Exam 2 Chapter 18,19, & 24

What are the Tax Results to the Shareholder?

Cash + FMV Property Recieved - Corporate Liability Assumed by the Shareholder = Amount Realized Dividend = Net FMV AB Asset = FMV

What type of dividend wouldn't be tax-free to the shareholder?

- A stock dividend where the shareholder could choose between cash and stock - A stock dividend to all holders of preferred stock

What type of items is an adjustment to taxable income or net loss to compute current E&P

- Dividends received deduction - Tax-exempt income - Net capital loss carry forward from the prior year tax return

What type of factors would be considered in determining if compensation paid to a shareholder/employee is reasonable?

- The individual's duties and responsibilities - What individuals performing in comparable capacities at other companies are paid - Whether the corporation has a formal compensation policy

Under what circumstances does property received by a corporation in a §351 transaction not receive a carryover basis? What is the reason for this rule?

-When a shareholder recognizes gain as the result of receiving boot in a §351 transaction, the corporation adds the gain recognized by the transferor to the basis it carries over on the property transferred -This rule prevents gain recognized by the shareholder on the transfer to be recognized a second time if the corporation subsequently disposes of the property in an otherwise taxable transaction

Possible Tax Treatment

1. Dividend 2. Sale

List the key statutory requirements that must be met before a corporate formation is tax-deferred under §351.

1.) Transfer of property to a corporation 2.) The person transferring property to the corporation can receive ONLY stock in exchange 3.) The person transferring the property (transferor) must collectively control 80% or more of the corporation after

Corona Company is owned equally by Maria, her sister Carlita, her mother Gabriella, and her grandmother Olivia, each of whom hold 100 shares in the company. Under the family attribution rules, how many shares of Corona stock is Maria deemed to own?

200 Maria is treated as owning the shares of her mother, but not those of her sister or grandmother

Explain if the tax consequences are the same whether a shareholder contributes property to a corporation in a §351 transaction or as a capital contribution.

A contribution of capital is always non-taxable to the transferor under §118 (that is, gain or loss realized on the transfer is exempt from taxation). A §351 transfer may be taxable to the transferor if boot is received.

What income tax issues must a corporation consider before it makes a noncash distribution to a shareholder?

A corporation must determine if the property's fair market value exceeds or is less than the property's tax basis. To the extent the fair market value exceeds the tax basis, the corporation recognizes gain on the distribution. Corporations cannot recognize loss if the property's fair market value is less than the tax basis.

How does the issue of double taxation arise when a corporation decides between making a distribution to a shareholder employee as a dividend or compensation?

A distribution characterized as a dividend is subject to double taxation, first at the corporate level and then a second time at the shareholder level, because a corporation cannot deduct it from taxable income. A distribution characterized as compensation is taxed only once, at the recipient level, because it is deducted by the corporation.

Distinguish between an outbound transaction and an inbound transaction from a U.S. tax perspective.

An outbound transaction occurs when a U.S. person engages in a transaction outside the United States or one that involves a non-U.S. person. An inbound transaction occurs when a non-US. person engages in a transaction within the United States or one that involves a U.S. person.

Shareholder tax treatment when receiving a distribution

1. Dividend to the extent of E&P 2. Return of basis/paid in capital (not taxed) 3. Capital Gain

Types of forms of Earning Distributions that would be subject to double taxation at the corporate and share-holder level

Dividends Stock Redemptions Partial liquidations

True or False. A calendar-year corporation has positive current E&P of $100 and accumulated negative E&P of $200. A cash distribution of $100 to the corporation's sole shareholder at year-end will not be treated as a dividend because total E&P is negative $100.

False. The $100 distribution will be treated as a dividend because it does not exceed current earnings and profits.

What information must a taxpayer gather to determine the amount realized in a property transaction?

-Cash received, FMV of property received, any liability on that property, any selling expenses Cash Received +FMV of property received +Liabilities assumed by transferee from the property -Selling expenses incurred from transaction -Liabilities assumed by transferor on property received =Amount Realized

Under what circumstances does a corporate shareholder receive tax deferral in a complete liquidation?

-Corporate shareholders owning 80 percent or more of the stock (voting power and value) of the liquidating corporation do not recognize gain or loss on the receipt of liquidating distributions. This nonrecognition treatment is mandatory.

Explain whether the receipt of boot by the shareholder in a §351 transaction causes the transaction to be fully taxable.

Boot taints an otherwise tax-deferred transaction under §351. A shareholder who receives boot in the transferee corporation recognizes gain (but not loss) in an amount not to exceed the lesser of 1) gain realized or 2) the fair market value of the boot received.

When might a shareholder have to rely on the not essentially equivalent to a dividend test in arguing her stock redemption should be treated as an exchange for tax purposes?

A shareholder will have to rely on this test if she cannot meet either the "substantially disproportionate test" or the "complete termination of interest" test, which rely on a mechanical set of criteria.

Roll Forward E&P Calculation

After analyzing distributions for the year: Beginning Current E&P +/- Current E&P - Distributions treated as Dividends= Ending Accumulated E&P

Pavel, a citizen and resident of Russia, spent 100 days in the United States working for his employer, Yukos Oil, a Russian corporation. Under what conditions will Pavel be subject to U.S. tax on the portion of his compensation earned while working in the United States?

As a nonresident, Pavel will be subject to U.S. tax on the portion of his compensation that is treated as U.S. source income, which is usually determined based on how much time he spends working in the United States. Pavel may be exempt from U.S. tax on the compensation under a treaty provision in the U.S. - Russian Federation income tax treaty.

Why do publicly-traded corporations use a triangular form of Type A reorganization in acquiring other corporations?

-A triangular merger isolates the acquired company's assets and liabilities in a separate subsidiary without having to retitle the assets (if a reverse triangular merger). Reverse triangular Type A mergers are desirable because the transaction preserves the target corporation's existence. This type of merger is a common vehicle for effecting mergers when the parent corporation stock is publicly traded or the parent corporation is a holding company.

Explain whether all shareholders receive the same tax treatment in a complete liquidation of a corporation.

-All individuals and corporations owning less than 80 percent of the liquidating corporation generally recognize gain or loss on the receipt of a liquidating distribution. -Corporations owning 80-percent-or-more of the liquidating corporation defer recognition of gain or loss on the receipt of a liquidating distribution.

Why does the acquiring corporation usually prefer to buy the target corporation's assets directly in an acquisition?

-By acquiring assets, the acquiring corporation usually receives a step-up in the tax basis of assets to fair market value (assuming the assets have appreciated in value). If the asset is depreciable or amortizable, the acquiring corporation receives an increased tax deduction because of the higher basis. In a stock purchase, the acquiring corporation usually carries over the historic cost of the assets.

What is the Congressional purpose for allowing tax deferral on transactions that meet the definition of a corporate reorganization?

-Congress allows tax deferral in transactions that meet the definition of a corporate reorganization to allow individuals and entities to restructure their entity holdings without interference by the tax laws. Similar to a §351 transaction, tax deferral in corporate reorganizations is predicated on the transferor receiving a continuing ownership interest in the assets transferred through the receipt of equity in the acquiring corporation.

Explain whether a corporate shareholder recognizes gains and losses on the receipt of distributions of property from the complete liquidation of a subsidiary corporation.

-Corporate shareholders owning 80 percent or more of the stock (voting power and value) of the liquidating corporation do not recognize gain or loss on the receipt of liquidating distributions. This nonrecognition treatment is mandatory, and the tax basis in the property transferred carries from the liquidating corporation to the recipient shareholder. All other corporate shareholders recognize gain, but potentially not all losses, in a complete liquidation.

What type of payments could be treated as a constructive dividend by the IRS?

-End-of-year bonus payment to a shareholder/employee -Rent paid to a shareholder/Lessor -Interest paid to a shareholder/Creditor

What is a carryover basis as it relates to property received by a corporation in a §351 transaction? What is the purpose of attaching a carryover basis to property received in a §351 transaction?

-Under the carryover basis rule, the tax basis of property received by the corporation in a §351 exchange equals the property's tax basis in the transferor's hands (that is, the corporation carries over the shareholder's basis in the property). -The carryover basis rule prevents the recipient of the property from getting a basis equal to fair market value in a nontaxable transaction.

What are the potential U.S. tax benefits from engaging in a §863(b) sale?

In a §863(b) (mixed source) sale, a U.S. person may be able to treat a portion of the gross profit from the sale of inventory manufactured in the United States and sold outside the United States as foreign source. The portion treated as foreign source will be added to the numerator of the foreign tax credit limitation, potentially absorbing any excess foreign tax credits from other transactions.

Corporation Calculation for E&P

Taxable Income +/- Taxable Income/E&P Differences = Current E&P

Describe the priority of the tax treatment of a distribution from a corporation to a shareholder

The distribution is a dividend to the extent of the corporation's earnings and profits, then a return of capital, and finally gain from sale of stock

A calendar-year corporation has positive current E&P of $500 and accumulated negative E&P of $1,200. The corporation makes a $400 distribution to its sole shareholder. Will the distribution be a dividend?

The distribution will be a dividend because current earnings and profits are positive and exceed the distribution

What are the two categories of income that can be taxed by the United States when earned by a nonresident? How does the United States tax each category of income?

U.S. source income earned by a nonresident is classified as either effectively connected income (ECI) or fixed and determinable, annual or periodic income (FDAP). Income that is effectively connected with a U.S. trade or business is subject to net taxation (that is, gross income minus deductions) at the U.S. graduated tax rates. FDAP income, which is generally passive income such as dividends, interest, rents, or royalties, is subject to a withholding tax regime applied to gross income.

How does a residence-based approach to taxing worldwide income differ from a source-based approach to taxing the same income.

Under a residence-based approach, a country taxes the worldwide income of the person earning the income. Under a source-based approach, a country taxes only the income earned within its boundaries.

Describe current earnings and profits

current earning and profits is an ill-defined concept in the internal revenue code and represents a corporation's economic income

How is a stock redemption treated?

as an exchange only if it meets one of three stock ownership tests described in the internal revenue code

Negative Current E&P and Negative Accumulated E&P

None of the distributions are dividends

Positive Current E&P and Positive Accumulated E&P

1. If sum of distributions < sum of E&P, all distributions are dividends 2. If sum of distributions > sum of E&P, allocate the two E&P numbers seperately

Negative Current E&P and Positive Accumulated E&P

Net the two as of distribution date going date by date

What are the Tax Results to the Corporation?

Recognize Gains but not losses Decreasing E&P - Greater of FMV or E&P AB of Asset + Any Liability Relief

Corporations reduce E&P if

a distribution has been made

Why does Congress allow tax deferral on the formation of a corporation?

-To remove tax consequences as an impediment to forming a corporation and to provide taxpayers with flexibility in choosing their preferred form of doing business. -Substance over form argument -You are just changing the form of your investment, not the substance -Maintaining continuity of your investment

What must a shareholder do to waive the family attribution rules in a complete redemption of stock?

A shareholder must file a triple i agreement with the IRS and refrain from having a prohibited interest (shareholder, employee, director, officer, or consultant) for 10 years. The shareholder must agree to notify the IRS district director within 30 days if he or she acquires a prohibited interest within 10 years after the redemption.

What are the key differences in the tax law requirements that apply to forward versus reverse triangular mergers?

-For a forward triangular merger to be effective, the transaction must satisfy the requirements to be a straight Type A merger and the acquisition subsidiary must acquire "substantially all" of target company's "properties" in the exchange. -Three additional requirements must be met to satisfy the requirements in a reverse triangular merger. First, the acquired company must hold "substantially all" of its properties and the properties of the acquisition subsidiary. Second, the acquired company's shareholders must transfer in the exchange an amount of stock in the acquired company that constitutes control of the acquired company (80-percent-or-more of the stock). Finally, the shareholders of the acquired company must receive voting stock of the parent company in return for their stock that constitutes control of the acquired company in the exchange

W Corporation will acquire all of the assets and liabilities of Z Corporation in a Type A merger, after which W Corporation will sell off all of its assets and liabilities and focus solely on Z Corporation's business. Explain whether the transaction will be taxable because W Corporation fails the continuity of business enterprise test.

-For a transaction to qualify as a tax-deferred reorganization, the acquiring corporation must continue the target corporation's historic business or continue to use a significant portion of the target corporation's historic business assets. The continuity of business enterprise (COBE) test does not apply to the historic business or assets of the acquiring corporation; the acquiring corporation can sell off its assets after the reorganization without violating the COBE requirement.

What typer of individuals are considered "family" for purposes of applying the stock attribution rules to a stock redemption?

-Parents, -Grandchildren - Spouse

Why might a corporation prefer to characterize an instrument as debt rather than equity for tax purposes? Are the holders of the instrument indifferent as to its characterization for tax purposes?

-Payments on debt are treated as interest and are tax-deductible by the corporation issuing the debt. Payments on equity are treated as dividends and are not deductible by the corporation issuing the equity. -Holders of the instrument are not indifferent as to its characterization. Dividends receive preferential tax treatment, either a reduced tax rate (individuals) or a dividends received deduction (corporations). Interest is treated as ordinary income and is taxed at the recipient's marginal tax rate.

Under what conditions is it advantageous for a shareholder to hold §1244 stock? Why did Congress bestow these tax benefits on holders of such stock?

-Section 1244 allows a shareholder to treat a loss on the sale or exchange of stock that qualifies as §1244 stock as an ordinary loss. Section 1244 applies only to individual shareholders who are the original recipients of the stock. The maximum amount of loss that can be treated as an ordinary loss under §1244 is $50,000 per year ($100,000 in the case of married, filing jointly shareholders). To qualify for this tax benefit, the corporation from which the stock was received must be a small business corporation when the stock was issued. The Code defines a small business corporation as one in which the aggregate amount of money and other property received in return for the stock or as a contribution to capital did not exceed $1 million. There is an additional requirement that for the five taxable years preceding the year in which the stock was sold, the corporation must have derived more than 50% of its aggregate gross receipts from an active trade or business. -Congress enacted §1244 to provide a tax benefit to entrepreneurs who create a risky start-up company that ultimately fails rather than succeeds.

Why do the shareholders of the target corporation usually prefer to sell the stock of the target corporation to the acquiring corporation?

-Target corporation shareholders usually prefer to sell stock because it results in one level of taxation at the seller's level and any gain recognized on the sale usually qualifies for preferential capital gain treatment if the seller is an individual.

What is the presumption behind the continuity of ownership interest (COI) requirement in a tax-deferred acquisition? How do the target shareholders determine if COI is met in a Type A reorganization?

-Tax deferral in a reorganization is based on the presumption that the shareholders of the acquired corporation retain a continuing ownership (equity) interest in the acquired corporation's assets or historic business through ownership of stock in the acquiring corporation. -According to the regulations, the target shareholders satisfy the COI requirement when they receive, in the aggregate, equity equal to 40 percent or more of the total value of the consideration received.

What are the key differences in the tax law requirements that apply to a Type A stock-for-assets acquisition versus a Type B stock-for-stock acquisition?

-The requirements for a Type A stock-for-assets acquisition are much more flexible than the requirements that apply to a Type B stock-for-stock acquisition. A Type A acquisition allows up to 60 percent of the consideration paid to be in cash or other property, while a Type B acquisition does not allow any cash to be used other than to pay shareholders for fractional shares. Both types of acquisitions require the acquiring company to meet the continuity of business enterprise and business purpose tests.

Compare how a shareholder computes her tax basis in stock received from the acquiring corporation in a straight Type A merger versus a Type B merger.

-The shareholder's tax basis in the stock received in a Type A merger is a substituted basis of the stock transferred plus any gain recognized less boot received. -Similarly, the shareholder's tax basis in the stock received in a Type B acquisition is a substituted basis of the stock transferred. Because of the prohibition of boot in a Type B acquisition, the shareholder in a Type B acquisition will not recognize gain or receive boot.

In a stock acquisition, why is there a difference between the tax basis of assets held by an acquired corporation and the tax basis of the shares held by a corporate acquirer? Why is this difference important?

-The tax basis of the assets and liabilities of the acquired corporation (called "inside tax basis") differs from the acquired shares because the tax basis of the assets are not affected by the acquisition of shares. This inside tax basis is the basis can only be depreciated by the acquired corporation. The buyer's tax basis in the stock of the corporation acquired (called "outside tax basis") cannot be depreciated and is used to determine gain or loss on a subsequent sale of the stock of the acquired corporation. Typically, the acquiring corporation would prefer to have the purchase price reflected in the inside tax basis to claim additional depreciation.

Distinguish between a definitely related deduction and a not definitely related deduction in the allocation and apportionment of deductions to foreign source taxable income.

A definitely related deduction is a deduction that can be directly associated with a particular item of income (for example, machine depreciation with manufacturing gross profit). A deduction not directly associated with a particular item of gross income (for example, medical expenses) is referred to as a not definitely related deduction.

What must a shareholder consider in computing the amount of a noncash distribution to include in her gross income?

A shareholder must determine the fair market value of the distribution and any liability she will assume on receipt of the property. The shareholder's dividend amount is the fair market value of the property received less any liability assumed on the property.

Distinguish between allocation and apportionment in sourcing deductions in computing the foreign tax credit limitation.

Allocation is the qualitative process of associating a deduction with a specific item or items of gross income for purposes of computing foreign source taxable income. Apportionment is the quantitative process of calculating the amount of a deduction that is associated with a specific item or items of gross income for purposes of computing foreign source taxable income.

Why might a shareholder who is also an employee prefer receiving a dividend instead of compensation from a corporation?

An individual might prefer a dividend to compensation because the dividend is eligible for a preferential tax rate

Sam owns 70% of the stock of Club Corporation. Unrelated individuals own the remaining 30%. For a stock redemption of Sam's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Club stock must Sam own after the redemption?

Any percentage less the 50% Under Section 302(b)(2), Sam must own less than the lesser of 1.) 80% x 70%=56% or 2.) 50%

What is the definition of control for purposes of §351? Why does Congress require the shareholders to control a corporation to receive tax deferral?

Control -Ownership of 80-percent-or-more of the corporation's voting stock and 80-percent-or-more of each class of nonvoting stock Congress requires shareholders to own a significant percentage of stock after the transaction to distinguish corporate reorganizations of ownership from a sale of assets to the corporation

What is meant by the term "double taxation of corporate income"

Corporate earnings are first taxed when earned by a C corporation and then are taxed a second time when the earnings are distributed to the shareholders as a dividend.

Describes the concept of the "double taxation" of corporation income?

Corporate income is taxed when earned by a C corporation and then a second time at the shareholder level when distributed as a dividend

How does current earnings and profits differ from accumulated earnings and profits?

Current earnings and profits represents the corporation's earnings and profits of the current year before reduction by any distributions made during the year. Accumulated earnings and profits represents undistributed earnings and profits from all years prior to the current year.

Contrast how a taxpayer's tax basis in property received in a property transaction will be affected if the transaction results in gain exclusion versus gain deferral.

Excluded Gains -The taxpayer's tax basis in the property received will be its fair market value Deferred Gains -The taxpayer's tax basis in the property received will be its fair market value less the gain deferred

Distinguish between exclusion and deferral as it relates to a property transaction.

Excluded Gains -Will never be taxed -Will never be recognized on tax return Deferred Gains -Will be taxed in a later year -Will be recognized on tax return in a later year

True or False. A calendar-year corporation has negative current E&P of $100 and accumulated E&P of $100. A cash distribution of $100 to the corporation's sole shareholder on June 30 will not be treated as a dividend because total E&P at December 31 is $0.

False. A portion of the distribution could be treated as a dividend based on accumulated earnings and profits on June 30. If the current year deficit is earned ratably over the year, accumulated earnings and profits on June 30 would be $50 [$100 - 181/365 x ($100)]. A deficit in current earnings and profits is allocated on a per day basis unless determined by tracing specific items that caused the deficit.

Natasha is not a citizen of the United States, but she spends 200 days per year in the United States on business. She does not have a green card. True or False: Natasha will always be considered a resident of the United States for U.S. tax purposes because of her physical presence in the United States. Explain.

False. Natasha likely will be treated as a resident because she meets the physical presence test (i.e., she is in the United States more than 182 days in the current year) She could qualify for nonresident status if she meets an exception in the Internal Revenue Code (for example, she is a student) or she qualifies for nonresident status under a treaty between the United States and her country of residence

Which members of a family are included in the family attribution rules? Is there any rationale for the family members included in the test?

Family members include spouse, children, parents, and grandchildren. These are the family members that are the most closely related to the shareholder by blood. Family members excluded are grandparents, brothers and sisters, aunts and uncles, and nieces, nephews, and cousins

Henri is a resident of the United States for U.S. tax purposes and earns $10,000 from an investment in a French company. Will Henri be subject to U.S. tax under a residence-based approach to taxation? A source-based approach?

Henri will be subject to U.S. tax on the income under a residence-based approach because he will be taxed on all of his income regardless of source. Henri will not be subject to U.S. tax on the income under a source-based approach because the income is not U.S. source income.

IBM incurs $250 million of research and experimental expenditures (R&E) in the United States. How does the "exclusive apportionment" of this deduction differ depending on the R&E apportionment method chosen in the computation of the foreign tax credit limitation?

IBM can exclusively apportion a percentage of R&E based on where the research is conducted. The amount that can be sourced under this exclusive apportionment option is 50 percent if the sales method is elected and 25 percent if the gross income method is elected. In this case, IBM can exclusively source $125 million as being U.S. source if it chooses to apportion the remaining R&E using the sales method. IBM can source $62.5 million as being U.S. source if it chooses to apportion the remaining R&E using the gross income method.

How to determining if the distribution is a dividend

Identifying if current and accumulated E&P amounts are positive or negative

Exception

If liability relief > FMV of asset, use liability relief as Amount Realized and use liability relief in the rest of the calculations

How does a corporation's computation of earnings and profits differ based on the tax treatment of a stock redemption to the shareholder (that is, as either a dividend or exchange)?

If the redemption is treated as a dividend, the corporation reduces E&P using the dividend reduction rules. If the redemption is treated as an exchange, the corporation reduces E&P at the date of distribution by the percentage of stock redeemed, not to exceed the fair market value of the property distributed. The distributing corporation reduces its E&P by any dividend distributions made during the year before reducing its E&P for redemptions treated as exchanges.

Positive Current E&P and Negative Accumulated E&P

Ignore Accumulated E&P

Briefly describe the two different methods for apportioning interest expense to foreign source taxable income in the computation of the foreign tax credit limitation.

Interest expense is allocated to all gross income based on the assets that generated such income. Interest can be apportioned based on average tax book value or average fair market value for the year.

How does the tax treatment differ in cases where liabilities are assumed with a tax avoidance purpose versus where liabilities assumed exceed basis? When would this distinction cause a difference in the tax consequences of the transactions?

Liabilities Assumed with Tax Avoidance Purposes -The tax law treats all liabilities assumed as boot received by the transferor -The transferor would recognize gain in an amount equal to the lesser of gain realized or the fair market value of the boot received Liabilities Assumed Exceed Basis -Just the excess over basis is treated as boot -The excess is treated as gain recognized by the transferor

Maria is not a citizen of the United States, but she spends 180 days per year in the United States on business-related activities. Under what conditions will Maria be considered a resident of the United States for U.S. tax purposes?

Maria will be considered a resident if she meets one of two tests. Maria will be treated as a resident if she possesses a permanent resident visa (green card) at any time during the calendar year. Maria also will be treated as a resident if she meets the substantial presence test, which will be met if she is physically present in the United States for 31 days or more during the current calendar year, and the number of days of physical presence during the current calendar year plus 1/3 times the number of days of physical presence during the first preceding year plus 1/6 times the number of days of physical presence during the second preceding year equals or exceeds 183. Maria does not meet the substantial presence test if she has not been physically present in the United States during the previous two years. She would, however, be considered a resident if she was in the United States during the current year for at least 183 days.

Maria has all of her stock in Mayan Corporation redeemed. Under what conditions will Maria treat the redemption as an exchange and recognize capital gain or loss?

Maria will treat the stock redemption as an exchange if she does not own any additional stock through attribution that causes her to fail either of the other two stock ownership tests. If she only owns stock constructively through the family attribution rules, she can waive the family attribution rules by filing a triple i agreement with the IRS and avoid acquiring a prohibited interest in the corporation for 10 years

Catamount company had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Caroline West. The land's fair market value was $200,000 and its tax and E&P basis to Catamount was $250,000. The tax basis of the distribution to Catamount in 20X3 would be:

No loss recognized and a reduction in E&P of $250,000

Ilya and Olga are brother and sister. Ilya owns 200 shares of stock in Parker Corporation. Is Olga deemed to own Ilya's 200 shares under the family attribution rules that apply to stock redemptions?

No. A brother and sister are not included under the family attribution rules.

Will the shareholder's tax basis in noncash property received equal the amount she includes in gross income as a dividend? Under what circumstances will the amounts be different, if any?

Not always. Where the shareholder assumes a liability attached to the property, the amount of the dividend income is computed as the property's fair market value less the liability assumed (section 301(b)). The shareholder takes a tax basis in the property equal to its fair market value, not reduced by the liability assumed (section 301(d)).

Substantially Disproportionate

Ownership % after the transaction: 1. < 50% 2. < 80% of the ownership % before the redemption

Briefly describe the two different methods for apportioning research and experimental expenditures (R&E) to foreign source taxable income in the computation of the foreign tax credit limitation.

R&E expenditures can be apportioned between U.S. and foreign source income using either a sales method or a gross income method. Under the sales method, a U.S. company can exclusively apportion 50% of R&E to the place where the R&E is conducted and the remainder is apportioned between U.S. and foreign source income based on the percentage of sales that are U.S. or foreign. Under the gross method, a U.S. company can exclusively apportion 25% of R&E to the place where the R&E is conducted and the remainder is apportioned between U.S. and foreign source income based on the percentage of gross income that are U.S. or foreign.

Discuss the difference between gain realization and gain recognition in a property transaction.

Realized Gain -Occurs when a transaction takes place and the "amount realized" exceeds the taxpayer's tax basis in the property sold or exchanged -Total potential gain you can have Recognized Gain -The recording of the gain realized on a tax return -Taxed this year The two usually happen simultaneously, unless some of it is excluded or deferred

If none of the Tax rules apply

Shareholder has a dividend

What is the primary goal of the United States in negotiating income tax treaties with other countries?

The U.S. government negotiates treaties to promote trade between the United States and a treaty partner. An income tax treaty is a bilateral agreement between the United States and another country in which each country agrees to modify its own tax laws to achieve reciprocal benefits. The general purpose of an income tax treaty is to eliminate or reduce the impact of double taxation on cross-border transactions so that residents paying taxes to one country will not have the full burden of taxes in the other country

Why are the income source rules important to a U.S. nonresident?

The U.S. source-of-income rules are important to a U.S. nonresident because they limit the scope of U.S. taxation to only the nonresident's U.S. source income.

Why does the United States allow U.S. taxpayers to claim a credit against their precredit U.S. tax for foreign income taxes paid?

The United States applies a residual approach to taxing foreign source income earned by U.S. persons. Under this approach, the U.S. government collects the difference between the U.S. tax that would have been paid if the income had been U.S. source and the foreign tax paid on such income. The United States accomplishes this objective by allowing the U.S. person a credit for the foreign taxes paid. By using this method, the U.S. attempts to fully or at least partially mitigate the double taxation of foreign earned income by the U.S. persons

A corporation distributes appreciated noncash property to a shareholder as a dividend. What impact does the distribution have on the corporation's earnings and profits?

The corporation reduces E&P by the lesser of the property's fair market value or E&P adjusted basis, reduced by any liability assumed by the shareholder on the distribution.

Earnings & Profits (E&P)

The corporations ability to pay out profits without returning the shareholders paid in capital

What role does the foreign tax credit limitation play in U.S. tax policy?

The foreign tax credit limitation is designed to limit the credit allowed for foreign income taxes paid to the amount of U.S. income tax that would have been paid on the income if it was earned in the U.S.

Why are the income source rules important to a U.S. citizen or resident?

The income source rules can be important to a U.S. citizen or resident for several reasons: 1) To calculate the numerator in the foreign tax credit limitation calculation (foreign source taxable income), 2) a U.S. citizen or resident employed outside the United States may be eligible to exclude a portion of foreign source earned income from U.S. taxation under §911, and 3) a U.S. citizen or resident who pays U.S.-source FDAP income to a foreign person (for example, interest or dividends) may be required to withhold U.S. taxes on such payments

What are the major U.S. tax issues that apply to an inbound transaction?

The major U.S. tax issues that apply to an inbound transaction involve 1) whether the non- U.S. person has nexus in the United States (is subject to U.S. taxation), 2) whether the income earned by the non-U.S. person is from U.S. sources, 3) the type of U.S. source income earned (income effectively connected with a U.S. trade or business (ECI) or income that is fixed, determinable, annual or periodic (FDAP)), and 4) whether a treaty applies to change the U.S. taxation of the transaction that otherwise would apply.

What are the major U.S. tax issues that apply to an outbound transaction?

The major U.S. tax issues that apply to an outbound transaction involve 1) whether the income earned by the U.S. person is from foreign sources, 2) whether the U.S. person incurs a foreign income tax on the income that is eligible for a credit, 3) the type of foreign source income earned (passive category or general category), and 4) what deductions taken on the U.S. tax return must be allocated and apportioned to foreign source income for foreign tax credit purposes

Why do you think the tax law imposes constructive stock ownership rules on stock redemptions?

The tax law imposes constructive ownership tests to prevent a shareholder from technically disposing of his stock interest while effectively continuing to own stock through family members or through ownership in an entity that nominally owns the stock.

What are the criteria to meet the "not essentially equivalent to a dividend" change-in-stock-ownership test in a stock redemption?

To satisfy the "not essentially equivalent to a dividend" requirement, the IRS or a court must conclude that there has been a "meaningful" reduction in the shareholder's ownership interest in the corporation as a result of the redemption.

Carol receives $500 of dividend income from Microsoft, Inc., a U.S. company. True or False: Absent any treaty provisions, Carol will be subject to U.S. tax on the dividend regardless of whether she is a resident or nonresident. Explain

True. Carol will be taxed on all of her income if she is a U.S. resident. If she is a nonresident, she will be taxed only on her U.S. source income. Because Microsoft, Inc. is a U.S. corporation, the dividend will be treated as U.S. source income and will be subject to (withholding) tax.

True or False: A taxpayer will always prefer deducting an expense against U.S. source income and not foreign source income when filing a tax return in the United States. Explain.

True. The deduction reduces taxable income in either case. By apportioning the expense to U.S. source income, the taxpayer maximizes the numerator of the foreign tax credit limitation and, by so doing, maximizes the foreign tax credit.

Explain whether a corporation's assumption of shareholder liabilities will always constitute boot in a §351 transaction.

Under the general rule, the corporation's assumption of a shareholder's liability attached to property transferred (for example, a mortgage attached to the building and land) is not treated as boot received by the shareholder. Congress created two exceptions in which liability assumption by the corporation is treated as boot. 1.) Tax Avoidance Transactions: Under the first exception, if any of the liabilities assumed by the corporation are assumed with the purpose of avoiding the federal income tax or if there is no corporate business purpose for the assumption, all of the liabilities assumed are treated as boot to the shareholder. 2.) Liabilities in Excess of Basis: Under the second exception, if a shareholder's liabilities assumed are in excess of the aggregate tax basis of the properties transferred by the shareholder, gain is recognized to the extent of the excess. Liabilities, the payment of which would give rise to a deduction, are not treated as liabilities in making this determination.

What is a substituted basis as it relates to stock received in exchange for property in a §351 transaction? What is the purpose of attaching a substituted basis to stock received in a §351 transaction?

Under the substituted basis rule, the stock received in a §351 transfer equals the tax basis of the property transferred to the corporation. The formula to compute the stock's substituted basis is (see Exhibit 19-4): + Cash contributed + Tax basis of other property contributed - Liabilities assumed by the corporation on prop contributed = Substituted tax basis of stock received The substituted basis rule preserves the gain or loss deferred in the transfer. If the shareholder sells the stock received at fair market value in a taxable transaction, the gain or loss recognized will equal the gain or loss deferred.

A calendar-year corporation has negative current E&P of $500 and accumulated positive E&P of $1,000. The corporation makes a $600 distribution to its sole shareholder. Will the distribution be a dividend?

Up to $600 of the distribution could be a dividend depending on the balance in accumulated earnings and profits on the date of the distribution