REGULATION PERSONAL PART 2 Flashcards
When does the 80% test no longer apply for determining brother-sister corporations?
- corporate tax brackets
- the accumulated earnings credit
- the minimum tax exemption
When does an affiliated group exist?
- when one corporation owns at least 80% of the voting power of another corporation and holds shares representing at least 80% of its value
- test must be met on every day of the year
- can elect to file a consolidated tax return (insurance companies, S corporations, and foreign corporations are not eligible)
What are the special rules for consolidated tax returns?
- dividends between the affiliated corporations are eliminated on the consolidated tax return
- gains and losses on inter-company sales are deferred until disposition outside the group
- parent adjusts the basis of the stock of a consolidated subsidiary for allocable portion of income, losses, and dividends
- the members of the group must conform their tax year to the parent’s tax year
What are the rules for ordinary dividends from a C corporation?
step 1 - taxable as dividend income to extent of the shareholder’s pro-rata share of E&P
step 2 - excess is tax-free to extent of shareholder’s basis in stock (and reduces the basis)
step 3 - remaining distribution amount is taxed as a capital gain
What are the rules for property distributions from C corporations?
- amount distributed = FMV - liabilities on property
- basis of the property to the shareholder is the fair market value
What are earnings and profits?
- conceptually, E&P measures corporation’s economic ability to pay a dividend
- computed by making adjustments to taxable income
What are the adjustments for earnings and profits?
- increased for all items of income, including tax-exempt income, and is decreased for both deductible and nondeductible expenses and losses
- the alternative depreciation system (straight-line) must be used for E&P purposes
How is E&P reduced for dividends?
- for cash distributions - the amount of money distributed
- for property distributions - by the greater of the FMV or the adjusted basis of the property distributed, less the amount of any liability on the property
What are the special rules when it comes to current and accumulated E&P and dividends?
Current Accumulated Results
+ + dividend=both
- - not a dividend
+ - dividend=current
- + net first
What is the special rule when it comes to corporate gain?
- gain but not loss is recognized to a corporation that distributes property as a dividend, as if the property were sold to the shareholder at its FMV
What is a redemption?
A sale of stock back to the issuing corporation
When does a redemption qualify for sale or exchange treatment (i.e. capital gain treatment)?
if the shareholder owns:
- after the distribution, less then 80% of his or her total interest in the corporation before the distribution, and
- less than 50% of the total combing voting power of all classes of stock entitled to vote
What are some other situations where a redemption also qualifies as a sale or exchange?
- it is not essentially equivalent to a dividend
- complete termination of interest (family attribution rules are waived)
- partial liquidation: at least two active businesses for last five years and one is liquidated
- redemption used to pay death taxes (stock must be at least 35% of adjusted gross estate)
When does a liquidation occur?
- a liquidation occurs when an entity ceases to be a going concern and it distributes its assets
- expenses incurred in the liquidation are deducted on the last corporate return
What are the consequences of a liquidation to a corporation?
- gain or loss is recognized to a liquidating corporation on the distribution of property in complete liquidation
- for purposes of computing gain/loss, the FMV of the property will not be less than any liability that is attached to the property
When may losses not be recognized upon liquidation to a corporation?
- the property had been contributed in last five years, or
- the property is distributed to a related party
What are the consequences of a liquidation to a shareholder?
- shareholders treat the distribution as a sale/exchange; capital gain or loss is recognized
- the basis of assets received by the shareholder will be the FMV on date of distribution
What happens if a parent liquidates a subsidiary?
- in general, no gain or loss is recognized on the liquidation
- basis in the subsidiary’s assets will stay the same
What is a corporate reorganization?
- where two corporations (acquiring corporation and target corporation) choose to either merge or consolidate, or where one corporation spins off part of its operations into a separate corporation
What are the basic types of corporate reorganization?
- stock for asset reorganizations are “A” and “C”
- stock for stock reorganizations are “B”
- divisive reorganizations are “D”
- if the transaction doesn’t meet one of the reorganization classifications, all gains and losses are recognized
What are the rules for an A reorganization?
- stock for asset
- known as a statutory merger
- target corporation must dissolve
- voting or non-voting stock can be used by acquiring
- at least 50% or the consideration given to Target by acquiring must be stock
What are the rules for a B reorganization?
- stock for stock
- acquiring must own at least 80% of target after the transaction
- only voting stock can be used by acquiring
- no boot is allowed
What are the rules for a C reorganization?
- stock for asset
- does not have to be a statutory merger
- only voting stock can be used by acquiring
- boot is allowed, but it can’t exceed 20% of the consideration provided by acquiring
- acquiring must acquire substantially all of Target’s assets (90% of net asset value and 70% of gross asset value)
What are the consequences to shareholders of a reorganization?
- no gain or loss is recognized to the shareholders of the corporations involved in a tax-free reorganization if they receive only stock in exchange for property of the acquiring organization
What if the shareholders receive other property in addition to stock under a reorganization?
- treated as boot and gain is recognized equal to the lower of:
- boot received or
- realized gain
What are the consequences to corporations under a reorganization?
- generally, no gain or loss is recognized
- if the acquiring corporation transfers appreciated property to target corporation, gain (but not loss) will be recognized
- if the target corporation transfers appreciated property to its shareholders, gain (but not loss) will be recognized
What is the basis to a shareholder in stock received under a reorganization?
basis in stock surrendered
+ gain recognized
- boot received
What is the basis for the acquiring corporation in the transferor’s assets?
Transferor’s basis in the asset
+ gain recognized by transferor
What happens with tax attributes under a reorganization?
- tax attributes of target normally carryover to acquiring, including adjusted basis of assets, E&P, carryovers, accounting methods, and tax credit carryovers
- same rules apply to the tax-free liquidation of a subsidiary
When do use taxes apply?
levied on the use of tangible personal property that was not purchased in the state
When do excise taxes apply?
levied on the quantity of an item or sales price (i.e. tax on gasoline, cigarettes, and alcohol. Can be charged to a manufacturer or consumer.)
What is a domestic corporation?
Entities incorporated under the laws of particular state
What is a foreign corporation?
A corporation incorporated in another state
*difficult to determine the degree of power to tax foreign corporations
What are the four tests on jurisdiction to tax foreign corporations?
- activity must have substantial nexus with state
- fairly apportioned
- not discriminate against interstate commerce
- fairly related to services that the state provides
What activities don’t create Nexus in a state?
- soliciting sales of tangible personal property that are approved and shipped outside the state
- advertising
- determining reorder needs of customers
- furnishing autos to sales staff
What must business income be apportioned to in multiple states?
apportioned among all the states in which the corporation does business
How must non-business income be apportioned?
apportioned only to the corporation’s home state (determined in various ways) or the state in which the income is earned
What are the general rules for taxation of foreign income?
- treaties between the U.S. and other countries generally override the tax provisions in the U.S. tax law or foreign tax law
- foreign taxpayers are usually taxed only on U.S. source income
- U.S. taxpayers are taxed on all income earned anywhere in the world
What are the source rules for foreign income?
- earned income is foreign source if earned in a foreign country and U.S. source if earned domestically
- also includes employee benefits
- unearned income is foreign source if received from a foreign resident or for property that is used in a foreign country
Where is the source of gain from the sale of personalty?
Income from the sale of personalty is determined based on the residence of the seller, except:
- inventory is sourced where title transfers
- for depreciable property, recapture is sourced where depreciation was claimed; remaining gain is sourced where title transfers
Where is the source of income from the sale of intangibles?
sourced where the amortization was claimed
Where is the source of income from the sale of real property?
sourced based on the location of the property
When is interest income U.S. source?
if received from:
- U.S. government
- Noncorporate U.S. residents
- Domestic corporations
Where is the source of income producing property?
- source of income from the use of tangible property is determined by the country in which the property is located
- source of income from the use of intangible property is determined by the country in which the property is used
What is a Controlled Foreign Corporation (CFC)?
- a foreign corporation for which more than 50% of the voting power or value of stock is owned by U.S. shareholders (limited to those who own, direct and indirect, 10% or more of the foreign corporation) on any day of the tax year of the foreign corporation
- U.S. shareholders may be taxed on CFC income as a constructive dividend
What are the types of income that U.S. shareholders may be taxed on from a CFC?
- not connected economically to the country in which it is organized
- income from insuring the risk of loss from outside the country in which it is organized
What three provisions mitigate the potential double taxation of worldwide income?
- foreign income taxes paid are an itemized deduction for individuals
- alternatively, a credit may be claimed for foreign taxes paid
- certain individuals can elect to exclude foreign-earned income
What is the equation for the limit on the foreign tax credit?
(U.S. tax on worldwide income x foreign source taxable income) / worldwide taxable income
What is the carryback/forward period for excess foreign tax credits?
- can be carried back one year and carried forward 10 years
What are the two tests (one must be met) for qualifying individuals to get the foreign earned income exclusion?
- during a continuous period that includes an entire tax year the individual is a bona fide resident of at least one foreign country, or
- the individual has a tax home in a foreign country and was present in one or more foreign countries for at least 330 days during any 12 consecutive months
What are the rules for foreign currency gains and losses?
- foreign currency exchange gains and losses resulting from the normal course of business operations are ordinary
- foreign currency exchange gains and losses resulting from investment or personal transactions are capital
What is a private foundation?
a tax-exempt organization which receives less than one-third of its annual support from the general public, governmental units, churches, charitable organizations, etc.
What are the annual filing requirements for Exempt Organizations (EOs)?
- must file an information return (Form 990) if gross receipts exceed $50,000. Private foundations file Form 990-PF
- Form 990-EZ can be used unless gross receipts exceed $200K (or total assets exceed $500K)
- EO that are not required to file the 990 or 990-EZ must file a notice each year (Form 990-N)
- churches don’t file form 990 or form 990-N
What are the acceptable activities for an EO?
- the organization must operate exclusively for a tax-exempt purpose
- influencing legislation or political parties is not an acceptable purpose
- section 501(c)(3) organizations can participate in lobbying efforts if an election is made and lobbying expenditures don’t exceed certain ceilings
What happens if an EO has unrelated business income?
- an EO is taxed on its unrelated business income (UBI)
- to be UBI, income must:
- be from a business regularly carried on, and
- not be substantially related to the EO exempt purposes
What is related income for an EO?
- activity where substantially all work is performed for no compensation
- a business carried on for the convenience of students or members of a charitable, religious, or scientific organization
- sale of merchandise received as contributions
- in general, investment income
- rents from real property
What are some general rules for UBI?
- income from advertising in journals of the EO is UBI
- qualified corporate sponsorship income is not UBI
- UBI is taxed (only if it exceeds $1,000) at regular corporate rates if the organization is a corporation; at trust rates if it is a trust
What are the rules for general partners?
can participate in management and have joint and several liability for the partnership’s debt. All partnerships must have at least one general partner.
What are the rules for limited partners?
they are only liable up to their investment, but they can’t participate in management without losing their limited liability status
*LLC members have limited liability
What are the check-the-box regulations?
non-incorporated entities (i.e., partnerships, limited liability companies) are taxed as follows:
- if only one business owner, the default classification is that the entity is disregarded for tax purposes
- if more than one owner, the default classification is partnership
- However, the owners can elect to be taxed as a corporation if they wish
What happens with partnership interests received for services?
- wage income is recognized equal to the fair market value of the partnership interest
What are the basis rules for partnership formation?
the partner takes a substituted basis in his/her partnership interest (i.e. basis they had in property transferred), and the partnership takes a carryover basis in assets it receives
How must a partner’s basis be adjusted each year in a partnership?
once the partnership begins operations, a partner’s adjusted basis for their partnership interest must be adjusted to reflect the results of operations
What are the holding period rules for a partner’s holding period in a partnership interest?
- holding period tacks on for contributions of capital assets and section 1231 assets
- for other assets, the holding period starts when the contribution is received by the partnership
What things typically increase a partner’s initial basis?
- the partner’s share of taxable and non-taxable income
- increases in the partner’s share of partnership debt
- additional contributions the partner makes to the partnership
What things typically decrease a partner’s basis?
- share of the deductions, losses, nondeductible and non-capitalizable expenditures of the partnership
- decreases in the partner’s share of partnership debt
- any distributions from the partnership to the partner
What happens with liabilities and partnership basis?
- basis is increased with an increase in the share of liabilities
- basis is decreased with a decrease in the share of liabilities
- limited partners are not allocated any share of recourse debt
How is non-recourse debt allocated?
- based on the partners’ profit sharing ratios
* both general and limited partners are allocated non-recourse debt
How are year-ends determined for partnerships?
- partnerships use the same year-end as its majority interest partner(s) (more than 50% capital interest and profits interest)
- if the partnership has no single year for the majority test, then the partnership uses same year-end as all of its principal partners (5% or more profits interest)
What is the Section 444 election?
- allows a year-end different from required year-end, but deferral can’t exceed three months
What are the special loss rules for partnership losses on an individual partner’s tax return?
- a partner can deduct partnership losses on their tax return only to the extent of basis in their partnership interest
- a partnership loss will be a passive loss to a limited partner
What is the at-risk amount in a partnership?
generally basis less share of nonrecourse debt
What are the rules for guaranteed payments?
- determined without regard to partnership income
- paid to a partner in his or her role as a partner
- taxable as ordinary income to the partner and are deductible by the partnership
- taxed as if they were paid on the last day of the partnership’s taxable year
What is the special rule for built-in gains or losses for a partnership?
if a partnership disposes of an asset with a built-in gain/loss, the recognized gain/loss is allocated back to the contributing partner to the extent of the built-in gain/loss
When do related party loss rules apply for partnerships?
- losses are disallowed between a partnership and person owning more than 50% of capital or profits interest
- losses disallowed between two partnerships if same person owns more than 50% of capital or profits interest
- constructive ownership rules apply
What is the correct order of assets distributed from a partnership?
- Cash
- Unrealized receivables and inventory
- Capital assets and 1231 assets
When does a partner recognize a gain on a distribution?
- they recognize a gain if the cash distributed exceeds the partner’s outside basis in the partnership immediately before the distribution
- the gain recognized is usually a capital gain
What basis does the partner take in the distributed property?
- in general, distributed property takes a carryover basis to the distributee partner
- the partner reduces their basis in their partnership interest by the basis of the property distributed
What are the exceptions for liquidating distributions?
- loss is recognized if:
- the partner receives only cash, unrealized receivables and inventory, and
- the inside bases of these assets is less than the partner’s outside basis in the partnership immediately before the distribution - The partner’s basis must be reduced to zero
How is a partnership interest treated?
- A capital asset. Gain/loss from the sale of a partnership interest is, in general, capital in nature
- to the extent the partnership has hot assets, gain will be re-characterized as ordinary income
What are hot assets?
- unrealized receivables (receivables of a cash basis taxpayer; includes depreciation recapture), and
- inventory
What are the rules for collectibles and unrecaptured section 1250 gain when a partnership interest is sold?
- collectibles are taxed at a 28% rate
- unrecaptured Section 1250 gain is taxed at 25%
When does a technical partnership termination occur?
- There is a sale of exchange of at least 50% interest in both capital and profits within a consecutive 12 month period
- Termination requires a closing of the partnership tax year
How are items prorated for an S corporation?
allocation = item x ownership % x portion of year owned
What are the loss limitation rules for an S corporation?
- losses may flow through to the shareholder, but only to the extent of the shareholder’s stock and loan basis
- loan basis is created when the shareholder loans funds directly to the S corporation
- disallowed losses are carried forward until there is basis to deduct them
How is a shareholder’s basis in an S corp. determined?
initial basis \+ stock purchases \+ taxable and tax-exempt income - AAA distributions (accumulated adjustments account) - deductible and non-deductible expenses
What are the fringe benefit rules for S corporation shareholders?
- S corporation shareholders who own more than 2% of the stock are treated as partners for fringe benefit purposes, meaning that the following are included in income:
- employer paid health and accident insurance premiums
- benefits paid under employer-sponsored accident and health plans
- cost of up to $50,000 of employer paid group term life insurance
- meals and lodging provided by the employer
What is the passive investment income tax for S corporations?
If the S Corp.’s passive investment income exceeds 25% of gross receipts and the S Corp. has C corporation AE&P, a tax is imposed at the highest corporate rate
What is the Built-In gains tax for S corporations?
- a C corporation that makes an S election and has unrealized built-in gains in its assets as of the election day must pay a built-in gains tax on this appreciation if it is recognized within the next five years
- gain is taxed at the highest corporate tax rate
How are distributions with E&P taxed under an S corp?
- tax-free to the extent of AAA
- Ordinary dividend to the extent of accumulated E&P
- tax-free to the extent of basis in stock
- excess is treated as capital gain
What is the Accumulated Adjustments Account?
- reflects the cumulative income and losses for all of the S corporation years that have not been distributed
- only tax-exempt income and the nondeductible expenses related to tax-exempt income are excluded in computing the amount in the AAA
How are distributions in an S corp. taxed with no E&P?
- tax-free to the extent of basis in stock
- excess is treated as capital gain
What is the unified credit?
- provides an exemption for transfers from an estate so that most individuals are not subject to the estate tax at death
- the unified credit also applies to the gift tax
When a taxpayer transfers property to a trust, what two gifts have they made?
- an income interest - the beneficiary receives the income from the trust each year
- a remainder interest - the beneficiary receives the property (corpus) of the trust when the trust terminates
What is the value of gifts for gift tax purposes?
Fair market value
When are gift tax returns due (Form 709)?
April 15th
What is gift-splitting?
- spouses can give away an amount up to twice the annual exclusion a year to a donee and pay no gift tax, regardless of which spouse actually made the gift
- a gift tax return must be filed to elect gift splitting
What is the equation for federal estate tax?
Gross estate - Deductions \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Taxable estate \+Taxable gifts made after 1976 \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Total taxable transfers x Unified tax rates \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Tentative transfer tax - Gift tax paid after 1976 (at current rates) - Unified credit and other credits \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Estate tax due
What does the gross estate include?
The FMV of all property owned at the date of death
What is the alternate valuation date?
Six month after the date of death
*AVD can be elected only if the value of the gross estate will be less than the date of death value
What are the rules for jointly owned property?
- husband and wife - 50% of the property owned jointly by husband and wife goes into the estate of the first spouse to die.
- a tenancy by the entirety is a joint tenancy between husband and wife
What happens with joint-tenancy with a right-of-survivorship?
- at death the property immediately passes to the other owner that is still living
- 100% of the property is included in the estate of the first owner to die
What happens under tenancy in common?
- no right of survivorship
- Decedent’s share of the property is included in the gross estate for tax purposes
When is life insurance included in the gross estate?
- the decedent has incidents of ownership (e.g. the right to designate the beneficiary)
- the decedent’s estate is the beneficiary of the insurance policy
- life insurance proceeds from buy-sell agreements are generally excluded from the gross estate
What happens with transfers involving retained interests and revocable transfers within three years of death?
- where the retention or right to revoke was terminated within three years of death are included in the gross estate
- transfers of life insurance and gift tax paid within three years are also included
What are the main deductions allowed from the gross estate?
- marital deduction
- debts of the estate
- funeral and admin. expenses
- charitable contributions
- casualty losses
When is the estate tax return (Form 706) due?
Nine months after the date of death
What is the special rule for administrative expenses?
- admin. expenses and losses can’t be deducted on both the estate tax return (Form 706) and the estate income tax return (Form 1041)
- if the expenses are deducted on Form 1041, the executor must file an election to waive the estate tax deduction
What is the unified credit as of 2015?
The unified credit will offset a net estate of $5.43 million in 2015
When is the generation-skipping tax imposed?
- imposed on an estate when a bequest skips a generation
-
When are estate and trust tax returns due?
- the 15th day of the fourth month after the close of the tax year
- estates may have a calendar year or fiscal ear
- trusts must use a calendar year
How is income taxed on an estate or trust?
- income is taxed only once to either the fiduciary or the beneficiary
- a distribution deduction for fiduciary prevents double tax
How are an estate’s administration costs and losses treated?
- can be deducted by the estate
- if deducted on the fiduciary return, can’t also be deducted on the estate return
How are state inheritance or estate taxes treated?
not deductible
How are extraordinary items treated?
they are allocated to principal; that is, payments that are made irregularly such as proceeds from a fire
What are the personal exemption amounts for fiduciaries?
- $600 for estates
- $300 for simple trusts and complex trusts that distribute all their income currently
- $100 for all over complex trusts
What is IRD?
- income in respect of a decedent
- IRD is income that was earned by the decedent, but not constructively received before death
- IRD is included in the gross estate for estate tax purposes and is included in taxable income for the estate also
What is distributable net income (DNI)?
- the maximum amount that the entity can use as a distribution deduction for the year and on which the beneficiaries can be taxed
- the beneficiaries may be taxed on less than DNI since DNI includes tax-exempt interest
What is the DNI computation?
Taxable Income \+ net tax-exempt income \+ personal exemption \+ net capital loss - net capital gains allocable to corpus \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Distributable net income
What are sources of primary authority?
- legislative authority
- administrative authority
- judicial authority
What is the process for statutory law development?
house ways and means committee > house of reps. > senate finance committee > senate > joint conference committee > back to house and senate > president - sign or veto
What are the main sources of legislative authority?
- Constitution
- Internal Revenue Code (IRC 351)
- Congress barring certain exceptions
- Committee Reports
What are the main sources of administrative authority?
- Treasury Regulations
- legislative, interpretative, procedural
- proposed, temporary, final
- Revenue Rulings
- Private Letter Rulings
- Revenue Procedures
- Technical Advice Memoranda
What are the main sources of judicial authority?
- tax court, district court, and claims court (original jurisdiction)
- circuit court of appeals, court of appeals - federal circuit
- supreme court
How do precedents in court work?
- courts must follow previous decisions for future cases with the same controlling set of facts
- Tax Court will follow previous decisions in the Circuit that will have jurisdiction on appeal
What does the weighting of a judicial decision depend on?
- level of court
- legal residence of the taxpayer
- whether IRS has acquiesced to the decision
- the date of the decision
- whether later decisions have concurred with opinion
What is DIF?
The Discriminant Function System. The DIF score is used to determine which returns to review for possible audit by the IRS
What is the statute of limitations for an IRS audit?
Up to three years from the later of:
- the date the return was filed or
- the due date of the return, with two exceptions:
1. the statute is six years if gross income omissions exceed 25% of the gross income stated on the return
2. There is no statute of limitations if the taxpayer willfully evaded tax in a fraudulent manner
When can a tax year be reopened?
A tax year may be reopened after the statute of limitations has expired if there is a determination for an open year that an earlier treatment was erroneous
What is the report called where the IRS reports their audit findings?
an Income Tax Examination Changes report
- disagreements between the taxpayer and IRS may arise from questions of fact or from questions of law
What if the taxpayer agrees to the audit changes proposed in the Revenue Agent’s Report?
- they can’t pursue tax relief through the appeals process or through the tax court
- a signed agreement binds the IRS and taxpayer with regard to only items in the agreement
What happens if an agreement is not reached?
- the taxpayer will receive a copy of the Revenue Agent’s Report and a 30-day letter
What happens with a 30 day letter?
- the taxpayer is not required to respond
- if there is no response, a 90 day letter is issued which includes a statutory notice of deficiency
What happens if a case is settled in the appeals process?
a Form 870-AD is signed, which means that the case will not be reopened unless there is a significant mathematical error or fraud
What happens if the IRS issues a “no change” report?
the taxpayer still has the option to amend the return
What is significant about the 90 day letter?
This is the time that the taxpayer has to file a petition with the Tax Court
What is an offer in compromise?
Where the IRS allows a taxpayer to settle a tax liability for less than the actual amount owed
What are the other professional standards CPAs must abide by when preparing tax returns?
- AICPA’s Code of Professional Conduct
- AICPA’s Statements on Standards for Tax Services
When does no underpayment penalty apply to individuals with AGI under $150K?
If the total tax payments are at least equal to the lower of:
- 90% of the current year’s tax or
- 100% of the prior year’s tax
* If AGI exceeds $150K it becomes 110% of the prior year;s tax
* Also an annualization exception
What is the underpayment penalty for individuals?
the applicable interest rate times the underpayment until the earlier of April 15 or the time the tax is paid
When are trust returns due?
- the 15th day of the fourth month
- an automatic five-month extension is allowed
What are the rules for Corporation estimated payments?
- made on the the 15th of April, June, September, and December
- only have to be made if the total amount of tax owed is at least $500
- no underpayment penalty if the total tax payments are at least equal to the lower of:
- 100% of the current year’s tax
- 100% of the prior year’s tax
What is the payment exception for a corporation with $1 million or more of taxable income in any of its three preceding tax years?
- they can use the preceding year’s tax exception only for its first installment
What is the failure to file penalty if it is fraudulent?
the penalty is increased to 15% per month up to a maximum of 75% of the tax due with the return
When does the 20% accuracy-related penalty apply for taxpayers?
- applies to underpayments attributable to negligence or disregard of rules or regulations, substantial understatement of income tax, and substantial valuation overstatement
When is an understatement considered substantial?
- it exceeds the greater of 10% of the tax required to be shown on the return, or $5,000
- a 75% civil penalty, and possible criminal penalties, can be imposed for fraud
What is the Statute of Limitations for the IRS assessing additional tax?
they can assess additional tax up to three years from the later of:
- the date the return was filed or
- the due date for the return
What are the two exceptions to the Statute of Limitations?
- It is 6 years if gross income omissions exceed 25% of the gross income stated on the return
- There is no statute of limitations if the taxpayer willfully evaded tax in a fraudulent manner
When must a claim for refund be filed?
by the later of:
- three years from the date the return was filed or
- two years of the actual payment of tax
When is Form 1045 (or Form 1139 for Corporations) used?
to claims refunds based on net operating losses, business credits or capital losses
What are the levels of confidence for tax positions?
- not frivolous - not patently improper
- reasonable basis - at least one authority that has not been overruled
- substantial authority - more than a reasonable basis
- more likely than not - more than 50% chance of succeeding
What is the taxpayer preparer penalty for taking an unreasonable position?
- the greater of $1,000 or 50% of the income derived by the preparer for preparing the return
- a position is unreasonable if there is not substantial authority for it
What is the exception to the unreasonable position penalty?
- if the position was disclosed and there is a reasonable basis for it
- exception applies to reportable transactions and tax shelters only if the position has a “more likely than not” chance of being sustained
What happens if a preparer willfully attempts to understate the tax liability or recklessly or intentionally disregards rules or regulations?
- the penalty is the greater of $5,000 or 50% of the income earned by the tax preparer for preparing the return or claim
What is the marginal tax rate?
- marginal tax rate is the rate that should be used for decision making
- it is the amount of taxes that would be paid on the next dollar of taxable income, or that would be saved on the next dollar of deduction
What are some good tax planning strategies when tax rates are changing?
- if rates are increasing in the future, accelerate income and defer deductions
- if rates are decreasing in the future, accelerate deductions and defer income
What is the maximum AMT rate for individuals?
28%
What happens when appreciated property is gifted to a charity?
- avoids recognizing the appreciation as income
- the FMV is deductible as a charitable contribution
