Exam 3: Chapters 11, 9, & 7

7:14 What are the disadvantages of a type C asset-for-stock reorganization as opposed to a type A merger reorganization?

- Type C reorganization does not require the acquiring corporation to assume or acquire all the target corporation's liabilities. Only those liabilities that the acquiring corporation agrees to assume or acquire are obtained from the target. Although this restriction may be a disadvantage to the target, it also may be an advantage to the acquiring corporation. - Type C reorganization is that only a limited amount of cash (up to 20%) can be used to effect the reorganization. If the acquiring corporation assumes a substantial amount of liabilities, then, as a practical matter, it can use no cash to effect the reorganization.

11:1 Five Disadvantages of making an S election:

1. All income taxed on 1040 to shareholder when earned ( not deferred); Corps taxable when distributed (dividends). 2. S Corporations are subject to an excessive net passive income tax & built-in gains tax. 3. Dividends received by S Corporations are not eligible for the dividends-received deduction. 4. S Corporations are somewhat limited/restricted in type & number of shareholders it can have & the capital structure it can use. 5. S Corporations must use calendar year as their tax year unless they can establish a business purpose.

11:1 Five Advantages of making an S election:

1. Corporation's income is exempt from Corporate tax as it is taxed as a pass through entity; only taxed to shareholders. 2. Corporation's Losses pass through to shareholders; can be used to reduce the taxes owed on other types of income. 3. Undistributed income taxed to the shareholder is not taxed again when subsequently distributed UNLESS dist. exceeds the shareholder's basis in stock. 4. Splitting S Corporation income among family members is possible; as long as family members provide capital or service. 5. S Corporations are not subject to Personal Holding Tax or Accumulated Earnings Tax.

9:1 Yvonne and Larry plan to begin a business that will grow plants for sale to Retail Nursery. They expect to have substantial losses for the first three years of operations while they develop their plants and their sales operations. Both Yvonne and Larry have substantial interest income, and both expect to work full-time and this new business. List three advantages for operating this business as a partnership instead of a C corporation.

1. Partnerships are pass-through entities; losses flow to Y&L that can be used to offset other income. 2. No Double Taxaction (Dividends) 3. There is flexibility to the division of of profits & losses. 4. Partnerships are simple to create; can just be a handshake.

9:31 The BCD Partnership is formed in April of the current year. The three equal Partners, Boris, Carlton Corporation, and Damien have had tax years ending on December 31st, August 30th, and December 31st, respectively, for the last three years. The BCD partnership has no natural business year. A. What tax year is required for the BCD partnership under sec. 706? B. Can the BCD partnership make a sec. 444 election? If so, what are the alternative tax years BCD could select?

A. December 31. The tax year-end of majority partners Boris and Damien is December 31, making this the required year-end for the partnership. B. Yes. Possible year-ends are those that allow for no more than a three-month deferral from the required December 31 year-end. These year-ends include September 30, October 31, and November 30.

11:5 Which of the following classifications make a shareholder ineligible to own stock in an S corporation? A. US Citizen B. Domestic Partnership C. Partnership where all the partners are US citizens D. Estate of a deceased US Citizen E. Grantor trust created by a US Citizen F. Nonresident alien individual

A. Eligible B. Ineligible C. Ineligible D. Eligible E. Eligible F. Ineligible

9:30 The BCD partnership is being formed by 3 equal partners, beta Corporation, Chi Corporation, and Delta Corporation. The partners' tax year ends are June 30th for beta, September 30th for Chi, and October 31st for Delta. The BCD Partnerships natural business year ends on January 31st. A. what tax year(s) can the partnership and left without IRS permission? B. What tax year(s) can the partnership select with IRS permission? C.How would your answers to part A & B change if beta, chi, end Delta own 4%, 4%, and 92%, respectively, of the partnership?

A. The partnership must use a June 30 year-end, or with a Sec. 444 election, a tax year that ends on March 31, April 30, or May 31. B. The natural business year that ends on January 31. C. The partnership would be required to use an October 31 year-end, or the tax year of the majority partner. Alternatively, with IRS permission, the partnership could use a natural business year-end (January 31), or with a Sec. 444 election, the partnership could use a tax year that did not exceed a three-month deferral of income.

11:29 Voyles Corporation, a calendar year taxpayer formed five years ago, desires to make an S election beginning 2017. Sue and Andrea each own one-half of the Voyles stock. A. How does Voyles make the s election? B. When can voyles file its election form? C. If in Part b the corporation does not file the election in a timely manner, when will the election take effect?

A. Voyles Corporation makes the S election by filing Form 2553 in a timely manner with all its shareholders consenting to the election. B. The corporation can make the S election (1) any time during the tax year preceding the year for which the election is to be effective (2016) or (2) on or before the fifteenth day of the third month of the year for which the election is effective (March 15, 2017). C. The election will take effect on the first day of the next tax year (2018) unless the corporation obtains relief from the IRS for its late election.

11:6 Will the following events cause an S election to terminate? A. The S Corporation earning 100% of its gross receipts in its first tax year from passive sources B. The S Corporation issuing non voting stock that has a dividend preference. C. The S Corporation purchasing 100% of the single class of stock of a second domestic corporation that has conducted business activities for four years D. An individual shareholder donating 100 shares of S Corporation stock to a charity that is exempt from tax under sec 501(c)(3) E. The S Corporation earning tax-exempt interest income

A. Will NOT terminate S election. B. Yes, will terminate an S election. C. Will NOT terminate S election. D. Will NOT terminate S election. E. Will NOT terminate S election

7:14 what are the advantages of a type C asset-for-stock reorganization as opposed to a type A merger reorganization?

Advantages: - Type C reorganization requires that "substantially all" the target corporation's assets be acquired. Thus, only those assets the acquiring corporation agrees to acquire are obtained in a Type C reorganization, provided the "substantially all" requirement is met. - A merger offers the acquiring corporation the advantage of not having to acquire "substantially all" of target assets. Generally, all target assets and liabilities other than those assets that are not wanted and which are sold, exchanged, or otherwise disposed of are acquired in a merger.

11:9 What tax years can a newly created corporation that makes an S election adopt for its first tax year? If a fiscal year is permitted, does it require IRS approval?

An S corporation generally must adopt a permitted tax year (which normally is a calendar year or a 52 53 week year) as its tax year. Alternatively, it can adopt a fiscal year for which it has established the necessary business purpose; IRS approval of the tax year is required. Another alternative, the S corporation can elect under Sec. 444 to adopt or change to a tax year with a limited deferral period (e.g., three months or shorter period).

7:15 How does the IRS interpret the "substantially all" asset requirement for a type c reorganization?

Based on a 70% / 90% test. For advance ruling purposes, the IRS interprets "substantially all" to mean that at least 70% of the FMV of the gross assets and 90% of the FMV of the target corporation's net assets be acquired.

9:8 The BW partnership reported the following current year earnings: $30,000 interest from tax-exempt bonds, $50,000 long-term capital gain, and $100,000 from operations. Bob saw these numbers and told his partner, Wendy, that's a partnership had $100,000 of taxable income. Is he correct? Explain your answer.

Bob is incorrect; the ordinary income for BW is $100,000. The total taxable income for BW would be $150,000 (100,000+50,000).

7:2 What tax advantages exist for a corporate buyer when it acquires the assets of another Corporation in a taxable transaction? For a seller when he or she exchanges stock in a taxable transaction? In a non-taxable transaction? **

Buyer can step-up the basis of the target corporation's assets to the acquisition costs. Also can use debt to make the acquisition which minimizes the amount of stock issuance (keeps from diluting ownership rights) The seller avoids having to recognize a gain on disposal of assets at the Corporate level. **

7:12 How does the IRS interpret the continuity of Interest Doctrine or a Type A reorganization?

Currently, a 40% threshold; however, the IRS and the courts have accepted lower stock consideration percentages for Type A reorganizations in certain circumstances.

9:4 Doug contribute services but no property to the CD partnership upon its formation. What are the tax implications of his receiving only profits interest versus his receiving a capital and profits interest?

Either way Doug should be reporting what he receives as ordinary income. A taxable event is created when there is a contribution of services for partnership interest.

11:8 After an S Corporation revokes or terminates its S election, how long must the corporation wait to make a new election? What circumstances permit an early election?

Five Years. Unless the IRS consents to an earlier reelection. Reg. Sec. 1.1362-5(a) permission for an early reelection can occur when (1) more than 50% of the corporation's stock is owned by persons who did not own stock on the date of the termination or (2) the termination was caused by events not reasonably within the control of the corporation shareholders.

9:3 Sam wants to help his brother, Lou, start a new business. Lou is a capable auto mechanic but has little business sense, so he needs Sam to help him make business decisions. Should this partnership be arranged as a general partnership or a LLP? Why? Should they consider any other form for structuring their business?

General partnership. Because Sam will be providing business advice, this partnership should be arranged as a general partnership. Both brothers will be actively managing the business and therefore limited liability protection would not be available to Sam if the partnership is created as a limited partnership with Sam as the limited partner. May want to consider an LLC instead of a partnership

7:1 From the standpoint of the target Corporation shareholders, what is the advantage of a taxable stock acquisition by a purchaser Corporation compared to the purchasers acquiring all the targets Assets in a taxable transaction followed by a liquidating distribution from the target to its shareholders?

If the purchaser corporation purchases the target corporation's stock from shareholders, each shareholder will be taxed on Capital g/l equal to the difference between the amount received & their basis. If the purchaser buys the target's assets, the target corporation will be taxed on the gains/losses for each asset. IN ORDER to distribute sale proceeds to shareholders, target must liquidate which creates a 2nd layer of tax. Shareholders are better off with a single layer of tax through a taxable stock acquisition.

11:14 What actions can an S Corporation shareholder take before year-end to increase the amount of the S Corporation's losses he or she can deduct in the year they are incurred?

Increase stock or debt basis. The shareholder can make additional capital contributions or make additional loans to the corporation by year end.

11:15 What is a post-termination transition period? What loss carryovers can an S corporation shareholder deduct during this period?

Is a one year period immediately following the last day of the final S corporation tax year in which loss and deduction carryovers can be used by the S corporation's shareholders even though the S election has been revoked or terminated. Also includes the 120-day period beginning on a determination date (e.g., date on which a court decision becomes final) or a closing agreement is finalized. The loss and deduction carryovers can be deducted only up to the adjusted basis of the shareholder's stock at the end of the post termination transition period. Loss and deduction carryovers cannot be deducted against the basis for amounts owed by the corporation to a shareholder.

9:2 Bob & Carol want to open a bed and breakfast in as soon as they buy and renovate a turn-of-the-century home. What would be the major disadvantage of using a general partnership rather than a corporation for this business? Should they consider any other form of structuring for their business?

Major disadvantage is the lack of limited liability; which id provided by C-Corps. (unprotected personal assets in the case of litigations) Could consider an LLC, which has the benefits of limited liability as well as being structured as a pass-through entity.

7:8 A shareholder receives stock and cash in an acquisitive reorganization. The shareholder recognizes a gain because of the boot (cash) received. What rules determine whether the character of the shareholder's recognized gain is dividend income or capital gain?

Sec. 302(b) redemption rules. For most taxpayers, both the dividend income and capital gains are currently taxed at the capital gains rate

7:23 Compare and contrast the requirements for, and the tax treatment of, the spin-off, the split off, and the split up forms of divisive type D organizations. Spin-off

Spin-off: the parent distributes the stock of the controlled corporation (subsidiary) to all its shareholders without receiving anything in exchange. The stockholders end up with stock ownership in both the distributing and controlled corporations

7:23 Compare and contrast the requirements for, and the tax treatment of, the spin-off, the split off, and the split up forms of divisive type D organizations Split-off

Split-off: the parent corporation distributes the stock of a controlled corporation (subsidiary) to some or all of its shareholders in exchange for part or all of their parent stock. Some shareholders may terminate their interest in the distributing corporation.

7:23 Compare and contrast the requirements for, and the tax treatment of, the spin-off, the split off, and the split up forms of divisive type D organizations Split-up

Split-up: the parent distributes the stock of two or more controlled corporations (subsidiaries) to some or all of its shareholders in exchange for all their parent stock. The parent corporation then goes out of existence.

9:9 How will a partner's distrbutive share be determined if the partner sells one-half of his or her beginning-of-the-year partnership interest at the beginning of the tenth month of the partnership's tax year?

The partner's distributive share will equal the sum of the partner's earnings for one-half of his or her beginning-of-the-year interest for the entire year and the partner's earnings for the other one-half of his or her beginning-of-the-year interest for nine months.

7:34 why do some taxpayers to procure an advance ruling for a proposed reorganization transaction?

To ensure against adverse tax consequences. Advance rulings generally are requested because of the complexity of the tax law in the realm of reorganizations and because these transactions involve substantial dollar amounts. An advance ruling offers a degree of security and generally can be relied upon by the parties to the reorganization. an increasing number of reorganizations are consummated without an advance ruling but with an opinion letter from tax counsel, because the IRS has indicated unwillingness to issues "comfort rulings" to taxpayer.

7:13 How does the IRS interpret the continuity of business enterprise requirement for a Type A reorganization?

Type A reorganization meets the continuity of business enterprise requirement if the acquiring corporation continues the target corporation's line of business or uses the target assets in its (the acquiring corporation's) business.

9:10 Can a recourse debt of a partnership increase the basis of a limited partner's partnership interest? Explain.

Usually no because a limited partner normally has no economic risk for recourse debt. However, a limited partner's basis is increased by recourse liabilities to the extent the limited partner is liable to incur an economic loss, for example, to the extent he or she is obligated to repay the general partner IF the general partner have to pay the debt or to the extent the limited partner has guaranteed the debt.

11:7 What is an inadvertent termination? What actions must the S Corporation and its shareholders take to correct an inadvertent termination?

Where the IRS, corporation, and shareholders all agree was unintentional. Once such a determination is made, the S corporation or its shareholders must take the necessary steps, within a reasonable time period after discovering the event causing the termination, to restore its small business corporation status.