Advanced Tax

482 Coco car example

Auto maker is parent company in Japan HQ with subsidiary in US, then US sells car to end user. Car sold for 29,000 to subsidiary. Sub sells it to end user for 30,000. You only tax the sub bc it is in US, so US captures income of 1,000. IRS will step in and say they are related parties so the transfer price of 29,000 does not reflect economic reality and is not an arm's length transaction (people you don't know). Under 482, IRS says fair price is 25,000 is transfer price that should've been used, so profit is 5,000 captured in US to pay tax on.

Foregin investment in real property tax act (2)

Gains and losses realized by NRAs and foreign corporations on dispositions of U.S. real property interests are treated as effectively connected income. U.S. real property interest (USRPI) is any direct interest in real property situated in the United States and any interest in a domestic corporation.

Advisory Committees

IRS director of office of professional responsibility may establish these composed of 5 individuals authorized to practice before IRS; should balance attorneys, accountants, enrolled agents and they may make recommendations regarding professional standards

Statutes of limitations and 2 exceptions

IRS has 3 years from later of your filing date/date tax was due to initiate audit 1.. when no return or a fraudulent return is filed, or one isn't signed, statute never beings to run 2. substantial omission of GI (more than 25%) it is increased to 6 years

Preparer penalties 3 specific ones

IRS imposes additional sanctions to encourage ethical behavior by tax practitioners on those who prepare substantial portion of tax form for compensation 1. unreasonable position on return causing understatement (falsely tell them to take deduction) 2. willful and reckless conduct including an intentional disregard for IRS rules or regs 3. failure to sing a return, furnish your identifying number, copy of return to TP, or endorse or negotiate their refund check

Offer in compromise 3 appropriate situations What does IRS encourage doing Closing agreements

TP likely doesn't have the money to pay full deficiency, so instead of having open case forever, you negotiate an amount to settle at (can't pay 200,000 interest and offer to lessen it to 150k or something 1. doubt as to TP's liability 2. collectibility of full tax is questionable 3. disputed tax amount would cause economic hardship for TP installment payments for delinquent taxes; ask employer to withhold more than usual to send to them directly binding on both IRS and TP to get water under the bridge; common with sizable estates/large corporation liquidations

Unitary theory method Benefit What must states do

a corporation is required to file a combined return that includes the results from all operations of its related corporations, not just those in their parent's state a state can apply the apportionment formula to a firm's nationwide or worldwide unitary income determine if the subsidiaries' activities are an integral part of a unitary business and should be subject to apportionment

Night, Inc., a domestic corporation, earned $300,000 from foreign manufacturing activities on which it paid $36,000 of foreign income taxes. Night's foreign sales income is taxed at a 50% foreign tax rate. What amount of foreign sales income can Night earn without generating any excess FTCs for the current year? Assume a 21% U.S. tax rate.

foreign sales income and manufacturing fall into same FTC limitation basket. The $300,000 is taxed at effective rate of only 12%, this generates a $27,000 excess limit b/c $300,000/21% = $63,000. the foreign tax rate of 50% is 29% higher than the US rate, so 27,000/.29 = 93,103

What is a tax-exempt organization

generally not subject to FIT due to social consideration objective of the tax law, but there are exceptions where some areas of them are subject to taxation 1. tax on excess lobbying expenditures 2. tax on feeder organizations 3. excise tax on private foundations 4. tax on unrelated business income

Section 482 482 is based on what Potential abuse using US and Ireland

gives IRS broad powers to reallocate income and deductions among organizations who are controlled to more accurately reflect economic reality/prevent tax evasion arm's length/fair value pricing US parent company and Irish sub; US borrows 100 mil from Ireland with 10% interest and can take 21% deduction while Ireland taxed on only 10%; would be disallowed for arm's length

Page 23-19: how to determine UBIT you will have to pay

gross receipts - income related to business/purpose = net unrelated business income +- modifications - 1000 standard deduction = UBTI

Use tax How many states have sales tax

if you buy something in DE where there's no sales tax and bring it back to PA to use, you must pay the 6% PA sales tax as use tax; also applies to property 45 and DC

South Dakota v. Wayfair Other states Specific service transactions

if you have more than 200 transactions or collect more than 100,000 in a state, you must collect and remit sales taxes regardless of physical presence separate nexus rules apply some states added some to sales/use tax base; most commonly involving hotels, restaurants, salons, entertainment, etc.

2017 tax reform provisions goals 3 changes

increase competitiveness of US businesses that operate in multiple countries and encounter territorial taxing systems and low income tax rates 1. move toward territorial system for US businesses 2. provide incentives for US businesses to locate jobs in US and repatriate foreign profits back here (taxed much less here) 3. prevent US entities from shifting taxable income outside US into low tax countries (Ireland 10% compared to our 21)

9 circular 230 restrictions (first 3)

info: if IRS asks for documentation relevant to matter, you must provide it prompt disposition: don't unreasonable delay any matter can't accept help from or assist any person under disbarment/suspension from practice

Statement 4

it is appropriate to rely on client estimates when it is impractical to obtain exact data; don't need to disclose to IRS either ex: client didn't keep thorough documentation so estimate used (mileage when it's not your regular commute) can't present estimates that make it look like exact data (how much you gave to church without documentation)

Main difference between letter rulings and revenue rulings (2)

letter apply only to TP who requested ruling so not authoritative to others, while revenue apply to all TP public if letter rulings are deemed to be of significant applicability, they can be published later as revenue rulings

Intangible income Purpose

lower tax rate of about 13% applies to income from intangible assets that US entity employs oversees encourage US corps to conduct international business that leverages US expertise in profitable operations around the world

Limited scope opinions

may consider less than all the significant federal tax issues if 1. practitioner and TP agree that scope of opinion and reliance on it are limited to issues addressed in opinion 2. does not address listed transactions, tax shelters, or marketed opinions 3. discloses that it is limited in nature and other issues could exist

Apportionment Allocation Business income Non-business income

means by which corporation's business income is divided among states with nexus; if you do business in 4 states, they can't cumulatively tax 100% of your earnings or you'd lose money non business income method where specific components of corp's income are directly assigned to certain state; from normal operations (ordinary and necessary expenses too sale of an asset not used ordinarily (truck in pizza business); sell HQ in PA to move to NY and gain is NBI that is allocated to PA

What does the appeals division have

more flexibility than agent in settling tax disputes; they can assess the hazards of litigation

Taxation of S corps S corp return Chapter 24-4 example

most states have favorable tax treatment (no corporate tax) but a few including NYC, Tennessee, and DC fail to provide federal-like pass through treatment for tax purposes (taxed as C corp) composite allowed by some states: instead of each shareholder paying amounts to all states they do business in, you can do it once through this return

How to satisfy broad public support criterion

must satisfy both external and internal support tests

AICPA statement 2 3 reasonable grounds for admission

need to make reasonable effort to provide appropriate answers to ALL questions on a tax return where you don't really need to answer 1. answer not easily attainable/insignificant 2. uncertainty: in good faith don't know answer through research 3. voluminous answer: could answer it but would need like 50 pages to answer easy question

Common exemptions/exclusions of sales tax that many states have (5); probably don't need to know this but just in case

a. Sales for resale are exempt because the purchaser is not the ultimate user of the sold property. b. Casual or occasional sales that occur infrequently are exempt from the sales/use tax base chiefly for administrative convenience. c. Most purchases by exempt organizations are excluded from taxable sales. d. Sales of necessities such as groceries and medical prescriptions and equipment. e. Sales of targeted items can be exempt to improve the equity of the sales/use tax system or support particular industries.

Additional tax base for erosion When does it kick in Put trademark on a subsidiary in Ireland, and they license with US parent to use it. US parent pays them 10M licensing fee. Section 59A SEE 25-3D

anti-abuse provision that applies to foreign and US corporations with average sales of $500M+ for 3 tax years when they have excessive deductible royalties, mgmt fees, similar payments made to non US person base erosion items total 3% of total deductible payments for the year, they pay corporate income tax drawing money out of US into another country; anti-abuse minimum tax to keep TP from unduly reducing US taxable income to 0 by shifting deductions with related party

Covered opinion Arises from (3)

any written or electronic advice by a practitioner concerning one or more federal tax issues; if you fall under any of these, you must take position that is more likely than not true and subject to several provisions 1. tax shelter: usually done through partnership you set up due to favorable tax treatment 2. listed transaction: IRS has list of transactions where it is treated like tax shelter if you do it 3. entity formed for significant purpose of tax avoidance or evasion

2 effectively connected tests

asset-use test: asset generating income held in US or not business-activities test: trade or business activities are material factor in production of income

Are corporate sponsorship payments included in unrelated income

no if T or B making payments will not receive substantial benefit other than use of name/logo/product line use or acknowledgement does not include advertising payor's product/services payments do not include any payment where amount is contingent upon level of attendance, ratings, or other factors

Internal support test Intent of these 2 tests Examples of those who meet broad public support EXAMPLE OF BOTH ON 23-4A

no more than 1/3 of entity's support can come from gross investment income (interest, dividends, rent, royalty) or unrealted business taxable income minus related tax exclude from private status those 501c3 who are responsive to general public rather than to private interests of select few girl scouts, university alumni associations, PTA

Accident mistake penalties What if you didn't care or intentionally did something wrong

no serious penalties censure or disbarred

Do all exempt orgs need IRS approval of exempt status What must most exempt orgs file Who doesn't have to (4) What is on this form

no: those under 501c3, 501c9, and 501c20 have to but it does not apply to churches annual information return using form 990 that is publicly available federal agencies, churches, private foundations (990-PF), orgs with annual gross receipts less than 25,000 assets, liabilities, extensive information/disclosures about executives and other information

Privileged communications

non-attorneys have limited privilege of confidentiality with respect to tax preparation and advice; does not apply to criminal proceedings or tax shelters

Foreign corporation definition Taxation difference of effectively and not effectively connected

not domestic not: taxed similar to NRA at flat 30% effectively: of foreigns conducting t/b in US subject to say FIT as domestic corps

Taxing of nonresident aliens and foreign corps What is a NRA Taxing of NRA not engaged in US t/b (French citizen living in France with US source income)

only to extent of US source income and foreign income effectively connected with conduct of US trade/business not a citizen or resident of US taxed on 30% flat rate on US source GROSS income with no deductions allowed (mostly investment income is all they can do); 30% is withheld and no return must be filed

Unitary business Gist

operates as a unit and cannot be segregated into independently operating divisions; operations of each division depends on or contributes to the operation of the whole business unitary theory ignores existence of separate entities/subsidiaries and instead treats them all as one business for state income tax purposes

Types of covered opinions and what is it essentially

opinion that is written that goes along with tax shelter; client needs CPA to write this to explain tax treatment of entity reliance: can be relied upon by TP marketed: will be marketed with the sale of the partnership

2 types of cross-border transactions U.S. tax provisions

outbound: US taxing US taxpayers earnings from foreign sources inbound: US taxing foreign taxpayers for US source income

Beaver, Inc., an exempt organization, leases land and a building (realty) and computers (personalty) housed in the building. Under the lease, $46,000 of the rent is for the land and building and $4,000 is for the computers. Expenses incurred for the land and building are $10,000

personal rent income = 4,000 which is less than 10% which is 5,000 net rent income from real property = 46,000-10,000 = 36,000 this and the 4,000 are negative adjustments to UBTI

Taxation of partnerships

same rule as for s corps above, while some states require estimated payments for out-of-state partners a few apply entity-level income tax where you'd have to file composite return

White is exempt org that leases office building to another place that has nothing to do with exempt purpose. They get 120k per year. How much tax do you pay

average acquisition indebtedness beg and end of year/average AB of property = debt percentage {AB = cost less dep.} that is subject to tax then subtract deductions related to this (expenses * debt percentage) is the income you pay tax on average AI = average amount of outstanding debt for taxable year without interest; sum outstanding debt on first day of each calendar month then divide by # of months

Requirements for written advice (5)

can't give written federal tax advice if 1. you base advice on unreasonable factual assumptions 2. unreasonably relies on statements of others 3. does not consider all relevant facts practitioner should know 4. uses or encourages playing tax lottery 5. tax shelter

2 types of unpublished IRS rulings

determination letters: tax exempt status, employment status, qualification of pension plans technical advice memoranda: arise from audits when you want legal counsel for advice on rectifying specific issue; not binding but logical persuasion)

First 2 steps in apportioning income and deductions Internationally

determine foreign and US source income and overall expenses; then must figure out how to allocate those expenses to each directly related expenses first allocated (rent building in Japan that has nothing to do with US operations goes to Japan; worker only in one country goes to that country)

Consequences of gaining exempt status Postage rates Property donors to exempt orgs NFL example

don't pay FIT, state income tax, franchise tax, sales tax, or property tax exempt org may receive discount on these rates may qualify for charitable contribution deductions on FIT and SIT forms not all exempt orgs are qualified charitable contribution recipients, so they pay tax on contributions received which led them to give up exempt status so executive compensation like Goodell isn't publicly available

Who is not subject to taxpayer preparer penalties specifically Amount of penalties for paying and filing late Penalties for filing on time but not paying balance

employees who prepare for employers, those doing reproduction/typing services, volunteers done not for compensation 5% per month (partial counts as full) with 215 minimum and 25% max (5 months); fraud penalties are tripled failure to pay .5% of tax due per month, with max of 25%

Intermediate sanctions that IRS can impose if prohibited transactions are made Examples (2) and amount of tax

excise tax imposed on anyone with substantial influence in org who engages in excess benefit transactions 1. transaction where disqualified person engages in non FMV transaction with exempt org 2. disqualified person receives unreasonable compensation from exempt org the penalty on disqualified person is 25% of excess benefit or 10% on management

What is the starting point for computing state income tax base for corporation Tax rates are mostly... Most states... See exhibit 24.1 in text for formula used for multistate corporation tax liability

federal taxable income, however many different methods are used to determine state TI and tax rates with different additions and deductions relatively flat instead of progressive; similar to corporate tax rate piggyback onto IRS audit process

Form 990-T

file if you have unrelated business income because T means taxable unless GI from unrelated is less than 1,000 DeSales never files 990T even though there is endowment with funds unrelated but use them for the org purpose so they only do 990

Controlled foreign corporation (CFC) Subpart F of IRC Subpart F income

foreign corporation where more than 50% of stock/voting power is owned by US shareholders on any day during taxable year certain types of income generated by controlled foreign corps (CFCs) are included in current year GI by US shareholders essentially all forms of passive income; treated as flow through income to US taxpayer

PA operating corp has $100 million taxable income, with 6% tax rate. You create another entity called DE holding company that has no operations. It holds trademark of McDonald's golden arch. PA makes payment of $100 million/year to Delaware holding company for use of TM. What is the difference if PA is unitary or separate return state.

separate return state: PA state income is 0; DE's is 100M but state tax rate is 0 so you save $6 million in tax in arm length transaction unitary: PA has nexus so the 100M is brought in and cannot be abused

Serving common good definition

serving the general public or large subgroup thereof (broad def); DeSales serves those interested in education which is big, Red Cross serves a ton too, Jimmy V foundation for cancer research only specific groups (narrow)

Foreign corporations can be created to Response

shelter income from US taxation to prevent tax avoidance, tax law extends wordlwide approach to some of this income by treating it on a pass-through basis that triggers immediate US taxation even though foreign corp is used

What if it's a unitary return state

since PA has nexus in example above, any of related entities have nexus in combined return so DE amount would be brought in

US model income tax convention Sourcing of income depends on

starting point for negotiating treaties and what US wants countries to adopt primarily the classification of that income

The sales factor Ultimate destination concept Sales to US government Throwback rule

take business income in state you're looking at / total sales to find % applies to sales factor: sales assumed to take place at point of delivery, not shipment assigned to the sales factor numerator of state from which sale occurs since federal is everywhere if sale is not subject to tax in destination state, sale is assigned to origination state (in PA and make sale to Delaware who doesn't have corporate state tax, goes to PA numerator)

Rent and royalty income sources Foreign-source income def

tangible property sourced by physical location; intangible where property is used not U.S. source

Effective tax rate Process for doing problems on apportionment Difference if there is double weighting for sales

tax paid / total income find 3 factors for each state add up the cumulative % for all 3 divide by 3 that % of income is apportioned to each state, then multiply that by the state income tax rate to find liability when you find sales factor, multiply by 2 then when you sum factors, divide by 4

Next 2 steps in apportioning

those expenses that are overhead and relate to company everywhere (CEO salary, IT, finance) apportioned on reasonable basis; one kind of reasonable basis is revenue (if revenue equal foreign and US, split CEO salary equally to each) last step is deduction not directly related anywhere are allocated to all classes

Who is most likely to be audited Other things that affect who is audited (4)

those who make more; odds are very very low until you're making more than $200,000 per year; IRS audits only about .8% per year nature of business: schedule C has high chance of abuse with understatement of income and overstatement of expenses if IRS has been successful on past audits IRS targeting special industries or market segments certain types of deductions or outlier/beyond the norms deductions (they have guidelines about reasonable amounts for each type like charity)

Statement 5

took position you just lost on administrative appeal knowing that you had reasonable possibility/substantial authority in the past

______ has delegated administration and enforcement of the tax law to _____ 3 IRS functions One way IRS gives information to TPs Hierarchy of tax law

treasury (in charge of revenue collection) delegated to IRS (subsidiary of treasury) enforces revenue laws of federal government educates TPS as to operation of tax law collects current and delinquent taxes as authorized letter rulings: provides guidance on particular issues highest is IRC where it is binding on all, then regulations that are formal interpretations, then less formal letter rulings and revenue rulings, then court cases

Sanctions

treasury can suspend, censure (public reprimand), or disbar any practitioner if they are incompetent, fails to comply with circular 230, or misleads with intent to defraud a client

Tax professionals governed by what? (2)

treasury circular 230: rules of IRS for those practice for IRS (applies to everyone) AICPA standards for tax services that only apply to CPAs in practice

US taxation of cross border transactions depends on what Treaties are what What overrules what US has treaties with how many countries Treaties provide what

treaty agreements and IRC bilateral agreements between countries that provide tax relief for those covered by them treaties generally overrule US or foreign tax law/statutes 70 taxing rights for TI for residents who earn income in other country

Interest paid on what The IRS has a comprehensive array of penalties at its disposal to use as inducements to voluntarily comply with the tax laws. These penalties cannot be deducted as an expense by the taxpayer. Be familiar with some penalties for HW (page 26-16: failure to file, failure to pay, accuracy, related, negligence, etc.)

under/overpayments at market rates compounded daily using published IRS rates set by congress

Acquisition indebtedness

unpaid amounts for debt-financed property including debt incurred to acquire or improve it, or incurred prior to or after acquisition/improvement which wouldn't have been incurred without it

UBIT Applies to; exception

unrelated business income tax; charity like wounded warrior project isn't subject to tax but they entered into a sale during lent to sell food and are successful and open stores; subject to corporate income tax state colleges and all exempt orgs under 501c except federal agencies; materiality exception: doesn't apply if unrelated income is less than 1,000

Statement 7

use judgement to ensure that advice reflects professional competence and appropriately serves their needs consider consequences of taking a position, make sure you tell them and ensure it serves their needs

We own a CFC with $10 million interest income. US shareholders own 60%.

we deem that distribution was made even though it wasn't. $6 million flows through to US

Low cost article rule

when a donor receives a product like a briefcase in exchange for a gift to charity, it appears that a sale occurred which is UBI if the items are under 11.10 in 2019 it is exempt from UBI; if more than one item is distributed you combine costs

When are letter rulings particularly significant How is it used on occasion Considered by Coco to be...

when large tax liability is involved: big corporations with major issues vs. $1,000 personal one (letter ruling protects you) find out the flaws of a proposed transaction and fix it to get the result you want an insurance policy that can be relied upon/protect you

Congress believes what about territorial systems Legacy law 2018 changes purpose and 2 changes

will increase competitveness of US businesses in global marketplace, so they've taken steps to adopt some territorial aspects defer until repatriation strategy by US Tps c corps allowed limited version of territorial taxation while being encouraged to repatriate any profits accumulated from past DRD of 100% is allowed for payments paid to US parent C corp from E&P of non US subsidiary owning 10% DRD allowed even if foreign affiliate is not a CFC of US parent

Reliance opinion Exclusion

written advice concluding at a confidence level of at least more likely than not (over 50%) that significant tax issue would be resolved in TP favor and avoid penalties (if you have reasonable authority as tax shelter you are hit with penalty) does not include written advice not about listed transactions, or any partnership or any other entity, plan, arrangement whose principal purpose is tax avoidance usually given to individual TP

Foreign currency transaction example How are gains/losses treated Important foreign exchange rate tax issues (3)

you enter into contract with European supplier and agree to pay 100 Euros (equals $120); a month later when contract finalized the exchange rate is now $110; you have gain that goes on tax return and this must be constantly tracked but gain/loss recognized only when transaction closed non-operating: separately from underlying transaction and treated as property other than money date of recognition of g/l, source foreign or US of g/l, character of g/l

Difference between income tax and other forms IRS main administrative power Their burden of proof (2) to establish tax deficiency during litigation (must get this and then show incorrectness) Another contingent power

you fill out form telling IRS what you owe; they don't tell you audit: determine amount of tax due is correct taxpayer complied with record-keeping and substantiation requirements TP cooperated with IRS regarding reasonable requests for info to assess deficiency and demand payment for tax if discovering a mistake

Playing the audit lottery

you know you have very little chance of being right, but do it anyway because you know you have a 1% chance of being audited; prohibited

The hazards of litigation

you tell client the expense they take will likely hold up in court 55% so you take it and agent comes after you you go to appeals division and they can compromise: they collect less than you would owe if it didn't hold up in court; many take it

Taxes levied on private foundations (6)

· Based on investment income (§ 4940). · Self-dealing (§ 4941). · Failure to distribute income (§ 4942). · Excess business holdings (§ 4943). · Investments that jeopardize charitable purposes (§ 4944). · Taxable expenditures (§ 4945).

4 requirements to be considered charity/exempt

.1. org serves some type of common good 2. not a fort profit entity 3. net earnings do not benefit org members 4. does not exert organized political influence

Lantern Company, a domestic corporation, purchases merchandise for resale from Light Bulb Company, a non-U.S. corporation, for 48,000 euros. On the date of the purchase, the exchange rate is 1€:$1. On the date of payment by Lantern, the exchange rate is 1.30€:$1. What is the amount of the foreign currency gain or loss recognized by Lantern on (1) the date of the purchase, and (2) on the date of the payment.

1. There is no foreign currency gain or loss on the date of purchase since the exchange rate is 1€:$1. 2. On the date of the payment, the foreign currency has been devalued in relation to the U.S. dollar. Lantern will pay Light Bulb 48,000 euros, which will cost Lantern only $36,923 (48,000€ ÷ 1.30). On the date of payment, there will be a foreign currency gain of $11,077 ($48,000 − $36,923).

Exceptions to debt-financed clasification (5)

1. at least 85% is used for achievement or exempt purpose; only % that doesn't meet is classified 2. GI otherwise treated as unrelated 3. GI is from research performed for US or agency, college, or org that performs for public interest 4. used in T or B that is not unrelated (all work by volunteers) 5. land that is acquired for prospective exempt use

Positive UBTI modifications that are added (2)

1. charitable contributions in excess of 10% of UBTI (100k income, 13,000 cont. = 3,000 addition) 2. unrelated debt financed income net of unrelated debt financed deductions

Organizations that can't be classified as private (4)

1. churches, educational, hospitals, medical research, other charities receiving major portion of support from general public, U.S., a state, or political division that is operated as benefit of college or government unit 2. broadly supported by general public, government units, or organizations above 3. organized and operated exclusively for benefit of orgs described above 4. organized/operated exclusively for testing public safety

Best practices for tax advisors restrictions (4 recommendations)

1. communicating with client about terms of engagement: expectations, time, how you're going to do it 2. establishing facts and arriving at conclusion supported by law and facts (don't assume facts are true) 3. advising client about importance of conclusions reached (like they have high likelihood of being audited) 4. making sure all associates of firm follow above procedures

2 adverse effects of being private foundation

1. contributions received not as favorable 2. may be subject to federal taxation

3 issues with respect to tax gap

1. how do wee reduce it? hire more personnel and what items should they examine? 2. how large can IRS become without Big Brother atmosphere and abuse of confidentiality 3. why should government not attempt to close it and eliminate annual budget deficit?

Negative UBTI modifications (4) See 23-5B

1. income from dividends, interest, annuities net of related deductions 2. royalty income, gross income, taxable income from property net of related decutions 3. rent income from real property and personal property associated with it; personal rent income can't exceed 10% of gross income 4. gins and losses from sale of property except inventory (recognized gain on sale of asset)

Consequences of engaging in prohibited transactions (3)

1. income may be subject to FIT 2. org may lose exempt status 3. intermediate sanctions imposed on insiders of the org must continue to meet the initial requirements discussed above at all times

4 conditions; if any is met it is not considered UBIT

1. individuals performing substantial work do so without compensation 2. T or B consists of merch sales and substantially most is received as gifts/contributions 3. T or B conducted primarily for convenience of org members (DSU selling books/shirts for convenience of students) 4. employee unions T or B consists of selling to association members at usual employment place vending machines, snack bars, bingo, etc.

3 effects of unitary theory tax-wise (see 24-3b)

1. larger portion of a corporation's income is taxable in states where compensation, 2. favorable when unprofitable affiliates' losses may be offset against profitable affiliate gains where there are large differences in marginal tax rates among nexus states 3. takes away abuse of separate state theory where income could be shifted to avoid or minimize state taxes concept summary 24.3 in text

External support test (2)

1. more than 1/3 of entity's support each year must come from general public, government, or charitable orgs through contributions, membership, grants, gross receipts from admission, merch, services, that isn't unrelated 2. amounts from disqualified people don't count: officers, directors, trustees of exempt org and their family, entities affiliated with disqualifieds; however, any person or agency in giving more than 5,000 or 1% of support is not counted

Rules when IRS assesses a deficiency (2) Lien

1. no collection effort may be made until 90 days after a statutory notice of deficiency 2. after assessment of tax, IRS issues notice and demand for payment (30 day letter) if 90 days passes without payment or resolution IRS can place this on all of TP property if TP refuses to pay tax after receiving these

What must be present for UBIT to apply (3)

1. org must conduct T or B: anything for production of income through sales/services 2. T or B not substantially related to org's purpose: selling food as Wounded Warrior project not related unless they are employed and proceeds used to rehabilitate them; DSU selling books/shirts is okay too 3. T or B regularly carried on; not one off sale

Solicitation restrictions (3)

1. practitioner can't use false or misleading advertising (accounting firm saying you can save pennies on a dollar with IRS or you were former IRS agent) 2. must keep for 36 months copy of communication you're using to advertise 3. written fee schedule: if you publish this, you can't charge more than it for 30 day period after last publishment

9 requirements for covered opinion (first 5)

1. reach overall conclusion as to likelhiood of treatment and provide reasons or state you can't reason conclusion 2. must consider and identify in separate section all relevant facts 3. opinion can't be based on unreasonable factual assumptions 4. must relate applicable law to facts 5. must set forth likelihood that TP prevails on each tax issue

3 mechanical requirements with audits Do you have to pay if IRS agent disagrees with you?

1. revenue agents report (RAR) and 30 day letter 2. Form 870: waiver of restrictions on assessment and deficiency collection 3. 90 day letter no, you can appeal

Excluded advice: covered item does not include... (5)

1. written advice that practitioner is expected to provide later satisfies 230s standards for giving advice 2. written advice not about listed transactions or tax shelters 3. written advice for use solely by TP, but only if advice provided after return filed 4. written advice from employee to employer if solely to determine tax liability 5. written advice that does not resolve tax issue in TP favor or favorable resolves the issue at any confidence level

Starting point in computing state R taxable income is federal TI after special deductions. Statutes of R provides that interest on all state and local is included in income, and a deduction is permitted for Federal income tax that is accrued or paid. Sales 2.2M Interest on Federal 100k; Interest on state/muni 200k Refund of state income tax 100k; Div received from 50% owned 100k Expenses related to federal obligations 8k Expenses related to state/muni 12,000 State inc tax exp 200,000 Dep allowed for federal tax purpose 480k (500k allowed for state) Other allowable deductions 1,000,000 Determine Fed taxable income

2,200,000 + 100,000 fed + 100,000 refund + 100,000 divs = 2,500,000 expenses = 8,000 + 200,000 + 480,000+1,000,000 = 1,688,000 2,500,000-1,688,000 = 812,000 812,000 - (.65 * 100,000 DRD) = 747,000

Penalty at stake for taking position with 15% chance of winning 45% chance of winning

20 % times deduction amount * 21% tax rate have realistic possibility and substantial authority, so 0

Political influence requirement Exemption Supporting/opposing candidates example

501c3 organizations are prohibited to influence legislation (lobbying) or participate in political campaigns if it directly affects org, it is a limited situation where you can try to influence (Obamacare doesn't align with DSU mission and some sue to have it not apply) can't do either one; DSU employees lobbied for candidates using their DSU email which could jeopardize 501c3 status

Example of feeder org

501c3 who provides lodging services for abused women and also own ice cream chain charity not taxable on contributions made, but ice cream that "feeds" it is subject to taxation (look in book if confused)

More requirements for covered opinions (3)

6. if an opinion does not reach more likely than not, then must disclose this and TP can't use opinion for purposes of avoiding penalties 7. tax lottery prohibited 8. marketed opinions conclusion must be more likely than not for each issue or can't issue that opinion

Starting point in computing state R taxable income is federal TI after special deductions. Statutes of R provides that interest on all state and local is included in income, and a deduction is permitted for Federal income tax that is accrued or paid. Sales 2.2M Interest on Federal 100k; Interest on state/muni 200k Refund of state income tax 100k; Div received from 50% owned 100k Expenses related to federal obligations 8k Expenses related to state/muni 12,000 State inc tax exp 200,000 Dep allowed for federal tax purpose 480k (500k allowed for state) Other allowable deductions 1,000,000 Determine R taxable income

747,000 + 200,000 interest on state/muni + 200,000 state income tax expense + 8,000 - 12,000 - 156,870 - 100,00- refund of state income tax - 20,000 excess depreciation - 100,000 interest on federal = 766,130 taxable for R

Use Exhibit 24.1 to compute Balboa Corporation's State F taxable income for the year. Addition modifications $29,000 Allocated income (total)25,000 Allocated income (State F)3,000 Allocated income (State G)22,000 Apportionment percentage40% Credits800 Federal taxable income90,000 Subtraction modifications 15,000 Tax rate 5%

90,000 + 29,000 - 15,000 = 104,000 104,000 - 25,000 = 79,000 apportion income 79,000 * .4 = 31,600 + 3,000 allocated = 34,600 34,600 * .05 = $1,730 1,730 - 800 = 930

Restructuring corporate entities

An optimal mix of entities often generates the lowest combined state income tax for the corporation. The goal of designing a good corporate combination often is to situate the highly profitable entities in states that impose a low (or no) income tax.

Martinho is a citizen of Brazil and lives there year-round. He has invested in a plot of Illinois farmland with a tax basis to him of $1 million. Martinho has no other business or investment activities in the United States. He is not subject to the alternative minimum tax. a. Upon sale of the land for $1.5 million to Emma, an Illinois individual, what are the Federal income tax consequences to Martinho? b. What are the Federal income tax withholding requirements with respect to Martinho's sale? Who pays the withheld amount to the U.S. Treasury?

$500,000 taxed at individual rate, not capital gain rate Emma must withhold and remit 10% amount realized which is 150,000 according to FIRPTA

2 levels of tax levied on private

(1) Initial taxes. Imposed on prohibited transactions (except tax on investment income). (2) Additional taxes. Imposed only if prohibited transactions are not corrected within the statutory time period.

Statement 6

CPA should advise client upon learnings of error in previous return or failure to file return ex: you fill someone's out for first time and look at previous year and find error, must tell them that they have to amend the return if client doesn't take action, you can't report them or file out their return but you should consider withdrawing from the engagement (if it's material, if not, don't have to/if you think they're ethical or not)

Who is qualified to practice before the IRS TP representation Who may represent entities

CPAs, attorneys, and enrolled agents (EAs) represent yourself or represented by immediate family members employees, officers, owners, tax return preparer for year in question

Potential preparer penalties: Suggested to the client various means by which to generate excludible income. Suggested to the client various means by which to conceal cash receipts from gross income. Suggested to the client means by which to improve her cash flow by delaying for six months or more the deposit of the employees' share of Federal employment taxes. Failed, because of pressing time conflicts, to conduct the usual review of the client's tax return. The IRS later discovered that the return included fraudulent data. Failed, because of pressing time conflicts, to conduct the usual review of the client's tax return. The IRS later discovered a math error in the computation of the personal exemption.

None criminal penalty under section 7201, civil penalty under 6701 (see ch. 26 solutions #39) section 6694 conduct respect to income, 6701 aiding and abetting understatement of liability, 7206 preparing return with material matter of violation known or should have known about position without substantial authority 6694 not likely penalty

Indicate for each transaction whether a sales (S) or use (U) tax applies or whether the transaction is nontaxable (N). Assume that the most common definitional rules apply in both states. All taxpayers are individuals. A resident of State A purchases an automobile in A. A resident of State A purchases groceries in A. A resident of State B purchases an automobile in A. A charity purchases office supplies in A. An A resident purchases in B an item that will be in the inventory of her business.

S N or S U N N under resale rule

Section 877 If you're a US citizen and want to give that up to not pay tax to US anymore (foreign residents who are citizens still have to pay tax). If they find out you gave up citizenship to avoid taxation, there is 10 year period where they can come after you tax-wise.

Section 877 provides for U.S. taxation of U.S.-source income earned by persons who relinquished their U.S. citizenship within 10 years of deriving such income if one of the principal purposes of terminating U.S. citizenship was to avoid U.S. taxation. a. Under § 877, taxes must be paid on U.S.-source income under the provisions pertaining to citizens of the United States. b. Tax avoidance is presumed if the expatriate's income immediately preceding, or net worth as of, the date of loss of their U.S. citizenship exceeds statutory levels.

Preemptive transfer pricing arrangements If accepted... If can't agree Car maker example

TP can propose transfer pricing method for certain future cross-border transactions through advance pricing agreement; aid to reducing pricing dispute attempt by IRS APA provides safe harbor transfer pricing result for TP going to owe taxes and penalties if audited and made mistakes a. New Indian car maker who doesn't sell in US but then decides too. They know other countries selling into US has issues with transfer pricing, so they pre-negotiate to avoid these issues and audits.

Drake, Inc., a domestic corporation, has worldwide taxable income of $250,000, consisting of $200,000 U.S.-source income and $50,000 foreign-source dividend income from Jetco, a foreign corporation in which Drake owns 4% of the voting stock. Drake's U.S. income tax liability before the FTC is $52,500 ($250,000 × 21%), and the foreign tax paid on the dividend income is $20,000.

U.S. income taxes before FTC × Foreign-source taxable income Total taxable income $52,500 × $50,000 = $10,500 $250,000 Because the actual foreign taxes paid are greater than the limitation, Drake is allowed an FTC of only $10,500. Thus, Drake's net U.S. income tax after the FTC is $42,000. Drake has an excess credit of $9,500. This excess credit can be carried back one year or forward 10 years, within the same FTC limitation basket.

Export sales Income/loss from this, licensing, branch operations Issue

US person must immediately include income from these; profits usually not taxed by customer's jurisdiction income and loss from export, licensing, branch operations of US person are taxed under worldwide system if the foreign country involved also imposes income tax, double taxation arises

Creating a cross-border business entity Outbound transfers that may defer taxation (4)

US taxpayers may trigger tax if they create entity to transfer assets abroad (usually intangible) to lower income place like Ireland (usually depreciated in value) US corp liquidates US subsidiary into existing foreign subsidiary (332) incorporates non US branch of US corporation to form new foreign corp (351) uses stock swap to acquire US corp (type B reorganization) foreign corp acquires substantially all of US corp assets (C reorganization)

UDITPA MTC Are they binding Example of 2 prominent state modifications Do Chapter 24 Problem on PDF pages 3 & 4

Uniform Division of Income Tax Purposes Act: attempt by numerous states to create model law that is standardized so state taxes are mostly similar Multistate Tax Commission is the body that develops and interprets model act of UDITPA No, states legislatures decide whether to adopt/follow or not the regulations created by MTC to find state taxable, add back state/local obligations (they are excludible for FIT purposes; and deduction allowed for FIT paid (can't deduct FIT on FIT)

Can you have not for profit status if you make profits? Explain.

Yes, it is what you do with the profit that matters. Pizzeria owner is not making profit for common good, they want to spend it. DeSales makes profit each year, and use it to serve students; not for own benefit. Must be poured back into the organization's purpose (net earnings requirement) and not benefit any individual. Usually put into endowment to help benefit people in future, or for capital improvements.

Optimal state tax structure (probably don't need to know)

a. When sufficient activity originates from the repair and maintenance of the corporation's products or the activities performed by the sales representatives within the state, the organization could incorporate the service or sales divisions. b. Although planning techniques often are employed to disconnect a corporation's activities from an undesirable state, they also can be utilized to create nexus in a desirable state. c. Establishing nexus in a state is advantageous, for instance, when that state has a lower tax rate than the state in which the income currently is taxed or when losses or credits become available to reduce tax liabilities in the state.

Source of interest income Dividends Personal services income; exception

according to the residence of the payor/where it's being paid from; there are some US exceptions but not big deal sourced from payor unless 25% or more of foreign corporation's sales are effectively connected with a US trade or business for last 3 years sourced from location where services performed (Apple services company in India, it is sourced to India) commercial traveler exception is foreign if nonresident alien outside US for 90+ days, compensation is less than 3,000, services are for foreign person not engaged in US trade/business; if it meets all this, it's foreign source

Marketed opinion Exception

advice used to promote, market, or sell partnership, investment plan, or arrangement (ex: oil partnership) need this when selling tax shelter to those who need to know same as last

Consolidated return Combined returns in unitary states

affiliated group of corporations can file consolidated federal return which is also allowed for some state returns; only corporations that are subject to tax in the state can be included filed in every unitary state when one or more subsidiaries have nexus

501 (h) Tax for non 501(h) Ceiling amount What if you exceed ceilnig

affirmative election available to non-religious 501(c)(3)s that allows some lobbying expenses those that lobby without this election are subject to 5% tax on expenditures and maybe 5% additionally on mgmt. 2 different ceiling amounts: 150% * lobbying nontaxable amount = lobbying ceiling 150% * gross roots nontaxable = grass root ceiling Lobbying nontaxable = lesser of 1M or Exhibit 23.2 Grass root nontaxable = 25% of lobbying nontaxable amount 25% tax on excess expenditures

$7,000 dividend from Stern Corporation, a U.S. corporation that generated total gross income of $4,000,000 from the active conduct of a foreign trade or business for the immediately preceding three tax years. Stern's total gross income for the same period was $5,000,000. $10,000 dividend from International Consolidated, Inc., a foreign corporation that reported gross income of $4,000,000 effectively connected with the conduct of a U.S. trade or business for the immediately preceding three tax years. International's total gross income for the same period was $12,000,000. $5,000 interest on Warren Corporation bonds. Warren is a U.S. corporation that derived $6,000,000 of its gross income for the immediately preceding three tax years from operation of an active foreign business. Warren's total gross income for this same period was $7,200,000.

all U.S. source more than 25% is effectively connected to U.S., so .33 * 10,000 = 3,333 US source and 6,667 foreign source 5,000 foreign source; although it is domestic, it meets the 80% foreign business requirement for INTEREST

Difference between apportionment and allocation Gist of apportionment

allocable income is assigned to one state, whereas apportioned is divided among several take business income and decide fair share to go to each state; states determine how this is done through apportionment factors

Foreign tax credit Allowed against Limited to FTC baskets include

annual election where tax payments are claimed as deductions against GI when you are taxed in 2+ places TP regular tax liability US tax that would be incurred on the income amount active business income, portfolio, income from foreign branches, intangible income

Functional currency Qualified business unit Branch operations

currency where entity operates; all tax determinations made in the TP's function currency so would be dollars in the US may use foreign currency as its function currency if it s a separate identifiable t/b unit ; take those amounts and transfer to US dollars when reported and an exchange g/l is recognized when remitting to US (ordinary income)

Standards w/ respect to tax returns: Frivolousness Reasonably likely penalties Reliance on client-furnished info Knowledge/omission by client Diligence Return of client records

cannot advise client to take position that is frivolous, can't delay administration, or disregards rules must inform client of any of these in regard to positions on tax return same rule above with SSTS's but must make reasonable inquiries if it appears to be questionable or incomplete must notify client if they previously made mistake but you don't have to notify IRS but consider withdrawing better do all work to ensure docs are correct and accurate; make sure you have rules right maintain copies for 3 years but must return upon their request (can sue them if they don't pay, but can't withhold records

What are feeder orgs What activities aren't subject to feeder org rules (3)

carry on trade/business to benefit exempt organizations and remit their profits to exempt org 1. activities that generate rental income excluded from the definition of the term rent for purposes unrelated to business income tax 2. that normally constitute a trade/business but substantially all of work is performed by volunteers 3. normally constitute trade/business of selling merch, but most received as contributions/gifts

Claims for refunds statutes of limitations Proper way to claim refund Case of bad debts

claim must be made within 3 years of when return was filed or within 2 years following payment of tax form 1040x for individuals or 1120x for corps 7 years

230 miscellaneous restrictions (5)

client refunds: may not endorse or negotiate refund checks issued to client can't notarize signature of anyone in which you have interest can't practice law if not member of state law referral agreements must be disclosed to clients: you refer financial advisor and receive kickback as part of their fee email disclaimer about not avoiding tax

The payroll factor Total payroll is $10 million. NJ payroll is $3 million. Property factor What is generally used in this factor Leased property Do the other in-class Chapter 24 problem

compare compensation paid for services rendered in a state to total compensation paid 30% divide average value of real and tangible property used/rented in state by average value of all property average historical cost of assets but some states allow downward adjustment for accumulated depreciation, monthly average values, or income tax basis included at eight times annual rental amount

Big 230 restriction (3 parts)

conflicts of interest with former government employees 1. if IRS employee substantially participated (directly) in matter of IBM audit, they can never represent or assist those parties with respect to that matter 2. if IRS employee had official responsibility (not direct influence, you are IRS exec who heard about it) for IBM audit, cannot represent either party in next 2 years with that matter 3. within 1 year of leaving government employment, can't appear before IRS to influence any US treasury employee if you participated in development of rule or had official responsibility with it within 1 year of leaving

Additional tax on intangible income What is allowed

congress feared that US CFCs would transfer intangible overseas to avoid FIT permanently, so tax applies at effective rate of 10.5% on shareholders of a CFC where entity generates foreign-sourced intangible income FTC to extent of 80% of foreign taxes paid

What does PL 86-272 also do Economic nexus Don't really need to know this but have general idea

congressional study of state taxes several states follow MTC model that automatically assigns nexus to TP that exceeds these thresholds: 50,000 of property 50,000 of payroll 500,000 of sales; all 25% tax rate

Nexus When is this present (4) States define nexus differently but...next slide

corporation only subject to state tax if this is established; is a measure of the extent of business contact that TP has established in the state when any of the following occur... 1. corporation derives income from sources in state 2. owns or leases property in the state 3. has employees in the state 4. has physical or financial capital within state

3 types of IRS audits

correspondence by mail (most popular) 1. correct apparent error in computation (w2 says 80,000 but you type 60,000 in) 2. may need photocopies or documentation to support deductions/exemptions/income office: conducted in IRS office when TP has few items questioned field: primarily for returns with business or professional income; more complete audit

Tax haven; example Usually has what rules What US government does Treaty shopping

country where either locally sourced income or residents are subject to zero or low levels of local taxation; Ireland 10% rate had boom because many moved income there like intangibles allow TPs to establish residency with minimal presence looks at income generated by foreign entities to determine abuse and has right to make changes if it doesn't reflect economic reality investing through corp created in a treaty country where most shareholders are not residents of the country

Page 23-4: see all organizations that qualify as tax exempt

deal with 501c-3 the most: religious, charitable, educational, scientific, literary, etc.

Public Law 86-272 definition 3 components to know

political compromise from federal gov that states the minimum nexus that must be reached 1. nexus is avoided where a business merely solicits orders that are approved or denied outside the state, and approved orders are both filled and shipped outside (allowed to send salespeople into state as long as they solicit with brochures or whatnot if that's all they do there) 2. in some states, offering repair and maintenance contracts or conducting training seminars can create nexus (some states very aggressive but these are allowed) 3. leases, rentals, services, dispositions of real estate, and intangible properties not protected by this law

3 general apportionment factors What is common among these What can occur Special industry apportionment formulas

portion of sales, property, payroll in each states used to determine sales weighted heavier than others is common and shifts greater portion of state tax burden out-of-state entities while benefiting those in state lack of consistency in state formulas can cause corporation to be subject to state income tax more or less than 100% of FTI mandated by many states for financial services, insurance, transportation, communications taxpayers

Covered opinions confidentiality Contractual protection Prominently disclosed State/local bond opinion Principal purpose

practitioner imposes on recipient limitation on disclosure of info contained in written advice written advice where fee is either refundable (intended tax consequences not sustained) or contingent readily apparent or set forth in separate section written advice delivered to any purchaser of state or muni bonds where it addresses tax advantages with rescept to owning it exceeds any other purpose

230 fees restrictions

practitioner may never charge unconscionable fee and may only charge contingent fee in 3 circumstances (only in tax; not audit) 1. IRS examination or audit (you get to keep x amount of money you save them) 2. claim solely for a refund of interest and/or penalties (offer to find company refund and keep x % of what you find) 3. judicial proceeding arising under IRC (dependent on how much you save in court)

Conflict of interest 230 restriction

practitioner may represent all clients even if conflict of interest exists if: 1. he/she believes they can competently represent the clients 2. no law prohibits it 3. each affected client waives conflict of interest in writing

Competence to provide opinion and reliance on opinions of others (2)

practitioner must be knowledgable in all relevant aspects of tax law to opinion being rendered may reasonably rely on opinion of another practitioner if you identify it and set forth its conclusions

Statement 3

procedural aspects of preparing returns: don't have to audit your client's information; it is acceptable to rely on info furnished by client or by 3rd parties when you need to audit/check: you believe info is incorrect, incomplete, inconsistent (also check on previous year returns when possible)

Source of real property gains/losses Assets other than real property Personal property Income from sale of purchased inventory When seller produced inv, income sourced where

property location depends whether property was produced by seller, what type of property (inv vs. capital), where residence of seller was residence of seller country where sale occurs country where asset was produced

Debt financed property def. Unrelated debt-financed income Examples

property of exempt org that produces income on which there is acquisition indebtedness (exceptions next slide) included in UBI calculation; gross income generated from debt-financed property rent income from real estate or tangible personal property (Church owns and leases space in office building), or gains from disposition of debt0financed property

Are bingo games unrelated T or B?

qualified ones are not unrelated—legal under local and state laws while commercial are not allowed

Federal tax issue Significant federal tax issue

question concerning federal tax treatemtn of any item or tasnaction or value of property for tax purposes issue with respect to which IRS has reasonable basis for successful challenge and resolution of issue has significant tax impact under reasonable foreseeable circumstances

AICPA statement 1

tax return positions: can take position contrary to that of IRS if it appears realistically possible of being sustained and client fully informed of risks realistic = greater than 20% chance of being right after looking at all guidance; likely be audited because you must disclose it to IRS substantial authority = greater than 33% chance: don't need to disclose this position more likely than not: greater than 50%; only needs to be taken for tax shelter

Taxing NRA engaged in US trade/business

taxed at same rates as US citizens/residents on taxable income those with effectively connected income that flows through are allowed deductions for casualty and theft, charity, and one personal exemption effectively connected depends on location of production, management, distribution, other business activities (asset generating income is in US)

Most countries use what type of taxing system US system Business income tax rates Foreign tax credit (see chapter 12)

territorial: only income generated inside borders subject to tax there citizens and companies subject to tax elsewhere; worldwide system that is less common but strict worldwide systems are rare most companies cutting it legacy law credit that addresses potential for double taxation of business income under worldwide system