CD 1

Gross Income - Includes all income from whatever source unless it is specifically excluded
If excluded it is not taxed

Exclusions - income that is not included in gross income

not taxable and never will be taxable
must be specified by law

Deductions - amount subtracted form income to arrive at AGI

Above the line - Subtracted to get to AGI
Below the line - Subtracted to get to Taxable Income

Total Income
'- Deductions to arrive at AGI (Above the line Deductions)
= AGI
- Itemized or Standard Deduction(Below the line Deductionss)
- Exemptions
= Taxable Income

Credits - subtracted from computed tax to arrive at taxes payable

Exclusions -

Support of Minor Children - money you received from parent while going to school

Property Settlement from a divorce - Not taxable

However if you receive cash and it meets certain requirements it can be taxable
Allimony

Life Insurance Proceeds - if paid by reason of death , generally excludable

Received in Installments

100,000 Wife Bene

20 yrs 20 yr expected life

5000 a year
** Amounts Received in excess of Pro
Actually pay 6200

6200 - 5000 = Interest Income

Dividends - not taxable up to point of premiums paid

Employee Benefits

Group Term Life Insurance - Premiums paid on up to 50,000 policy are non taxabale
If more than 50,000 policy, the premiums paid on the excess part is taxable and sh
 Ex. Using # 5 of questions

80,000
-50,000
=30,000

8$ for every 1,0000

= 30*8 = 240 taxable income to W-2

Only not taxable if your employer is NOT THE BENEFICIARY

Accident and health benefits provided by employer are excludable if for:

Premenant injury or loss of bodily function

Reimbursement for medical car eof employee,spouse or dependents
Can not take itemized deduction for reimbursed med exp

MSA - must be covered under high deductable health insurance plan

Employer contributions to MSA are excluded to arive at AGI

Employee contributions are deductable for AGI

Can only contribute 65% of annual deductable amount if single, 75% if Family (join

Earnings on MSA are not taxable

distributions excluded from Gross Income if used to pay for medical care

** If not all of the earnings are used up at the end of the year IT IS TAXABLE

HAS - Can carry over what is left at the end of the year

Employee Fringe Benefits

Qualified Moving Expenses - can exclude any amount received from employer as
moving expenses which would be deductable if directly paid by individu

Cost of moving and lodging moving to new place, also including gas.

Meals are not qualified expenses if reimbursed by employer

Workmans Compensation - Non taxable

Damages of Physical Injury and Sickness are non taxable

Punative Damages - ARE TAXABLE
 Gifts or Inheritance - Non Taxable

Stock Dividends -
C/S Holder -----> C/S = Non Taxable

C/S Holder -----> P/S - Non Taxable

P/S Holder ------> P/S or C/S - TAXABLE

Taxable Amount = # Shares * FMV at Date of Dist. = Taxable Income

= Basis in Stock as well

Interest - Dividends recived for Instate Muni Bonds is not taxable if proceeds are used to finance Gov O

Private Activity Bonds are taxbale

Except : Qualified bonds issued for benefit of schools, hopitals or charitable orgn

Interest on US obligations is TAXABLE

Treasury Bonds or Notes

Savings Bonds for Higher Educaiton

Accrued interest on Series EE US savings bonds is excluded from gross income to extent the
to fund higher education expens for taxpayer, spouse or dependents
Must be issued after 12/31/89 to individual 24 or older
Purchaser must be sole owner (or joint owner with spouse and must file a joint retu
Must be used to pay higher eduation expenses
If redemtion proceeds exceed qualified higher education expenses only pro rata a
See pg 361

Scholarships & Fellowships

Degree Candidate can exclude amount used for tuition and course related fees,books, suppli
Room and Board is included in income

Amount received for teaching or research or other services are NOT EXCLUDABLE

Non Degree students cant exclude ANYTHING

Discharge of Indebtedness

Is taxable income unless due to bankruptcy

Lease Improvements
Rent a building and make improvements and lease is over
If the lesee leave the improvements and it goes against rent then the FMV of impr

Items to Be Included in Gross Income

Property received as ocmpensations is included at FMV on date of receipt

Gross income Derived from business or profession - Sch C

 Distributions from S Corp or Partnership - Sch E Supplemental Income

Sch E Partnership Income

Rents & Royalties

Dividends - Sch B
Interest - Sch

CD 1 Pt 2

If elect to amortize the bond premium on taxable bonds aquired after 1987 and bond premium amort is an offset ag

10,800 Paid
5% Bond 10,000 Face Value
800 Premium Method used to amortize bond premium is called Constant Y
10 year life
80 per year amortization It reduces interest and bond premium

500 per year interest Income after 1st year Basis = 10,800 - 80 = 10,720 after 1st year
- 80 Amortization
= 420 on sch B

Interest on Tax Refund IS TAXABLE

Alimony - Is included in recipients Gross Income and is a deduction from AGI by the payor
To Be alimony must:
Be pursuant to a decree of divorce
Be made in cash
Terminate upon death of recipient or payor
Not be made ot member of same household at time of payment
Cant file joint return with person receiving payments
Must be characterized as ALIMONY in the decree and nothing else

Alimony Recapture
Look at Examples on Pg 365

2005 2006 2007

50000 20000 0

IN 2007 you will recapture amounts from 2006 and 2005

You start with 2006 and you will subtract 15,000 from first preceding year
20,000
-15,000
= 5000 to recapture from 2006

Then you figure the 2005 amount to recapture

You first subtract the 15,000 from the 2005 payment
and then you take the difference between the 2006 payment that you have not rec
which is 15,000 (20,000 -15,000 = 5,000 to recapture so you have recaptured 5,0
and average that with the 2006 and 2007 payments
= 15,000 + no payment in 2007/ 2 = 7500
 You then add the amount from 2005 minus 15,000 and then subtract the average
= 35,000 - 7,500 = 27,500

So your recapture for 2007 = 5,000 form 2006 and 27,500 from 2005 = 32,500

LOOK AT # 26 in MC

Child Support - is not alimony

It is not Gross Income to payee or deduction to payor
If decree specifies Alimony & Child Support then th emoney first goes against Child Support

If there is a contingency in the payments then the contingent amount is treated as child suppo
Ex. 1000 a month untill the child reaches 21 then it is reduced by 400
Since the 400 is the contingent amount it is treated as child support
for the 1000 payments form day 1

Social Security Benefits

Not taxable if you make under 25,000 in provisional Income
If you make 60,000 or more then 85% of your Social Security is TAXABLE
85% is the higest you will be taxed on

Stock Options
Incentive Stock Option Plan - Offered ot everyone, not discrimenatory
No income is recognized when option is granted
If employee holds stock aquired through exercise of option at least 2 years form op
itself at least 1 year
employees realized gain will be long term capital gain
employer receives no Deduction
If holding period requirements are NOT met then the employee has ordinary incom
Date of exercise exceeds option date
Remainder of gain is short term or long term
Employer receives a dedeuction equal to amount reported as ordinary i

Prizes and Awards - Other Income

Taxable Unless:
Was Selected without his/her part - didn’t enter contest
Not required to render future services
Designates the prize will be transferred to charitable entiry by payor
The prize is excluded form Gross Income BUT cannot be taken as charitable contr

Tax Benefit Rule - If you take a deduction this year and recover that item in subsequent year you must in
State Refund - If you did not itemize in the year you are receiving the refund for you do not ha
income because you did not receive the benefit of withheld taxes on Sch A

Tax Accounting Method

Cash or Accrual method is fine

Cash Method - recognizes income when first received or constructivly received (property or c
expenses are deducted when paid
 Constructive Receipt - when item is unqualifiedly available without restriction

If you have inventory you can not use the cash basis, must use accrual
TAX SHELTERS CAN NEVER USE CASH BASIS

Cash basis can not be used in C Corps

Partnerships who have C Corp as partner can not be on cash basis

However, following can use Cash Method:

Qualified Personal Service Corp if 95% of stock is owned by specified s
Entity has average annual gross receipts of 5mil or less for any three p
sale to customers
A SMALL business owner with 1mil or less of gross receipts for and prio
and is EXCLUDED from requirements to account for invento
Small business taxpayer having average gross receipts of 1mil to 10mi
1) principle business activity is not retailing, wholesalling, ma
2) Pricipl Business activity is provision of services or custom
3) Regardless of principle business activity, if taxpayer may
business that satisfies 1 or 2 above

Accrual Method
Income recognized when earning process has been complete
Expenses deductable when all events have occurred that establish liability and am

SPECIAL RULES
If you receive any rent or royalties under EITHER method you treat as income in th

Prepaid items must be set up in accrual basis even if you are in cash basis - favor

Unearned income is treated on cahs basis

Installment Method
Cannot be used in sale of ordinary business items or Stocks and securities

Determined by formula

Gross Profit X Amount received in the year = Amoun

Total Contraxt Price
GP = Sales - CGS

Example 70,000 = 70%

100,000

PART 7
EXEMPTIONS
Deducted from AGI
 Allowed for taxpayer, spouse, and qualifying child ro relative

Qualifying Child
Must be child or descendent
Must be US Citizen or resident US, Canada or mexico
Must be under 19 or under 24 if full time student (5 months)
Must have same principle abode for more than half the year
Cannot furnish more than half of their support for themselves
Child cannot file joint return
Cannot be claimed as a dependent on more than one return
None is actual parent - Higest AGI parent gets
1 is actual parent - qualifying child for that parent
Both are actual parent - parent whom child resided with the
If stayed equally with both then the parent with hi

Qualifying Relative
Must NOT be qualifying child
C - citizen or resident of US , Mexico or Canada
R - Relationship test - don’t have to live with you if related to you but ha
A - absense of joint return, unless soley for a refund
I - Income Test - Gross Taxable income cannot be higher than exepmti
S - support test must be met
# 157, 162 & 164
YOUR WIFE IS NEVER A DEPENDENT SHE IS A CO TAX PAYER!!!

# 167 Multiple Support Agreement

Must Furnish more than 10% of Support and meet:
C
R
A
I

everyone must sign the agreement who provided more than 10%

FILING STATUS

Married Persons can file joint return or separate

Must have the same tax years
Spouses can have different accounting methods
Can file a return with non resident alien if both spouses file an election form
Cannot be divorced at the end of the year
# 170

Qualifying widow(er) with dependent child

can use joint tax rates for two years following death of spouse
Surviving spouse must be eligible to file a joint return in year the spouse died
Must have a dependent son, daughter, step daughter or step son living in the hosu
Surviving spouse must provide more than 50% of cost for maintining house

Head of Household
Must be unmarried
#168,171 Furnish more than 50% of cost of the household which is a principle place of abod
 Quliafying child
Relative (closer than cousin) whom taxpayer clains as dependent (mus
Parents need not live with head of household but you must maintian pa

COST OF MAINTAINING HOUSEHOLD

Rent, Mortgage Interest, Taxes on residnece, insurance, repairs, food eatin in hou

Excludes: clothing, education, medical expenses, vacations, life insurance, transp

ALTERNATIVE MINIMUM TAX

Regular Taxable Income (1040)

+ - Adjustments
+ Tax preference Items
=Alternative Minimum Taxable Income
- AMT Exemption Deduction
= AMT tax base
* 26 or 28%
= Tentative Minimum Tax

Compare Tentative Minimum Tax to Regular Tax (1040)

If Tentative > Regular you owe AMT Tax

If Tentative < Regular you owe no additional tax

CD 1 CLASS 8
Adjustments :Can be pluses or minuses to Regular T.I.
Tax Preferences can only be '+'

Adjustments:
Real property put into service from 1986 - 12/31/98, the difference between regula
and straight -line 40 years

Excess of regular tax depr and depreciation using 150% db for real property place

Excess of stocks FMV over the amount paid upon exercise of incentive stock optio
It is now income for AMT since not income for Reg IT

Medical expenses are calculated at 10% floor and not 7.5%

No deduction is allowed for home motgage interest if loan proceeds didn’t go to bu

Cant use proceeds to pay off Credit Cards for AMT

No deduction for RE Taxes, PP Taxes, state and local taxes, or misc itemized 2%

No deduction for AMT for personal exemptions or standard deductions

AMT has its own exemtion deduction

Have to use percentage of completion not completed contract for long term contra
 Installment method cant be used for sales of dealer property

Preference Items (added to income)

Tax Exempt interest on PAB's

Property before 1987 for difference on accelerated depreciation over straight-line

Minimum Tax Credit:

Amount of AMT paid (net of exlusion preferences) is allowed as a credit against re
Can only be used against regular tax, not AMT Tax in future years
Carries forward indefinetly

OTHER TAXES
Self-Employment Tax
Combined self-employment tax is 15.3%, of which medicare portion is 2.9%
You do not put items on Sch C if they can go somewhere else on the return
Ex. Charitable Contribuitons
No taxes for net earnings less than 400$ for self employment income. No Self Emp
Deduction for 1/2 of SE Tax is deductable to reach AGI

CREDITS Only Worry about Child & Dependent Care Credit

Child & Dependent Care Credit

Eligibility
Incure expenses so you can be gainfully employed
Must be day care, not school
Married must file joint return, if divorced parent having child longest mu
Qualifying child mst have same principle abode for more than half the y
Qualifying child must be under 13
Or can be Dependent or spouse who is physically or mental
Qualifyinf Expenses
Payments to relative you can claim an exepmtion for or child under 19 d

NON REFUNDABLE CREDIT

Foreign Income Tax Credit

Form 1116
Can take it as a deduction or credit and make the election each year for which typ
Credit is only a portion of the expense

NON REFUNDABLE CREDIT

Earned Income Credit

REFUNDABLE CREDIT

Credit for Adoption Expenses

NON REFUNDABLE
Up to 11,390
Qualified Adoption Expenses for each eligible child under 18 at time of adoption

Joint return to claim credit

Credit pased out fo AGI limits
 Taken in year adoption becomes final

Credit may be carried forward up to 5 years

Look kat # 202

Child Tax Credit

Must be qulifying child under 17 before close of tax year
AGI Phaseout

Has a refundable and non refundable amount

1000 per child

Education Credit

Hope Credit
First 2 years of postsecondary education
Non Refundable Credit
Availabl eon a per student basis
covers tuition for taxpayer, spouse, and dependents
Does not cover room and board
Must be enrolled on half time basis atleast
Can only deduct if you claim student as a dependent
AGI Phaseout
Can only take Hope Credit or Lifetime Learning Credit

Lifetime Learning Credit

Non Refundable
20% Credit of up to 10,000 qualified tuition and related expenses
Must be a graduate or undergraduate course at eligible institution
Cant be a trade school
Phase out for AGI
Can only claim if they are your dependent on your tax return
Credit is computed for expenses paid by tax payer for ALL students, no

ESTIMATED TAX PAYMENTS

If wages withholdings do not cover taxes for the year you must pay quarterly estimates
April 15th, June 15th, Sept 15th, Jan 15th
No penalty if
Estimates = 90% of current years tax
100% of prior years tax paid

If you are a High Income Individual you must pay in 110% of prior years liability or you will be
Hihg income individual is someon who had 150,000 or 75,000 for separate filing in
Generaly no penalty if:
Less than 1000 due
No liability in prior yeat
IRS waives penalty for failure to pay if it was a result of casualty or disaster

Filing Requirements
 Due on April 15th
One tim extension for 6 months is file form 4868 and pay any estimated taxes by April 15th

LOST MY FUCKING NOTES>>> READ THE BOOK FOR THE REST!!!!!

can be taxable

ts Received in excess of Pro Rata part of face amount is taxable as interest

cy are non taxabale

excess part is taxable and shown on the W-2
 or dependents
ursed med exp

nt if single, 75% if Family (joint return)

ay for medical care

he year IT IS TAXABLE

t received from employer as payment for (or reimbursment)

ble if directly paid by individual

place, also including gas.

rsed by employer
e of Dist. = Taxable Income

ds are used to finance Gov Operations

ols, hopitals or charitable orgnizations

m gross income to extent the proceeds are used

ouse and must file a joint return to qualify)

ion expenses only pro rata amount of interest can be excluded:

se related fees,books, supplies and equipment.

NOT EXCLUDABLE

st rent then the FMV of improvements is taxable to Lessor

remium amort is an offset aginst interest earned on the bond

premium is called Constant Yield to Maturity Method

80 = 10,720 after 1st year

ayment that you have not recaptured yet

so you have recaptured 5,000 of the 20,000)
 d then subtract the average of the 2 years

,500 from 2005 = 32,500

goes against Child Support

ount is treated as child support for the payments

reduced by 400
s treated as child support

ption at least 2 years form option date and holds stock

employee has ordinary income to extent the FMV at

amount reported as ordinary income by employee

entiry by payor
t be taken as charitable contribution

subsequent year you must include it in Income

g the refund for you do not have to include it in
hheld taxes on Sch A

ctivly received (property or cash)

lable without restriction

must use accrual

on cash basis

stock is owned by specified stockholders including employees

of 5mil or less for any three prior years and does not have inventories for

of gross receipts for and prior 3 year period can use cash method
ements to account for inventories
ross receipts of 1mil to 10mil and meets any one of 3 requirments
not retailing, wholesalling, manufacturing, mining,
ovision of services or custom manufacturing
ess activity, if taxpayer may use cash method with respect to any separate
es 1 or 2 above

that establish liability and amount can be determined

hod you treat as income in the year received

you are in cash basis - favors Government no immediate deduction

Stocks and securities

eceived in the year = Amount to be reported that year

 udent (5 months)
than half the year
port for themselves

re than one return

AGI parent gets
hild for that parent
whom child resided with the most gets deduction
h both then the parent with highest AGI gets

th you if related to you but have to live with you the entire year if not related

annot be higher than exepmtion amount

O TAX PAYER!!!

ovided more than 10%

es file an election form

in year the spouse died

or step son living in the hosue the entire year
t for maintining house

h is a principle place of abode for more than half of the year for
er clains as dependent (must live with for entire year)
old but you must maintian parents household and be able to claim them as a dependent

ce, repairs, food eatin in house

ations, life insurance, transportation, rental value of home, value of taxpayers services

he difference between regular tax depreciation

0% db for real property placed in service after 1986

ercise of incentive stock options

loan proceeds didn’t go to buy, build, or improve house

l taxes, or misc itemized 2% floor deductions

ndard deductions

contract for long term contra ctracts

epreciation over straight-line

allowed as a credit against regular tax in future years

AMT Tax in future years

edicare portion is 2.9%

here else on the return

oyment income. No Self Employment tax for less than 400$

arent having child longest must claim

bode for more than half the year as tax payer

e who is physically or mentally incapable of self care

pmtion for or child under 19 do not qualify

ction each year for which type to take

nder 18 at time of adoption

 and related expenses
se at eligible institution

on your tax return

ax payer for ALL students, not a per student basis

ay quarterly estimates

r years liability or you will be subject to penalty

r 75,000 for separate filing in AGI prior year

of casualty or disaster
imated taxes by April 15th
TRANSACTIONS IN PROPERTY

A sale is one that generally gives rise to a gain or loss

can be ordinary or capital gain/loss

If a transaction is nontaxable then the gain/loss is generally deffered untill a later transaction

Basis of Property is usually cash paid or FMV of other property plus expenses connected with purchase:
title fees, instalation of utilitiy servces, legal fees, recording fees, surveys, transfer taxes, own
and any amounts buyer agrees to pay that the seller owes
ex. Back taxes. Since you don’t own the property at the time you pay you are unab
and must put towards basis of property

If aquired by GIFT

Selling Price above Donors Basis and FMV at Date of Gift - Use donors basis to figure out ga

Donors Basis

Selling price inside - no gain or loss recognized

FMV date of Gift

Selling Price below the Donors Basis and FMV at date of Gift - use te lesser of the Donor Bas

If aquired from Decedent

basis is properties FMV on date of death or the alternate valuation date (6 onths after DOD o
if it is before the 6 month limit)

If te alternate valuation period is elected then you must value the property at the FMV at the a

UNLESS you receive the property within the 6 month window at which time you will value the

If it is distributed to you AFTER the alternate valuation date then you have to use the FMV at

It cannot be valued at any date past the 6 months no matter what

If STOCK received as a DIVIDEND

the basis of stock received as a dividend depends if it was included in income when received

If you are a C/S holder and you receive C/S or P/S dividend ten it is a non taxable receipt at t

If you are a P/S holder and receive C/S or P/S then it is a TAXABLE recipt and valued at the
this is your basis
 For C/S holder to figure out basis in dividend you must:

Allocate the basis of the original stock proportionatly to the dividend received base
distribution

Ex. Own 100 Shares in 2004 for 12,000

Get 10 P/S in 2007 @ FMV of 5,000
The 100 original 100 shares in 2007 have FMV of 15,000

To figure out basis of new stock you must take FMV at date of disposition of all sto

5,000/20,000 * Original Basis (12,000) = 3,000

15,000/20,000 * 12,000 = 9,000 Basis of original 100 share

*** You ALWAYS use the date of the original stock for the holding period, so in the
use 2004 as the purchase date for ALL stock

In SALE, gain or loss is generally diff between

Cash or FMV received and the adjusted basis of property sold

If property sold is mortgaged and buyer assumes or takes property subject to debt
You must include the amount of debt in the realized amount because seller is relie

Ex. Property with 10k mortgage and basis of 15k is sold for 10k and buyer assume

Realized amount = 10k mort + 10k cash = 20k

20k - Basis (15k) = 5,000 gain

NON TAXABLE EXCHANGES

Like-kind Exchange - an exchange of business or investment property of like-kind

Doesn’t apply to personal use property , must be business or investment related

Property held for business use can be excahnged for investment and vice versa

Like-kind means same Class of Property

Real Property must be exchanged for real property

Personal Property must be exchanged for Personal Property

Exchange of personal property for real property DOES NOT QUALIFY

Exchange of US property for Foreign property DOES NOT QUALIFY
 If boot is received
any realized gain is recognized to te extent of the lesser of the realized gain or the

NO loss is recognized due to recipt of boot

Ex. Land with basis of 10k exchanged for investment real estate with FV of 9k an a

Realized Gain = 9k +2k + 1500 = 12,500 - Original Basis (10k) = 2,500 Realiz

Boot Received = 2k + 1500 = 3,500

Recognized gain = lesser of Boot Received or Realized gain = 2,500

If Liabilities assumed by either party or both

Boot Receievd = if liability was assumed by other party

Boot Paid (given) - if taxpayer assumed a liability

IF LIABILITES ASSUMED ON BOTH SIDES THEN THEY ARE OFFSET TO DET

Ex. I assumed liability of 10k and gave liability of 15k

Net boot given = 5k

****** SEE EXAMPLE IN BOOK ON PG 491!!!!!!

The Basis of like-kind exchange property =

Basis of Like Kind property given

+Gain Recognized
+Basis of boot given
- Loss Recognized
- FMV bot received

= Basis of New Property

Involuntary Conversions

Occurs when money or property is received for property that has been destroyed damaged, s

If payment is received and gain realized, can elect to not recognize gain if converted property
of similar use
Gain is recognized only to extent amount realized exceeds cost of replacement

Basis of replacement property is cost of replacement decreased by any gain not re

Ex. Recd 24,000 New Prop = 21,000 Did not reinvest 3,000
Old Basis = 20,000
 Realized Gain of 4,000
Recognized gain = lesser of Realized gain or am

=3,000

1,000 is not recognized

New Basis =

Amount of New Prop 21,000

Amt not Recognized - 1000 DEFERED GAIN since red
New Basis = 20,000

ASSUME he reinvested 25,000

Amount not reinvested = 0 now

So now recognized gain would be ZERO

So New basis would be now 25,000

- 4000
= 21,000

Sale or Exchange of Principal Residence

Single = Can exclude 250,000 from realized gain

Married = Can exclude 500,000 from realized gain

Must have lived in residence for 2 out of last 5 years

Owned and Occupied

For married only one needs to own it but both must meet occupied test

CAN NEVER DEDUCT A LOSS FROM SALE OF RESIDENCE

WASH SALE

Occurs when stock are sold at a loss and within 30 days of when you purchase the SAME am
in the SAME company

The loss is disallowed and the loss is added to the basis of the new stock

Does not apply to gains, must recognize gain

The new stock takes on the holding period of the old stock

Doesn’t pertain to dealers in stock who do this on a regular basis

Loss is disallowed on the sale or exchange of property to a related taxpayer

Transfere's basis is cost; holding period begins when transfere aquires property

On later resale , gain recognized by transferee is reduced by disallowed loss (unless a wash

Related tax payers include:

Members of family (spouse, brothers, sisters, ancestors, lineal descendents)
Transaction between a corporation and a more than 50% shareholder
Transaction between a partnership and a more tan 50% partner

Ex. Sell some stock to my sister Sister Sells

Seling Price 14k Selling Price

Basis 18k Basis
Loss -4k Gain
- Disallowed Loss
Actual Gain =

**** You can only take the disallowed

the gain amount, cant go negative

Capital Gains and Losses

Result from sale or exchange of capital assets

Capital Assets include investment property and property held for personal use

EXCLUDES
Inventory
Depreciable or real property used in trade or business
This is Sec 1231 property if held for more than 1 year
AR and Notes Receivable
Covenants Not to Compete

You Net the Short Term Loss against the LT Loss and if you have a Loss you can only deduc
a year. If you have anything left you will have a carryforward to use in subsequent years

CORPORATIONS GAIN/LOSS RULES FOR Cap Gains

Can only take Capital Losses against Capital Gains

Cannot offset ordinary income

If you have excess capital loss , it can be carried back 3 years and forward 5 years
ALL capital loss carrybacks and carryforwards are treated as SHORT TERM capit

Personal Casualty and Theft Gains & Losses

Usualyy on give loss questions on test
 Goes on Sch A for losses

Causlaty Loss
- Ins Proceeds
- 100$
- 10% of AGI
= Casualty Loss Deduction on Sch A

Gains & Losses on Business Property

All gains are ordinary on business property held for one year or less

Section 1231
Must be held for more than one year

Sec 1231 gains/losses include those from

sale or exchange of property used in trade or business which is NOT in

Two steps for combining 1231 Gains and Losses

1. Net all casualty and theft gains/losses

if the losses exceed the gains treat all casualty/theft losses/g
and do not net with 1231 items

if the gains exceed the losses , the net gain is combined with

2. Net all other Sec 1231 gains/losses

Include Casualty and theft net gain
Include gains and losses from the sale or exchnge of proper
or business

If losses exceed gains, trat all gains and losses as ordinary

If gains esceed losses, treat Sec 1231 net gain as long-term capital gain

Section 1245
Amount that is recaptured as ordinary income due to selling of equipment

Does not apply to real residential rental property and non residential real property
straight line depreciation is allowable

Upon disposition of property subject to Sec 1245 , and recognized gain will be ord
income to extent of all depreciation deductions

In gain situations, the amount to be recaputred is the lesser of the gain or the depr
If any gain exists after the depreciation recaputre it is taken to Sec 1231

If there is a loss then the entire loss goes to Sec 1231 items

Section 1250
Applies to all real property( buildings & structural componenets)

If held for 12 months or less, gain on disposition is recaptured as ordina

to the extent of ALL depreciation (including S/L)

If held for MORE than 12 months gain is recaputred as ordinary income

OTHER than S/L is used.
If placed in service after 1986 then S/L was used and ALL g
be Sec 1231 gain

IF A CORPORATION
This is Sec 291

You must take 20% of depreciation and recaputre it

up to the extent that ordinary income would have been recap
if you were using Sec 1245

Ex. You sell a property for 220,000

Purchased for 200,000

30,000 of depreciation S/L
Owned more than 12 months

Ordinary Treatment under Sec 1250:

S.P. 220000
Basis 170,000
Recapture 0
Gain 50,000
 later transaction

es connected with purchase:

surveys, transfer taxes, owners title insurance

he time you pay you are unable to take as a deduction

donors basis to figure out gain

se te lesser of the Donor Basis or the FMV at date of Gift to figure out loss

on date (6 onths after DOD or when you receive the property

property at the FMV at the alternate date

which time you will value the property on the date of distribution

you have to use the FMV at 6 months after the DOD to value

ed in income when received

t is a non taxable receipt at time of dividend

BLE recipt and valued at the # of shares received * FMV on date of receipt
o the dividend received based on their FMV at date of

at date of disposition of all stock and find %

Basis of P/S dividend

Basis of original 100 shares

r the holding period, so in the example above you would

rty subject to debt

mount because seller is relieved of obligation

old for 10k and buyer assumes mortgage

operty of like-kind

ness or investment related

investment and vice versa

S NOT QUALIFY
NOT QUALIFY
ser of the realized gain or the FMV of boot received

real estate with FV of 9k an auto FMV 2k and 1,500 cash

nal Basis (10k) = 2,500 Realized Gain

ed gain = 2,500

HEY ARE OFFSET TO DETERMINE NET AMOUNT OF BOOT RECEVIVED/PAID

been destroyed damaged, stolen, or condemned(even if threat of condemnation)

ze gain if converted property is replaced with property

ceeds cost of replacement

decreased by any gain not recognized

Did not reinvest 3,000

esser of Realized gain or amount not reinvested

DEFERED GAIN since reduces basis of new property

New Prop
Amount not Recognized
= New Basis

n you purchase the SAME amount of shares you sold

quires property

allowed loss (unless a wash sale where no loss is allowed)

rs, lineal descendents)

50% shareholder

20k
14k
6k
-4k
2k

can only take the disallowed loss up to

amount, cant go negative

personal use

e a Loss you can only deduct up to 3000

se in subsequent years

k 3 years and forward 5 years

ated as SHORT TERM capital losses
 or business which is NOT inventory

reat all casualty/theft losses/gains as ordinary

the net gain is combined with other sec 1231 items

he sale or exchnge of property ussed in trade

g-term capital gain

selling of equipment

non residential real property since

d recognized gain will be ordinary

lesser of the gain or the depreciation already taken

aputre it is taken to Sec 1231 items
 sition is recaptured as ordinary income

ecaputred as ordinary income if deprectiation

hen S/L was used and ALL gain will

tion and recaputre it

come would have been recaputred

If a Corp and Sec 291 applies

S.P. 220000
Basis 170000
Gain 50,000

Recapture 6000 (20% * 30,000)

SO Ordinary Income would = 6000

Sec 1231 Gain = 44,000
PARTNERSHIP FORMATION

No Gain or Loss is recognized by a partner when there is a contribution of property to

the partnership in exchange for an interest in the partnership
UNLESS

Partner must recognize gain when property contributed is subject to a liability and the resultin
partners individual liability exceeds the partners partnership basis

Ex. Partner aquires 20% interest in a partnership by contrib property worth 10,000
but with an adjusted basis of 4000 and a mortgage of 6000. The partnership assum
the 6000 mortgage

Adjusted basis 4000

Liability Assumed
to other Part -4800 (80% * 6000) have to use what the other partne

Gain 800

Your basis in the partnership is 0 since you received more than you gave
YOU CANNOT HAVE A NEGATIVE BASIS

4000 is the basis of the property to the partnership

FMV has nothing to do with calculating gain/loss if it does not deal with a taxable

Partner must recognize compensation income when an interest in a partnership capital is rec
in exchange for SERVICES RENDERED

Ex. X received 10% interest in ABC in exchange for services rendered. On date he
ABC had net assets of 30,000 and a FMV of 50,000.

X must recognize 5,000 as compensation income. 5000 = ( 10% * FMV of 50,000)

Since it is a taxable event we use the FMV to figure out income

5000 is also his beginning basis in the partnership

Property Contributed to partnership has same basis as it had in the contributing partners hands

Basis for the partners partnership interest is increased by the adjusted basis of property contr

No gain or loss is generally recognized by the partnership upon contribution

Partnerships holding period for contrib property includes the period of time property was held by partner
It odenst matter what type of property is contributed

If partner contributes a Capital Asset or Sec 1231 property then his holding period in the partnership incl
of the contributed property

If not capital asset or Sec 1231 then hodling period begins on date you contribute the propert
 Partnership may elect to deduct up to $5,000 of organization costs for year in which partnership begins b
Must reduce 5000 amount dollar for dollar for all expenses over 50,000
Remianing expenses must be deducted over 180 months (15 years)

Similar rules apply to start up expenses

Partnership Syndication fees (expenses of selling partnership interests) are not deduc

PARTNERSHIP INCOME & LOSS

Since partnership is a pass through partnership reporting of income and deductions requires a two-step

STEP 2
Pg 54-56 of handout
Investment interest expense Is not deductable to arrive at ordinary income, it goes on Sch K
Remember, can only deduct investment int expense up to the investment income

Section 179 is not deductable to get to Ordinary Income

Net Sec 1231 gains or losses go on Sch K

Net Earnings from Self Employment =

Sch K Line 1 Ordinary Income
Sch K Line 4 Guaranteed Payments
- Sch K line 12 Sec 179 Expenses
=Sch K line 14 A Net Earnings from Self Employment

Frequently encountered ordinary income and deductions include

Sales - COGS
Business Expenses - wages, rents, bad debts, and repairs
Guaranteed Payments to partners
Depreciation
Amortization
Sec 1245

STEP 1
All items having special tax characteristics must be segregated and taken into account sepera
caharcteristics are preserved

These special items are listed separately on Sch K of partnership return

Capital Gains/Losses
Sec 1231 gains/losses
Charitable Contrib
Foreign Taxes
Sec 179 expense deduction
Interest,dividend, and royalty income
Investment interest expense
Net income/loss form rental real estate activity
Net income/loss from other rental activity
LECTURE 2

Rules for Partnership losses

You can only take loss on your Sch E up to the basis you hold in the company

If you have unused losses you can carry forward and deduct when partner obtains additional

Beg basis
+ Share of Income
- Withdrawls of Assets
- Non Deductable losses
- Ordinary Loss

Ex. Partner had 200 in capital gains and 3000 in ordinary loss
His basis is 2400

Basis 2400 His new basis is 2600 wh

Share of Income 200 and must carryforward the
Ord Loss -3000

The deductability of losses is also limited to the At-Risk Basis of the partner
At-Risk is gernerally the same as the partners regular basis with exception that liab
are included in at-risk only if partner is personally liable for such amounts

Nonrecourse Liabilities ar egenerally excluded from at-risk basis since

Distributable Shares of Income & Garunteed Payments

Reported by [artners for their taxable year during which the end of partnership fiscal year occ
All items including garunteed payments are deemed to pass through on last day of partnershi

Garunteed Payments - payments to partner determined without regard to income of the partn
Deductable by partnership and reported as income on partners return

Ex. 20 % Interest
50,000 Income for fiscal year 5/31/08
Got garunteed payments of 1000 from 6/1/07 - 12/31/07
and 1500 from 1/1/08- 12/31/08

Amount to report in 08 individual tax return

20% * 50,000 10000

7 * 1000 7000
5 * 1500 7500
= 24500
 Partners Fringe Benefits (health ins premiums, life insurance, etc.)

Partners are not considered employees for purposes of employee fringe benefits a
for partners will be deductable as garunteed payments to partners and included on
to get their gross income

PARTNERS BASIS IN PARTNERSHIP

Partners original basis is determind by the manner aquired partnership interest

Contribution of Property - Adj Basis
Compensation of Services - FMV at date of aquired * % share
Purchases - Amount spent to aquire
Gift - Basis depends on if you can sell the interest at a loss or a gain
Received from decedent - FMV at Date of Death or Dist

Partners Basis increases

Adj Basis of any subsequent capital contributions
Partners Distributive share of
Ordinary Income
Capital Gains
Tax Exempt Income

Partner Basis decreases

Amount of money distributed
Amount of adj basis of distributed capital
Partners Distributive share of
Nondeductable items
Ordinary Loss

Change in Liabilities affect partners basis

If there is an increase in liabilities it increases each partners basis by their share

If there is a decrease in liabilities it decreases each partners share and is consider

to the partner

Partners basis for the partnership is ADJUSTED IN FOLLOWING ORDER

Share of Liabilities personally responsible for
Increase for all income
Decrease for distributions
Decreased by deductions & losses

TRANSACTIONS WITH CONTROLLED PARTNERSHIPS

No losses are deductable for sales or exchanges of property between a partnership and a 50
or between partnerships where a partner owns more than 50% ownership of thw tw

A gain later realized on a subsequent sale by the transferee will not be recognized to the exte
 Ex. Partnership X is owned equally by A, B & C who are brothers. X sells property
Since C directly owns 1/3 and indirectly thoruhg his brothers the remaining 2/3 this

Later when C sells the property to a non related party for a 6000 gain the disallowe
lower the amount C recoginzes as a gain to 1000

GAINS ARE NEVER DISALLOWED

A gain recognized on a sale of property between a partner of 50% or more and a partnership
the way the transferee is intending to use the property

Ex. Partner sells a lamp at a 5000 gain to his partnership he owns more than 50%
If the partnership intends to hold the property as an investment or cap

If they intend to resell the land and hold it in inventory then the gain w
the partners return

TAXABLE YEAR OF PARTNERSHIP

Partnership must adopt the taxable year used by one or more of its partners owning an agreg
but only if the taxable year has been the same for lessor of 3 taxable years or how long partn

Ex. Partnership 50% owned by X Corp. X Corp fiscal year end is June 30th. Partn

The partnership tax year closes when a partner liquidates or dies

Ex. B sold his interest on Feb 28th, his interest ends then so he only has activity u

Partnerships use of Cash Method

Cash method cant generally be used if you have inventories, are a tax shelter, or partnership

If you have no inventories and have less than 5 mill in sales for any 3 preceeding years you c

If you are a small partnership with avg sales of 1 mil or less you can use the cash method eve

Termination or Continuation of Partnership

As soon as 50% or more of the partnership interest is sold in one year the partnership termina

Ex. Sell 55% of ownership on 3/4/08. Partnership ceases to exist on 3/4/08

Partnership will terminate when it no longer has atleast 2 partners

Sale of Partnership Interest

Sale is usually a capital gain/loss

 Gain is excess of amoutn realized over basis
Include in the selling price the liabilities assumed by buyer because selling partner is releieve

Ex. Sold interest for 50,000

Basis = 10k with Liabilities =10,000

S.P 50,000
10,000
=60,000
Basis -20,000
Gain = 40,000

If you are on the cash basis you use the adjusted basis
If you are on the accrual basis you use Market Value to figure out basis

To figure out the amount of ordinary income you must recognize when you sell your interest
you must take your share of the unrealized A/R and appreciated inventory if you are on the ca

Ex. There are 420,000 in unrealized A/R

you have 1/3 interest
You must recognize 140,000 worth of gain as Ordinary Income

Look at example on 528 at botom of page

Pro Rata Distributions from Partnerships

Can only have gain if money exceeds basis in company (non liquidating and liquidating distrib
Can only have a loss if the money received is less than basis (ONLY liquidating distribution)

If you receive money and property you first subtract the money from the basis
Once you do this then the basis of the property you receive will be the lessor of
the Partnerships Basis in the property or the amount of basis you have left in the partnership
You cannot recognize a gain on distribution of property
only on distribution of Money if it exceeds your basis

Ex. You have basis of 9000

You get Money of 5000 and Property with basis in Co of 3000

First you subtract the money from your basis

9000
-5000
New Basis =4000

Now figure out if the property's basis when held by Co is less than what remaining
if it is then you use that as the basis for the property distribution and subtract from

4000
-3000
=1000
 If the basis was 5000 you would use your basis of 4000 as the basis in the propert
you would not recognize a gain

4000
-4000
0

For total liquidation

If you receive property you can not recognize a loss

You can only recognize a loss when you receive cash, unrealized A/R and invento

You realize a gain if the cash received is greater than partners basis

If you receive cash and property

your basis in the property is whatever you need to bring your basis in the company

Liquidating Distribution
60,000 Basis in Co
10,000 Distribution
20,000 Property Basis to Co

60,000
-10,000
=50,000 basis left

Property now has a basis of 50,000 instead of 20,000 so it will bring y

to a liability and the resulting decrease in

b property worth 10,000

6000. The partnership assumes

o use what the other partners have assumed to figure out

ore than you gave

oes not deal with a taxable event (giving property)

a partnership capital is received

rvices rendered. On date he was admited ot partnership

0 = ( 10% * FMV of 50,000)

ng partners hands

sted basis of property contributed

operty was held by partner

eriod in the partnership includes the holding oeriod

e you contribute the property

n which partnership begins business

p interests) are not deductible or amortizable

uctions requires a two-step approach

y income, it goes on Sch K

p to the investment income

nd taken into account seperately by each partner so that any special tax
he company

n partner obtains additional basis in partnership

His new basis is 2600 which he can take 2600 of the loss against
and must carryforward the 400 of ordinary loss to future years

basis with exception that liabilities

for such amounts

ded from at-risk basis since partner is not personally liable

partnership fiscal year occurs

gh on last day of partnerships tax year

gard to income of the partnership

partners return
f employee fringe benefits and any premiums paid
to partners and included on their Sch K in garunteed payments

rship interest

**** GARUNTEED PAYMENTS DO NOT EFFECT PARTNERS BASIS

It only effects the ordinary income
loss or a gain

tners basis by their share

rtners share and is considered to be a dist of money

een a partnership and a 50% (directly or indirectly) or more partner

an 50% ownership of thw two

ot be recognized to the extent of the disallowed loss

 e brothers. X sells property at a 5000 loss to C.
others the remaining 2/3 this loss is disallowed

or a 6000 gain the disallowed loss of 5000 will

% or more and a partnership will be recognized

hip he owns more than 50% in

rty as an investment or capital asset the gain is a Capital Gain

n inventory then the gain will be recognized as ordinary income on

s partners owning an agregate of 50%

ble years or how long partnership has existed

ear end is June 30th. Partnership will use June 30th as YE

en so he only has activity up to that date in profits and losses

a tax shelter, or partnership with C Corp as a partner

ny 3 preceeding years you can use the cash method

an use the cash method even if you have inventories

year the partnership terminates on that date of the sale.

es to exist on 3/4/08
se selling partner is releieved of them

when you sell your interest Sec 751 Gain

nventory if you are on the cash basis.

dating and liquidating distributions)

LY liquidating distribution)

e the lessor of
have left in the partnership

is less than what remaining basis you have

stribution and subtract from your basis
0 as the basis in the property so

unrealized A/R and inventory

partners basis

g your basis in the company to Zero

d of 20,000 so it will bring your basis to ZERO

Transfers to a Controlled Corporation

Sec. 351

No gain or loss is recognized if property is transferred to a corp soley in exchange for stock
and imedietly after the exchange those persons transferring property control the corp

Property includes everything but services

Control means ownership of atleast 80% of voting power and 80% of each class of nonvoting stock

Shareholder recognizes gain if liabilities assumed by corp exceed basis of property transferred

Shareholders basis for Stock =

Adjusted basis of property transferred

+ Gain recognized
- Boot received ( assumption of liability always treated as boot in determining stock
= Shareholders Basis

Corporations Basis =

Transferors Adjusted Basis

+ Gain Recognized to transferor
= Corp Basis

Sec 1244 - Small Business Corp Stock (SBC)

Sec 1244 permits shareholders to deduct an ORDINARY loss on sale or worthlessness of stock

To take must:
Be original holder of stock (an individual or partnership, not a Corp)
Stock can be common or perfered, voting or non, and must have been issued for m
Ordinary loss up to 50,000 or 100,000 if filing a joint return
any excess is treated as capital loss
Must be a domestic corporation

To be a SBC (small business corp) you must have less than 1,000,000 in SE

Variations from Individual Taxation

Filing and Payment of Tax

Must file form 1120 every year even if no income

Return must be filed on 15th day of third month following year end

Estimated payments must be made for any Corp expected to pay more than $500 in tax
 Quarterly Payments Due 15th day of 4th, 6th, 9th, and 12th month

No penalty for underpayment if you payments = prior years 100% tax liability
or 100% of current year liability

If you are a Large Corp (1million or more of taxable income)

You MUST pay 100% of CURRENT years tax liability to not pay a penalty

Corporations are subject to

Regular Tax Rates - 15% - 35%

0- 50k 15%
50,001 - 75k 25%
75,001 - 10Mil 34%
Over 10 Mil 35%

AMT
S Corp doesn’t compute AMT

Reg T.I. (1120)

+ Tax Preferences
+ - Adjustments
= Pre ACE Alt Min T.I.
+ - ACE Adjustments
= A.M.T.I.
- Exemption (40,000)
=Tax Base

Tax Base * 20% = Tentative Minimum Tax

Compare Tentative Minimum Tax to Regular Tax

If Tent Min Tax is > than Reg Tax

Pay AMT

Preference Items - always +

Tax Exempt interest on PAB bonds
Excess of Accelerated over straight line depr on real property and lease
in service before 1987

Adjustments - + or -
Depr diff between Real Estate placed in service after 1986 and before 1
Regular Depr over Straight Line 40 years
Depr diff between personal property placed in service after 1986
200db vs. 150db diff is added back
Construction contracts MUST be done on % of Completion not Comple

ACE - Adjusted Current Earnigns

Adjustments:
 Add
Tax Exempt icome on municipal bonds
Tax Exempt life insurance death benefits
70% dividends-received deduction
Capitalize orginizational expendetures

Minimum Tax Credit

You get a credit for any AMT tax you pay and can use it in future years against RE
Can be carried forward Indef but not carried back at all

Small Corp Exemption

You do not have to pay AMT tax your first year as a Corp
You are exempt your second year if your gross receipts from year one are less tha
You are exempt your thirs year if avg gross receipts of first 2 years is less than 7.5
You are exempt all other years if prior 3 years gross receipt average is less than 7

Gross income have a few differences

Corp does not recognize gain/loss on issuance of its own stock (including treasury stock)

No gain/loss on issuance of debt

Deductions have some major differences as opposed to individual tax payers

Organizational expenditures paid after Oct 22 2004 can deduct up to 5000

in year corp starts unless over 50,000 and must limit the 5000 deduction for every dollar over

Remainder is deducted ratably over 180 month period beginning with month the corp bein

You must make the election by the due date of the return (including extensions)
If you do not amortize the first year then you cannot take the expense and must capitalize all
of the costs

Expenses in connection of issuing or selling stocks is neither deductable or amortizable

Charitable Contributions are limited to 10% of Taxable Income before Chart Cont Deduction, Div Exclusi

Sales
- COGS
=G.P.
+ Rent, Royalties, Gross Div, Net CGs
= Total Income
- Deductions (Except Contributions, Div Exclusion, NOL Carryback)
- NOL Carryforward
 = Taxable income before Contrib & Div Recvd Deduction
- Contributions (10% of T.I.)

The remainder is carried forward for 5 years

Dividends Deductions

100% of dividends received from affiliated (80% owned or more) corporations is deductable if
a consolidated return is not filed

80% deduction is allowed for qualified dividends from domestic corporations you own atleast

70% dedutction is allowed for qualified dividends if you own less than 20%

*** Anytime you have a loss from operations you can only take the Dividend Receie
before DRD if the full DRD does not create a loss

Ex. Sales = 20000 Sales 20,000

Exp = 22000 Exp 22,000
Div =10,000 Loss = -2000
Own 20% of Stock Div 10,000
so 80% DRD T.I. Before DRD =8000
DRD -6400
T.I. =1600

Losses
Dissalowed if sold to more thasn 50% owner

Capital Losses are only able to be offset against capital gains

Not ordinary income
There is no special tax rate for LT CG's
Can carry back 3 years and forward 5 years
All carrybacks and carryforwards are treated as Short Term

Casualty Losses

No 100$ floor like individuals or 10% AGI deduction

If it is completely destroyed the loss is the properties adjusted basis

If it is a partial loss then it is treated just like individuals

Adjusted Basis or FMV difference before and after, lesser of

Always subtract the insurance proceeds

NOL
Dividends recevied Deduction is allowed without limitation
No deduction is allowed for NOL carryback or forward from other years
NOL carried back 2 years and forward 20 years
 Can elect to only carryforward 20 years, if you do you must ALWAYS take your NO

R&D
Can expense in current year
Amortize over 60 months or determinable life

Life Incurance Premiums - If the Corp is beneficiary then they cannot take the deduction since
If they are not the benificiary they can take the deduction

Reconciling Book & Taxable Income

Sch M-1 provides reconciliation of Book to Tax income before NOL & DRD
Perm Diff
Temp Differences

Sch M-2 shows changes in corps Unappropriated RE's per books

Beginning
+ Net Income
+ Other increases
-Dividends to shareholders
- other decreases
= Ending

Consolidated Returns (Affiliated & Controlled Corps)

Own atleast 80% of voting power of stock and 80% of value of stock

May elect to file consolidated return, if do then must file like this forever

If you consolidate the intercompany dividends are eliminated in consolidation process

If don’t consolidate that’s why they have the 100% DRD for Affiliated Dividends

Possible advantages

Deferral of gain on intercompany transactions

Offsetting operating/capital losses of one corp against profits/capital gains of
the other

Dividends & Distributions

Dividends (Ordinary corporate distributions)

Dividends are subject to a 3 step treatment

Dividend - to be included in gross income to extent of Current Earnings & Profits a

Return of Stock Basis - non taxable and reduces shareholders basis for stock
Gain - to extent dist exceeds shareholders stock basis
 Amount of distribution is cash plus FMV of property receievd reduced by any liabilities assum

Shareholders basis in propoerty is JUST the FMV and is not reduced by the liabilities assume

Distributing Corp Recognizes a gain on distribution if FMV is greater than basis.

They do not recognize a loss if FMV is less than basis if it is a non liquidating dist.

If distribute cash then there is no gain/loss to corp

Earnings and Profits

Curretn Earnings & Profits are similar to Book Income

Current Earnigns & Profits are increased by the gain on distribution between FMV and Basis

Accum Earnings & Profits - sum of prior years CEP reduced by distributions and net operating

HANDOUT PG 67!!!!
This explains what happens when there are different AEP and CEP #'s!!!!!

Stock Redemptions

If the company buys back your stock they will give you proerty
or money.

To figure out the gain or loss you use the money receieved or the FMV of the property receive

Treated entirely as a capital gain to the shareholder

the Corp can have a an Ordinary or Capital gain depending on the property given

Complete liquidations

Property received has a basis equal to FMV

Corp recognizes gain/loss on liquidation

this can be ordinary or capital depending on the property given

Liquidation of subsidiary

No gain or loss to Sub or Parent in a total liquidation of a subsidiary

 Since there is no taxable event you pick up the cost basis of the property
when you receive it, not its FMV

Personal Holding Company and Accumulated Earnings Tax

PHC's are subject to penalty tax on undistributed PHC income to discourage accuulating of in
income in corps lower tax bracket

A PHC is any Corp that meets the following two requirments

Anytime in the last half of tax year, five or fewer indv. Owned more than 50% of
value of outstandig stock directly or indirectly
Corp receives atleast 60% of gross income as 'personal holding company income'
- Dividends, interest, rents, royalties, other passive income

PHC is taxed at ordinary rates for ordinary income plus a 15% tax on undistributed
PHC income

PHC Tax is
Self assesing (Sch PH and attached to 1120)
There is a 6 year statute of limitations if no Sch PH is filed
It can be avoided by paying out dividends to reduce PHC income to zero

To figure out PHC Tax

T.I.
+ Dividends - received Deduction
+ NOL
- Federal & Foreign Taxes
- Charitable Contributions in excess of 10% limit
-Net Capital Loss
- Net LTCG over Net STCG
=Adjusted Taxable Income
- Dividends Paid during year
- Dividends paid 2 1/2 months after close of the year
- Consent Dividends
= Undistributed PHC Income
* 15%
= PHC Tax

Consent Dividends - treat as though pad on last day of corps year

Since these were not actually distributed they reduce the stockholders basis
and reduce the Undistributed PHC income at the end of the year

AET for Regular Corps

You can still have an Accumulated Earnings Tax if you are a regular corp and hold more asse
 need in the course of business

It is seen as a ta avoidance and will have an additional tax

May be imposed witout regard to # of shareholders

There is an Accumulated Earnings credit allowed ( ONE TIME CREDIT, once used it is GONE
Greater of 250,000 (150,000 if personal service corp)
or Reasonable Needs of the Business (expansion, working capital, retirement of d

Balance remaining is taxed at 15% and can be avoided if you pay out didvidends to zero out

To calculate:

T.I.
+ Dividends - received Deduction
+ NOL
- Federal & Foreign Taxes
- Charitable Contributions in excess of 10% limit
-Net Capital Loss
- Net LTCG over Net STCG
=Adjusted Taxable Income
- Divideds paid out last 9 1/2 months of the year and 2 1/2 months after year
- Consent Dividends
- Accumulated Earnings Credit
= Accumulated Taxable Income
* 15%
=Accumulated Earnings Tax

S Corporations

S Corp generally pys no corp income tax and functions as a pass through to shareholders

To be eligible to be an S Corp

Must be Domestic Corp

An S Corp may own any % of stock of a C Corp and 100% of stock of Qualified Subchapter S
S Corp cannot file a consolidated return with an affiliated C Corp

Shareholders can be individuals, eststes and trusts and other S Corps but not C Corps or Pa

Only one class of stock can be issued and outstanding

Voting and Nonvoting common stock are treated as one class of stock
 No nonresident alien shareholders

Number of Shareholders is limited to 100

Wife and Husband count as one shareholder

Election must be filed anytime in preceeding taxable year or on or before 15th day of 3rd month of year f
This election is valid for all succeding years untill terminated
All of the stockholders have to agree to the election

S Corps are generally on a Calander year basis (12/31)

Termination of S Corp status may be caused by shareholders owning more than 50% consenting to revo

Failing to satisfy any of the requirements to be an S Corp the termination of S Corp is the date you fail to

Once Terminated S Corp election you must wait 5 non S Corp years to reelect the S Corp designation

If an S Corp distributes appreciatd property to its Shareholders the S Corp will recognize a gain
either capital or ordinary depending on the holding period and type

S Corp does not generate any earnings and losses

You do not deduct foreign income taxes (go on Sch K and K-1)

You do not deduct investment interest expense (Sch K)

Sec 179 is not deducted or ordinary income (Sch K)

Any ordinay income from S Corp is not SE income

LOOK AT PG 57- 60 of handout

Contributions are not deducted for ordinary income

Items which must pass through seperatley :

Net LTCG/L
Net STCG/L
Net 1231 Gain/Loss
Tax Exempt Int
Charitable Contr
Foreign Income Taxes
Investment interest Expense
Div, Int, royalty income
Net inc/loss rental
Net inc/Loss real estate
Shareholders can deduct losses up to their basis in stock AND any debt that is owed to them by the corp
Any excess loss can be carried forward indef untill can be offset against basis to obsorb it

Stock Basis is Computed by:

Beg Basis
+ Income (taxable or not)
- Distributions or withdrawls of assets
- Non deductable expenis or losses
- Share of ordinary losses

= Ending basis

Treatment of Distributions

4 Step Process for Stockholders

Reduce AAA
If any E&P from C Corp conversion take from there
Reduce Basis
Capital Gain for Remaining

When you reduce the AAA account it also reduces the shareholders stock basis

Ex. You had 15k in your stock basis at the beginning of the year and no AAA
You make 20k during the year so it increases your basis by 20k and your AAA by
If you make distributions it decreases the 20k from basis and AAA

READ EXAMPLE ON PG 579 at the bottom!!!!!

S Corp Stockholder
Accum Adjustment Account - ordinary income taxed to share
FMV 100,000
Basis 60,000 Beg Bal 50,000
Gain 40,000 Ord Inc 20000
End 70,000

Distrib 100,000

Dist of AAA 70,000 Non taxable

Div Inc 5,000 Taxable
Basis Red 3,000 Non Taxable
Capital Gain 22,000 CG

Health and Accident insurance premiums and other fringe benefits pad by S Corp on behalf of 2% or mo
by Corp and included in employees W-2
Corporate Reoginizations

Non taxable to Corp or Shareholder

7 Different types of reorginizations

Type A - statutory merhers or consolidations

Type B - the use of solely owned voting stock of aquiring corp to aquire atleast 80% of voting
of target corp
Type E - recapitalization to change the capital structure of a single corp ( bondholders exchan
Type F - change in identity, form, or place of organization
Tyoe G - transfer of assets by insolvent corp or pursuant to bankruptcy, result that former cre
become owners of corp
nge for stock

ss of nonvoting stock

perty transferred

s boot in determining stock basis)

lessness of stock

ust have been issued for money or property

ore than $500 in tax

ars 100% tax liability

to not pay a penalty

on real property and leased personal property

ce after 1986 and before 1999

service after 1986

of Completion not Completed Contract

in future years against REGULAR tax

rom year one are less than 5 mill

st 2 years is less than 7.5 mil
eipt average is less than 7.5 mill

uding treasury stock)

ction for every dollar over 50000

ith month the corp beings business

se and must capitalize all

table or amortizable

ont Deduction, Div Exclusion Ded, NOL Carryback

rporations is deductable if

porations you own atleast 20% in up to 79%

take the Dividend Receievd Deduction up to the T.I.

The DRD would be 8000 since it is 80% of 10,000 which would not create a loss
Since it does not create a loss you use 80% of T.I. to figure out your DRD

If it did create a loss then you would use the full 80% of the Dividends Received
as your DRD

after, lesser of

om other years
ust ALWAYS take your NOL forward and not back

ot take the deduction since the proceeds will not be taxable when received

solidation process
for Affiliated Dividends

ofits/capital gains of

rrent Earnings & Profits and Accum Earnings & Profits

olders basis for stock
ed by any liabilities assumed

d by the liabilities assumed

quidating dist.

between FMV and Basis

ibutions and net operating losses of prior years

MV of the property received

property given
scourage accuulating of investment

wned more than 50% of

holding company income'

ssive income

n undistributed

h PH is filed
C income to zero

stockholders basis

r corp and hold more assets than you

DIT, once used it is GONE)

ng capital, retirement of debt, etc)

out didvidends to zero out the income

2 1/2 months after year end

of Qualified Subchapter S subsidiary (QSSS)

rps but not C Corps or Partnerships

class of stock
day of 3rd month of year for which effective

an 50% consenting to revocation of the election

Corp is the date you fail to satisfy that requirement

the S Corp designation

recognize a gain
 owed to them by the corp
ainst basis to obsorb it

hareholders stock basis

he year and no AAA

by 20k and your AAA by 20k (you add ordinary income that flows through to your 1040 to
your basis)

ary income taxed to shareholder but not yet distributed

E&P from when C Corp 5,000

Basis in Stock 3000

orp on behalf of 2% or more shareholder-employee are deductable

uire atleast 80% of voting and total stock

corp ( bondholders exchange old bonds for new bonds)

tcy, result that former creditors often