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Flashcards in Corporate Taxation Deck (78):
2

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

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.

3

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

Transferor's basis
+ Gain recognized by shareholder
= Basis

OR

FMV of Corporate Interest
- Adjusted basis of property
= Gain

4

What basis do shareholders and corporations use for property?

They both use ADJUSTED BASIS; NOT FMV of property.

5

Describe how loss is taken on Section 1244 small business corporation stock?

A loss on worthless stock is an ordinary loss.

6

What are the requirements for taking an ordinary loss on Section 1244 small business corporation stock?

Taxpayer must be original stock owner; and either an individual or partnership

$50k (single) or $100k (MFJ) limit - remainder is a capital loss

Must have been issued in exchange for money or property (not exchanged for services)

Shareholder equity must not be in excess of $1 million

Both common and preferred stock is allowed

7

What are the basic rules for filing a form 1120?

Return is due regardless of income level

Return is due 3/15 if on a calendar year basis; or 2 1/2 months after end of fiscal year

An automatic six-month extension is available

8

Describe the AMT calculation for C-Corporations

Taxable Income
+Tax Preference Items
+/- Adjustments
= Pre-ACE

+/- ACE Adjustments
= AMTI
- 40;000 Exemption

= Tax Base
x 20%

= Tentative Minimum Tax
- Regular Tax Liability
= AMT

9

When are corporate federal tax estimated payments required; and how are they calculated?

Required if more than $500 in tax liability expected; or

100% current year liability

100% previous year liability

Note: If corporation had more than $1 Million in revenue the previous year; the first estimated payment must be based on the previous year and the remainder based on the current year.

10

What are the ACE adjustments in the C-corporation AMT tax calculation?

1. Municipal Bond Interest

2. Life Insurance Proceeds

3. 70% Dividends Received Deduction

4. Organizational Expenditures must be capitalized; not amortized

Note: AMT paid gets carried forward indefinitely; but never carried back

11

What are the pre-ACE adjustments for C-corporation tax AMT calculations?

Real Estate purchased between 1986 and 1999 using Straight Line Depreciation must depreciate over a useful life of 40 years

Personal Property - use 150% MACRS; not 200%

Construction must use % completion method

12

When are C-corporations exempt from AMT?

In year one

In year two; if year one gross receipts were less than $5 Million

In year three; if the average gross receipts for years 1 and 2 were less than $7.5 Million

In year four and beyond; if the average from the previous 3 years is less than $7.5 Million

13

How are a C-corporation's deductible charitable contributions calculated?

Sales -COGS= Gross Profit
Gross Profit + Rent; Royalties; Gross Dividends; Capital Gains

=Total Income

Total Income - Deductions (No charitable contributions; Dividends Received Deductions (DRD); or NOL Carrybacks allowed)

- NOL Carryforwards

=Taxable Income before charitable contributions; DRD;
NOL Carrybacks

x 10%

=Deductible Charitable Contributions

14

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

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.

15

How are corporate organization costs handled?

Amortization of costs begin the month the corporation commences business activity

If the corporation doesn't amortize organization costs in year one; they can never be amortized

Costs associated with offerings are neither deductible nor amortized

16

How are excess charitable contributions treated in a C-corporations?

Excess charitable contributions get carried forward 5 consecutive years (No Carryback)

17

How is the dividends received deduction (DRD) calculated; and what are the limitations?

80% Interest = 100% DRD

20-79% = 80% DRD

less than 20% = 70% DRD

Only allowed if no consolidated return is filed. Qualified dividends from domestic corporations only.

In addition, to qualify for a DRD, the investor corporation must own the investee's stock for more than 45 days

18

When can a board of directors authorize charitable contributions for a tax year?

The Board of Directors can authorized charitable contributions up to 3/15 and have them count in the previous tax year

19

How are corporate losses on a sale to a corporation where a taxpayer owns a 50% or more interest handled in a C-corporation?

A loss on a sale to a corporation where taxpayer owns a 50% or more interest is DISALLOWED

20

What is the Dividends Received Deduction (DRD) calculation when there is a loss from operations?

Only take DRD % x Taxable Income

Note: If DRD brings a loss situation; then you can take the full DRD

If Taxable Income remains after DRD; only a partial DRD (T.I. x DRD %) is allowed

21

How are capital losses handled in a C-corporation?

Capital Losses are deductible only to the extent of Capital Gains

22

How are corporate losses carried back/forward?

Corporations can carry back losses 3 years and carry forward losses 5 years as a Short Term Capital Loss

Note: An unused net capital loss is always carried back and forward as a short-term capital loss whether or not it was short-term when sustained

23

How are net short term capital gains taxed in a C-corporation?

Net Short Term Capital Gains are taxed at ordinary income rates

24

What is the casualty loss floor for a C-corporation?

No floor ($100 and 10% of AGI) on corporate casualty loss like there is with an individual taxpayer

If destroyed; the loss is the property's basis (minus proceeds)

Calculation: Adjusted basis - Proceeds from Insurance = Loss

If partially destroyed; take the lesser of FMV or adjusted basis reduction (minus proceeds)

25

How are bad debt losses handled in a corporation?

Bad debt losses are classified as ordinary

26

How are net operating losses handled in a C-corporation?

If loss includes NOL Carryforward; reduce the loss (add back the amount) to get the loss without the Carryforward

Then; carry back the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to the most recent year

Any leftover NOL = This year's NOL

27

How is investment interest expense handled in a C-corporation?

Unlike individual taxation; investment interest expense is not limited to investment income.

Investment interest on tax-free investments are NOT deductible.

28

What is the purpose of Schedule M-2 on a corporate tax return? How is it calculated?

Reconciles beginning to ending retained earnings

Beginning Unappropriated Retained Earnings
+ Net Income
+ Other Increases
- Dividends paid
- Other decreases

= Ending Unappropriated Retained Earnings

29

What is the purpose of Schedule M-1 on a corporate tax return? Which items are included?

Schedule M-1 reconciles book to tax income before Net Operating Loss/Dividend Received Deduction

Includes permanent differences (such as tax-exempt interest and non-deductible expenses) and temporary differences (accelerated depreciated tax depreciation; straight-line; etc)

30

What is the purpose of Schedule M-3 on a corporate tax return?

Like M1; but for Corporations with $10M+ in assets

31

How are affiliated (80%) corporation tax returns handled?

Consolidation election is binding going forward

Dividends between them are eliminated; Advantage- Gains are deferred; Disadvantage- losses are deferred.

One AMT exemption

One accumulated earnings tax allowed

Note: In order to consolidate; the parent must have 80% voting power and own 80% of the stock value

32

How are corporate distributions to shareholders handled?

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)

33

What is the basic calculation for accumulated earnings and profits in a corporation?

Beginning Accumulated Earnings and Profits

+ Net Income

+ Gain on Distribution (if not already in book income)

- Distribution (but cannot create a deficit)

- NOL of prior years

= Ending Accumulated Earnings and Profits

34

What is the order of treatment in a corporation's distribution to a shareholder?

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

35

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

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

36

What is the treatment of a loss in a complete corporate liquidation?

Corporation: Depends on if property is capital in nature; otherwise ordinary loss

Individual: capital loss only

37

What is the treatment of the liquidation of a subsidiary?

No G/L to parent company

38

Describe the requirements for a personal holding company.

No banks or financial institutions can be PHCs

5 or fewer individuals own more than 50% of the stock (directly or indirectly)

60% of the PHC's income must be from passive means

PHC tax is self-assessing - 15% tax rate on undistributed PHC Income

39

What is a consent dividend? How is it treated?

Consented by the Board of Directors but not yet paid

Treat as if distributed by the end of the year

40

How is the accumulated earnings credit calculated for a corporation?

Take greater of $250,000 ($150,000 for Service Corps) or the legitimate balance based on future needs (i.e. purchasing a building)

41

How is corporate accumulated earnings tax (AET) different from PHC taxation?

Not Self-Assessing like a PHC

42

What are the requirements for holding S-corporation status?

Only individuals; estates and trusts can be shareholders

Domestic only; no international S-corps or foreign shareholders

Up to 100 shareholders allowed; and only one class of stock allowed

Calendar tax year only

43

How is an S-corporation election made?

Election for S Corp status must be made by 3/15 and counts as being an S Corp since the beginning of the year

To make election; 100% of the shareholders must consent

44

How is an S-corporation terminated?

To terminate election; 50% of the shareholders must consent

No S Corp election allowed for 5 years after termination

S Corp termination effective immediately following an act that terminates status

45

What items are not included in calculating an S-corporation's ordinary income?

These items are included on Schedule K; not in ordinary income:

1. Foreign Taxes paid deduction

2. No Investment Interest expense

3. Section 179 Deduction

4. 1231 Gain or Loss

5. Charitable Contributions

6. Portfolio Income (dividends or interest)

46

How is S-corporation shareholder basis calculated?

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

47

How should a corporate stock redemption be treated?

A corporate stock redemption is treated as an exchange, generally resulting in capital gain or loss treatment to a shareholder if the redemption meets any one of five tests

48

What are the 5 tests needed for a corporate stock redemption to qualify for exchange treatment?

Note: A corporate stock redemption ONLY needs to meet one of the five tests

Redemptions qualifying for exchange treatment include:

1. A redemption that is not essentially equivalent to a dividend

2. A redemption that is substantially disproportionate

3. A redemption that completely terminates a shareholder's interest

4. A redemption of a noncorporate shareholder in a partial liquidation

5. A redemption to pay death taxes

If none of the above 5 tests are met, the redemption proceeds are generally treated as a divided

49

What is the treatment of a Gain or Loss when a corporation makes a complete liquidation of a subsidiary?

The corporation will NOT recognize the Gain and/or Loss

Note: The subsidiary will NOT recognize any gain or loss either

50

What is the treatment of a Gain or Loss when a corporation makes a non-liquidating distribution (dividend) to a shareholder?

The corporation will recognize the Gain

Corporation will NOT recognize Loss

51

What is the treatment of a cash distribution made by a corporation to a shareholder?

A cash distribution is NOT a taxable event; therefore, the corporation will NOT recognize anything - no gain and/or loss

52

What is one thing that shareholders must do if they want to convert from a C-corporation to a S-corporation?

In order to make the election to be a S-corporation All shareholders must agree to the election

53

How do you calculate the ACE adjustment?

The ACE adjustment is equal to 75% of the difference between adjusted current earnings (ACE) and pre-ACE alternative minimum taxable income

The ACE adjustment can be positive or negative, but a negative ACE adjustment is limited to prior years' net positive ACE adjustments

ACE

x 75%
= ACE adjustment

If the current year ACE adjustment is negative and prior years net ACE adjustments are positive, you have to offset the total to the current year negative ACE adjustment

54

In a situation where a shareholder transfers a building to a corporation and receives common stock as well as cash (boot received), how much of the realized gain will the shareholder recognize?

In this situation, if consideration other than stock is received (shareholder received cash = boot), a realized gain must be recognized to the extent of the boot received

So, in other words, the max realized gain that the shareholder can recognized is the amount of boot that was received

55

In a situation where a corporation does a recapitalization (which is a reorganization) where a shareholder exchanges shares of the corporation stock to the corporation for shares of new stock and bonds in principal, how much of the realized gain will the shareholder recognize?

Since this situation is a recapitalization (reorganization), a realized gain is recognized ONLY to the extent that consideration other than stock or securities is received, including the FMV of an excess of the principal amount of securities received over the principal amount of surrendered

In this situation, no securities were surrendered, so the realized gain is recognized to the extent of the FMV of excess principal amount of securities (this would be the FMV of the bonds)

56

When a shareholder makes a contribution to the capital of a corporation, how is the gain or loss recognized to the shareholder?

When a shareholder makes a contribution to the capital of a corporation, no gain or loss is recognized to the shareholder

Instead, the corporation's basis of the contributed capital (i.e. stock or other property) is the same as it was when the shareholder owned it. In other words, the basis of the property gets transferred from the shareholder to the corporation (carryover of the basis)

If the shareholder contributes additional property (i.e. land), the shareholder original stock basis is increased by the adjusted basis of the additional property contributed

57

How do you calculate a net operating loss for a corporation?

To calculate a net operating loss for a corporation, do the following:

Gross Income (before dividends)
+ Dividends

= Net Loss
+ DRD deduction

Note: You add the DRD deduction to the net loss, which increases the net loss. If a problem say's that a corporation received dividends from a valid corporation and they don't say what the ownership % is, then you have to assume that the ownership % is less than 20%, which means that the DRD will be 70% of the dividends received

58

What is the formula for the ACE adjustment?

Adjusted current earnings (ACE) is a concept based on a corporation's earnings and profits, and is calculated by making adjustments to Pre-ACE AMTI:

AMTI before ACE adjustment and NOL deduction

+ Tax-exempt interest income on municipal bonds
- Tax-exempt life insurance death benefits
- 70% DRD

- Depletion using cost depletion method depreciation using ADS SL for all property - eliminated for property passed in service after 1993

- Capitalize organizational expenditures & circulation expenses

+ Increase in LIFO recapture amount (i.e. excess of FIFO over LIFO basis)

- Decrease in LIFO recapture

- Amortize intangible drilling costs over 5 years

- Installment method for nondealer sales of property (can't be used)

= ACE

- Pre-ACE AMTI

= Balance (positive or negative)

x 75%

= ACE adjustment (positive or negative)

59

What is a shareholder tax basis for Land received in a corporate distribution?

A shareholder's tax basis for property received in a corporate distribution will be the property's fair market value.

Note: If a shareholder assumes a mortgage on the distributed property, their tax basis is unaffected by this

60

Out of the following entities, which has the most flexibility in choosing an accounting period?

1. C corporation
2. S corporation
3. Partnership
4 Personal service corporation

A C corporation has the most flexibility since it can elect to use a calendar year or any fiscal year. In contrast, a partnership generally must use the same tax year as used by its partners in order to prevent the deferral of income to partners that would otherwise result

Similarly, S corporations and personal service corporations must generally adopt a calendar year unless the entities can establish a business purpose for having a different tax year

61

How would a corporation recognize a loss in making a pro rata distribution of marketable securities in redemption of its stock in a complete liquidation?

Generally, a corporation will recognize Gain or Loss on the distribution of its property in complete liquidation just as if the property were sold to the distributee (shareholder) for its Fair Market Value

62

How do you reconcile Book income to Taxable income?

If you begin with Book Income to calculate taxable income, make the following adjustments:

Book Income

Add Non-deductible Expenses:
+ Federal income

+ Excess of capital losses over capital gains (b/c a net capital loss is not deductible)

+ Income items in the tax return not included in books (i.e. prepaid rents, royalties, interest)

+ Charitable contributions > than 10% limitation

+ Expenses deducted on the books, but not on the tax return (amt of business gifts > $25, nondeductible life insurance premiums paid, 50% of business meals & ent)

Subtract Income not taxable:

- Income reported on books, but not on the tax return (i.e. tax-exempt interest, life insurance proceeds)

- Expenses deducted on the tax return, but not on the books (i.e. MACRS depreciation above SL, charitable contribution carryover)

- DRDs

- Domestic production activities deduction

= Taxable Income

63

How do you reconcile Taxable income to Book income?

If you begin with Taxable Income to calculate Book income, make the following adjustments:

Taxable Income

Subtract Non-deductible Expenses:
- Federal income

- Excess of capital losses over capital gains (b/c a net capital loss is not deductible)

- Income items in the tax return not included in books (i.e. prepaid rents, royalties, interest)

- Charitable contributions > than 10% limitation

- Expenses deducted on the books, but not on the tax return (amt of business gifts > $25, nondeductible life insurance premiums paid, 50% of business meals & ent)

Add Income not taxable:

+ Income reported on books, but not on the tax return (i.e. tax-exempt interest, life insurance proceeds)

+ Expenses deducted on the tax return, but not on the books (i.e. MACRS depreciation above SL, charitable contribution carryover)

+ DRDs

+ Domestic production activities deduction

= Book Income

64

In a situation where a Corporation distributes an asset to a shareholder with a FMV of $30,000 subject to a liability of $40,000 with a basis of $25,000; what amount of gain will the Corporation recognize?

Generally, a corporation must recognize gain on the distribution of appreciated property to a shareholder

The gain is measured by treating the corporation as if it had sold the property to the shareholder for FMV.

However, if there is a liability on the property that is assumed by the shareholder and the amount of the liability exceeds the property's FMV, then the amount of liability is used to measure the gain:

Liability $40,000
Less: Basis

Gain = $15,000

65

Do corporate reorganizations result in taxable gains or losses?

NO

Remember that a merger or a consolidation is considered a reorganization and reorganizations are NOT taxable; thus no taxable gain or loss will result

66

In calculating the built-in gains tax, how is the type of gain determined?

When you transfer assets from a C corporation to an S corporation, if you had assets in the C corporation that have appreciated in value, these assets may be subject to a built-in gains tax

To determine the built-in gains tax, you take the less amount of Taxable income and the Built-in-gain x 35% (corporate tax rate). The lower number is the actual built-in gain tax

Now, to determine the classification of the built-in gain tax (LTCG or LTCL), it depends on the what the built-in gain was:

If Built-in-gain = LTCG; then Built-in-gain tax = LTCL
If Built-in-gain = LTCL; then Built-in gain tax = LTCG

So, you net the two amounts and it passes through to the shareholder (on their K-1)

67

How are C corporations formed?

The following are attributes of the formation of C corporations:

1. C corporations generally can be formed tax free

2. No gain or loss for transferors if requirement of Sec. 351 are satisfied (i.e., transferors of property must own at least 80% of stock immediately after transfer)

3. No gain or loss to corporation when issuing stock

4. Corporation will have a transferred basis for property received; shareholders will have basis for stock equal to basis of property transferred

68

How are S corporations formed?

The following are attributes of the formation of S corporations:

1. C corporations generally can be formed tax free

2. No gain or loss for transferors if requirement of Sec. 351 are satisfied (i.e., transferors of property must own at least 80% of stock immediately after transfer)

3. No gain or loss to corporation when issuing stock

4. Corporation will have a transferred basis for property received; shareholders will have basis for stock equal to basis of property transferred

Note: The formation of a S corporation is the same as for a C corporation

69

How do S corporations operate?

S corporations are pass-through entities

Generally, pas no corporate income tax

Income, deduction, loss and credit items retain their characteristics when pass through to be reported on shareholder returns

70

What are the effects of Non-liquidating distributions to a shareholder (owner) of a C corporation?

Non-liquidating distributions to a shareholder of a C corporation are taxable as dividends to shareholders to extent made out of current or accumulated E&P

Distributions in excess of E&P treated as a nontaxable reduction of stock basis and will result in capital gain to the extent in excess stock basis

Noncash property distributions measured by FMV; property received will have FMV basis to distributee

71

What are the effects of Non-liquidating distributions to a C corporation?

Non-liquidating distribution gains (but NOT loss) are recognized on distributions to shareholders as if C corporation had sold the property for FMV

72

What are the effects of Non-liquidating distributions to a shareholder (owner) of a S corporation?

Non-liquidating distribution to a shareholder of a S corporation are generally treated as nontaxable return of stock basis and will result in capital gain to the extent in excess of stock basis

Taxable as dividend income to the extent made out of accumulated E&P from C corporation years

Noncash property distributions measured by FMV; property received will have FMV basis to distribute (same as for C corporation shareholders)

73

How do C corporations operate?

C corporations are separate taxpaying entities

Corporate taxable income taxed at corporate rates

Corporate earnings taxed to shareholders as dividends if distributed

74

What are the effects of Non-liquidating distributions to a S corporation?

Non-liquidating distribution gains (but NOT loss) are recognized on distributions to shareholders as if S corporation had sold the property for FMV

Note: This is the same as for C corporations

75

In a Section 332 liquidation (Complete liquidation), does NON-RECOGNITION of gain apply to distributions of appreciated property to minority shareholders?

With COMPLETE LIQUIDATIONS, non-recognition of gain does NOT apply to distributions of appreciated property to shareholders other than 80% distribute

In other words, the rule of not recognizing gains do NOT apply to shareholders who own LESS than 80% (minority shareholders) and they CAN recognize gain

76

In a COMPLETE LIQUIDATION, do minority shareholders recognize a loss on the distribution of appreciated property?

Although a liquidating corporation MUST recognize GAIN on distribution of appreciated property to minority shareholders in a Sec. 332 liquidation (complete liquidation), NO LOSS can be recognized

77

Does a subsidiary corporation recognize a gain in the liquidation of distributed property to its parent company in a COMPLETE LIQUIDATION?

With COMPLETE LIQUIDATIONS, NO gain or loss is recognized by the liquidating corporation on distributions made to its parent corporation (i.e. the 80% distribute)

78

Does a parent corporation recognize income in a COMPLETE LIQUIDATION of its subsidiary?

If the parent owns at least 80% of the subsidiary corporation, the liquidation qualifies under Sec. 332 as a NON-TAXABLE liquidation of a controlled subsidiary into its parent

As a result, the parent corporation recognizes NO gain on the receipt of property exchanged

79

What are the steps to solving a distribution problem to allocate distributions made during the year amongst Current E&P, Accumulated E&P and Excess distribution?

Corporate distributions are deemed to be made first from current earnings and profits (CEP) and then from accumulated earnings and profits (AEP)

If distributions during the year exceed CEP, CEP must be allocated on a pro rata basis to distributions regardless of when the distributions were made during the year

Distributions exceeding CEP are treated as made from AEP. Distributions from AEP are made in chronological order (i.e. allocated to distributions in the order that distributions are made)

Distributions in excess of CEP and AEP are treated as a nontaxable return of capital and reduce the shareholder's stock basis and to the extent in excess of stock basis are treated as capital gain

1st - Need to take the pro rata portion of the distribution that is deemed to come from Current E&P using proportion:

Distribution x (Current E&P / Total distributions) = Pro rata amount

2nd - Determine the portion of each distribution that comes from Accumulated E&P:

Distribution - Pro rate amount (from step 1) - however, this amount is limited to Accumulated E&P

3rd - Determine the excess distribution:

Distribution - (sum of the amounts from 1st and 2nd steps)