1. Final Review Session BA 128A
Final Exam 5/18 12:30- 3:30 C230
Questions from last lecture
Review Chapter 13
Final Review Ch I5,7,8,9,10,12,13,14; C2,3,4,9,11,12

2. Chapter 13 Estate Tax Estate tax formula Gross estate
- deductions (expenses, debts & losses)
=Adjusted gross estate
- deductions (marital and charitable)
= Taxable Estate
+ Adjusted taxable gifts (post 1976)
= Estate Tax Base
Tentative tax (current uniform transfer tax rates)
- Post 1976 gift taxes (current uniform transfer tax rate) - unified credit taken in year gift taxes are paid
- unified credit (full amount)
- other credits
= Estate Tax payable

3. Deductions
Expenses - administrative expenses for managing the estate, funeral expenses
Debts - personal liabilities e.g. mortgage
Casualty and theft losses - incurred while estate is being settled
Marital and Charitable deductions - no ceiling

4. Valuation of estate FMV at date of death or alternate valuation date
Alt. Valuation - all or nothing
FMV at date of death - price at which property would change hands between a willing buyer and seller
exception - life insurance - valued at face value
listed stock - average of low and high price; if sale takes place within a few days of death date, use wtd average of high and low stock price on the nearest trade dates before and after date of death
Other valuation - Block stock, non-public stock, real estate, annuities

5. Chapter 5 Capital G/L
ST < 1yr, LT > 1yr; deduct loss up to $3000, gain taxed at 20% except uncolletibles, 1250 unrecapture and section 1202
Netting of CL and CG
net STCL and STCG
net LTCL and LTCG
NLTCG > NSTCL = NCG
adjusted NCG is NCG without uncollectibles, section 1250 unrecapture and then sec1202 small bus stock
both NLTCL and NSTCL - use NSTCL first - retain character of loss
NSTCL > NLTCG - net highest rate group first (ie 28%, 25% and then 20%)

6. Chapter 5 Realized vs. recognized gain Property basis
received as gift - usually donor’s basis except if FMV < basis, donee has 2 basis (if sold at gain later, basis = donor’s basis, else basis = FMV)
Gift tax paid by donor increase donee’s basis
property from decedent - FMV
property convert from personal to business - lower of FMV or adjusted basis
basis of stock dividend
basis of stock rights

7. Chapter 7- itemized deductions
Deduct only if it exceeds standard deduction
Subject to phase out - 3% of amount exceeds threshold. Qualified medical expenses
Taxes
Qualified interest
Casualty and theft losses
Miscellaneous deductions
Non reimbursed employee expenses
Investment expenses
Cost of tax advice
Charitable Contributions

8. Qualified Medical Expenses
Deduct the amount that exceed 7.5% of AGI
No deduction it it is reimbursed
Include taxpayer, taxpayer’s spouse and dependent
Diagnosis, cure, mitigation, treatment and prevention of disease, medical procedures involving function or structure of body - except cosmetic surgery unless for deformity correction
Transportation for medical reasons
Long term care
Capital expenditures for medical care - add a swimming pool, remove physical barriers
Medical insurance premiums

9. Classification of interest
Active trade and business - for AGI
Passive activity - e.g. rental activity - for AGI - Chapter 8
Investment interest - offset investment income - from AGI
Personal interest - not deductible
Qualified residence - from AGI
Student loan - for AGI

10. Investment Interest
Investments - generates portfolio of income such as interest, dividends, annuities and royalties, not personal or business, not passive and not tax exempt securities
Net investment income = Investment income - investment expenses. Investment income include net gain to the extent that net gain exceeds net capital gain
Taxpayer can elect to include net capital gain in investment income that will be subject to regular tax rates
Investment expenses only deductible to the extent that it is >2% of AGI - ie this is the amount used to calculate net investment income

11. Other interest Qualified residence interest Student Loan interest
Principal + secondary residence
Secured by home
Acquisition indebtedness - up to $1,000,000
Home equity interest - can only deduct the amount applied to the lesser of FMV of qualified residence in excess of acquisition indebtedness or $100,000
Student Loan interest
For higher education expenses
FOR AGI deduction
Maximum deductible amount = $1000 in 1998.
Phased out ratably for AGI between 40,000 and 50,000

12. Charitable Contribution -limitation amount
Max - 50% of AGI
depends ORGANIZATION contributed to and TYPES of property contributed
Excess is carry forward for the subsequent 5 years
Capital gain property contributed to public charity is limited to 30% of AGI
Ordinary and cash property contributed to private nonoperating foundation is also limited to 30% of AGI
Contributions of capital gain property to private nonoperating foundation are limited to the lesser of 20% of taxpayer’s AGI or 30% of taxpayer’s AGI reduced by capital gain contributed to public charity
Contributions to athletics events in return for the right to purchase tickets (80% limitation)
Apply 50% limitation contributions first and then the 30% limitation
Carryover amounts subject to the same % limitations. Deductions for current year is applied first.

13. Charitable contributions - basis
Except capital property contributed to public charity (at FMV), all other transactions, used adjusted basis (or FMV - capital gain)
Transactions include ordinary and capital gain property to private nonoperating foundations, capital gain property that is unrelated use in nature - special circumstances - donation of inventory and scientific equipment - higher than adjusted basis

14. Chapter 8 loss and bad debts
Sale or exchange of property - capital asset result in capital loss, property in bus/trade e.g. inventory, accounts receivable, depreciable property and land used in a trade or business - ordinary loss (section 1231 subject to netting rules (I13)
Abandonment of property - ordinary loss
Demolition of property not deductible - add to basis of land
Other disallowed loss - wash sales, like kind exchange, related party transaction, transfer of property to a controlled corp in exchange for stock

15. Passive loss
Definition - any rental activity or any trade/business where taxpayer does not materially participate
Passive loss can only net against passive income and can be carried over (each activity). Suspended losses of passive activity is deductible against ordinary income upon disposition ownership interest
Rental activity excluding real property trade/business
$25000 deduct against ordinary income if actively participates and own at least 10% of value of activity; loss is subject to phase out

16. Casualty loss Bus/investment Personal
Identifiable event that was sudden, unexpected or unusual
Theft is included (proper substantiation e.g. police report)
only allowed to deduct up to adjusted basis
Bus/investment Personal
Total destruction adjusted basis smaller of
adjusted Basis or reduction in FMV
Partial destruction smaller of
> ad. Basis or < reduction in FMV

17. Bad Debts and NOL Bad Debts Bus bad debt - ordinary loss
Personal bad debt - ST capital loss
NOL
Adjust taxable income(loss) with
non-bus capital loss deduction
non-business deductions e.g. personal exemption and standard/itemized deduction

18. NOL Carry back to get tax refund
Carry forward to deduct subsequent year income
Can elect not to carryback
Adjust back other deductions
non-bus capital loss deduction
non-business deductions e.g. personal exemption and standard/itemized deduction

19. Chapter 9 Employee Reimbursed Expenses
Reimbursed employee expenses
accountable plan - substantiation, excess is returned to employer - not include in GI and not deductible, if excess is not return, include in income
not accountable plan - include in GI, expenses deducted as misc. itemized deduction
Unreimbursed employee expenses - deductible from AGI - misc. itemized deduction

20. What is deductible
Travel expenses - transportation, meals and lodging. Meals - 50%, has to be away from tax home
Automobile expenses - standard vs. actual
Entertainment expenses - 50%
Moving expenses - for AGI deduction
Education expenses
Office in home expenses
Deferred compensation
Qualified plans - exclusive for employees, not discriminating and other vesting and funding requirements
Employer can deduct contribution and employee not taxed on earnings from contributions until withdrawn
Traditional IRA $2000 deductible for AGI - subject to salary limit

21. Chapter 10 - Depreciation
For assets/property used in trade or business or held for production of income
Personal use property - no depreciation
Personal property - equipment, vehicles, furniture
Real Property - land and structure permanently attached to the land
MACRS - personal
Personal property - half year convention, conversion to straight line if yields larger amount, amount reduced by half in year of disposition, recovery period is 3,5,7,10,15 years
Requires the use of mid-quarter if aggregate basis of all personal property in service in the last 3 months > 40% of the cost of all personal property placed in service during the tax year
Disposal calculation needs to be consistent, half year or quarter
MACRS - real property
Residential years recovery period
Non-residential, 39 years
mid-month, st line

22. Chapter 10 Section 179
Apply only to tangible personal business property
$18500 in 1998 in year of acquisition
Not applied to real estate
Election made on annual basis
Limitations
cannot be related party transaction
Phase out >$200,000 property acquired $ for $
Cannot exceed taxpayer’s income

23. Chapter 13 Section 1231 - treatment of character of gains and losses
Section depreciable personal property + limited nonresidential real property (depreciation recapture)
Section real property - excess depreciation
Section 1250 recapture - all st. line depreciation recapture at 25% LTCG

24. Section 1231 continue Net section 1231 gains and losses
If gain -> LTCG
If loss -> ordinary loss
exception- Casualty loss - if loss > gain, non section 1231 ordinary loss, if gain> loss, section 1231 gain
Subject to 5 year look back rule - ordinary loss in the past five years needs to be recaptured as ordinary income instead of capital gain - loss recaptured apply to net 1231 gain in the 25% group first and then the 20% group

25. Section 1245 Apply only to gains on disposition on property
Depreciation recapture as ordinary income
cannot exceed amount of realized gain
1245 property
property subject to depreciation and amortization besides real property
applies mostly to depreciable personal property
property under section 179
exception nonresidential real estate placed in service between that used ACRS accelerated cost recovery method instead of straight. line

26. Section 1250 and Unrecapture 1250 gain
Includes most depreciable real property except nonresidential real estate placed in service between , low income housing and depreciable residential rental property. Section 1250 usually applies to real estate place in service before 1986 since straight line is used after 1986
Recapture only the additional depreciation over straight line into ordinary income
Unrecapture 1250 gain - rest of the depreciation (ie straight line) will be recaptured at long term capital gain rate of 25% instead of 20%

27. Section 1231 netting procedure
Determine casualty gains and loss
if loss -> non 1231 loss - business casualty loss is a for AGI deduction, personal casualty loss is a from AGI (itemized deduction)
Compute net 1231 gains/loss
net casualty gain
gains and losses from sale/exchange of section 1231 property
gains and losses from condemnation of property
If net 1231 gain, check unrecaptured 1231 loss from previous years

28. Chapter 14 AMT Taxable income plus tax preference items
plus personal and dependency exemption
plus standard deduction if itemized deductions is not used
plus adjustments - disallowed itemized deductions, timing difference adjustments, disallowed AMT tax credits
= AMTI
- AMT exemption for married filing jointly, for single tax payers - subject to phase out 25% for AMTI > for married filing jointly and for single
= AMT Base
Tax rate = 26% for the first
28% for amount >175000
= Tentative minimum tax
- regular tax
= AMT

29. C2 -Forms of organizations
Sole Proprietorship
Partnerships
S-corp
C-corp
Know the tax advantages and disadvantages and liability consequences

30. Tax considerations in forming corporations
Tax free and taxable transfer of property
Section allows the deferral of gains and loss upon incorporation, apply to new and existing corporation
Requirements -
for stock
transfer in control immediately after exchange (no prearranged plan to sell)
Property must be transferred
Control - >= 80% of total voting stock and >=80% of each class of nonvoting stock
Property - money, A/R, inventory, equipment, intangibles and etc.
Exclusions - services, indebtedness with no security

31. Receipt of Boot SH receives cash, notes instead of stock
SH recognized gain up to lesser of realized gain or FMV of boot
Character of gain depends on asset received
SH basis = adjusted basis of property transfer + gain recognized - (boot received, cash received or liability assumed by transferee (ie corp))
SH holding period - include property’s holding period

32. Transferee Corp’s Recognition
No recognition if transfer stock even if 351 is not applied
If transfer appreciated property as part of section 351- recognized gain but not loss
Transferee corp basis = transferor’s adjusted basis for property + gain recognized by transferor
Holding period includes holding period of transferor + any depreciation recapture potential

33. C3 - corporations deductions and losses
No itemized deductions, hobby losses, net investment interest deduction limitations, personal exemption, non-bus bad debts, alimony, IRA contribution
Casualty losses are fully deductible
No deduction for interest expenses incurred to borrow tax-exempt securities

34. Capital Gains and Losses
Same process of netting LTCG, LTCL; STCG, STCL
Additional 20% depreciation recapture for section 1250 property
No $3000 capital loss offset against ordinary income; carry back 3 and forward 5
No capital gain rate preferential; same treatment as ordinary income

35. Charitable Contributions
10% of adjusted taxable income
adjusted taxable income excludes charitable contribution deduction, NOL carryback, capital loss carryback, dividends-received deduction but INCLUDEs NOL carryover
Similar rules regarding ordinary income and capital gain property as individuals

36. Special deduction - Dividends-received deduction
Include dividends in Gross Income
receive dividends deduction <20% - 70% deduction, >=20% but < 80% - 80% deduction
limitation - lesser of 70%(80%) of dividends or 70%(80%) of taxable income without regard to any NOL deduction, capital loss carryback or dividends-received deduction itself
Does not apply if an NOL results after the deduction is taken into account
If ownership >=80% - receive full 100% dividends deduction with no limitations - members of affiliated group

37. Net Operating Loss
Carry back 2 (earliest of the 2 first) and forward 20 (first preceding year)
May elect not to carry back, once elected for the year, irrevocable
Deduction sequence
Charitable Contribution (include NOL carryover)
Dividends received deduction (not include NOL carryover)
NOL

38. C4 - current E&P Calculating current earnings and profits
start with taxable income or NOL
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
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
plus or minus income and deductions items that is recomputed for E&P
depreciation - ADS for MACRS
LT contracts - % of completion for E&P

39. 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

40. 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

41. 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

42. 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

43. 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

44. 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