Agenda 5/3 BA 128A-1
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Questions from lecture
Review Chapter 9,10,11,12
Assignment C9-27,35
Additional C10-29,11-47, 12-32,50
Ch 9 - recap partnership profits
and losses
• Partner’s Basis
– contribution increase a partner’s basis in the partnership
– liability assumed by the partner also increase his/her
basis
– gain increase partner’s basis
– loss decrease partner’s basis until the basis =0
– partner’s personal liabilities assumed by partnership
decreases the partner’s basis
– partnership distributions are tax free
Contribution of property to
partnerships
• No gain or loss recognized for the partner and partnership if
property is cash, tangible and intangible property, services need to recognized gain
• if personal liabilities assumed by partnership exceed basis in
partnership, recognize gain
• partnership basis of property contributed = partner’s basis before
the transfer
• Unrealized receivables, basis = 0
• holding period includes the transferor’s holding period
• character of gain also transfers over
• depreciation recapture also transfers over
• apply the same rules after formation of partnership
Chapter 11 S-corp
• Shareholder-related requirements
– no more than 75 shareholders
– eligible shareholders, no C-corp and partnerships, 7
types of trust, tax-exempt public charity or private
foundation OK
– US citizens and residents
• Corporation-related requirements
– domestic corp
– must not be ‘ineligible’ corp - corp with special
federal income tax status
– one class of stock
Adv. and Disadv. of S-corp
• Adv
– Exempt from corporate income tax
– Pass through losses to SH to offset other types of
inceom
– Earnings not subject to self-employment tax
– Distributed income are not subsequently taxed
• Disadv.
– Corporate tax rates may be lower
– S-corp tax SH’s income, not distributions
– Not eligible for dividends-received deductions
– Special allocation not allowed
– restricted to calendar year and other loss limitations
Allocation of gains and losses
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“Per day, per share” basis - equal portion of % stock held and days held
Special allocation not allowed
Allocation of loss
– NOL allowed
– loss limited to the sum of the adjusted basis for the SH’s S corp stock plus
the adjusted basis of any indebtedness owed directly by the S-corp to the
SH
– S corp SH cannot increase his/her basis by liabilities assumed in the corp
– losses and deductions are deducted from the basis in the following
sequence
• Distributions
• nondeductible and noncapital expenditures
• ordinary loss and deduction items
– unlimited carryover of loss or deduction item
– Special SH loss and deduction limitations
• At-risk rules
• Passive Activity limitation
• Hobby Loss
Chapter 11 Gift Tax
• Gift and Transfer Tax - Unified Transfer Tax
system
• Gift tax served as
– Backstop to estate tax
– redistribute wealth
• Gift exclusion to recipient, taxable only to donor
• Unified rate scheme for both taxes
• maximum 55%
Gift Tax
• Subject to phase out, benefit of lower rates
phased out until avg rate is 55%, phase-out
also apply to unified credit after gift > $10m
• Gift valued at FMV at date of gift
• Post appreciation of gift does not matter
• Unified credit - reduced $ for $ of tax
computed for gifts and estates
Gift tax formula
Aggregate amount of gifts for individuals
minus 1/2 of gift splitting for the individual
plus
1/2 of gift splitting from spouse
minus annual exclusions
minus marital deductions
minus charitable deductions
=
taxable gifts of current period
plus
taxable gifts for all prior periods
=
cumulative taxable gifts
tax on cumulative gifts of prior periods (current rates)
minus tax on taxable gifts of prior periods (current rates)
=
tax on taxable gifts of current period
minus unified credit for the period - unified credit used in prior periods
=
tax payable for current period (not less than 0)
Exlusions and Deductions
• Exclusions
– $10,000 per donee
– unlimited donees
– indexed after 1998
• Deductions
– Marital deduction in excess of exclusions
– Charitable deduction
Gift splitting
• Automatic for community property
• Election for common property
– enable gifts to be taxed at lower marginal rates
• only applied to gifts made in the portion of
year of marriage