C239 - Advanced Tax Concepts TEST questions and answers.docx, Exams of Biology

Download C239 - Advanced Tax Concepts TEST questions and answers.docx and more Exams Biology in PDF only on Docsity! C239 - Advanced Tax Concepts TEST questions and answers A ____________ is a payment required by a government that is unrelated to any specific benefit or service received from the government - answer tax How is tax calculated? - answer Tax base x Tax rate Tax Base - what is being taxed Tax Rate - the level of tax imposed on the tax rate - answer _______ is what is being taxed - answer tax base c. unemployment d. excise - quantity tax e. transfer (gift and estate) 2. State and Local Taxes a. income b. property - ad valorem tax c. sales and use d. excise __________ are indirect taxes that result from a tax advantage the government grants to certain transactions - answer implicit taxes How are implicit taxes defined? - answer - the reduced before tax return that a tax favored asset produces because of its tax advantaged status Know the *Tax System Qualities* Definitions: Sufficiency, Equity, Certainty, Convenience, Economy - answer A tax system needs to be sufficient, this means that the size of the tax revenues generated needs to meet the needs of the system. - this is estimated by government by using static or dynamic forecasting static forecasting - ignores how the taxpayer may change their behavior to the proposed change in law dynamic forecasting - takes in to account tax payer response - provides better info to law makers to make decisions regarding tax law changes - answer How is sufficiency assessment performed? - answer - by static or dynamic forecasting static forecasting - ignores how the taxpayer may change their behavior to the proposed change in law dynamic forecasting - takes in to account tax payer response - provides better info to law makers to make decisions regarding tax law changes What tax system quality is the following: Assessing the aggregate size of the tax revenues that must be generated and making sure that the tax system provides these revenues. - answer sufficiency __________ is how the tax burden should be distributed across taxpayers. - answer Equity How is equity evaluated in a tax system? - answer - horizontal or vertical equity What is the difference between horizontal and vertical tax equity? - answer - horizontal: means 2 taxpayers in the same situation will pay the same tax - vertical: when taxpayers have a greater ability to pay more tax, the will Who settles disputes between tax payers and the IRS? - answer - the court system Where do tax related dispute court cases start? - answer - the lower trial level courts What are the 3 lower trial level courts? - answer 1. US court of federal claims 2. US tax court 3. US district court Which of the lower level courts gives you an option to have a jury? - answer - US district court Which of the lower level courts would you chose when you don't want to have to pay your deficiency first - answer US tax court Where does your tax case go after the lower level courts? - answer court of appeals, then to the final ruling authority the US supreme court What is "Stare Decisis" - answer - it means the court rules consistently with its previous rulings and the rulings of the higher courts with the appellate jurisdiction The tax court applies the Golsen Rule. What does that mean? - answer - they follow the ruling of the court to which the case would be appealed When evaluating taxes we look at three parties. Who are the 3 parties? - answer 1. taxpayer 2. person on the other side of the transaction 3. government What are the 3 main tax planning strategies? - answer 1. timing 2. income shifting 3. conversion strategies _____ strategy is the strategy that affects when income is taxed or an expense is deducted - answer - timing strategy What are the two primary timing strategies - answer - accelerate deductions - defer income into later periods How do you compare what timing strategy (mentioned above) is better? - answer - compare the present value of taxes payable on income rec'd in the future vs. - tax payable upon receiving the income in the current year or - to present value the tax savings on a deduction taken in the future vs. the tax savings of taking it in the current year When tax rates are constant, it makes sense to accelerate deductions and defer income - when tax rates are rising, we need to do the present value calculations to determine the best choice - answer according to their substance and not their form - economic substance doctrine- the IRS can reverse certain transactions unless they meaningfully change the taxpayer's economic position and they have a substantial purpose other than than tax avoidance for the transaction ___________ is using strategies to minimize tax within the confines of the law - answer tax avoidance __________ is the willful attempt to defraud the government and can result in jail time for both the taxpayer and their accountant - answer tax evasion What are the types of income? - answer 1. income from services - wages, salary, non- emply comp, unemployment 2. income from property - dividends, interest, rents, royalties, annuities, gains/losses 3. flow through entity income - business income from partnership, llc, scorp Examples of flow through entity income? - answer - partnership, llc, scorp Flow through income is reported to an owner on a ___________ - answer schedule k-1 Taxation of flow-through income: - taxed to owner as reported on _________ at owner's _______ tax rate - answer - Sch K-1 - individual The Tax Cut and Jobs Act now provides a new deduction that may be used to reduce flow through entity income - Qualified Business Income Deduction (20% deduction of what is qualified bus income) - answer What is the Qualified Business Income Deduction? - answer - 20% deduction for qualified business income from a flow through entity - also called section 199A deduction - its an in between the lines deduction - flow thro income may be subject to 3.8% net investment income tax when the taxpayers AGI exceeds certain thresholds - partnership income is subject to self employment tax - partnerships and Scorp income to the addt'l medicare tax of 0.9%- if the wages or partnership income exceed the threshold which is $250k for MFJ - answer Partnership Income - What are the 2 categories? - answer 1. ordinary income 2. separately stated items What is ordinary income under a partnership? - answer - items not separately stated - business income reported on form 1065 Page 1 (this carries to line 1 of sch K) e. sole proprietorship - answer a. yes b. yes c. no d. yes e. no (a sole prop must organize with state if she forms a single-member LLC) Entity Non-Tax Characteristics Responsibility for liabilities of a business a. corporation b. llc c. general partnership d. limited partnership e. sole proprietorship - answer a. entity b. entity c. general partners d. general partners e. owner Entity Non-Tax Characteristics Legal arrangement among owners a. corporation b. llc c. general partnership d. limited partnership e. sole proprietorship - answer a. not flexible b. flexible c. flexible d. flexible e. not applicable *flexible- can write whatever you want within your documents as long as its within the law IPO - answer Initial Public Offering - process of offering shares of a private corporation to the public in a new stock issuance Entity Non-Tax Characteristics Are they suitable for initial public offerings? (IPOs) a. corporation b. llc c. general partnership d. limited partnership e. sole proprietorship - answer a. yes b. no c. no d. no* e. no *uncommmon - but certain limited partnerships are eligible for IPOs Entity tax filing choice - is the entity a legal corporation? a. yes. did we elect S corp status? aa. yes- we will file as an scorp How is owner compensation paid for under Sole Proprietorships? - answer - no compensation payment, but all subject to payroll tax through SE tax How is a net operating loss treated for a C corp? - answer - carry forward indefinitely and limited to 80% of taxable income before the NOL deduction - you are not able to reduce taxable income down to zero with an NOL anymore within a c-corp How is a net operating loss treated for a flow through entity? - answer - at risk/passive activity limitations apply - NOLs pass through to the partner or shareholder How is a net operating loss treated for an Individual - answer [NOL is called excess business losses at individual level] - not allowed to deduct excess business losses formula: (Aggregate business deductions/aggregate income or gain) +threshold amount - threshold: $500k MFJ/ 250k all other TPs - the amount not deductible carried forward indefinitely Learn table 15-3 - and be ready to answer different questions regarding different entity types (following slides are from 15-3) - answer 15-3 What are the owner limits of the following entity type? a. C Corp b. Entity taxed as a partnership c. S Corp d. Sole Prop e. list most favorable to least favorable - answer a. at least one shareholder b. at least 2 owners c. not more than 100 owners, no corps, no partnerships, no nonresident aliens or certain trusts d. N/A e. C corp, partnership, S corp 15-3 How do you treat owner contributions of appreciated property to entity b. Entity taxed as a partnership c. S Corp d. Sole Prop e. list most favorable to least favorable - answer a. generally accrual, unless smaller corporation b. cash or accrual c. cash or accrual d. cash or accrual e. PS, Scorp, Soleprop most favorable (tied), Ccorp least 15-3 Allocation of income or loss items to owners Tax characteristics: a. C Corp b. Entity taxed as a partnership c. S Corp d. Sole Prop e. list most favorable to least favorable - answer a. N/A b. allocations based on PS agreement (can differ from ownership %s) c. allocations based on stock ownership %s d. N/A e. partership, scorp 15-3 Share of flow through entity debt included in basis of owner's equity interest Tax characteristics: a. C Corp b. Entity taxed as a partnership c. S Corp d. Sole Prop e. list most favorable to least favorable - answer a. n/a b. increase basis in ownership interest by owner's share of entity's debt c. no increase in stock basis for debt of entity d. n/a e. PS, S corp 15-3 Nonliquidating distributions of noncash property e. ccorp, PS, Scorp (all tied for #1), sole prop-n/a How do you calculate QBI? - answer deductible QBI amount for the business is equal to the lesser of: 20% of the business's QBI, or. The greater of: (a) 50% of the W-2 wages for the business, or (b) 25% of the W-2 wages plus 2.5% of the business's unadjusted basis in all qualified property. What are the two greatest sources of income for state and municipalities? - answer - sales tax and income tax Who makes state tax laws? (a-name the source) Who makes local tax laws? (b-name the source) - answer a state legislative body b. municipal bodies A business is subject to state tax if? - answer - they have commercial domicile: where business HQ and directs its operations - they have Nexus- meaning sufficient/minimum connection between a business and state to require filing of a tax return What is Sales Tax Nexus? - answer - this is a tax on the value of tangible personal property - some states also charge sales tax on installation or other ancillary services (ex: installation of floor) - Sales tax nexus is judged on a physical presence test: a. salespeople (or IC) enter the state to obtain sales or b. you have tangible personal property located in that state ___________ is the connection between a seller and a state that requires the seller to register then collect and remit sales tax in the state. - answer sales tax nexus What is the criteria for Income Tax Nexus? and who sets the criteria? - answer - set by the supreme court criteria: 1. sufficient connection or nexus exists between state and business 2. state may only tax a "fair portion" of income 3. tax cannot be constructed to discriminate against non-resident businesses 4. taxes paid must be fairly related to the services the state provides Physical presence in a state creates a nexus for? - answer - service providers, sellers of real property, and businesses licensing - have not yet occurred - an be altered before taking action - allow for other options in planning scenarios Closed Facts: - already occurred - cannot be altered - may limit options in planning ____________ are investments that are held for appreciation purposes - answer - capital assets Capital assets typically include what type of assets? - answer - investment type assets and personal use assets ex:stock, bonds, personal residence, your iphone, your car Capital assets are any assets other than? - answer - assets used in trade or in business - accounts or notes receivable acquired in business from sale or services or property - inventory When we sell capital assets we generate what? - answer - a capital gain or a capital loss The amount realized that you get from sale of a capital asset is less _________ and __________ - answer broker's fees and selling costs The value basis for the capital asset sold includes? - answer - costs of acquisition and other costs to improve the asset Stocks are most often sold using what method? - answer FIFO metho (unless basis is tracked by specific shares, then can use specific identification method) What are they types of capital income? - answer capital gains and capital losses Net Short Term Capital Gains are taxed at what rates? - answer - ordinary rates - short term cap gain, means asset was owned less than 1 yr Net Capital Gains are taxed at what rate? - answer - taxed at preferential rate (0% / 15% / 20%) Sec 1250 recapture (that's your depreciation recapture on a real property) taxed at? - answer - taxed at max rate of 25% LTCG from collectibles (ex: stamp collection) held greater than 1 year taxed at? - answer max rate of 28% LTCG from qualified small business stock, held greater than 5 years, taxed at what rate? - answer - taxed at max rate of 28% What are the "Wash Sale" rules? - answer - these prevent the deductions of certain losses - a loss is disallowed if the TP sells a stock at a loss, but then purchases the same or substantially identical stock within 30 days before the date of sale or 30 days after the date of sale (61d period) What are the advantages to holding capital assets longer than 1 year? - answer - preferential tax rate - deferred tax on the growth until sold What is loss harvesting? - answer - using losses to offset STCG that's taxed as ordinary income or other ordinary income T/F: losses on personal use residences are not deductible - answer TRUE T/F: gains on personal use residences are not taxable - answer FALSE- gains on personal use residences ARE TAXABLE Tax law provides an exclusion for capital gain taxes on the sale of your personal residence, up to $500k for MFJ, and $250k for all others if you meet certain tests . What are these tests? - answer 1. ownership test- owned for 2 or more during the 5 year period ending on the date of sale 2. use test- used the property as principal residence for a total of 2 or more years during the years period ending on the date of the sale ***MFJ taxpayers are eligible for the full exclusion if either of them meets the ownership test, but both of them must meet the use test What are the Personal Residence Special Rules (cap gains exclusions?) - answer - widowers are entitled to full $500k cap gains exclusion if sell home within 2 years of date of death of spouse (they cannot remarry) What is the "nonqualified use" limitation - answer - when people move out of there home, and rent it, and they are no longer using the home as their personal residence - the rental period is considered a period of non-qualified use - ***you need to calculate the amt of gain you must recognize with the following formula: Period of NQU/time TP owned home What happens if someone moves from their home 2 years before they meet the "use test"? or has cancer and has to move? (has an unseen circumstance) ***unforseen circumstance does NOT include marriage**** - answer unforseen circumstance- reduce max exclusion using ratio of: inherited - FMV at Decedent's date of death (DOD) or alternative valuation date if elected by estate Property we convert from personal use to business use ===appreciated property - basis is the same as taxpayer basis ====if asset declines in value at the date of conversion = use FMV at date of conversion for loss in the sale of assets Character of Gains and Losses (what type of gain/loss are they) Holding Period: Short-term (1yr or less) Property use: Trade or Business - answer ordinary gain/loss Character of Gains and Losses (what type of gain/loss are they) Holding Period: Short-term (1yr or less) Property use: Investment or Personal Use Asset - answer Short-term capital gain or loss Character of Gains and Losses (what type of gain/loss are they) Holding Period: Short-term (1yr or less) Property use: Inventory and Accounts Receivable - answer - ordinary gain/loss Character of Gains and Losses (what type of gain/loss are they) Holding Period: long-term Property use: Inventory and Accounts Receivable - answer ordinary gain/loss Character of Gains and Losses (what type of gain/loss are they) Holding Period: long-term Property use: Investment or personal use asset - answer long term capital gain/loss Character of Gains and Losses (what type of gain/loss are they) Holding Period: long-term Property use: trade or business - answer Section1231 property What are section-1231 assets? - answer - depreciable assets and land used in trade or business held for more than 1 year When you have a S-1231 gain, what is it considered? - answer - its considered a LTCG ch.11/18/19 video) - answer - C corps do not recognize S1250 recapture - instead, they recognize recapture under S291 under S291 they: - Recapture as ordinary income 20% of the lesser of: a. recognized gain or b. accumulated depreciation The S291 gain for a Ccorp is what type of gain? - answer - ordinary gain S1250- Recapture for Individuals *******likely not to be tested on this - answer - depreciable real property is S-1250 property - but is generally not subject to S-1250 recapture - gain that would be S1245 recapture if asset were S1245 property is called - "unrecaptured S1250 gain" All gain from selling property to a related person buyer is considered what type of income? - answer - ordinary income - the seller is required to recognize ordinary income for depreciation deductions the buyer will receive in the future Related people for individuals include? - answer - a controlled corporation where they own >50% - partnership - trust in which they or their spouse is the beneficiary - related ppl also includes: controlled groups, majority partners, S corps and C corps, C corps controlled by the same person What is the S1231 LookBack Rule? - answer - it affects the character of the gain, but not the amount taxed - gains and losses from individual asset disposition are annually netted together - rule says: TP is required to recharacterize current year gains as ordinary to the extent they deducted ordinary net Sec 1231 losses in prior years (best of both worlds, we have lt capital gains treatment of capital gains , and we have ordinary treatment of losses, the irs doesn't want us to keep that , so we have to keep track of our 1231 losses deducted in prior years, if we have one of these awesome LTCG 1231 gains, we have to recharacterize it, and make it ordinary to recapture S1231) Notes: non recognition transactions - talked about how capital gains and losses that are realized, how most likely recognized immediately 2. method under S1031(d) adjusted basis of like-kind property surrendered +adjusted basis of boot given + gain recognized - fmv of boot rec'd - loss recognized ____________________ = basis of like-kind property rec'd What is considered "real property" - answer fixed properly, usually land or buildings T/F: LikeKind Exchange problems will have to be on "real property" to qualify - answer TRUE Involuntary Conversions - answer - appreciated property involuntarily converted in an accident or natural disaster - gain is deferred - basis of property converted carried over to new property Example of Indirect Conversion - answer - the taxpayer receives money to purchase replacement property, usually from insurance proceeds Indirect Conversions - answer - gain recognized is lesser of: a. gain realized or b. amt of reimbursement the TP does not reinvest in qualified (replacement) property --qualified replacement property must be of a similar or related use to the converted property ____________ is sales where the proceeds are received in more than one period - answer installment sales How are gains recognized on Installment Sales? (+formula) - answer - must recognize portion of gain on each installment payment received - formula: Gross profit % = Gross Profit / Contract Price _______, ________, and __________ cannot be accounted for under the installment sale rules - answer inventory, marketable securities, depreciation recapture ***any gain from the above items is fully recognized in the year of sale Installment sale rules do not apply to ____________. - answer losses ****likely will see one installment sales problem on the OA- instructor recommends not spending too long on this - answer portion of test, instructor says one question - answer topic 6 Cost recovery for tax is done under? - answer - Modified Accelerated Cost Recovery System (MACRS) topic 6 depreciation for tax purposes is under ____________ depreciable life is determined by the ____________ - answer a. MACRS b. the system topic 6 Office furniture, fixtures, equipment (incl desks, files, etc) class life- a general recovery period- b alternative recovery period- c - answer a. 10 yrs b. 7 yrs c. 10 yr topic 6 information systems, incl computers and their peripheral equipment class life- a general recovery period- b alternative recovery period- c - answer a. 6yrs b. 5 yrs c. 5yrs topic 6 light general purpose trucks, incl trucks for use over the road class life- a general recovery period- b alternative recovery period- c - answer a. 4 b. 5 c. 5 topic 6 for depreciation problems: i am given the 1/2 yr convention tables and mid-quarter convention tables ****learn the last 3 notecards - answer IRS wanted to set a way that ppl could come together and start a business and do it tax deferred (background to the next slide, don't memorize) - answer What does S-351 state? (under Corporation Formation) - how to form a corporation - answer - we can form a corporation tax deferred when one or more persons transfer property for stock - immediately after the transfer, these same shareholders control the corporation - persons include: indiv, corporations, Parterships, and fiduciaries - property includes: money, tangible assets, intangible assets For Boot received, the character gain is determined by? - answer - the type of property to which the gain is allocated What formula would you use when you have a Boot included in the transaction? - answer cash contributed + tax basis of other property contributed + gain recognized on the transfer - fmv of boot received - liabilities assumed by the corp on property contributed _________________________________________ tax basis of stock received Generally, assumption of Shareholder liability is not boot. The exceptions are? - answer - contribution is to avoid federal income tax OR - there is no business purpose for the assumption *************not clear on this point - TP recognized gain to extend liabilities assumed exceed aggregate tax basis of properties transferred, allocate by character based on relative FMV of the assets - does not include liabilities which would give rise to a deduction - answer Corporation Consequences (tax deferred transaction from formation) - answer - no gain or loss on receipt of property in exchange for stock - Non S351 - FMV basis in property - S351- carryover basis from transferor, as well as holding period - if shareholder recognizes gain it increases - if shareholder recognizes gain it increases tax basis to the corporation 4 Types of Corporate Acquisitions - answer - taxable acquisition : where you buy the assets from the corp - taxable acquisition: you buy the stock directly from the Sh Type A or Type C reorganization involves? - answer - using equity of acquiring corporation (treated as asset purchase) Type B reorganization involves? - answer - using voting equity of the acquiring corporation What are the ways you can have a taxable acquisition of a C-corp? - answer - acquire ongoing business through stock purchase form SH a. acquired company retains tax and legal identity b. then can liquidate into itself or merge into another c. asset basis is unchanged and does not reflect amt paid for shares - purchase business assets for cash - SH recognizes gain/loss on each asset individually S338 Election requirements 3. Business Purpose Test - acquiring corp must show a significant business purpose for the transaction, other than tax avoidance Type A Reorganization - answer - known as the statutory merger or consolidation - one corporation acquires assets and liabilities of another in return for stock and/or cash - transaction satisfies the 3 judicial principals - meets state law to be a merger or consolidation - there is no gain/loss rec'd by target SH (unless cash is rec'd) - no gain/loss recognized by acquiring corp or target corp (see diagram in cohort for this) What are the types of "Type-A Reorganizations" - answer 1. upstream/forward: target is merged into acquiring 2. downstream/reverse: target is the surviving entity What is a - Forward Triangular Type A Reorganization - answer - the acquiring corporation is a subsidiary and uses the stock of its parent corporation to acquire target corporation's stock - must use solely the stock of the parent corporation - must acquire "substantially all" of the target corporation's property in the transaction a. IRS interprets to mean 90% of the fmv of target corp's net properties and 70% of FMV of target corp's gross properties (see diagram in cohort for this) Reverse Triangular Type A - answer - acquiring corporation is a subsidiary and uses voting stock of its parent corporation to acquire target corporation's stock ----surviving corp must hold "substantially all" of the property of both surviving and merged corporations ----target SH must transfer stock that constitutes control of target (80% or more) ----target SH must receive parent voting stock in return - all target and subsidiary properties must survive (see diagram in cohort for this) Type B Reorganization - answer - stock-for- stock acquisition - acquiring corp must acquire 80% or more of target corp using solely voting stock of acquiring corp - VERY restrictive: even $1 can taint and cause it to be fully taxable E&P- actual cash available for distribution to SH - answer Taxable Income + Exclusions from Taxable Income + Deductions allowed for Tax but not E&P - Deductions allowed for E&P and not tax +/- timing differences between tax and E&P ____________________________________________________ _________________ = Earnings and Profits When calculating E&P - section 1 "+ Exclusions from Taxable Income" What is included in this? - answer + tax exempt bond interest + life insurance proceeds + federal tax refunds (if a cash-basis taxpayer) + increase in cash surrender value of corporate-owned life insurance policy (include all of the above in E&P) When calculating E&P - section 2 "+ Deductions allowed for Tax but not E&P" What is included in this? MEMORIZE ME*********************** - answer + dividends received deduction + NOL deduction carrybacks and carryforwards + Net capital loss carryforwards + contribution carryforwards When calculating E&P - section 3 "- Deductions allowed for E&P and not tax What is included in this? - answer Deductions allowed for E&P and not tax (this $ is not going to be available to pay divended to a SH) *- most likely to be seen - *federal income taxes paid or accrued - *expenses of earning tax-exempt income - current yr charitable contributions in excess of the 10% limitation - nondeductible premiums on life insurance policies - *current yr net capital loss - *penalties and fines - *nondeductible portion of meal exp - entertainment exp - disallowed lobbying exp, dues, and political contributions - decr in cash surrender value of corporate owned life insurance policy When calculating E&P - section 4 "-+/- timing differences between tax and E&P What is included in this? - answer *******lots of information on this one, see cohort III - at 32:15 *****try to gauge from the PA if i truly need to memorize these or not b. FMV of noncash appreciated property c. Liabilities assumed by SH on property Stock Dividend points (when corporations give out stock dividends) - answer - nontaxable if prorata distribution of common stock - (to common stock SH) does not change ownership %s - overall basis (for the shares) does not change (for the SH), but per share basis changes as spread over more shares - (stock dividends are...)taxable if ownership %s change, have the option or actually receive other property in the distribution 99 What is a Stock Redemption? - answer - when the corporation buys back the stock from the shareholder in exchange for property ____________ is when a corporation acquires stock from the SH in exchange for property - answer stock redemptions Stock redemptions are treated as ___________ - answer dividends Stock redemptions are treated as dividends unless the meet what? - answer Stock Redemptions are treated as dividends unless they meet one of the following, then it is treated as a sale: 1. Substantially disproportionate redemption a. SH does not control the co. after <50% voting power b. SH %is voting stock and aggregate value is <80% of % before redemption 2. complete redemption of all shares owned by SH 3. not essentially equivalent to a dividend With Stock Redemptions, what rules apply? - answer - S318 attribution rules apply and may be waived What do the S318 Attribution Rules state? - answer - family attribution: individuals treated as owning shares owned by spouse, children, grandchildren, and parents - entities to owners/beneficiaries" a. partners: own pro rata share of estate/trust stock b. beneficiaries: own pro rata share of estate/trust stock c. SH: own pro rata share if they own at least 50% value of the corporation's stock (family attribution applies) - ownerships to entities 100% of shares owned by owners to PS, estate and trust, and to SH (but only if SH owns at least 50% value of corp's stock) - must be filed within 30d after owners resolve to liquidate Liquidations are fully taxable to a ____________ - answer non corporate shareholder a. the corp treats property rec'd by them as "full pymt" in exchange for their stock b. gain/loss recognized is the difference btw stock basis and FMV of property rec'd a. debt assumed by SH reduces FMV of prop rec'd (for gain.loss calculation) b. FMV cannot be less than the debt assumed by SH c. tax basis equals property's FMV (do not adjust for any liabilities assumed) d. if a corporate SH that owns 80% or more of the stock gets liquidated (parent.sub situation) - so its the subsidiary - there is no gain.loss recognized and its carryover tax basis Taxable Liquidating Distributions + and when does it not recognize a loss? - answer - liquidating corporation recognizes all gains and certain losses on taxable distributions of property - does not recognize loss if: a. distributed to a related party b. distribution in non pro rata c. asset distributed is disqualified property ----acquired within 5 yrs of date of distribution in tax deferred S351 transaction or as a nontaxable contribution of capital d. property distributed was acq in S351 transaction or as contribution of capital, and the principal purpose was to recognize a loss by liquidating corporation ---- prevents build in loss at time of distribution from being recognized by treated basis as its FMV at time of contribution What is the treatment of NonTaxable Liquidating Distributions? - answer - liquidating corporation does not recognize gain.loss on tax free distributions of property to an 80% corporate SH parent/sub - liquidation expenses are deductible on final form 1120 - deferred or capitalized expenditures are deductible on final tax return non prorata in a liquidation involving a related person means? - answer - you don't recognize a loss **Important rule to remember for Depreciation Recapture (non-real estate) (see problem #1, Ch. 11 from ch 11/18/19 video) - answer - S1245 recaptures the lesser of depreciation taken or recognized gain as ordinary income - the remaining gain would be S1231 gain