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Flashcards in corps Deck (39):
1

recognition of G/L- corps

recognition of G/L on contribution of property in exchange for stock is determined by ownership levels of contributing shareholders

2

Deferral of G/L

deferred gain and loss is required for members of the control club.
--property must be contributed (services don't count) and must be in exchange for stock
must own 80% of stock after transfer
- receipt of boot triggers boot but NOT LOSS

3

If boot received

Gain recognized to shareholder is the lower of the realized gain or the FMV of the boot received.

4

If stock is received in exchange for services

Transferor has wage income equal to FMV of stock received and the corp has a salary expense deduction

5

CORPS DO NOT RECOGnIZE G/L on issuing stock

NO G/L on issuance of stock

6

Holding period

Capital Asset or Section 1231- asset transferred to corp--- property holding period is tacked on to the stock holding period

All other property- hold period of property does NOT tack on. stock HP begins on day after transfer

CORPS HOLDING PERIOD- in property received is ALWAYS the transferor's HP before the exchange

7

Debt vs. Equity

Corp debt can be reclassified as equity

8

Basis issues

adjusted basis for qualifying property is CARRYOVER BASIS

corp takes an adjusted basis in property transferred plus any gain recognized by the transferor

Shareholder's stock takes the ADJ. BASIS of the transferred property plus any GAIN recognized less any BOOT less LIABILITIES assumed by corp

9

Basis adjustment for loss property

if total basis of property transferred by shareholder is greater than FMV a basis adjustment is required to prevent SH and corp from both benefiting from unrealized loss.

10

Debt Assumption

gain must be recognized in 2 circumstances if corp assumes the SH debt
1. if total liabilities assumed by corp exceed the total adj. basis of property transferred by SH, then gain must be recognized as LIAB ASSUMED - BASIS of PROPERTY TRANSFERRED.

11

Corporate Income Tax formula

Realized income
LESS: Nonrecognition income like Deferrals and Exclusions/ COGS
EQUALS:
Gross Income
LESS
Deductions
EQUALS
Taxable income before special deductions
LESS
Special deductions
equals taxable income

12

Year end

Can chose fiscall year unless S election or qualifies as PSC (must use calendar year end, think personal)

13

Personal Service Corp

Corp whose principal activity is performing personal services performed by employees who own substantially all of the stock (MEDICAL GROUP)

14

Method of Accounting

required to use accrual except when:
GR less than 5 Million
S corps
certain PSC

15

Passive Loss rules

Passive loss limits do not apply to corps
closely held corps can use passive lossses to offset active corp income but not portfolio income
PSC cannot use passive losses to offset either active or portfolio income.

16

Schedule M-1

reconciliation of book income to taxable income-
reconcilies taxable income before dividends received and NOL deductions. Corps with total assets of $10 M or more are required to do M-3

-nondeductible expenses are added to book income,( net cap loss, expenses in excess of income, federal tax expense.)
- income that is taxable but not includible in book income is added to book income (PP income)
--nontaxable income that's included in book income is subtracted from bookincome (muni interest, insurance proceeds)
---deductions not expensed in book income are subtracted from book income (DRD, election to expense)

17

M-3

- provides certainfinancial information and reconcilies worldwide consolidated net income on book financial statements to book income for entities included in corp return
reconcilies book income computed in part 1 to taxable income
breakdown of expense/deduction items affecting reconciliation of book income to taxable income
certain large S corps and partnerships must file M-3

18

Net Operating Loss

negative taxable income carried from other years.
carryover is back 2 years and forward 20
any carryover from previous year is not included in calculating current NOL
USE IN FIFO order
Charitable contributions are not allowed in computing NOL

19

Start up costs

regular operating expenses except before the corp has starteed biz operation

20

Organization expenses

legal services incident to organization, accounting, org meetings or directors, fees paid to incorporate.

21

Charitable Contributions

Same as individuals except:
contribution of inventory or depreciables used in trade or biz to charities that use property in manner related to exempt purpose is the lower of
2 x AB or AB of property + 50% (FMV-AB)
can deduct accrued contributions if paid within first 2.5 months of year end
Limit on deduction is 10% of taxable income
carries forward 5 years no carryback

22

DRD

% of domestic dividends corp has held for over 45 days or 90 days for preferred stock.
20% ownership- deduction is 70%
80% or more ownership- then 100% deduction
in between 80% DRD
limited by taxable income before DRD unless DRD creates or adds to a NOL

23

DPD

production activities within the US qualify for deduction of 9% times lower of QPAI or taxable income
QPAI= gross receipts from domestic LESS cogs, direct expenses, pro rata share of indirect expenses
Deduction cannot exceed 50% of wages allocable to DPI.

24

Corp Deductions order

Gross income
Less deductions
= taxable income
less charitable contributions
Less DRD
Less: DPD, NOL carryback and STCL carryback
EQUALS taxable income

25

Distributions- Earnings and Profits

Additions to taxable income are made for exempt income or deductions that do not represent economic outlay- muni interest/life insurance proceeds, DRD
Some expenditures are not deductible- federal income tax, related party losses and penalties and fines
Some modifications to taxable income- timing differences can be positive or negative.-- section 179 expense, depreciation
Distributions generally reduce E&P- cash distributions, property by the greater of adjusted basis reduced by liabilities OR fmv--- cannot make negative E&P

26

Dividend Treatment

distributions are taxable as dividends to extent of pro rata share of E&P
Excess is tax free up to BASIS
remaining is a capital gain

BOth current and accumulated E&P are used to determine dividend distribution

27

Current vs. Accumulated E&P

if both are positive- first take from current then accumulated
if both negative- distributions are taxed free up to basis and then cap gain
if current is positive- take dividend up to current amount and basis after that
if current is negative and accumulated is positive- net E&P and take dividend to that extent.

28

Property distribution- corporation

value of property distributed net of debt assumed is amount eligible for dividend treatment (FMV)
distribution of appreciated proprety causes corp to recognize gains only like sale of property
if LIABILITY is greater than FMV than FMV=liability
amount distributed= FMV-liabilities on property
basis of property to SH is FMV

29

nonliquidating distribution to SH

cannot recognize a loss
only recognize gains!

30

Exempt from PSC tax

banks
insurance companies
finance companies

31

Deductions to AEtax to taxable income

charitable contributiones
net capital loss
net capital gain after tax
accured interest income

32

PHC income test

met if 60% of income is from passive income

33

Property received as dividend

FMV=basis
but taxed on the FMV-liabilities assumed.

34

Type A reorg

1. merger, aquired company dissolves into another corporation
2. consolidation- both acuired dissolve into new corp
3. at least 50% of consideration provided to target by aquiring company must be stock in aquiring
4. shareholders of firm can only defer gains and losses to extent they receive equity of aquiring corp
5. forms of payment do not qualify as equity are considered boot
6. acquiring must assume all liabilities of Targer.

35

Type B reorg- 80% rule

1. aquiring firm must exchange its own voting stock for stock of target
2. acquiring firm must own at least 80% of stock of target firm after most recent acquisition of stock (TOTAL)
any consideration other than voting shares will violate requirements of REORG B

36

Recorg C

1. Target distributes stock and other assets to its shareholders.
2, substantially all assets is defined as 90% of net asset value and 70% of gross asset value
3. can only be voting stock and must be at least 80% of consideration provided

37

Type D- split up

divisive reorg in that a corp divides by transferring assets to a sub in exchange for subs' shares

38

Tax Free Reorgs

1. transaction must be motivated by valid biz purpose.
2. Continuity of biz expertise- continuing biz of target corp and use significant portion of target's assets in continuing biz of acquiring corp
3. merger only qualifies as reorg if continuity of interest requirement is met

39

Tax Consequences of Reorgs

Deferral of G/L and basic issues;
Acquiring company- does not recognize g/l on transfer of its stock for acquired company
Acquired company= does not generallly recog. g/l
GAIN ALWAYS RECOGNIZED when company distributes appreciated property.

SH- recognize no g/l if they receive only stock in exchange for property of acquiring organization.