in excess of E&P.

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27
Q

*Distribution of Capital

A

Basis in stock will never be reduced below zero.

Excess of amount over E&P and basis treated as gain on sale of stock.

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28
Q

*Stock Distribution

A 
No gain/loss on distribution of own stock.
No gross income to shareholder unless:
  Distribution in lieu of money
  Disproportionate distribution
  Distribution of preferrred or 
  convertible preferred stock
  Distribution where some 
  receive common stock, some 
  receive preferred stock.
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29
Q

*Stock distribution rules

A

Allocate aggregate basis in old stock to both old and new stock by FMV.
Holding period includes that of the old stock.
No impact on E&P

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30
Q

Taxable Stock Distribution

A

Shareholder has option to choose between stock and other property.
May or may not be by shareholder choice.
Subject to tax is the FMV of distributed stock or stock rights.
Can include common stock and preferred, stock or property, convertible preferred stock to change the shareholder’s proportionate stock ownership.

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31
Q

Stock Split

A

Not a distribution.
Basis is split between old and new shares.
Holding period of the new stock includes that of the old stock.

32
Q

Stock Redemptions

A

When corporation acquires its own shares in exchange for property.
Shareholder is to treat amounts realized either as a distribution or as a sale of stock.

33
Q

Dividend or Sale Treatment

A

General rule is dividend treatment unless:

  • Redemption not essentially equivalent to dividend.
  • Redemption is substantially disproportionate.
  • Distribution is in complete redemption
  • Distribution is to noncorporate shareholder in partial liquidation.
  • Distribution received by an estate.
34
Q

Realized Gain of Redemptions by Corporation

A

Corporation recognizes as if property were sold at FMV, even if stock is redeemed.

35
Q

Loss Recognition of Redemptions by Corporation

A

Not allowed unless redemption is:

  • In complete liquidation of corporation
  • Of stock held by an estate to pay death taxes
36
Q

Depreciated property redemption

A

Ordinary income recognized to extent of lesser of depreciation or amount realized.

37
Q

Shareholder treatment of redemption

A

Same as with regular distribution. Amount is dividend. Unrecovered basis in redeemed stock.

38
Q

Shareholder Sale Treatment

A

Shareholder treats qualifying redemptions as if shares were sold to third party.

39
Q

Termination of Interest in Corporation

A

Must be complete to qualify.
All the shareholder’s stock must be redeemed
Family attribution rules apply

40
Q

Family Attribution Waiver

A

Shareholder may not retain any interest (except as a creditor).
May not acquire any interest for 10 years.
Written agreement must be filed with IRS.

41
Q

Substantially Disproportionate

A

Amount received by shareholders is not in proportion as their stock holdings.
Tested by determining the shareholders’ applicable ownership percentages both before and after redemption.

42
Q

Equivalent to a dividend

A

Meaningful reduction in the shareholder’s proportionate interest
Reduction in voting power is generally required.

43
Q

Estate Redemption

A

May treat qualifying redemption to pay death taxes as a sale.
Redeemed stock must be valued >35% of the gross estate, net of deductions.
Deductions allowed are admin expenses, funeral expenses, claims against the estate (including death taxes), and unpaid mortgages.

44
Q

Partial Liquidations

A

type of redemption

45
Q

Complete Liquidations

A

Corporation redeems all of its stock in a series of distributions.

46
Q

Complete Liquidations Corporate Gains/Losses

A

Recognizes any gain/loss realized on complete liquidation as if property sold at FMV
Computed on per-asset basis.
FMV treated as not less than related liabilities.
Character of amounts recognized depends on the nature of the asset in the hands of the distributing corporation.

47
Q

Corporate Losses on Complete Liquidation

A

Generally recognizes any losses on liquidating distributions.
Related party losses are not recognized if non-pro rata or within 5 years.

48
Q

Property contributed as part of Sec 351 in a Complete Liquidation

A

No loss recognized

  • Distribution is Sec 351 property
  • Shareholder receiving property is related party
49
Q

Shareholder treatment of Complete Liquidation

A

Realized in exchange for stock
Capital recovery to extent of basis permitted before recognizing gain or loss.
Holding period will not include that of the liquidated corporation.
Character is determined by the nature in the hands of the shareholder.
-Basis in distributed property is FMV after gain/loss on receipt has been recognized.

50
Q

Partial Liquidation

A

Noncorporate shareholder treats as a sale to the extent.
Corporate distributor recognizes gain but not loss.
Corporate distributee treats as a dividend to the extent of E&P in the corporation.
Contraction of the Corporation
-genuine reduction in size of the corporation.
-Must be pursuant to a plan and complete within either the tax year of plan adoption or the succeeding tax year.

51
Q

Subsidiary Liquidation

A

Subsidiary ceases operations and distributes assets to parent and existing minority shareholders.
Neither party recognizes gain or loss on liquidating distribution to parent.
Control: Parent must own 80% or more of both voting power and value of stock.

52
Q

Basis in Subsidiary Liquidation

A

Transferred basis to parent, basis in stock of subsidiary disappears.

53
Q

Liabilities in Subsidiary Liquidation

A

No gain recognized on distributions that satisfy obligations of subsidiary to parent.

54
Q

Tax Attributes of Subsidiary Liquidation

A

Such as NOLs and capital losses, carryover to the parent.

Holding period will include that of the subsidiary.

55
Q

Minority shareholders in Subsidiary Liquidation

A

Complete liquidation rules apply to distributions to shareholders other than parent.
Subsidiary recognizes gain but not losses.
Shareholder recognizes gain or loss and takes FMV basis in the property.

56
Q

Corporate Reorganization

A

Corporation generally continues to operate
Mere change in form of investment rather than a disposition of assets.
General rule of nonrecognition applies. However, gain is recognized to the extent of boot.

57
Q

In a reorganization to shareholders

A

No gain or loss on exchange of stock for stock in another corporation.
Gain on nonqualifying property is recognized.

58
Q

Transferor Corporation in reorganization (Acquired or Purchased)

A

Corporations are also granted nonrecognition
Gain recognized only on boot not distributed by transferee
Liability relief is generally not boot.

59
Q

Transferee Corporation in reorganization (Acquring or Purchasing)

A

Recognizes gain only on appreciated property exchanged.

Basis in property acquired: Transferred basis plus gain recognized.

60
Q

Reorganization Types

A

Nonrecognition applies only if change fits within definition types

61
Q

Type A Reorganization

A

Statutory merger or consolidation. Two corporations merge to one.
Stock in the non-surviving corporation is canceled. In exchange, its shareholders receive stock in the surviving corporation.

62
Q

Merger

A

One of the corporations remains, while the other is no longer in existence.

63
Q

Consolidation

A

Existing corporations are combined into a newly formed corporation.

64
Q

Type B Reorganization

A

Stock-for-Stock (no boot allowed)

Shareholders acquire stock solely for part or all of voting stock. must control (80% of voting and all other).

65
Q

Type C Reorganization

A

Stock for assets. One corporation acquires substantially all the assets of another in exchange for its voting stock (or its parent’s). the transferor (sale of assets) corporation must liquidate.
Limited amounts of boot allowable.
Only 20%of the assets acquired may be exchanged for other than voting stock of the acquiring corporation.

66
Q

Type D Reorganization

A

Division
Transfer of all/part of assets in exchange for stock.
Transferor or its shareholders must control the transferee after the exchange. Control means 80% of voting power and 80% of each class of nonvoting stock.
Distribution of the stock need not be pro rata among the shareholders of the corporation. Thus, division of the original corporation may result.

67
Q

Type E Reorganization

A

Recapitalization.

Capital structure modified by exchanges of stock and securities between the corporation and its shareholders.

68
Q

Type F Reorganization

A

Reincorporation

Stock and securities are exchanged upon a mere change in the name, form, or place of incorporation.

69
Q

Type G Reorganization

A

Bankruptcy reorganization

Stock, securities, and property are exchanged pursuant to a court-supervised bankruptcy proceeding.

70
Q

Nonrecognition of Reorganization

A

Applies only to extent several requirements are met:

  • Must be pursuant to a plan
  • Business purpose
  • Owners must maintain continuing interest
  • General historic business must continue
71
Q

Tax Return Due Date

A

Must file a return (postmarked) no later than the 15th day of the 3rd month after the close of its tax year. Automatic extension of 6 months file form 7004

72
Q

Termination

A

No taxable income in the current year and has ceased doing busines, dissolved, and retained no assets does not exist for federal purposes, without regard to state law. A final return should be filed.

73
Q

Tax Liability Due

A

Must be paid when the return is due, not including extensions.

74
Q

Penalties Imposed

A

Not Filing
-Failure to file is 5% of the tax for each month or fraction of a month the failure continues, up to a maximum of 25%.
Not Paying
-Failure to Pay is 1/2% of the tax for each month or fraction of a month the failure continues. Is reduced by the failure to pay penalty if both apply.
Interest is also charged on underpayments of tax and penalities.

75
Q

Closed Cases

A

Cases closed after examination will not be reopened to make adjustments unfavorable to the taxpayer except under certain circumstances. Qualifying circumstances include:

  • evidence of fraud
  • malfeasance
  • collusion
  • concealment
  • misrepresentation of a material fact

CPA (4 decks)

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