Agenda 4/26 BA 128A
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Questions from lecture
Hand in project
Review Ch4, Ch9
Assignment C4-29,37
Additional C4-36,40, C9-28
Chapter 4 - current E&P
• Calculating current earnings and profits
– start with taxable income or NOL
– always remember to deduct current federal income
taxes
Permanent differences
– plus income excluded from taxable income but included
in E&P
• life insurance proceeds, tax-exempt interest income
– plus deductions that reduce taxable income but not
allowed in E&P
• dividends-received deduction
• NOL, charitable contribution, capital loss carryover
Current E&P calculation
– minus expenses and losses not deductible in taxable but
allowed in E&P
• federal income taxes
• excess capital loss not allowed
• excess charitable contributions
• non deductible fines and penalties etc.
Temporary difference
– plus income deferred to a later year when computing taxable
income but included in E&P in current year
• installment sales, like-kind exchanges
– plus or minus income and deductions items that is recomputed
for E&P
• depreciation - ADS for MACRS
• LT contracts - % of completion for E&P
• depletion - cost depletion, IDC capitalized and amortized
Non-liquidating distributions
• Dividend - distribution made out of
corporation’s E&P
• Property as contribution - $, securities of
other corporation, and any other property
except stock, stock right of distributing
corporation
• if distributions > E&P - > return of capital,
reduce ownership basis
• if distributions> ownership basis, excess
treated as gain of sale of stock - capital gain
Non-liquidating distributions
• Distributions net against current E&P first and then
accumulated E&P
• Distributions come from current E&P as long as the
amount < current E&P even though accumulated E&P
is in deficit
• if distributions made during the year exceed current
E&P, current E&P is allocated to those distributions
on a pro-rata basia regardless of when the distributions
are made, distributions in excess of current will be
deducted from accumulated E&P in chronological
order
Property Distributions- tax
consequences to SH
• Amount of distribution to shareholder is the
property’s FMV, value determined at date of
distribution, distribution amount reduced by
any liability assumed by shareholder
• Basis to shareholders is the FMV
(regardless of liability assumed)
• Distribution is dividend to the extent of the
corp’s E&P
Property Distributions- tax
consequences to corp
• Corporation must recognized gain on distributed property
that has appreciated in value
• Property’s FMV must be at least the amount of liability
assumed by shareholder
• Does not recognized loss on distributed property
Effect on E&P of corporation
• gain recognized by distributed property increase E&P
• Tax on the taxable gain on distributed property decrease
E&P
• Property’s adjusted basis/FMV reduce E&P (if adjMusted
basis >= to FMV, reduce E&P with adjusted basis, else
reduce E&P with FMV
Constructive Dividends
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Indirect payment to shareholder without formal declaration
Likely arise in closely held corporation
Loans to shareholders
Excessive compensation
Excessive compensation for the use of SH’s property
Corporate payments for the SH’s benefits e.g. travel
expenses
• Bargain purchase of corporate property
• SH use of corporate property
Stock dividends and rights
• Stock dividend
– tax free
– basis allocated between old and new shares
– if stocks identical, dividing basis by old + new number
of shares
– if stocks not identical, use relative FMV to allocate
• Stock rights
– tax free unless SH’s proportionate interests is/may be
changed
– stock rights value <15% of stock, basis of rights is zero
unless election is made
– allocation is made using relative FMV of stock rights
and stock
Chapter 9 - formation of
partnerships
• Types of partnerships
– general partnerships
– limited partnerships
– LLC - taxed as partnerships but with limited
liability
– LLP - similar - more for professional
organizations
– check the box regulations
– electing large partnerships - simplified
reporting arrangement
Partnership profits and losses
• Partnerships - tax reporting entity
• partner reports his/her share of income from partnership from
the partnership return
• partnership has its own tax year and accounting methods
• partnership income can office personal losses of individual
partners
• 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
Partnership-reporting of income
• Separately stated items and ordinary income/loss
• Separately stated items are a list of deductions not
deductible in the partnership income calculation but
deductible for individuals (partners).
– Foreign income taxes paid, charitable contributions,
NOL carryovers and carrybacks etc..
– These items are deducted later on in partners’ individual
return
• Ordinary income are things such as gross profit on sales,
administrative expenses, salaries and etc.
Partnership’s distributive share
• Depends on partnership agreement, profits and losses share
may be different
• Varying interest rule - if partnership interest % changes
during the year, income and loss allocation is prorated
between the different days of ownership and interest %
• Special allocations
– pre-contribution gain or losses for contribution to
partnership after 3/31/1984
– gain/loss at the time of contribution allocated solely to the
SH who contributed the property
– other special allocations allowed if criteria is met for
substantial economic effect - appropriate
decrease/increase in capital account of partner and
partners will make up negative capital balance - see C9-19