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Advanced Taxation 9-28

by: Merritt Notetaker

Advanced Taxation 9-28 ACCT 4350

Merritt Notetaker


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About this Document

These notes cover the material taught on 9-28.
Advanced Federal Taxation
Dr. Ellen Best
Class Notes
Advanced, taxation, Corporation
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This 12 page Class Notes was uploaded by Merritt Notetaker on Thursday September 29, 2016. The Class Notes belongs to ACCT 4350 at University of North Georgia taught by Dr. Ellen Best in Fall 2016. Since its upload, it has received 10 views. For similar materials see Advanced Federal Taxation in Accounting at University of North Georgia.


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Date Created: 09/29/16
Adv T ax 9-28-16 Chapter 18 Assumption of Liabilities When a shareholder transfers a piece of property with a mortgage attached to it. § 357 Does not (usually) create boot for gain recognition purposes for the shareholder. Liabilities are treated as boot for determining basis of stock received. Basis of stock received is reduced by the amount of liability assumed by the corporation. Big Picture Example Assume David is no longer interested in Garden Inc. Emily wants to transfer all her assets. The exchange is tax free under § 351 However, Emily’s basis in the stock is reduced by the amount of liability assumed by Garden Inc. Liabilities ARE recognized as boot when §357 (b): Liabilities incurred are used as a tax avoidance mechanism. §357 (c): Liabilities are greater than the basis in assets transferred. If so, the excess of liabilities over basis is recognized as gain. If they are both present, part b trumps part c. See notebook paper. Shareholder Basis of Stock Adjusted Basis of property Plus Gain recognized Minus Boot Minus less property Equals Basis (Should equal at least the Fair Market Value of stock received.) Corporation Basis in Property Adjusted Basis of property Plus gain recognized by shareholder Minus adjust for loss property Equals basis of property Adjustment for Loss Property Property that is transferred when the fair market value is less than the basis is considered a loss property. Aggregate basis may have to be stepped down so basis doesn’t exceed the Fair Market Value Necessary to prevent parties from obtaining a double benefit. A step down has to be allocated among assets (See example 23 in text book) The step down has to happen with either the corporation or the shareholder but, not both. The step down usually happens on the corporation’s side but, the shareholder can elect to do it on their side. See notebook paper. Stock Issued for Service 2 May be able to deduct the Fair Market value of stock issued for service. If it is a normal service that would typically be expensed, the stock can be expensed. If it is a service that would normally be capitalized, then the Fair Market Value will be capitalized. If not enough information is given, assume it is a normal expenditure and expense off. Big Picture Example If David serves as a Manager to Garden Inc. and is paid in stock, the stock becomes a compensation expense. If David serves as a Legal service provider and is paid in stock, the Fair Market Value of the stock is capitalized. Holding Period If you transfer property that you have owned for 30 years and receive stock, the holding period of the stock becomes equal to the property, in this case, 30 years. Recapture §1245 and §1250 is not considered under §351. Capital Contributions No gain or loss is recognized by the corporation on receipt of money or property in exchange for stock. If you get a capital contribution from a non-shareholder, it is not taxable and its basis will be 0. Cash Capital Contribution If cash is contributed by a non-shareholder, not in exchange for stock, you must reduce any assets purchased in the following 12 months by the amount of the cash received. Debt vs. Equity 3 Interest Expense is deductible by corporation. Interest received is taxed as ordinary income. Loan repayments are not taxable. Equity Corporations pay dividends, which are not deductible. Individuals may be taxed at a lower rate on dividends received. Corporation may be able to use the Dividends Received Deduction. Reclassification of Debt as Equity Thinly Capitalized – you have too much debt and not enough equity IRS argues that debt is really equity. Debt may be treated as a dividend. Losses on Investment in Corporation Stock and Security Losses If stocks and bonds are capital assets, losses from worthlessness are capital losses. Loss is treated as occurring on the last day of the tax year. No loss if it simply declines in value. If the stocks and bonds are not capital, then it is any ordinary loss. If you gave the company a loan: If you are an individual: It is a non-business bad debt. It is a short term capital loss. Only deductible when fully worthless. 4 If you are a corporation: It is an ordinary loss. Business bad debt. Can deduct partial worthlessness. §1244 Stock Ordinary loss treatment for loss of “small business corporation.” Gain is a capital gain. Applies to the first $ 1 million of corporation’s stock. If there are more than 1 million shares, the corporation determines which shares are §1244. Loss Limit $50,000 if single $100,000 is married filing jointly Any remaining is capital Only §1244 stock in the hands of the original owner. Only individuals or partnerships can own §1244 stock. If §1244 stock is issued for loss property, stock basis is reduced to fair market value on date of exchange. See notebook paper. Selecting Assets to Transfer When going from a sole proprietorship to a corporation, you can pick can choose which assets you transfer in. For example, a cash basis account receivables has a basis of 0 so, when they are paid, the company will have to recognize a gain of $50,000. If you didn’t transfer, the owner can collect them and the transfer in cash. See notebook paper. 5 6 Scanned by CamScanner Scanned by CamScanner Scanned by CamScanner Scanned by CamScanner Scanned by CamScanner Scanned by CamScanner


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