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92 Cards in this Set
- Front
- Back
a business owned by one individual
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sole proprietorship
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from a tax and legal standpoint, a sople proprietorship is ____
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not a separate legal entitiy
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the owner of a sole proprietorship reports his income where
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on his individual tax return
schedule c |
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tax advantages of a sole proprietorship
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-the sole proprietorship is not subject to taxation
-the proprietors tax rate may be lower than the corporation tax rate -the owner may contribute cash to, or from the business w/o tax consequences -even though separate accounts are maintained, the money belongs to the owner -the owner may contribute property to or from w/o recognizing gain or loss -business losses may offset non buisness income |
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tax disadvantages of a sole proprietorship
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-profits are taxed to owner, whether or not they are retained in the business
-sometimes corporate tax rates are lower -owner must pay the full amount of social security taxes -may not deduct compensation paid to owner-employees, but corporations can -certain tax exempt benefits availabel to shareholder employees are not available to owner employees -a sole proprietor must use same accounting period for business and personal - |
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an unincorporated business carried on by two or more individuals
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partnership
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when a partnership return is filed, the preparer must send each partner a schedule
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k-1 form 1065
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a k-1 1065 is
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a form that states each partners allocable share of partnership
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____ partners may not generally participate in the management of the partnership
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limited
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tax advantages of partnership
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-partnership as an entity pays no tax
-partners tax rate may be lower than corporate -not subject to double taxation -additional taxes gernerally are not imposed on distributions to the partners -a partners gain is offset by the amount of income partner receives |
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tax disadvantages of a partnership
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-all profits are taxed when earned, even when reinvested in business
-partners tax rate may be higher than corporate -a partner is not an employee -is generally not able to choose fiscal year |
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corporations can be divided into two categories
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c corporations
s corporations |
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a c corporation is subject to
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double taxation
the earning s are taxed first at the corporate level when earned, then again at the shareholer level when distributed as dividends |
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C corporations are
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-a separate entity taxed on income at rates ranging from 15 to 35%
-Must report all its income and expenses and compute its tax liability on form 1120 Shareholders are not taxed on the corporations earnings unless the earnings are distrubuted as dividends -dividends recieved by a noncoporate shareholdera are taxed at the same rate tha tapplies to net capital gains -even when a corporation does not distrubute its profits double taxation may result. T |
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TAX ADVANTAGES OF THE C CORPORATION
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-AN ENTIY SEPARATE AND DISTINGCT FROM ITS OWNERS, ITS MARGINAL TAX RATE MAY BE LWOER THAN ITS OWNERS' MARGINAL RATES
-EARNINGS MAY BE USED FOR REINVESTMENT AND THE REITREMENT OF DEBT. -SHAREHOLDERS EMPLEOYED BY THE CORPORATION ARE CONSIDERED TO BE EMPLYEES FOR TAX PURPOSES, AND LIABLE FOR HALF SOCIAL SECURITY TAXES -ENTITLED TO TAX FREE FRINGE BENEFITS -A CORPORATION MAY DEDUCT AS AN ORDINARY BUSINESS EXPENSE COMPENSATION PAID TO SHAREHOLDER EMPLOYEES -CAN USE A FISCAL YEAR INSTEAD OF A CALENDAR YEAR -ALLOW SHAREHLEDER TO EXLUDE 50% OF THE GAIN REALICED ON THE SALE OR EXCHANGE OF STOCK HELD FOR MORE THAN FIVE YEARS |
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TAX DISADVANTAGES OF A C CORPORATION
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-DOUBLE TAXATION RESULTS
-SHAREHOLDERS GENERALLY CANNOT WITHDRAW MOENY OR PROPERTY FROM THE CORPORATION WITHOUT RECOGNIZING INCOME -NET OPERATING LOSS PROVIDE NO TAX BENEFIT TO OWNERS IN THE YEAR THE CORPORATION INCURS THEM -CAPITAL LOSSES PROVIDE NO TAX BENEFIT TO THE OWNERS IN THE YEAR THE CORPORATION INCURS THEM THEY CANNOT OFFSET ORDINARY INCOME OF EITHER THE CORPORATION OR ITS SHAREHOLDERS |
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PASS THROUGH ENTITIES INCLUDE
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PARTNERSHIPS AND S CORPORATION
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__ ___ ___AND ___ ARE ACCOUTED FOR BY THE S CORPORATION
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INCOME, DEDUCITONS, LOSSES, AND CREDITS
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A S COPORATION OR C CORPORATION IS MORE FLEXIBLE?
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S CORPORATION
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TAX ADVANTAGES OF A C CORPORATION
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PAY NO TAX
SHAREHOLDERS MARGINAL TAX RATES MAY BE LOWER CORPORATE LOSSES FLOW THROUGH TO THE SEPARATE RETURNS OF TEH SHAREHOLDERS BECAUSE CAPITAL GAINS RETAIN THEIR CHARACHTER THE SHAREHOLDERS ARE TAXED ON THESE GAINS SHAREHLERS GENERALLY CAN CONTRIBUTE MONEY TO OR WITHDRAW MONEY FROM SCORP W/O RECOGNIZING GAIN CORPORATE PROFITS ARE TAXED ONLY AT THE SHAREHOLDER LEVEL IN THE YEAR EARNED A SHAREHOLDERS BASIN IN S COPORATION STOCK IS INCREASED BY HIS OR HER SHARE OF CORPORATE INCOME THIS REDUCES THE SHAREHODERS GAIN WHEN HE OR SHE LATER SELLS THE SCORP STOCK, THEREFORE AVOIDING DOUBLE TAXATION |
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TAX DISADVANTEGES OF DOING BUISNESS AS AN S CORPORATION ARE
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SHAREHOLDERS ARE TAXED ON ALL OF AN S CORPORATION'S CURRENT YEAR PROFITS WHETHER OR NOT THESE PROFITS ARE DISTRIBUTED
IF THE SHAREHOLDERS MARGINAL TAX RATES EXCEED THOSE FOR A C CORPORATION THE OVERALL TAX BURDEN MAY BE HEAVIER AND THE AFTER TAX EARNINGS AVAILABE FOR REINVESTMENT AND DEBT RETIREMENT MAY BE REDUCED NONTAXABLE FRINGE BENEFITS ARE GENERALLY NOT AVAILABLE TO S CORP FRINGE BENFITS PROVIDED ARE DEDCUTIBLE BY THE CORP AND TAXABLE TO THE SHAREHOLDER S CORP EMPLOYEES PAY HALF OF SOCIAL SECURITY TAXES WHILE THE SCORP EMPLOYER PAYS THE OTHER HALF S COPR GENERALLY CANNOT DEFER INCOME BY CHOOSING A FISCAL YEAR OTHER THAN A CALENDAR YEAR UNLESS THE S CORP CAN ESTABLISH A LEGITAMATE BUSINESS PURPOSE FOR A FISCAL YEAR OR UNLESS IT MAKES A SPECIAL ELECTION |
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LLP has the following liabilities
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llp parnters are not liable for the negligence of miscoundut of the other partners
LLP parnters are liable for their own acts and ommisions as well as the acts of his agents |
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an eligible entity may elect its classification by filling out form
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8832
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if an entity elects to change its tax classification it cannot make another election
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until 60 months following the effective date of the initial election
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Some requirements for forming a corporation are
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investing a minimum amount of capital
filing articles of incorporation issuing stock paying state incorporation fees |
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In determining the tax consequences of incorporation, the following questions must be answered
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What property should be transferred to the corporation
what services should the transferors or the third parties provide for the corporation What liablities in addition to property should be transferred how should the property be transferred |
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in corporate formation if the transferors realized gain is taxable property the transfer is the
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FMV of stock received
Money received FMV of nonmoney boot property (including securities) received Amount of liabilities assumed by transferee corporation minus: adjusted basis of property transferred realized gain |
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in corporate formation if the transferors realized gain is nontaxable property the transfer is the
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FMV of stock received
Money received FMV of nonmoney boot property (including securities) received Amount of liabilities assumed by transferee corporation minus: adjusted basis of property transferred realized gain |
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in corporate formation if the transferors recognized gain in taxable property transfer
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Transferors recognize the entire amount of realized gain
losses may be disallowed under related party rules installment sale rules may apply to the realized gain |
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in corporate formation if the transferors recognized gain in nontaxable property transfer
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Transferors recognize non of the realized gain unless one of the following exceptions applies
-Boot property is recieved -Liabilities are transferred to the corporation for a nonbusiness or tax avoidance purpose -liabilites exceeding basis are transferred to the corporation -services, certain corporate indebtedness, and interest claims are transferred to the corporation The installment method may defer recognition of the gain when a shareholder receives a corporate note as boot |
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in corporate formation the tax treatment for the transferors for the basis of taxable property recieved
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is FMV
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in corporate formation the tax treatment for the transferors for the basis of nontaxable property recieved is
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Basis of property transferred to the corporation
Plus: Gain recognized Minus: money received (including liabilities treated as money)and FMV of nonmoney boot property total basis of stock received allocation of total stock basisi is based on relative FMVs Basis of nonmoney boot proptery is its FMV |
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in corporate formation the tax treatment for the transferors for the holding period of taxable property recieved of taxable property recieved
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day after the exchange date
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in corporate formation the tax treatment for the transferors for the holding period of nontaxable property recieved
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Holding period of stock received includes holding period of sec 1231 property or capital assets tranferred; otherwise it begins the day after the exchange date
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in corporate formation the tax treatment for the transferee corporation for the gain recognized of taxable property transferred
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the corporation recognizes no gain or loss on th ereceipt of money for other property in exchange for its stock
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in corporate formation the tax treatment for the transferee corporation for the gain recognized of nontaxable property transferred
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Same as taxable transaction except the corporation may recognize gain under sec 311 if it transfers appreciated nonmoney boot property
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in corporate formation the tax treatment for the transferee corporation for the basis of taxable property transferred
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FMV
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in corporate formation the tax treatment for the transferee corporation for the basis of nontaxable property transferred
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Generally, same as in transferor's hands plus any gain recognized by transferor
If the total adjusted basis for all transferred property exceeds the FMV of the property, the total basis to the transferor is lijmited to the property's total FMV |
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in corporate formation the tax treatment for the transferee corporation for the holding period of taxable property
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day after the exchange date
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in corporate formation the tax treatment for the transferee corporation for the holding period of nontaxable property transferred
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Transferor's carryover holing period for the property transferred regardless of the property's character
Day after the exchange date if basis is reduced to FMV |
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Section 351
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deferring gain or loss upon incorporation
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A transferors realized no gain or loss when incoporating the stock basis equals
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the basisi of property transferred less liabilities assumed by the corporation
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the specific requiremets for deferral gain or loss under sec 351 are
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the transferors must transfer property to the corporation
the transferors must recieve stock of the transferee corporation in exchange for their property the transferors of the property must be in control of the corporation immediately after the exchange |
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excluded from the statutory definition of property are
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services rendered to the corporation in exchange for its stock
indebtedness of the transferee corporation not evidenced by a security interest on transferee corporation debt that accruedon or after the beginning of the transferors holding period for the debt |
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section 351 requires that the transferors as a group to be
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in control of the transferee corporation immediately after the exchange
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A transferor's realized gain or loss that is unrecognized for tax purposes under 351, is/is not exempt from taxation
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is not exempt, it is only deferred
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the basis of the stock received equals the
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basis of property transferred less liabilities assumed by the corporation or FMV -deferred gain or + any deferred loss
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property does not include
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services
indebtedness of the transferree not evidenced by a security interest on trenasferee corporation debt that accrued on or after the beginning of the transferors holding period for the debt |
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control is defined as
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ownership of at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock
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when a person transfers both property and services in exchange for stock, the IRS generally requires that the FMV of the stock received for transferred property be at least ___% of the value of the stock RECEIVED FOR THE SERVICES PROVIDED
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10
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When a person transfers both property and services in exchange for stock the property must have ________. The IRS generally requires that the FMV of the stock received for the property be at least ________.
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more than nominal value for that person's stock to count toward the 80% control threshold.
10% of the value of the stock received for services provided |
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If an exisiting shareholder exchanges property for additional stock to enable another shareholder to qualify for tax free treatment the stock received must be
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of more than nominal value. The IRS requires that this value be at least 10% of the value of the stock already owned
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________ stock received in exchange for property is treated as boot
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nonqualified preferred stock
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nonqualifued stoick is considered nonqualified if
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the shareholder can require the corporation to redeem it
the corporation is either required to redeem the stock or is likely to excercise the right to redeem it the dividend rate on the stock varies iwth interest rates, commoodity prices or other similar indices |
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Upon receiving boot, the transferor recognizes gain to the extent of _______.
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the lesser of the tranferor's realized gain or the FMV of the boot property received
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A transferor never recognizes ______ in an exchange qualifying under sec 351.
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a loss
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If the shareholder transfers a capital asset such as stock in another corporation, the recognized gain is
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capital in charachter
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if the shareholder transfers sec 1231 property such as equipment equipment or a building the recognized gain is
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ordinary in charachter to the extent of any deprecation recaptured under sec 1245 or 1250. Thus depreiciation is not recaptured unles the transferor receives boot and recognizes gain
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if the sharehoder transfers inventory the recognized gain is
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ordinary in character
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in computing a shareholder's basis in the stock received he must minus:
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+FMV of the boot recieved from the corporation
+Money received from the corporation +Liabilities assumed by the transferee corporation |
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if a transferor receives more than one class of qualified stock, his or her basis must be
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alocated among all the classes of stock according to their relative FMV
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the transferor's holding period for any stock recieved in exchange for a capital asset or 1231 property
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includes the holing period of the property transferred
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corporations recognize ____when they exchange their own debt instruments for property or services
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no gain or loss
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corporations recognized ____ when they exchange appreciated property to a tranferor as part of a sec 351 exchange
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gain but no loss, the amount and charachter of the gain are determined as though the property had been sold by the corporation immediately before the transfer
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A corporation that acquires property in exchange for its stock in a transaction that is taxable to the to the transferor takes a ____ basis in the property
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cost
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if a corporation acquires property in exchange for its stock in a transaction that qualifies for nonrecognition treatment the corporation's basis for the property is compted:
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Tranferors adjusted basis
plus: gain recognized by the transferor minus: reduction for loss property |
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the transferee corporation's holing period for property acquired in a transaction satisfying sec 351 requirements include
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the period during which the property was held by the transferor
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If a corporation's total adjusted basis for all properties transferred by a shareholder exceeds their total FMV the basis to the corporation is
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limited to their total FMV
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For the purpose of determining gain recognition, the transferee corporation's assumption of liabilities qualifying under section 351 is ____.
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not considered equivalent to cash The tranferee corporation assumption of liabilities does not result in the transferor's recognizing part or all of his realized gain, for the purpose of calculating BASIS, the assuption of liabilities is treated as money received and decreases the transferors stock basis, for calculating the transferors REALIZED gain, the transferee corporation's assumption of liabilities is treated as part of the transferor's amount realized
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when a transferee corporation assumes liabilites in a property transfer, the transferee corporation's assumption of liabilities is treated
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as part of the transferor's amount realized
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the exception to 357, the rule determining gain recognition in regard to the assumption of liabilities, the two exceptions are
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tranfers for the purpose of tax avoidance or without a bonafide business purpose
and tranfers where the liabilities assumed exceed the total basis of the property transferred |
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The special liability rule will prohibit
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the acquisition of cash through liabilities on property tranferred to a controlled corporation. This cash MUST be recognized as BOOT
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If the total amount of liabilities under section 357 exceed the total adjusted basis of all property tranferred the excess liability is
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taxed as gain to the transferor
The transferor's basis in any stock received is zero |
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if the transering of liabilities would result in a deduction to the transferree they are treated how under 351
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they would not be considered liabilities for the purpose of determining the shareholder's basis
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if a sec 351 exchange is completely nontaxable, i.e. the transferor receives no boot, depreciation is
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not recaptured, the corporation inherits the entire amount of the the transferor's recapture potential
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if a sec 351 exchange is divided where teh transfror recognizes some depriciation recapture as ordinary income, and
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the transferee inherits the remaining recapture potiential
if the transferee corporaiton disposes of the depreciated property, the coproraiton is subject to recapture rulse on depreciation it climed subsequent to the transfer, plus the recapture potential it inherited from the transferor |
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When selling depreciated property, the recaptured deprication is treated as ____ and the other gain is treated as ____.
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sec 1245 ordinary income
sec 1231 gain |
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the ______ is assumed to have held the property for the entire month in which the property was transferred when calculating depriciation
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transferee corporation
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if the transferee corporations basis in the depriciable propery exceeds the transferor's vasis, as a result of an upward adjustment to reflect gain recognized by the transferor, thecorporation treats the excess amount as
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newly purchased MACRS property and uses the recovery period and method applicable to the class of the property transferred
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sec 385 was created to
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establish a workable standard for determining whether an obligation is debt or equity
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the following factors will determine whether obligations are debt or equity
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written unconditional promise to pay
whether debt is subordinate to or preferred ratio of debt to equity whether debt is convertible to stock relationship between holdings |
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interest paid on indebtedness is treated as ___- inderiving taxable income
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deductable
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advantages in useing debt in a corporations capital structure
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a corporaiton can deduct interest paid on debt obligation
shareholders do not recognize income when they receive a debt repayment as they would in a stock redemption |
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tax disadvantages in using debt in a corporations capital structure
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if at the time the corporation is formed or later when a sharehlder makes a capital contribution, the shareholder receives a debt instrument in exchange for property the debt is treated as boot
if debgt bcomes worthless or is sold at less than face value the loss is generally nonbusiness bad debt and is treated as a short term capital loss or a captial loss |
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ADVANTAGES OF USING EQUITY IN A CORPORATIONS CAPITAL STRUCTURE
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a 70 80 or 100% dividends received deduction is available to a corporate shareholder
can receive common and preferred stock tax free under 351 common or preferred stock can be distributed tax-free to the corporations shareholders as a stock dividend common or preferred stock that the shareholder sells or exchanges or that becomes worthless is eligible for limited ordinary loss treatment section 1202 permits a 50% captial gains exclusion on the sale of qualified small business corporation stock that has been held for more than five years for 2003-2020, qualified dividends are taxed at a max 15% rate |
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DIsADVANTAGES OF USING EQUITY IN A CORPORATIONS CAPITAL STRUCTURE
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dividends are not dedcutible in determining a corporations taxable income
redemption of common or preferred stock is generally taxable to shareholders as a dividend preferred stock recieved by a shareholder as a nontaxable stock dividend may be treated as sec 306 stock |
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a debt or a security that becomes worthless results in a capital loss for the investor when?
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as of the last day of the tax year in which the security becomes worthless
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Ordinary losses that generate an NOL are deductilbe how?
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carried back two years or forward up to 20 years
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ordinary loss treatment of worthless securities is available in what circumstances
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when a security that is a noncapital asset is sold or exchanged or becomes totally worthless
any security of an affilitated corporation that becomes worthless qulafiyin stock issued by small business corporation is sold exchanged or becomes worthless. Must have been issued the stock, not purchased from another shareholder or received as a gift |
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qualifications for 1244 is
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issuing corporation must receive $1mil or less in exchange for its stock
the issuing corporation must have received over 50% of its reciepts from "active sources" other than royaltyies, rents, dividends, etc |
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non business bad debts are deductible
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as short term capital losses up to the 3,000 annual limit for net capital losses
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a tranferor who dos not wish to recognize gain on the transfer of property to a corporation can avoid 351 treatment with these stragegies
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can sell the property to the controlled corporation for cash or for cash and debt
(in the latter may be treated as nontaxable exchange if the IRS recharacterizes the debt as equity) can sell to a 3rd party for cash and have teh 3rd party contribute the property to the corporation for stock can have the coporation distribute sufficeint boot property so that transerors do not own 80% immediately can transfer debt that exceeds basis of property transferred or debt that lacks a bsinss purpose |