Special deck-Corporate Taxation

Question 1

How is shareholder basis calculated for a new interest in a Corporation?

Answer 1

Adjusted basis of property transferred + Gain recognized (if less than 80% ownership) - Boot received = Shareholder basis. If shareholders have 80% control after a property transfer, no taxable event occurs. If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.

Question 2

How is shareholder basis calculated for a TRANSFEROR of an interest in a Corporation?

Answer 2

Transferor’s basis + Gain recognized by shareholder = Basis OR FMV of Corporate Interest - Adjusted basis of property = Gain

Question 3

How are gains and losses handled with respect to a Corporation’s transactions involving its own stock?

Answer 3

Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock. If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.

Question 4

How are Corporate distributions to shareholders handled?

Answer 4

Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income) Then, remainder (if any) is a return of basis. Then, add’l remainder (if any) is a Capital Gain Distribution amount = FMV of Property + Cash - Liability Assumed Shareholder basis = FMV of Property + Cash received (basis not reduced by the attached liability)

Question 5

What is the order of treatment in a Corporation’s distribution to a shareholder?

Answer 5

1. Distribution is a dividend to the extent of current and accumulated earnings and profits 2. Shareholder basis is then exhausted 3. Remainder, if any, is a Capital Gain

Question 6

What is the treatment of a gain in a complete Corporate liquidation?

Answer 6

If Capital Property, then Capital Gain If Non-Capital Property, then Ordinary Income Gain characterization is the same for both the Corporation and the shareholder

Question 7

How is S-Corporation shareholder basis calculated?

Answer 7

Beginning Basis +Share of Income Items (including non-taxable income!) -Distributions (cash or property) -Non-deductible expenses -Ordinary Losses (but don’t take income below zero) = Ending basis

Question 8

Name the DRD exception equation.

Answer 8

Div * % < Pre-DRD income < Div.

Then you use % * Pre-DRD income

Question 9

List adjustments and preference for AMT computation

Answer 9

Mneumonic - A SLIM PILE

A SLIM is used in determining ACE, PILE used in arriving at pre-ACE adjustment AMTI

• Amortization of business expenses
• Seventy percent dividends received deduction
• Life Insurance proceeds
• Municipal Bond Interest
• Private activity bond interest
• Installment sales of inventory-difference between accrual and installment method when installment method used for tax purposes
• Long term construction contract method used must be %-of-completion
• Excess depreciation on personal property - when DDB (200%) was used, use 150% DB

Question 10

How does one compute Corporate AMT?

Answer 10

Regular Taxable income

+/- adjustments and preferences

= AMTI before ACE adjustment

+/- Adjusted Current Earnings (ACE) adjustment( SLIM x 75%)

=AMTI before exemption

- AMT Exemption($40,000 - 25%(AMTI before exemption-$150,000))

AMTI

x Tax Rate (20%)

= Tentative Minimum tax

- Regular tax

AMT

Question 11

What is the ACE adjustment actually comprised of?

Answer 11

ACE adjustent is comrsied of the following 4 items

Mneumonic - SLIM

• Seventy-five percent DRD deduction on dividends from unrelated companies(70% only)
• Life Insurance proceeds from death of key employee
• Municipal bond interest

75% of all these values comprise the ACE Adjustment. Or you can add all three values, then take 75% and that will be your ACE adjustment.

Question 12

What is the Adjusted Current Earnings (ACE) comprised of?

Answer 12

The total of AMTI before the ACE adjustment, and the items that comprise the adjustment itself (SLIM)

Question 13

How does one compute corporate tax?

Show the procedure as outlined on the corporate return.

Answer 13

Corporate Income Tax Return 1120

Gross Income (worldwide)

(ordinary deductions)

Income before “special deductions

(Charitable Contribution)

(Div Received Deduction) (DRD)

Taxable Income

x Tax Rate

Gross tax liability

(Foreign tax credit)

Net regular tax liability

+ Personal Holding Company Tax (PHC)

+ Accumulated Earnings Tax (ACE)

+ Alternative Minimum Tax (AMT)

Total Tax Liability

Question 14

Show how DRD is calculated

Answer 14

Gross business income

+ Dividend income

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• business deductions

Taxable income before DRD

• DRD(dividend inc * %)

Taxable income

Question 15

C corp, S corp; built in gain applies in switching from which to which?

Answer 15

Switching from C-corp to S-corp

Question 16

What is it and how does it work?

Answer 16

When a company switches fron c corp to s corp, any difference between adjusted basis and FMV of equipment is recognized at highest tax rate applicable to companies (35%) and taxes as such. It can be recognized over a perio of 10 years, also.

Question 17

Are capital losses deductible.

Answer 17

No NEVER!. They can be carried back 3 years and carried forward 5 years,and reduce the amount of taxable capital gains by being netted against them, but they are never directly deductible.

Question 18

If a shareholder recieves boot during reorganization, is g/l recognized?

Answer 18

Gin is recognized, but not loss

Question 19

Define boot within a reorganzation? Can it include things other than cash?

Answer 19

Yes, boot can include the the FMV of an excess of principal (face amount) of securities received over face amount of securites surrendered.

Question 20

How would boot (involving excess of principal of securities received by shareholder) be calculated?

Answer 20

Excess face amount of security/face amount of security

* FMV of security = boot amount

Example:

old bond (surrendered)-$1,000

New bond (received)-$1500, FMV $1575

500/1500 *1575 = 525