Running head: TEAM B WEEK THREE DISCUSSIONS AND PROBLEM SOLUTIONS 1

Do the following decisions have the same precedential value: (1) Tax Court regular decisions, (2) Tax Court memo decisions (3) decisions under the small cases procedure of the Tax Court? Why? Which of the following sources do you think would be most beneficial for your client: (1) Tax Court regular decisions, (2) Tax Court memo decisions, (3) decisions under the small cases procedure of the Tax Court, or (4) Fifth Circuit Court of Appeals?

The tax court regular decisions, tax court memo decisions and the small cases procedures of the tax court do not have the same precedent.  The first time the tax court makes a decision on a legal tax issue is a tax court regular decision and the memo decision is a decision/ruling that is different than the original decision because of different facts presented.  Both of these decisions carry the same authoritative weight.  These two types of cases are usually for large amounts and have to be presented by a tax representative/lawyer.  Whereas, small case procedures are regarding matters for less than $50,000 and can be filed by the tax payer and the tax payer usually represents him or herself.  These decisions cannot be appealed.  Whereas, regular tax decisions and memo tax decisions can be appealed as far as the Supreme Court if need be. 

What constitutes substantial authority for a position taken on a tax return? What options do you have if substantial authority is lacking?

Substantial authority means that there is strong evidence that the position the taxpayer is taking is supported by the law and relevant facts. 

What business entities are available for a new business? What are the tax and nontax advantages of each form? Select two business types and provide an example of when that selection is most appropriate from a tax perspective and from a nontax perspective.

When you start a new business, it would be suggested to complete a business plan. During this planning phase the owners can determine how to structure their business and determine which business entity type to form. There are several options of business entities which are available for new businesses. An owner can choose form a Sole Proprietorship, Limited Liability Company (LLC), Corporation   or Limited Liability Partnership ( LLP ).

Tax Return Position Paper

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TEAM B WEEK THREE DISCUSSIONS AND PROBLEM SOLUTIONS 2

Tax Return Position Paper

There are a variety of sources that including tax law research such as primary and

secondary sources and several other methods used to resolve a tax issue. Tax professionals have

to be familiar with the IRC, which are organized paragraphs, sections, and parts. The

administrative and judicial interpretations of the IRC are essential and necessary. “The Treasury

Regulation provides administrative interpretations and Court opinions provide judicial

interpretations” (Pope & Anderson, 2010, p. 1-7). By researching primary and secondary tax

sources, court rulings, and substantial authority will provide a better understanding of how

essential the tax research has become for advisors and tax practitioners to communicate tax

consequences to clients.

TEAM B WEEK THREE DISCUSSIONS AND PROBLEM SOLUTIONS 3

What are the alternative tax years available to a corporation? What factors should be considered in electing the tax year?

Tax years are established when the business is formed. The corporation can adopt either the calendar or fiscal year. Their annual accounting period has to be the same. The election is made by filing the first tax return for the tax year chosen. The fiscal year is a 12-month period ending on the last day of any month other than December (as that would be the same as a calendar year). The calendar year is from January 1 to December 31 (as the name implies).

The first tax return for the tax year chosen will likely be a partial-year. This is called a short-period tax return, and is filed for the onset or last year of the corporation’s life when the beginning or end involves a less than 12-month period for the tax year (p. 3-2).

What methods of accounting are available to a small business and to a large business? If the business decides to make an accounting methods change, how is this accomplished?

Three accounting methods available: accrual, cash or hybrid methods

  Accrual method reports income and expenses in the period in which they earned the income or incurred the expense.

Cash method reports income and expenses in the period when they actually receive the income or pay the expense.

Hybrid method is a blend of accrual and cash methods. The sales, cost of goods sold, inventories, account receivable and accounts payable are all accounted for using the accrual method. But all other income and expenses use the cash method.

·         What are the requirements for the following deductions: U.S. production activity deduction, dividend received deduction, and net operating loss? Discuss any recent legislative changes.

U.S. Production activity deduction- Corporations can take a deductions equal to the percentage times the lessor of the taxable income before the activity deduction or the qualified production activities income for the year. Since 2010 the percentage rate is 9% and the deduction can't be more than 50% of the corporation's W-2 wages.

Dividend Received Deduction- This deduction is based on the amount of dividends received and

TEAM B WEEK THREE DISCUSSIONS AND PROBLEM SOLUTIONS 4

the percentage of the deduction will depend on the amount of the distributing stock owned. A minimum of 20% of the stock or voting power is owned then the deduction would be 80%. If less than 20% is owned than a 70% deduction is allowed. If the corporation dividends that qualify for both the 70% and the 80% deduction, then the corporation must lower the taxable income  by the aggregate amount of the 80% dividends before they compute the 70% dividends. 

Net Operating Loss-defined as the amount of deductions that exceeds its gross income. When figuring the net operating loss, the corporation cannot take a deduction for a carryover or carryback. The corporation cannot take the productions activities deduction since it does not have a positive income.

What is the legislative intent behind the corporate alternative minimum tax (AMT)? Define tax preference items, AMT adjustment, and minimum tax credit.

The purpose of an alternative minimum tax is so every taxpayer (including corporations) with considerable economic income pays a minimum tax regardless of the use of credits, deductions, and exclusions to decrease the income tax liability. Tax preference items are items added to a business’s regular taxable income to arrive at its alternative minimum taxable income. These items can include the excess depletion deductions, excess drilling and development cost, excess accelerated depreciation, and tax-exempt interest on certain private activity bonds.  These items increase taxable income. AMT adjustments can increase or decrease taxable income because they entail recalculating specific income, loss, gain, and deduction items.  

C: 2-6

1) Tax revenues increase when making corporate formation a taxable event.2) Under the current system, taxpayers are prevented from recognizing losses which

increase government revenues.

C: 2-40

A) Since Karen and Larry receive only stock, they do not recognize any gain or loss. Joe only receives bonds and he recognized $7000 in capital gain ($15000-$8000) and does not qualify for treatment.

TEAM B WEEK THREE DISCUSSIONS AND PROBLEM SOLUTIONS 5

Week Two Outline

Discussions Team Participation

Post minimum of two substantive responses per team member o One response to questiono One response to team membero Responses due midnight Friday, June 29, 2012

Compiled by Saturday June 30, 2012 by Kathryn Bartram Submitted for team review by Kathryn Bartram

June 30, 2012 6:00 PM ESTDiscussion Questions

C: 3-8 (p. 3-55) Three ways in which the treatment of charitable contributions by individual and corporate taxpayers differ

How does a corporation compute earnings and profits (E&P)? What income is deferred to a later year when computing taxable income but is included in E&P in the current year? What deductions are allowed for taxable income purposes but denied for E&P?

Earnings and profits are computed by taking the taxable income or net operating loss and adjusting it. The adjustments come from taxes or non-taxable income. After adding or subtracting taxable income items, tax-exempt items such as life insurance proceeds and tax-exempt interest are added.  This is because earnings and profits are what the firm uses to pay dividends.

Distinguish between current and accumulated earnings and profits. Why is it important to make this distinction?

  Accumulated earnings are excessive earnings that have accumulated, where current earnings

are earnings that are not currently needed for business purposes and have the potential of being accumulated. The reading material also notes the 15% maximum tax rate on dividends that reduces the negative affect of double taxation. That way, current and accumulated earnings cannot be over taxed. Earnings must be divided between these two categories so they are not combined and the corporation pays higher taxes (at least that was my understanding after reading about this, but I may be wrong). If a corporation can avoid accumulated earnings, they can avoid the accumulated earnings tax which is a penalty tax.

What is a stock redemption? What are some reasons for redeeming stock? Why are some redemptions treated as sales and others as dividends?

Stock redemption is the acquiring of a corporation's own stock in exchange for corporate property.

TEAM B WEEK THREE DISCUSSIONS AND PROBLEM SOLUTIONS 6

Some reasons for redeeming stock are:~Shareholder wanting to withdraw from corporate business~sell under terms of a stock purchase agreement~asset withdrawal before sale of business

Team B Week Three Discussions and Problem Solutions

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Running head: WEEK FIVE TEAM B ASSIGNMENT 7

WEEK FIVE TEAM B ASSIGNMENT 8

Team B Week Three Discussions and Problem Solutions

Discussion Question C:3-8 Describe three ways in which the treatment of charitable

contributions by individual and corporate taxpayers differ.

Individual and corporate differences are the timing of the deduction, the amount allowed to contribute, and the maximum deduction permitted in each year. Individual tax deductions for charity must be paid in cash or other property before the close of the year to be deductible and regardless of the method of accounting the individual uses. Corporations using the accrual method can apply a special rule where all or part of the charitable contribution can be used in the year it accrued instead of the year it was paid. 

Sue and Bill plan to open an accounting firm and expect to work full time in the firm. They expect to incur a small loss during their first year of operation and expect to be profitable after the first year. What are the tax law requirements for structuring the business as a partnership or an S corporation? Which would you recommend and why?

Sue and Bill could form partnerships under:

General partnership – each partner could manage the business but both would have unlimited liability and share in profits and losses.

Limited partnerships – has at least one general partner (manages) and one with limited liability but no authority to manage.

Limited Liability Limited Partnership – not in all states and general partner has liability

Bob and Dave plan to start a business. Bob will contribute land and Dave will contribute services. Would you recommend this business be formed as a partnership or as an S corporation? Why?

Bob and Dave plan to start a business. Bob will contribute land and Dave will contribute services. Would you recommend this business be formed as a partnership or as an S corporation? Why?

Bob and Dave have the choice of forming a partnership or S corporation. Either would allow two investors or business owners. The choice then would be which is the most advantageous for each person.

WEEK FIVE TEAM B ASSIGNMENT 9

What are separately stated items on a K-1? Why is it necessary to separate these items from ordinary income?

Each partner must fill out a Schedule K-1. It should list the partners distributive share of the ordinary loss or income, deductions, credits, and other pass-through entities.  The K-1 helps the taxpayer to show the income they earned when they do their personal taxes. The income that is reported to the individual could affect the alternative minimum tax or affect other issues concerning the business taxable income.

Reference:  Investinganswers.com http://www.investinganswers.com/financial-dictionary/tax-center/schedule-k-1-76 

What is the difference between a distribution and a distributive share? How do these affect the owner’s K-1 and individual taxes?

Actual distribution is the amount of money withdrawal from the company.  A distributive share is the portion  of taxable income and nontaxable income allocated to the partner based off the partnership agreement. Or if no partnership agreement in place than the percentage or amount is determined by the partner’s interest in the company.

The owner’s K-1 will have the distributive share as the amount to be claimed on their personal tax return.  The distributive share may be different than the actual distribution. 

C:6-8 In many cases, usually no because the two alternatives results are the same. A corporation’s shareholders recognize the distributions gain or loss when a corporation recognizes its gains and losses, sells its assets, and pays its taxes. If the corporation’s assets are distributed directly to the shareholders, it will still recognize gain or losses as if it sold its assets. Then the corporation would pay its taxes and distribute the remaining assets to its shareholders. Under the first alternative, the distributed assets FMV must be the same amount as the distributed cash. Since shareholders take a FMV basis in the distributed assets, shareholders recognize the same gain or loss. Shareholders do not recognize further gain or loss upon selling assets. The results may be different if the corporation under Sec 336(d) is subject to loss limitations upon property distribution to certain shareholders. The limitations of Sec 336 do not apply to direct sales by the corporation to outside third parties. Under Sec. 362(e)(2), a property’s basis may have been reduced upon the corporation’s contribution, which reduces a realized loss upon a distribution.

WEEK FIVE TEAM B ASSIGNMENT 10

Team B Week Four Outline

C:9-35: Allocation of Precontribution Gain

Response to sections by Saturday, July 14, 2012 6:00 EST – Kathryn Bartram

o Patty

Ordinary Income

Long-term Capital Gain

o Dave

Ordinary Income

Long-term Capital Gain

 C:11-45:  Use of Losses by Shareholders

What is a liquidating distribution? What is a nonliquidating distribution? Provide an example of each.

A liquidating distribution ends the partner's interest in the partnership and is done with one or a series of distributions. Nonliquidating distributions are all other distributions. A partner's outside or inside basis is used. An outside basis is the partner's basis in the interest and the inside basis is the partner's basis in assets.

What is an inadvertent termination of an S election? How does an S corporation and its shareholders rectify an inadvertent termination? What could happen if a company fails to rectify the termination?

An inadvertent termination of an S corporation is the accidental end of an S election.  An accidental termination could happen because the company has failed the passive investment income test for 3 consecutive years or if there are more than 100 shareholders.

WEEK FIVE TEAM B ASSIGNMENT 11

What events will cause an S election to terminate? What would you recommend S corporations do to plan for an orderly termination of an S election?

If the S Corporation does not meet the criteria to be an S corporation, it will be terminated .  The criteria are the following:

·         Greater than 100 shareholders

·         Creating more than one class of stock

·         Electing an improper tax year

·         If more than 25% of the gross income is from passive investment income for 3 consecutive years

A C corporation has incurred substantial losses and the owners have decided to close the business. What considerations should the owners make in this termination? Should they consider making an S election and then later, terminating the S corporation? If you were their tax advisor, what would you recommend?

Week Five Team B Assignment

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WEEK FIVE TEAM B ASSIGNMENT 12

WEEK FIVE TEAM B ASSIGNMENT 13

Week Five Team B Assignment

C: 9-35 Allocation of Precontribution Gain Solution

Patty: $3,200 ordinary income, $7,600 gain

Dave: $$4,800 ordinary income, $2,400 gain

Patty must report $3,200 in ordinary income (40% of $8,000). The precontribution gain is

allocated among the partners with Patty’s allocation of $6,000 (40% of $10,000) and Dave’s

allocation of $2,400 (60% of $10,000). The postcontribution for the sale of the land would be $1,600

gain for Patty (40% of $10,000 - $6,000). Dave would report $4,800 of ordinary income (60% of

$8,000 basis in contributed land).