Agenda 4/26 BA 128A

1. Agenda 4/26 BA 128A • Questions from lecture • Hand in project • Review Ch4, Ch9 • Assignment C4-29,37 • Additional C4-36,40, C9-28

2. Chapter 4 - current E&P • Calculating current earnings and profits • start with taxable income or NOL • always remember to deduct current federal income taxes Permanent differences • plus income excluded from taxable income but included in E&P • life insurance proceeds, tax-exempt interest income • plus deductions that reduce taxable income but not allowed in E&P • dividends-received deduction • NOL, charitable contribution, capital loss carryover

3. Current E&P calculation • minus expenses and losses not deductible in taxable but allowed in E&P • federal income taxes • excess capital loss not allowed • excess charitable contributions • non deductible fines and penalties etc. Temporary difference • plus income deferred to a later year when computing taxable income but included in E&P in current year • installment sales, like-kind exchanges • plus or minus income and deductions items that is recomputed for E&P • depreciation - ADS for MACRS • LT contracts - % of completion for E&P • depletion - cost depletion, IDC capitalized and amortized

4. Non-liquidating distributions • Dividend - distribution made out of corporation’s E&P • Property as contribution - $, securities of other corporation, and any other property except stock, stock right of distributing corporation • if distributions > E&P - > return of capital, reduce ownership basis • if distributions> ownership basis, excess treated as gain of sale of stock - capital gain

5. Non-liquidating distributions • Distributions net against current E&P first and then accumulated E&P • Distributions come from current E&P as long as the amount < current E&P even though accumulated E&P is in deficit • if distributions made during the year exceed current E&P, current E&P is allocated to those distributions on a pro-rata basia regardless of when the distributions are made, distributions in excess of current will be deducted from accumulated E&P in chronological order

6. Property Distributions- tax consequences to SH • Amount of distribution to shareholder is the property’s FMV, value determined at date of distribution, distribution amount reduced by any liability assumed by shareholder • Basis to shareholders is the FMV (regardless of liability assumed) • Distribution is dividend to the extent of the corp’s E&P

7. Property Distributions- tax consequences to corp • Corporation must recognized gain on distributed property that has appreciated in value • Property’s FMV must be at least the amount of liability assumed by shareholder • Does not recognized loss on distributed property Effect on E&P of corporation • gain recognized by distributed property increase E&P • Tax on the taxable gain on distributed property decrease E&P • Property’s adjusted basis/FMV reduce E&P (if adjMusted basis >= to FMV, reduce E&P with adjusted basis, else reduce E&P with FMV

8. Constructive Dividends • Indirect payment to shareholder without formal declaration • Likely arise in closely held corporation • Loans to shareholders • Excessive compensation • Excessive compensation for the use of SH’s property • Corporate payments for the SH’s benefits e.g. travel expenses • Bargain purchase of corporate property • SH use of corporate property

9. Stock dividends and rights • Stock dividend • tax free • basis allocated between old and new shares • if stocks identical, dividing basis by old + new number of shares • if stocks not identical, use relative FMV to allocate • Stock rights • tax free unless SH’s proportionate interests is/may be changed • stock rights value <15% of stock, basis of rights is zero unless election is made • allocation is made using relative FMV of stock rights and stock

10. Chapter 9 - formation of partnerships • Types of partnerships • general partnerships • limited partnerships • LLC - taxed as partnerships but with limited liability • LLP - similar - more for professional organizations • check the box regulations • electing large partnerships - simplified reporting arrangement

11. Partnership profits and losses • Partnerships - tax reporting entity • partner reports his/her share of income from partnership from the partnership return • partnership has its own tax year and accounting methods • partnership income can office personal losses of individual partners • Partner’s Basis • contribution increase a partner’s basis in the partnership • liability assumed by the partner also increase his/her basis • gain increase partner’s basis • loss decrease partner’s basis until the basis =0 • partner’s personal liabilities assumed by partnership decreases the partner’s basis • partnership distributions are tax free

12. Contribution of property to partnerships • No gain or loss recognized for the partner and partnership if property is cash, tangible and intangible property, services - need to recognized gain • if personal liabilities assumed by partnership exceed basis in partnership, recognize gain • partnership basis of property contributed = partner’s basis before the transfer • Unrealized receivables, basis = 0 • holding period includes the transferor’s holding period • character of gain also transfers over • depreciation recapture also transfers over • apply the same rules after formation of partnership

13. Partnership-reporting of income • Separately stated items and ordinary income/loss • Separately stated items are a list of deductions not deductible in the partnership income calculation but deductible for individuals (partners). • Foreign income taxes paid, charitable contributions, NOL carryovers and carrybacks etc.. • These items are deducted later on in partners’ individual return • Ordinary income are things such as gross profit on sales, administrative expenses, salaries and etc.

14. Partnership’s distributive share • Depends on partnership agreement, profits and losses share may be different • Varying interest rule - if partnership interest % changes during the year, income and loss allocation is prorated between the different days of ownership and interest % • Special allocations • pre-contribution gain or losses for contribution to partnership after 3/31/1984 • gain/loss at the time of contribution allocated solely to the SH who contributed the property • other special allocations allowed if criteria is met for substantial economic effect - appropriate decrease/increase in capital account of partner and partners will make up negative capital balance - see C9-19