R3: C and S Corporation Taxation and Exempt Organizations

Question 1

Corporation Tax Consequences

Answer 1

1. General Rule–No Gain or Loss Recognized (on formation, re-acquisition, or resale)
2. Basis of Property received by Corporation- basis is the greater of a) adjusted basis of transferor; or b) debt assumed by corporation

Question 2

Shareholder TaxConsequences

Answer 2

1. No gain or loss recognized if:
   a) Immediately after transaction, transferor owns at least 80% of the voting stock and at least 80% of the nonvoting stock
   b) Boot not involved (received)

Question 3

Basis of Common Stock (to shareholder)

Answer 3

a) Cash
b) Property–Adjusted Basis (NBV): 1) Adjusted basis is reduced by any debt on the property; 2) Gain recognized by SH (i.e. when debt exceeds the asset’s adjusted basis) is added to bring basis to zero.
c) Services–Fair Market Value (taxable)

Question 4

Method of accounting to be used

Answer 4

1) Accrual method of accounting will be required by tax shelters, large C corporations and manufacturers.
2) Cash method may be used by personal service corporations.

Question 5

Goodwill impairment

Answer 5

180 months (15 years) for tax deduction

Question 6

Gross Income (M-1 Rec)

Answer 6

Gross Income:

• Temporary differences: Interest, rental and royalty income received in advance
• Permanent differences: Interest income from municipal or state obligations/bonds; Proceeds from life insurance on the life of an officer; and federal income taxes are not deductible on tax return.

Question 7

Corporate Liquidation

Answer 7

A. Corporation Sells Assets and Distributes Cash to Shareholders.

1. Corporation recognizes gain or loss (Sale Price - Basis)
2. SH recognize gain or loss (Proceeds - Stock basis)

B. Corporation Distributes Assets to Shareholders

1. Corporation recognizes gain or loss (FMV - Basis)
2. SH recognize gain or loss (Sale Price - Stock basis)

Question 8

Tax-Free Reorganization

Answer 8

Type A- Mergers or Consolidations
Type B- Acquisition by one corporation of another corporation’s stock; stock for stock
Type C- Acquisition by one corporation of another corporation’s assets, stock for assets
Type D- Dividing of the corporation into separate operating corporations
Type E- Recapitalization
Type F- A mere change in identity, form, or place of organization

Question 9

Net Operating Loss

Answer 9

• No offset to Other Income

- Carry back 2 years; carry forward 20 years

Question 10

Net Capital Loss

Answer 10

• Corporate Net Capital Loss: No offset to other income; Carry back 3; carry forward 5
• Individual Net Capital Loss: $3k maximum offset against other income; No carry back; carry forward indefinitely

Question 11

Uniform Capitalization Rules Impact

Answer 11

Raw Materials, Direct Labor and Factory Overhead

Question 12

General Business Credit

Answer 12

1. Included Credits:
   - Investment Credit
   - Work Opportunity Credit
   - Alcohol Fuels credit
   - Increased research credit
   - Low-income housing credit
   - Small employer pension plan start-up costs credit
   - Alternate motor vehicle credit
   - Other infrequent credits
2. Formula:
   - 25% of regular tax liability above $25k, or
   - Tentative minimum tax for the year

Question 13

Dividends Received Deduction

Answer 13

• Applies when a taxed corporation gives dividends to a small corp with ownership of 45 days or more.
• Equals the lesser of:
  1. 70% (0-20% ownership) or 80% (20-80% ownership) dividends received; or
  2. 70% (or 80%) of taxable income computed with regards to the DRD, any NOL deduction, capital loss carryback, or domestic production activities deduction.

Question 14

DRD does not apply to:

Answer 14

1. Personal Service Corporations
2. Personal Holding Companies
3. (Personally taxed) S Corporations

Question 15

Accrual Basis of accounting is required for:

Answer 15

1. Accounting for purchases and sales of inventory.
2. Tax shelters
3. Certain farming corporations
4. C corps with more than $5M of average annual gross receipts for the three year period ending with the tax year.

Question 16

AMT Adjustments

Answer 16

• Long-term Contracts
• Installment Sale Dealer
• Depreciation Adjustments

Question 17

AMT Preferences

Answer 17

• Percentage depletion
• Private activity-issued post ‘86 tax exempt interest income
• Pre ‘87 ACRS excess depreciation

Question 18

AMT Adjusted Current Earnings (ACE)

Answer 18

• Muni interest income
• Organizational expense amortization
• Life insurance proceeds on key employees
• Difference between AMT and ACE depreciation
• Dividends received deduction (under 20% ownership)

Question 19

AMT Calcualtion

Answer 19

Regular Taxable Income
\+- Adjustment
\+ Preferences
=Unadjsuted AMT Income
\+- ACE
-AMT NOL Deduction
=AMTI
-AMT Exemption
=AMT Base
x 20%
Gross AMT
-Foreign tax credit
=Tentative Minimum tax (TMT)
-Regular tax liability
=AMT