T2

Question 1

A net capital loss carryback cannot be carried back to a year if

Answer 1

it creates or increases a net operating loss (NOL) for that year.

Question 2

Section 382 Ownership Change Rules

Answer 2

When one or more “5-percent shareholders” increase their aggregate ownership of the loss corporation’s stock by more than 50% over the lowest stock percentage owned by those shareholders during the testing period, the deduction of pre-change loss corporation NOLs against taxable income each year after the ownership change is limited to the Section 382 limitation amount.

Question 3

Any unused Section 382 limitation is

Answer 3

Carried forward and increases the next year’s limitation amount.

Question 4

Section 382 limitation amount =

Answer 4

Fair market value of the loss corporation’s stock immediately before the ownership change multiplied by the federal long-term, tax-exempt rate.

Question 5

Capital Losses are applied against

Answer 5

ONLY capital gains. Cannot reduce taxable income below zero.

Question 6

When can you not use past year NOLs?

Answer 6

In a year that you already have an NOL.

Question 7

Corporation’s basis in property received from a shareholder:

Answer 7

The greater of:

1. The shareholder’s adjusted basis (NBV) of the property (plus an gain recognized by the shareholder); or
2. The debt assumed by the corporation

Question 8

Shareholder realized gain/loss formula for contributing property:

Answer 8

FMV of property contributed − Adjusted basis of property

Question 9

When does a shareholder contributing property not recognize any gain or loss realized?

Answer 9

If the following two conditions have been met:

1. Immediately after the transaction, those shareholders contributing property must own at least 80 percent of the voting stock and 80 percent of the nonvoting stock (Shareholders who contribute only services are NOT COUNTED)
2. Transfer of property must be solely in exchange for stock (No receipt of BOOT)

Question 10

Shareholder’s Basis in Common Stock Formula:

Answer 10

Cash Contributed
+ FMV of services contributed
+ NBV of property contributed
+ Gain recognized by shareholder (boot)
- FMV of boot received
- Liabilities assumed by the corp.
—————————
Shareholder’s basis in common stock

Question 11

Name the corporation distribution sources, their order, and each one’s type of income to shareholder and effect on shareholder stock basis

Answer 11

1. Current earnings and profits: Taxable dividend, no effect on shareholder stock basis
2. Accumulated earnings and profits: Taxable dividend, no effect on shareholder stock basis
3. Stock basis (return of capital): No income to shareholder, reduction of shareholder stock basis
4. Distributions in excess of E&P and stock basis: Taxable capital gain, no effect on shareholder stock basis because it is $0

Question 12

How are current and accumulated earnings and profits matched to multiple dividends in a year?

Answer 12

Current earnings and profits are allocated on a pro rata basis to each distribution, regardless of the actual date of the distributions

Accumulated earnings and profits are applied in chronological order, beginning with the earliest distribution

Question 13

Constructive Dividends

Answer 13

Transactions that aren’t in the form of dividends but are treated as such because the payments are not in proportion to stock ownership

Ex. Unreasonable compensation, loans to shareholders where there is no intent to repay, sale of assets below FMV

Question 14

Are stock dividends taxable?

Answer 14

Stock dividends are generally not taxable unless the shareholder has a choice of receiving cash or other property.

Question 15

Taxable amount for cash dividends vs. property dividends

Answer 15

Cash dividends: amount received
Property dividends: FMV of property received

Question 16

Formula for distribution of property dividend involving appreciated property:

Answer 16

FMV of property
(Adjusted basis (NBV))
————————–
Corp. gain

Question 17

Rule for property dividends involving depreciated property

Answer 17

Cannot recognize a loss

Question 18

Proportional vs. Disproportional Stock Redemption

Answer 18

Stock Redemptions occur when a corporation buys back stock from its shareholders

Proportional: Taxable dividend income. The corporation either redeems or cancels the stock pro rate for all shareholders.

Disproportional: Treated as taxable capital gain/loss to shareholder. There has been a meaningful reduction in the shareholder’s ownership interest.

Question 19

Tax treatment for corporate liquidation

Answer 19

The transaction is subject to double taxation

Question 20

Corporation gain/loss formula for selling assets and distributing proceeds to shareholders

Answer 20

Sale price
(Basis)
————–
Taxable gain (loss)

Question 21

Shareholders gain/loss formula for when corporation sells assets and distributing proceeds to shareholders

Answer 21

Proceeds
(stock basis)
————-
Taxable gain (loss)

Question 22

Corporation gain/loss formula for distributing assets to shareholders

Answer 22

FMV of assets distributed
(Basis in assets distributed)
——————————–
Taxable gain (loss)

Question 23

Shareholders gain/loss formula for when corporation distributes assets to shareholders

Answer 23

FMV of assets received
(Debt assumed by shareholder)
————————–
Amount realized
(Shareholder’s basis in stock)
—————————
Taxable gain (loss)

Question 24

Tax treatment for when a parent liquidates its subsidiary

Answer 24

No gain or loss is recognized by either the parent corporation or the subsidiary corporation when the parent, who owns AT LEAST 80 percent, liquidates its subsidiary.

Question 25

Liquidation vs. Reorganization when it comes to Chapter of Bankruptcy, Affect on business activities, corporate consequence, and shareholder consequence.

Answer 25

Liquidation: Chapter 7, business activity completely ceases, corporate is taxable, shareholder is taxable. Reorganization: Chapter 11, business activity continues, corporate is nontaxable, shareholder is nontaxable

Question 26

Section 1244 Small Business Stock Details

Answer 26

When a corporation's stock is sold or becomes worthless, an original stockholder can be treated as having an ordinary loss (fully tax deductible) instead of a capital loss. Max ordinary loss deduction: $50,000 single, $100,000 MFJ Any loss in excess is a capital loss (subject to $3,000 deduction)

Question 27

Qualified Small Business Stock Details

Answer 27

A noncorporate shareholder, who holds qualified small business stock (QSBS) for more than five years, may generally exclude 100 percent of the gain on the sale or exchange of the stock Max exclusion is limited to the greater of: -10 times the taxpayer's basis in the stock; or -$10 million

Question 28

Examples of those denied the privilege of filing a consolidated tax return

Answer 28

FIRES Foreign corporations Insurance companies Real estate investment trusts (REITs) Exempt organizations S corporations

Question 29

To be entitled to file a consolidated return, all the corporations in the group must:

Answer 29

1. Be members of an affiliated group at some during the tax year; and 2. Each member of the group must file a consent on Form 1122 (Authorization and Consent of Subsidiary Corporation to Be Included in a Consolidated Income Tax Return)

Question 30

Affiliated group requirements

Answer 30

An affiliated group means that a common parent directly owns: -80% or more of the voting power of all outstanding stock; and -80% or more of the value of all outstanding stock of each corporation

Question 31

Brother-Sister Corporations

Answer 31

Corporations in which an individual (not a corporation) owns 80 percent or more of the stock of two or more corporations that don't own each other. Can't file a consolidation

Question 32

Controlled vs. uncontrolled taxpayer

Answer 32

Controlled taxpayer: Any one of two or more taxpayers owned or controlled directly or indirectly by the same interests. Can be controlled directly OR indirectly Uncontrolled taxpayer: Any one of two or more taxpayers not owned or controlled directly or indirectly by the same interests.

Question 33

Controlled vs. uncontrolled transaction

Answer 33

Controlled transaction: Any transaction or transfer between two or more members of the same group of controlled taxpayers. Uncontrolled transaction: Any transaction between two or more taxpayers that are NOT members of the same group of controlled taxpayers.

Question 34

Section 482 Study

Answer 34

A document justifying a taxpayer's pricing methods by comparing it to allowable pricing methods set forth in the U.S. Treasury. OR A document justifying the same thing but by establishing that the pricing method would clearly reflect income.

Question 35

Advance Pricing Agreement

Answer 35

An agreement between a taxpayer and government to avoid or resolve transfer pricing disputes by outlining things like the transfer pricing method and comparables.

Question 36

Permanent establishment applies when a corporation:

Answer 36

-Conducts business in a foreign country on a regular basis; -Has a permanent location in a foreign country; and -Operates the corporation's business through the foreign location

Question 37

Foreign Branch vs. Foreign Subsidiary

Answer 37

Foreign Branch: -Extension of a domestic corporation, not a separate legal entity. -Profits/losses are taxed in full when earned. Foreign Subsidiary: -Separate legal entity, incorporated under the laws of the foreign host country. -Income earned is not taxed until earnings are brought back to the United States in the form of a dividend.

Question 38

Items of income that should be treated as sources of income from within the United States:

Answer 38

DRIPSGUDS Dividends Rents & Royalties Interest Personal Services Social Security Benefits Guarantees Underwriting income Disposition of U.S. Real Property interest Sale or exchange of Inventory property

Question 39

Where are the following traced to: Dividend income Interest income Rental income Royalty income

Answer 39

Dividend income is sourced to the location of the entity paying the dividend Interest income is sourced to the location of the entity paying the interest Rental income is sourced to where the underlying property is located Royalty income is sourced to where the property is used

Question 40

Worldwide Tax System vs. Territorial Tax System

Answer 40

Worldwide: Used by the U.S. Citizens and residents are generally subject to tax on their worldwide income. Territorial: Used by some foreign nations. Citizens and residents are only taxed on income earned inside the country's borders.

Question 41

Foreign Tax Credit definition, calculation, and rules

Answer 41

Primary mechanism for mitigating double taxation. Allows U.S. taxpayers to take a credit for income taxes paid to a foreign government Foreign Tax Credit limitation = Pre-credit U.S. tax on total taxable income x (Foreign source income / Total taxable income) Foreign tax credit is the lesser of the limitation shown above or the foreign taxes paid. There is a separate foreign tax credit for passive, general, foreign branch, and global intangible low-taxed income. Each are added to get the total FTC. The formula is changed replacing "foreign source income" with the separate category of foreign income.

Question 42

Foreign Dividends Received Deduction requirements

Answer 42

A U.S. corporation only is allowed to exempt foreign-source dividend payments from U.S. taxation by taking a 100% dividends-received deduction against such income if it owns 10% or more of the dividend-paying foreign corporation.

Question 43

U.S. person includes:

Answer 43

U.S. citizen U.S. resident alien U.S. partnership U.S. corporation U.S. trusts and estates

Question 44

U.S. anti-deferral regimes that result in the current taxation of foreign-source income:

Answer 44

1. Passive foreign investment company regime 2. Controlled foreign corporation rules/Subpart F regime Subpart F rules supersede the PFIC rules.

Question 45

Passive Foreign Investment Company Requirements

Answer 45

Must meet one of the two tests: 1. 75% or more of the foreign corporation's gross income is passive. 2. 50% or more of the foreign corporation's assets are passive assets

Question 46

Controlled foreign corporation (CFC) Requirements

Answer 46

-More than 50% of its stock is owned by U.S. shareholders -A U.S. shareholder is any U.S. person owning at least 10% of the foreign corporation's stock.

Question 47

Global Intangible Low-Taxed Income Tax (GILTI)

Answer 47

A minimum tax imposed on certain low-taxed income that is intended to reduce the incentive to relocate CFCs to low-tax jurisdictions.

Question 48

Transition Tax

Answer 48

A one-time tax on the previously untaxed foreign earnings of a CFC, consistent with the TCJA's change to a territorial-based tax system.

Question 49

Base Erosion and Anti-Abuse Tax (BEAT)

Answer 49

A minimum tax on large U.S. corporations with a significant amount of deductible payments to related foreign affiliates. This provision is a means to eliminate the tax advantage that would result from these payments, as they reduce the U.S. tax base.

Question 50

Foreign-derived intangible income (FDII)

Answer 50

Double out, income relating to business with people outside of the U.S. and services/property used outside of the U.S. Excludes related parties.

Question 51

Interest charge domestic international sales corporation (IC-DISC)

Answer 51

A set of provisions that enables domestic manufacturing corporations that export goods to reduce their tax liability by permitting a tax-deductible commission to be paid to an IC-DISC. Since the IC-DISC is tax-exempt, no income is recognized on these commissions, thereby reducing the tax liability of the corporation as a whole.

Question 52

Foreign person includes:

Answer 52

Nonresident alien individuals Foreign corporations Foreign partnerships Foreign trusts Foreign estates Any other person who does not meet the definition of a U.S. person.

Question 53

Withholding tax regimes for foreign persons' nonbusiness income:

Answer 53

1. Fixed, Determinable, Annual, or Periodic Income (FDAP) 2. Foreign Account Tax Compliance Act of 2010 (FATCA)

Question 54

Fixed, Determinable, Annual, or Periodic Income (FDAP)

Answer 54

Deals with the withholding on foreign persons' investment-type income (Dividends, interest, royalties)

Question 55

Foreign Account Tax Compliance Act of 2010 (FATCA)

Answer 55

Deals with withholding tax on foreign entities for failure to provide information to U.S. recipients.

Question 56

Mark-to-Market Regime

Answer 56

Imposed on covered expatriate individuals who renounce their U.S. citizenship and satisfy on of the following three tests: Tax Liability Test Net Worth Test Compliance Test

Question 57

List the strategies that corporations use to reduce their tax liability:

Answer 57

-Timing Strategies -Income-Shifting Strategies -Estimated Payments and the Avoidance of Underpayment Penalties

Question 58

Goal of timing strategies:

Answer 58

-Minimizing tax costs -Maximizing tax savings

Question 59

Formula and details for after tax costs/savings

Answer 59

For income items, choose the lower number For expense items, choose the higher number Pre-tax Income x Marginal tax rate = Tax costs x Discount Factor = PV of tax costs Pre-tax Expense x Marginal tax rate = Tax savings x Discount Factor = PV of tax savings

Question 60

Important note for using NOLS from before and after 2018

Answer 60

Deduct the 2018 ones before calculating the 80% of taxable income. Also, use the oldest NOLs first

Question 61

When tax rates are constant or decreasing...

Answer 61

Corporations will choose to accelerate deductions into earlier years and defer income into later years.

Question 62

When tax rates are increasing...

Answer 62

Corporations must consider whether the increase in the tax rate is large enough that it changes outweighs the effect of the discount factor.

Question 63

Ways in which a corporation can avoid double taxation through income-shifting:

Answer 63

-Paying a salary to corporate shareholder-employees -Rent property from shareholders or receive loans from shareholders All of the above create deductions at the corporate level.

Question 64

What creates adverse tax consequences by generating unexpected tax liabilities for a shareholder and corporation when trying to use income-shifting strategies?

Answer 64

Contributions or distribution of noncash property.

Question 65

Difference between individuals and corporations for estimated tax payments

Answer 65

Corporations use 100% of the current year estimated liability, unlike the 90% used by individuals Corporations can also use the annualized method.

Question 66

Annualized method of estimated tax payments definition and calculation

Answer 66

Used when income is not expected to be earned evenly across quarters. 1st quarter: 25% of last year's tax liability 2nd quarter: (Q1 income x 12/3 x 50% x 21%) - Q1 payment 3rd quarter: (Q1&2 income x 12/6 x 75% x 21%) - Q1&2 payments 4th quarter: (Q1,2,&3 income x 12/9 x 100% x 21%) - Q1,2,&3 payments