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
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