Agenda 4/26 BA 128A

1
Agenda 4/26 BA 128A

• Questions from lecture
• Hand in project
• Review Ch4, Ch9
• Assignment C4-29,37
• Additional C4-36,40, C9-28

2
Chapter 4 - current EP

• Calculating current earnings and profits
• start with taxable income or NOL
• always remember to deduct current federal income
  taxes
• Permanent differences
• plus income excluded from taxable income but
  included in EP
• life insurance proceeds, tax-exempt interest
  income
• plus deductions that reduce taxable income but
  not allowed in EP
• dividends-received deduction
• NOL, charitable contribution, capital loss
  carryover

3
Current EP calculation

• minus expenses and losses not deductible in
  taxable but allowed in EP
• federal income taxes
• excess capital loss not allowed
• excess charitable contributions
• non deductible fines and penalties etc.
• Temporary difference
• plus income deferred to a later year when
  computing taxable income but included in EP in
  current year
• installment sales, like-kind exchanges
• plus or minus income and deductions items that is
  recomputed for EP
• depreciation - ADS for MACRS
• LT contracts - of completion for EP
• depletion - cost depletion, IDC capitalized and
  amortized

4
Non-liquidating distributions

• Dividend - distribution made out of corporations
  EP
• Property as contribution - , securities of other
  corporation, and any other property except stock,
  stock right of distributing corporation
• if distributions gt EP - gt return of capital,
  reduce ownership basis
• if distributionsgt ownership basis, excess treated
  as gain of sale of stock - capital gain

5
Non-liquidating distributions

• Distributions net against current EP first and
  then accumulated EP
• Distributions come from current EP as long as
  the amount lt current EP even though accumulated
  EP is in deficit
• if distributions made during the year exceed
  current EP, current EP is allocated to those
  distributions on a pro-rata basia regardless of
  when the distributions are made, distributions in
  excess of current will be deducted from
  accumulated EP in chronological order

6
Property Distributions- tax consequences to SH

• Amount of distribution to shareholder is the
  propertys FMV, value determined at date of
  distribution, distribution amount reduced by any
  liability assumed by shareholder
• Basis to shareholders is the FMV (regardless of
  liability assumed)
• Distribution is dividend to the extent of the
  corps EP

7
Property Distributions- tax consequences to corp

• Corporation must recognized gain on distributed
  property that has appreciated in value
• Propertys FMV must be at least the amount of
  liability assumed by shareholder
• Does not recognized loss on distributed property
• Effect on EP of corporation
• gain recognized by distributed property increase
  EP
• Tax on the taxable gain on distributed property
  decrease EP
• Propertys adjusted basis/FMV reduce EP (if
  adjMusted basis gt to FMV, reduce EP with
  adjusted basis, else reduce EP with FMV

8
Constructive Dividends

• Indirect payment to shareholder without formal
  declaration
• Likely arise in closely held corporation
• Loans to shareholders
• Excessive compensation
• Excessive compensation for the use of SHs
  property
• Corporate payments for the SHs benefits e.g.
  travel expenses
• Bargain purchase of corporate property
• SH use of corporate property

9
Stock dividends and rights

• Stock dividend
• tax free
• basis allocated between old and new shares
• if stocks identical, dividing basis by old new
  number of shares
• if stocks not identical, use relative FMV to
  allocate
• Stock rights
• tax free unless SHs proportionate interests
  is/may be changed
• stock rights value lt15 of stock, basis of rights
  is zero unless election is made
• allocation is made using relative FMV of stock
  rights and stock

10
Chapter 9 - formation of partnerships

• Types of partnerships
• general partnerships
• limited partnerships
• LLC - taxed as partnerships but with limited
  liability
• LLP - similar - more for professional
  organizations
• check the box regulations
• electing large partnerships - simplified
  reporting arrangement

11
Partnership profits and losses

• Partnerships - tax reporting entity
• partner reports his/her share of income from
  partnership from the partnership return
• partnership has its own tax year and accounting
  methods
• partnership income can office personal losses of
  individual partners
• Partners Basis
• contribution increase a partners basis in the
  partnership
• liability assumed by the partner also increase
  his/her basis
• gain increase partners basis
• loss decrease partners basis until the basis 0
• partners personal liabilities assumed by
  partnership decreases the partners basis
• partnership distributions are tax free

12
Contribution of property to partnerships

• No gain or loss recognized for the partner and
  partnership if property is cash, tangible and
  intangible property, services - need to
  recognized gain
• if personal liabilities assumed by partnership
  exceed basis in partnership, recognize gain
• partnership basis of property contributed
  partners basis before the transfer
• Unrealized receivables, basis 0
• holding period includes the transferors holding
  period
• character of gain also transfers over
• depreciation recapture also transfers over
• apply the same rules after formation of
  partnership

13
Partnership-reporting of income

• Separately stated items and ordinary income/loss
• Separately stated items are a list of deductions
  not deductible in the partnership income
  calculation but deductible for individuals
  (partners).
• Foreign income taxes paid, charitable
  contributions, NOL carryovers and carrybacks
  etc..
• These items are deducted later on in partners
  individual return
• Ordinary income are things such as gross profit
  on sales, administrative expenses, salaries and
  etc.

14
Partnerships distributive share

• Depends on partnership agreement, profits and
  losses share may be different
• Varying interest rule - if partnership interest
  changes during the year, income and loss
  allocation is prorated between the different days
  of ownership and interest
• Special allocations
• pre-contribution gain or losses for contribution
  to partnership after 3/31/1984
• gain/loss at the time of contribution allocated
  solely to the SH who contributed the property
• other special allocations allowed if criteria is
  met for substantial economic effect - appropriate
  decrease/increase in capital account of partner
  and partners will make up negative capital
  balance - see C9-19