Federal Taxation VII: More Corporate Taxation Flashcards Preview

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Flashcards in Federal Taxation VII: More Corporate Taxation Deck (24):

Accumulated Earnings Tax

20% penalty imposed on undistributed accumulated taxable income


Accumulated Earnings Tax Formula

Taxable income
+/- Adjustments:
- corporate Income tax
- excess charitable donations
- net capital loss
- net capital gain (after tax)
+ dividends received deduction
+ net operating/capital loss carryovers
- Dividends paid/deemed paid
- Accumulated earnings credit
= Accumulated Taxable Income


Accumulated Earnings Credit

Greater of:

1. Amount of current E&P needed for the "reasonable needs" of the business

2. Flat $250K (or $150K for service corps) less the accumulated E&P at close of preceding year


Personal Holding Company (PHC) Tax

20% Penalty imposed on PHC

Penalty tax triggered by relatively high levels of investment income in a corporation. Operates by imposing penalty tax on undistributed income.


PHC Tax Formula

Taxable Income
+/- Adjustments:
- corporate income tax
- excess charitable contributions
- net capital gain (after tax)
+ dividends received deduction
+ net operating loss carryover (not previous year)
= Adjusted Taxable Income
- Dividends paid/deemed paid
= Undistributed PHC Income


PHC Income Test

Met if Passive Income > 60% of adjusted ordinary gross income (AOGI)


PHC Ownership Test

Met if > 50% of the value of the stock is owned directly or indirectly by < 5 individuals at any time during last half of year


Passive Income

- taxable dividends
- interest

- rents/royalties
- personal service contracts.


Adjusted Ordinary Gross Income (AOGI)

Gross income excluding capital and 1231 gains and reduced by expenses associated with the production of rent/royalty income


Indirect Ownership determined by stock attribution rules.

Define ownership to include stock held by an entity or family members (brother, sisters, spouse, ancestor, and lineal descendants)


Difference between adjustments for PHC and accumulated earnings taxes

In PHC there is no adjustment for net capital losses and the adjustment for net operating loss carryovers does not include an NOL from the previous year


Deficiency Dividend

Dividend expressly declared to avoid the PHC tax. Paid within 90 days of tax imposition.


Affiliated Group

exists when a corporation owns at least 80% of the voting power of another corporation AND holds shares representing at least 80% of its value.

This test must be met every day of the year.


Eligible affiliated corporations can elect to file consolidated return, which permits (3)

1. the corporations to eliminate intercompany profits/losses
2. allows profitable corporation to offset its income against losses of another corp
3. permits net capital losses of one corp to offset capital gains of another


Controlled Group

1. entitled to one $250K accumulated tax credit
2. limited to taxable income in each of the first two brackets, as though the group were one corp
3. receives only one Section 179 expense deduction and one AMT exemption


Controlled Group: Parent-Subsidiary

Focuses on Corporate Ownership

Exists if:

1. stock possessing > 80% of voting power of all classes of stock entitled to vote OR > 80% of total value of shares of all classes of stock of each of the corps, except the common parent, is owned by one or more of the other corps

2. the common parent owns stock possessing > 80% of the total combined voting power of all classes of stock entitled to vote OR > 80% of the total value of share of all classes of stock of at least one of the other corporations


Controlled Group: Brother-Sister

Focuses on individual ownership

Exists if:

2 or more corps are owned by 5 or fewer persons (individuals, estates, trusts)

1. who have common ownership of > 50% of total combined voting powers of all classes of stock entitled to vote OR > 50% of total value of shares of all classes of stock of each corp

2. who possess stock representing at least 80% of the total combined voting power of all classes of stock entitled to vote OR at least 80% of total value of shares of all classes of each corporation


3. the 80% test does not apply for determining brother-sister corps when determining corporate tax brackets, the accumulated earnings credit, and the minimum tax exemption


E&P: Additions to taxable income

made for exempt income or deductions that do not represent an economic outlay:

1. Municipal interest/life insurance proceeds
2. Dividends-received deduction
3. Carryforwards
4. Domestic production activities deduction
5. Proceeds from corporate life insurance policy (less cash surrender value)


E&P: Expenditure that are not deductible but represent economic outlays

These expenditures reduce taxable income in computing E&P:

1. Federal Income Tax (net of credits)
2. Related party losses
3. Penalties, fines, lobbying expenses, "key" life insurance, disallowed portion of meals and entertainment


E&P: Modifications to taxable income

Timing differences that can be positive or negative:

1. Deferred portion of a gain from a current installment sale (added this year, reversed later)
2. Amount of depreciation deducted in excess of straight-line (added this year, reversed later)
3. Section 179 expense
4. Net capital loss and the excess amount of charitable contributions


E&P: Distributions

Generally reduce E&P

1. Cash Distributions
2. Property Distributions reduce E&P by greater of value or adjusted basis les any liabilities assumed by s/h
3. Appreciated Property Distribution - first increase E&P by amount of gain
4. Distributions cannot create a deficit in E&P, but net operating losses can


E&P: Dividend Treatment

1. Taxable as dividend income to extent of s/h pro-rata share of E&P
2. Excess is tax-free to extent of s/h basis in stock (and reduceds basis)
3. Remaining distribution is taxed as a capital gain
4. Both current and accumulated E&P are used to determine whether a distribution is a dividend


Property Distributions

1. Value of property distributed less any debt assumed by s/h is amount eligible for dividend treatment
2. Distribution of appreciated property causes the corporation to recognize gains like a sale of the property
3. If liability on the property exceeds FMV, the FMV is treated as being equal to the liability
4. Amount distributed = FMV - liabilities on property
5. Basis of property to the shareholder is FMV


Constructive Dividend

Payment to s/h that is regarded as a dividend, such as property distributions