TAX II FINAL STUDY GUIDE

What are organizational expenditures? How are they treated for tax purposes?

Organizational expenditures include outlays incident to the creation of a corporation, chargeable to the corporation's capital account, and of a character that would be amortizable if the corporation had a limited life. The corporation can elect under Sec

Name the 3 ways in which treatment of charitable contributions by individual and corporate taxpayers differ.

1. Time of the deduction.
2. Amt of the deduction permitted for the contribution of certain nonmonetary property.
3. The max deduction permitted in any given year.

Budget Corporation is a personal service corporation. Its taxable income for the current year is $75,000. What is Budget's income tax liability for the year?

$26,250

What are the tax advantages of substituting fringe benefits for salary paid to a shareholder-employee?

This permits the shareholder-employee to exclude these amounts from personal taxation while the corporation obtains a deduction for the expenditure.

How does a corp compute its current E&P balances.

A corp computes current E&P ion an an annual basis by making adjs to taxable income so that the resulting amount represents the corp's economic ability to pay dividends out of the current year's earnings.

How does a corp compute its accumulated E&P balances?

Accumulated E&P is the sum of current E&P (less distributions made out of current E&P) balances for all previous years reduced by the sum of 1) all previous current E&P deficits and (2) any distributions that have been made out of accumulated E&P

Why is it necessary to distinguish between current and accummulated E&P?

Distributions are deemed to come first out of current E&P and then out of accumulated E&P, so if current E&P is positive, any distributions will be dividends to the extent of current E&P. However, if E&P is insufficient to cover all distributions, distrib

Describe the effect of a $100,000 cash distribution pd on Jan 1 to the sole shareholder of a calendar year corporation whose stock basis is $25,000 when the corp has $100,000 of current E&P and $100,000 of accumulated E&P.

The distribution of $100,000 dividend payable out of current E&P.

Describe the effect of a $100,000 cash distribution pd on Jan 1 to the sole shareholder of a calendar year corp whose stock basis is $25,000 when the corp has a $50,000 accumulated E&P deficit and a $60,000 current E&P balance.

?First, $60,000 of the distribution is a dividend from current? E&P. Second,? $25,000 is a return of capital that reduces the? shareholder's stock basis to zero.? Third, the remaining? $15,000 is a capital gain. The? $50,000 accumulated? E&P deficit remai

Describe the effect of a? $100,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is? $25,000 when the corporation has a? $60,000 accumulated? E&P deficit and a? $60,000 current? E&P deficit.

First, $25,000 of the distribution is a return of capital that reduces the? shareholder's stock basis to zero.? Second, the remaining? $75,000 is a capital gain. a? $120,000 accumulated? E&P deficit remains.

Describe the effect of a? $100,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is? $25,000 when the corporation has an? $80,000 current? E&P deficit and a? $100,000 accumulated? E&P balance.

The distribution is a? $100,000 dividend payable out of accumulated? E&P. None of the current? E&P deficit reduces accumulated? E&P since the distribution is made on January 1.

Describe the effect of a? $100,000 cash distribution paid on October 1 to the sole shareholder of a calendar year corporation whose stock basis is? $25,000 when the corporation has? $100,000 of current? E&P and? $100,000 of accumulated? E&P.

The distribution is a? $100,000 dividend payable out of current? E&P.

Describe the effect of a? $100,000 cash distribution paid on October 1 to the sole shareholder of a calendar year corporation whose stock basis is? $25,000 when the corporation has a? $50,000 accumulated? E&P deficit and a? $60,000 current? E&P balance.

First, $60,000 of the distribution is a dividend from current? E&P. Second,? $25,000 is a return of capital that reduces the? shareholder's stock basis to zero.? Third, the remaining? $15,000 is a capital gain. The? $50,000 accumulated? E&P deficit remain

Describe the effect of a? $100,000 cash distribution paid on October 1 to the sole shareholder of a calendar year corporation whose stock basis is? $25,000 when the corporation has a? $60,000 accumulated? E&P deficit and a? $60,000 current? E&P deficit.

First, $25,000 of the distribution is a return of capital that reduces the? shareholder's stock basis to zero.? Second, the remaining? $75,000 is a capital gain. a? $120,000 accumulated? E&P deficit remains.

Describe the effect of a? $100,000 cash distribution paid on October 1 to the sole shareholder of a calendar year corporation whose stock basis is? $25,000 when the corporation has an? $80,000 current? E&P deficit and a? $100,000 accumulated? E&P balance.

Accumulated? E&P as of October 1 is? $40,0000 so that? $40,000 of the distribution is a dividend. Allocation of the current? E&P deficit to the? pre-October 1 period is accomplished by multiplying? $80,000 times? 9/12ths. Of the remaining? $60,000, $25,00

Hickory Corporation owns a building with a $160,000 adjusted basis and a $120,000 FMV . Hickory's E and P is $200,000. Should the corporation sell the building and distribute the sales proceeds to its shareholders or distribute the property to its shareho

The corporation should sell the building to a third party and report a $40,000 loss ?($120,000 FMV? - $160,000 ?basis) and then distribute the proceeds to its shareholders. If the corporation distributes the property to the shareholders? first, the loss c

Corporation owns a building with a $120,000 adjusted basis and a $160,000 FMV . Walnut?'s E and P is $200,000. Should the corporation sell the building and distribute the sales proceeds to its shareholders or distribute the property to its shareholders an

Same tax result either way. From a tax? perspective, it makes no difference whether the property is distributed first and then sold or sold first and the proceeds distributed to the shareholder. Either? way, the corporation must recognize a $40,000 gain ?

Why are stock dividends generally? nontaxable? Under what circumstances are stock dividends? taxable?

Stock dividends are nontaxable because they do not add to the property the shareholder already? owns, however they are taxable whenever a stock dividend changes or has the potential to change the? shareholder's proportionate interest in the distributing c

What is a stock redemption?

A stock redemption is the acquisition by a corporation of its own stock for consideration.

What are some reasons for redeeming? stock?

After the death of a major? shareholder, a corporation may be forced to redeem a certain percentage of the? decedent's stock from either the estate or a beneficiary to provide sufficient funds to pay estate and inheritance taxes and funeral and administra

Why are some redemptions treated as sales and others as? dividends?

Some redemptions that substantially change the? shareholder's proportionate interest closely resemble a sale of stock to a third party and are treated as a sale or? exchange, while others that do not produce such a change are esentially equivalent to a di

Field Corp redeems 100 shares of its stock from Andrew for $10,000. Andrew's basis in the shares is $8,000. Explain possible alternative tax treatments of Andrew's receiving the $10,000.

Some redemptions that substantially change the? shareholder's proportionate interest closely resemble a sale of stock to a third party and are treated as a sale or? exchange, while others that do not produce such a change are essentially equivalent to a d

Explain the purpose of the attribution rules in determining stock ownership in a redemption.

To prevent shareholders from either taking advantage of favorable tax rules or avoiding unfavorable tax rules by deeming family members or related entities to own stock that the shareholder may not own.

Describe the 4 types of attribution rules that apply to redemptions.

1. Family attribution.
2. Corp attribution.
3. Spousal attribution.
4. Sibling attribution.

Exempt from PHC tax? Closely held corps

No

Exempt from PHC tax? S Corps

Yes

Exempt from PHC tax? Professional corps?

No

Exempt from PHC tax? Publicly held corps

Yes

Because of its quality? investments, Carolina Corporation has always generated? 30% to? 40% of its gross income from passive sources. In the current? year, Carolina sold a block of stock in a company it acquired several years ago. As a result of the? sale

Carolina's president should be worried that her company could be considered a personal holding company? (PHC), since the stock ownership requirement is met. The company must compute its adjusted ordinary gross income? (AOGI). As AOGI excludes any capital

The corporate AMT liability is reported on Form ____

4626

A corporation that is subject to accumulated earnings tax may also be subject to interest and underpayment penalties on the amount

of the unpaid liability.

A corp files a Schedule ____ to report its PHC tax for the tax year

Schedule PH

Why do tax advisors caution people who are starting a new business that the tax costs of incorporating a business may be low while the tax costs of liquidating a business may be high.

Shareholders generally recognize no loss on a corporate formation even if they receive boot? property, however shareholders recognize gain or loss upon receiving liquidating distributions in exchange for their stock.
B.
A corporate formation transaction i

Explain the following? statement: A corporation may be liquidated for tax purposes even though dissolution has not occurred under state corporation law.

When a corporation liquidates it does not surrender its corporate charter for state? purposes, which is required for a full dissolution.
B.
Many corporations retain their corporate charters to protect its corporate name from being acquired by another part

Describe tax consequences of ordinary dividends

Ordinary dividend distributions require the distributing corporation to recognize gain when distributing noncash property as a dividend. Shareholders report dividend income equal to the FMV of the property distributed when the distribution comes from earn

Describe the tax consequences of stock redemptions.

Stock redemptions require the distributing corporation to recognize gain when distributing noncash property. Shareholders report either dividend income or capital gain depending on the nature of the redemption transaction.

Describe the tax consequences of complete liquidations

Complete liquidations require the distributing corporation to recognize gain or loss when distributing noncash property and shareholders reports a capital gain or loss equal to the difference between the FMV of the property distributed and the? shareholde

Nils? Corporation, a calendar year? taxpayer, adopts a plan of liquidation on April 1 of the current year. The final liquidating distribution occurs on January 5 of next year. Must Nils Corporation file a tax return for the current? year? For next? year?

Nils Corporation must file federal income tax returns for both the current year and next year.

What is a plan of? liquidation? Why is it advisable for a corporation to adopt a formal plan of? liquidation?

A plan of liquidation is a written document that details the steps to be taken to carry out the complete liquidation. The plan of liquidation helps the corporation determine when it begins its liquidation process. Once liquidation status is? determined, d

Jane contributes valuable property to a partnership in exchange for a general partnership interest. The partnership also assumes the recourse mortgage Jane incurred when she purchased the property two years ago.
a. How will the liability affect the amount

Jane recognizes gain on the contribution of property and assumption of a liability if the amount of the liability assumed by the other partners exceed? Jane's basis in the contributed property plus her share of existing partnership liabilities.

Jane contributes valuable property to a partnership in exchange for a general partnership interest. The partnership also assumes the recourse mortgage Jane incurred when she purchased the property two years ago.How will it affect her basis in the partners

Her basis in the partnership interest will be decreased by the amount of the liability assumed by the other partners.

On the first day of the? partnership's tax? year, Karen purchases a? 50% interest in a general partnership for? $30,000 cash and she materially participates in the operation of the partnership for the entire year. The partnership has? $40,000 in recourse

$60,000

George pays? $10,000 for a? 20% interest in a general? partnership, which has recourse liabilities of? $20,000. The partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses.? George's basis in his pa

$14,000.

On January? 1, Helmut pays? $2,000 for a? 10% capital,? profits, and loss interest in a? partnership, which has recourse liabilities of? $20,000. The partners share economic risk of loss from recourse liabilities in the same way they share partnership los

?$3,900.

Doug contributes services but no property to the CD Partnership upon its formation. What are the tax implications of his receiving only a profits interest versus his receiving a capital and profits? interest?

Whether Doug receives a profits interest or a capital and profits? interest, he theoretically should report the value of the property he receives for services as ordinary income.

Sean is admitted to the calendar year XYZ Partnership on December 1 of the current year in return for his services managing the? partnership's business during the year. The partnership reports ordinary income of? $100,000 for the current year without cons

What are the tax consequences to Sean and the calendar year XYZ Partnership if Sean receives a? 20% capital and profits interest in the partnership with a? $75,000 FMV?

Sean is admitted to the calendar year XYZ Partnership on December 1 of the current year in return for his services managing the? partnership's business during the year. The partnership reports ordinary income of? $100,000 for the current year without cons

What are the tax consequences to Sean and the XYZ Partnership if Sean receives only a? 20% profits interest with no determinable? FMV?

Marjorie works for a large firm whose business is to find suitable real? estate, establish a limited partnership to purchase the? property, and then sell the limited partnership interests. In the current? year, Marjorie received a 55?% limited partnership

Marjorie works for a large firm whose business is to find suitable real? estate, establish a limited partnership to purchase the? property, and then sell the limited partnership interests. In the current? year, Marjorie received a 55?% limited partnership

Yong contributes a machine having an adjusted basis of? $20,000 and an FMV of? $25,000 for a? 10% partnership interest. Yong had taken? $10,000 of depreciation prior to the contribution. The partnership has no liabilities. As a result of the? contribution

no gain or loss.

For a? 20% interest in partnership? capital, profits, and? losses, Kasi contributes a machine having a basis of? $30,000 and an FMV of? $40,000. The partnership also assumes a? $24,000 recourse liability secured by the machine. The partnership has? $6,000

?$12,000

For a? 30% interest in partnership? capital, profits, and? losses, Carol contributes a machine with a basis of? $40,000 and an FMV of? $80,000. The partnership assumes a? $70,000 recourse liability on the machine. At the time of the? contribution, the par

a capital gain due to the contribution of? $6,000 and a zero basis in the partnership interest.

Stella acquired a? 25% interest in the STUV Partnership by contributing land having an adjusted basis of? $32,000 and a fair market value of? $100,000. The land was subject to a? $48,000 mortgage, which was assumed by STUV. No other liabilities existed at

$0

David contributes investment land with a basis of? $24,000 and an FMV of? $40,000 to a partnership for a? 10% interest in partnership? capital, profits, and losses. The land is subject to a? $30,000 recourse? liability, which is assumed by the partnership

?$1,200 capital gain.

Rashad contributes a machine having a basis of? $30,000 and an FMV of? $25,000 to a partnership in exchange for a? 20% interest in partnership? capital, profits, and losses. Prior to the? contribution, the partnership had recourse liabilities of? $20,000.

?$18,000.

Albert contributes a Sec. 1231 asset to a partnership on June 1 of this year in exchange for a? 10% partnership interest. He had purchased the asset on March? 1, 2002. His holding period for the partnership interest begins

March? 1, 2002.

Allen contributed? land, which was being held for sale to? Allen's customers, to a partnership in exchange for a? 20% interest. The partnership uses the land in its business for three years and then sells the property. When the property was? contributed,

?$200,000 of ordinary income.

Bao had investment land that he purchased in 1990 for? $80,000. Two years? ago, when the land was contributed to a? partnership, the FMV was? $50,000. The land is inventory in the hands of the partnership. The partnership then sells the land in the curren

a? $30,000 capital loss and a? $4,000 ordinary loss.

The BCD Partnership is being formed by three equal? partners, Beta? Corporation, Chi? Corporation, and Delta Corporation. The? partners' tax? year-ends are June 30 for? Beta, September 30 for? Chi, and October 31 for Delta. The BCD? Partnership's natural

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.

The BCD Partnership is being formed by three equal? partners, Beta? Corporation, Chi? Corporation, and Delta Corporation. The? partners' tax? year-ends are June 30 for? Beta, September 30 for? Chi, and October 31 for Delta. The BCD? Partnership's natural

The
natural business year
that ends on
January 31.

The BCD Partnership is being formed by three equal? partners, Beta? Corporation, Chi? Corporation, and Delta Corporation. The? partners' tax? year-ends are June 30 for? Beta, September 30 for? Chi, and October 31 for Delta. The BCD? Partnership's natural

The partnership would be required to use? a(n)
October 31
?year-end.
The IRS may permit the partnership to use
a natural business year-end.
The partnership may also use a tax year
that did not exceed a three-month deferral of income with a Sec. 444 electi

Matt and Joel are equal partners in the MJ Partnership. For the current year ended December? 31, the partnership has book income of? $80,000, which includes the following? deductions: (1) guaranteed payments? (salaries) to? partners: Matt,? $35,000; and?

$86,000

A partner's distributive share includes the full amount of partnership ordinary income, which she must report on her tax return plus ____

her share of separately stated taxable and tax exempt items.

In computing the ordinary income of a? partnership, a deduction is allowed for

bad debts.

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

No, because a limited partner normally has no economic risk for recourse debt.

Jeff, a? 10% limited partner in the recently formed JRS? Partnership, expects to have losses from the partnership for several more years. He is considering purchasing an interest in a profitable general partnership in which he will materially participate.

No. As a limited partner in the JRS? Partnership, Jeff is almost certainly subject to the passive loss limitation rules on losses from this partnership.? Accordingly, income from a general partnership in which Jeff materially participates cannot be used t

?Helen, a? 55% partner in the ABC? Partnership, owns land? (a capital? asset) having a? $20,000 basis and a? $25,000 FMV. She plans to transfer the land to the ABC? Partnership, which will subdivide the land and sell the lots. Discuss whether Helen should

Helen should contribute the property. ABC Partnership will hold the land as inventory for resale to customers and not as a capital asset. Because Helen owns more than a? 50% interest in the ABC? Partnership, the sale of the land to the partnership will ge

Doug contributes services but no property to the CD Partnership upon its formation. What are the tax implications of his receiving only a profits interest versus his receiving a capital and profits? interest?

Whether Doug receives a profits interest or a capital and profits? interest, he theoretically should report the value of the property he receives for services as ordinary income.

What items can be deducted up to $5,000 and amortized as part of a partnership's organizational expenditures?

1. Legal fees for drawing up the partnership agreement.
2. Accounting fees for establishing an accounting system.
3. Filing fees required under state law in initial year to conduct business in the state.

The DH Partnership reported the following current year? earnings: $34,000 interest from? tax-exempt bonds, $40,000 ?long-term capital? gain, and $90,000 net income from operations. Dennis saw these numbers and told his? partner, Heather?, that the partner

The DHDH Partnership reported the following current year? earnings: $ 34 comma 000$34,000 interest from? tax-exempt bonds, $ 40 comma 000$40,000 ?long-term capital? gain, and $ 90 comma 000$90,000 net income from operations. DennisDennis saw these numbers

Yvonne and Larry plan to begin a business that will grow plants for sale to retail nurseries. 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

Advantages include? (1) partnerships are not subject to? tax, thereby eliminating the problem of double taxation that exists for C? corporations, (2) partners may divide the? partnership's profit or loss among themselves without regard to their proportion

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

No, because a limited partner normally has no economic risk for recourse debt.

The ABC Partnership has a nonrecourse liability that it incurred by borrowing from an unrelated bank. It is secured by an apartment building owned and managed by the partnership. The liability is not convertible into an equity interest. How does this liab

The financing meets the requirements for qualified nonrecourse real estate financing so is therefore included in the? at-risk basis of both general and limited partners.

Javier is retiring from the JKL Partnership. In January of the current? year, he has a? $100,000 basis in his partnership interest when he receives a? $10,000 cash distribution. The partnership plans to distribute? $10,000 each month this? year, and Javie

It is a liquidating distribution. A current distribution is a distribution that does not terminate the? partner's interest in the? partnership, nor is the payment one of a series of payments intended to terminate the? partner's interest in the partnership

The AB Partnership purchases plastic components and assembles? children's toys. The assembly operation requires a number of special machines that are housed in a building the partnership owns. The partnership has depreciated all its property under MACRS.

Depreciation recapture potential under Sec. 1245 for the machinery used to produce the inventory.

List items that are considered to be inventory for purposes of Sec. 751.

Supplies, inventory, Notes receivables, and lots held for resale.

What conditions are required for a partner to recognize a loss upon receipt of a distribution from a? partnership?

A partner can recognize a loss on a distribution only if it is a liquidating distribution consisting of? money, unrealized? receivables, and/or inventory and the sum of these amounts is less than the? partner's predistribution basis in his or her partners

Can a partner recognize both a gain and a loss on the sale of a partnership? interest? If? so, under what? conditions?

Yes, when a partner sells his or her partnership? interest, the partnership is deemed to sell all its assets in a hypothetical sale for their FMVs. The selling partner is allocated his or her share of the ordinary income or loss from the sale of Sec. 751

yra has a zero basis in her partnership interest and a share in partnership? liabilities, which are quite large. Explain how these facts will affect the taxation of her departure from the partnership using the following methods of terminating her interest

In the case of a liquidating distribution of? property, the amount realized will equal
her interest in partnership liabilities
. Because she has a zero? basis, she must report
a gain equal to her share of the partnership liabilities
.

Tyra has a zero basis in her partnership interest and a share in partnership? liabilities, which are quite large. Explain how these facts will affect the taxation of her departure from the partnership using the following methods of terminating her interes

The amount realized will equal
the sum of the money received and any liabilities assumed by the purchaser
. Because her basis is zero she will report
a large gain
.

Tom is a? 55% general partner in the RST Partnership. Tom wants to? retire, and the other two? partners, Stacy and? Rich, want to continue the partnership business. They agree that the partnership will liquidate? Tom's interest in the partnership by payin

The Sec. 736 provisions apply in this scenario since the partnership is not terminating.

List three advantages of partnership terminations.

1. Termination of tax accounting elections.
2. Possibility of an accelerated loss flow through when the terminated? partnership's year closes.
3. The transfer of assets does not create a basis change under the Treasury Regulations.

List three disadvantages of partnership terminations

1. Termination of tax accounting elections.
2. The transfer of assets does not create a basis change under the Treasury Regulations.
3. Loss of a favorable tax year and the possible bunching of income into one year for the partners due to a? short-period

What is a publicly traded partnership (PTP)?

A PTP is defined as a partnership whose interests are either traded on an established securities exchange or are traded in a secondary market or the equivalent thereof.

Are all publicly traded partnerships taxed as corporations?

No. Partnerships that have 90% or more of their gross income being "qualified income" are taxed as partenrships. No. A publicly traded partnership that existed on December 17, 1987 and which has not added a substanttial new line of businesss, was not taxe

What are the advantages of a firm being formed as a limited liability company? (LLC) instead of as a limited? partnership?

An LLC provides its owners with limited liability for debts of the firm and an LLC with more than one owner can choose to be treated as either a partnership or a corporation.

Maria purchased an interest in a real estate tax shelter many years ago and deducted losses from its operation for several years. The real property owned by the tax shelter when Maria made her investment has been fully depreciated on a? straight-line basi

The amount realized on the sale of a partnership is $100,005 and the recognized gain is 100,005

What is the amount of the personal exemption for trusts and? estates?

The personal exemption deduction for estates is $600. Trusts that must distribute all their income currently receive a $300 exemption, and all other trusts receive a $100 exemption.

A client inquires about the significance of distributable net income? (DNI). Explain.

DNI sets the ceiling on the? fiduciary's distribution deduction and the amount of income taxed to the beneficiaries.

Are net accounting income and DNI always the same? amount?

No. Net accounting income and DNI can differ in amount.

Explain a common reason for a difference between net accounting income and DNI.

Some or all of the? fiduciary's fee is charged to principal. This portion of the fee reduces DNI but not net accounting income.

Are capital gains usually included in? DNI?

No. Capital gains are generally classified as? principal, they usually are not included in DNI.

In the current? year, a trust has distributable net income? (DNI) of? $30,000. During the? year, the trust makes a mandatory distribution to Sarah of? $5,000 and a discretionary distribution of? $10,000 to Kyle. The trust has no? tax-exempt income. The di

$15,000.

Panther Trust has net accounting income and distributable net income of? $100,000, $75,000 from taxable sources and? $25,000 from taxminus?exempt sources. During the? year, the trust makes a mandatory distribution to Julius and Steve of? $50,000 each. The

$75,000.

On his individual? return, Al reports salary and exemptions for himself and seven dependents. His itemized deductions consist of mortgage? interest, real estate? taxes, and a large loss from breeding dogs. On his individual? return, Ben reports? self-empl

Ben's, because it includes a number of items that probably depart from the DIF statistical norm.? Al's, however, has a large number of exemptions plus a loss that the IRS might think is a nondeductible hobby loss.

The IRS notifies Tom that it will audit his current year return for an interest deduction. The IRS audited? Tom's return two years ago for a charitable contribution deduction. The? IRS, however, did not assess a deficiency for the prior year return. Is an

No. Even though the IRS audited his return for two years? earlier, that audit dealt with a different issue.? Therefore, the IRS can challenge the interest expense deduction on the current year return.

The IRS informs Brad that it will audit his current year employee business expenses. Brad just met with a revenue agent who contends that Brad owes? $775 of additional taxes. Discuss briefly the procedural alternatives available to Brad.

A.
After being notified of the? deficiency, he may pay the taxes and file for a refund in a U.S. district court or the U.S. Court of Federal Claims. He may ask to meet with the examining? agent's supervisor. If the matter is complex and highly? technical,

What? course(s) of action is? (are) available to a taxpayer upon receipt of the following? notices: The 30-day letter?

Taxpayer has 30 days from the date of the letter to request a conference with an IRS appeals? officer, or to file a protest letter.

What? course(s) of action is? (are) available to a taxpayer upon receipt of the following? notices:The? 90-day letter?

Taxpayer has 90 days from the date of the letter to file a petition with the Tax Court.

What? course(s) of action is? (are) available to a taxpayer upon receipt of the following? notices: IRS rejection of a claim for a? refund?

Taxpayer has two years to sue the IRS for a refund in a U. S. district court or the U.S. Court of Federal Claims.

List the courts in which a taxpayer can begin? tax-related litigation.

The Tax? Court, the U.S. Court of Federal? Claims, or a U.S. district court.

In what circumstances will the IRS rule on estate tax? issues?

The IRS will rule on estate tax consequences of transactions of a living person.
The IRS will rule on estate tax matters for a decedent if the estate tax return has not been filed.

Is the IRS likely to issue a private letter ruling on whether the taxpayer correctly calculated a capital gain reported on last? year's tax? return?

No. The capital gain reflects a completed transaction for which the taxpayer already has filed a return.

Is the IRS likely to issue a private letter ruling on the tax consequences of using stock derivatives in a corporate? reorganization?

Yes. The exchange involves a proposed transaction. The IRC is unsettled or unclear on the tax treatment.

Is the IRS likely to issue a private letter ruling on whether a mathematical formula correctly calculates the fair market value of a stock? derivative?

No. No transaction is involved. The result is hypothetical.

Is the IRS likely to issue a private letter ruling on whether the cost of an Internet course that purports to improve existing employment skills may be deducted this year as a business? expense?

Yes. The issue pertains to a transaction for which the taxpayer has not yet filed a? return, and the IRC is unsettled or unclear on the tax treatment.

Due date for an income tax return for a corp

15th day of the 3rd month after end of tax year. Extension - 6 monts after original due date.

Tracy wants to take advantage of a? "terrific business? opportunity" by engaging in a transaction with Homer.? Homer, domineering and? impatient, wants Tracy to conclude the transaction within two weeks and under the terms proposed by Homer.? Otherwise, H

No. The IRS cannot respond by the time Tracy must finalize the transaction.

Your client wants to know whether she must file any documents for an automatic extension to file her tax return. What do you tell? her?

She must file form 4868 requesting a? six-month extension of her individual income tax? return, or a Form 7004 for her corporation or other entity returns requesting a? five- or? six-month extension depending on the entity.

A client believes that obtaining an extension for filing an income tax return would give him additional time to pay the tax at no additional cost. Is the client? correct?

No. The client is incorrect. An automatic extension does not extend the due date for the payment of the tax. The taxpayer will owe interest and penalties on any tax not paid by the original due date for the return.

Briefly explain the rules for determining the interest rate charged on tax underpayments.

?Generally, the interest rate charged on deficiencies is three percentage points higher than the federal? short-term rate? (Sec. 6621). For large corporate? underpayments, the rate is five percentage points above the federal? short-term rate. Rates are ro

Is this rate the same as that for? overpayments?

The rate for overpayments generally is three percentage points above the federal? short-term rate? (two percentage points in the case of a? corporation). For corporate tax overpayments exceeding? $10,000, the interest rate is reduced to the federal? short

In which months might the? rate(s) change?

The rate potentially changes once a? quarter, in? January, April,? July, and October. The new rate usually is made public in the month preceding the month in which the next quarter begins.

In April of the current? year, Stan does not have sufficient assets to pay his tax liability for the previous year.? However, he expects to pay the tax by August of the current year. He wonders if he should request an extension for filing his return inste

To avoid the? failure-to-file penalty, Stan should request an extension for filing. If Stan is delinquent in paying his taxes on? time, he will still owe the? failure-to-pay penalty.

At what rate is the penalty for underpaying estimated taxes? imposed? How is the penalty amount? calculated?

The rate is the same as the interest rate for taxes that are not timely paid. The separate penalty for each quarter is based on the amount of the underpayment of the estimated taxes due at a payment date times the annual rate times the fraction of the yea

The IRS audited? Tony's return, and Tony agreed to pay additional taxes plus the negligence penalty. Is this penalty necessarily imposed on the total additional taxes that Tony? owes? Explain.

No. The negligence penalty is levied on just the portion of the underpayment attributable to negligence.

Assume that a taxpayer owes additional taxes as a result of an audit. Give two reasons why the IRS might not impose a substantial understatement penalty on the additional amount owed.

The taxpayer made adequate disclosure on the return or in a statement attached to the? return, and a reasonable basis exists for the position.
It might conclude that the taxpayer has substantial authority for the position adopted on the return.

Upon? audit, the IRS determines? Maria's tax liability to be? $40,000. Maria agrees to pay a? $7,000 deficiency. Will she necessarily have to pay a substantial understatement? penalty? Explain.

Not necessarily. The penalty may be imposed if it exceeds the greater of? 10% of the tax required to be shown on the return.? However, the penalty may not be imposed if Maria can show reasonable cause and good faith for her position.

Distinguish between the circumstances that give rise to the civil fraud penalty and those that give rise to the negligence penalty.

The negligence penalty is imposed where the tax underpayments result from negligence or disregard of the rules and? regulations, but without the intent to commit fraud. The civil fraud penalty is levied where the taxpayer has deliberately deceived? (e.g.,

Distinguish between the burdens of proof the government must meet to prove civil and criminal fraud.

The government must prove civil fraud by? "preponderance of the? evidence." It must prove criminal fraud? "beyond a reasonable? doubt.

Carmen's current year individual return reports a $20,000 deduction for a questionable item not relating to a? tax-shelter. The IRS audits Carmen's ?return, and she consents to a deficiency. As a? result, her tax liability increases from $20,000 to $26,20

Because Carmen discloses her? position, which is not? frivolous; the underpayment is not treated as an understatement.? Thus, she incurs no penalty.

In? general, when does the limitations period for tax returns? expire? List four exceptions to the general rule.

Three years after the later of the due date for the return or the date on which the return was filed. Four exceptions include civil? fraud, criminal? fraud, omission from gross income exceeding more than? 25%, and no return being filed. These exceptions h

Frank, a calendar year? taxpayer, reports? $100,000 of gross income and? $60,000 of taxable income on his Year 1? return, which he files on March 12 of Year 2. He fails to report on the return a? $52,000 long-term capital gain and a? $10,000 short-term ca

The limitations period for a criminal indictment
expires six years after the date of the last fraudulent act; after October 8 of Year 9.

?Maria, a calendar year? taxpayer, files her Year 1 individual return on March 12 of Year 2 and pays the amount of tax due. She later discovers that she overlooked some deductions that she should have reported on the return. By what date must she file a c

Three
years from
the due date of the return,
that? is, by
April 15 of Year 5.

Explain what is encompassed by the term tax law as used by tax advisors.

?"Tax law" refers to the Internal Revenue Code? (IRC) as elaborated by Treasury Regulations and administrative pronouncements and as interpreted by federal courts.

The U.S. Government Printing Office publishes both hearings on proposed legislation and committee reports. Distinguish between the two.

Committee reports concerning tax legislation explain the purpose behind? Congress' proposing the legislation. Transcripts of hearings reproduce the testimonies of the persons who spoke for or against the proposed legislation before the Congressional commi

Explain how committee reports can be used in tax research. What do they? indicate?

Committee reports can help resolve ambiguities in statutory language by revealing Congressional intent. They are indicative of this intent.

What two functions does a citator? serve?

Citators? (1) trace the history of the case in question and? (2) list other authorities that have cited such cases.

Describe two ways that the information available from the CHECKPOINT citator differs from that available from the INTELLICONNECT citator.

CHECKPOINT lists all citing? cases, however INTELLICONNECT which just lists those that the editors believe will serve as precedent.
B.
CHECKPOINT indicates how the case in question was? cited, when INTELLICONNECT only lists the case for the researcher to

List four methods of searching the CHECKPOINT and INTELLICONNECT databases.

Keyword, index,? citation, or content

Under a divorce agreement executed in the current? year, an? ex-wife receives from her former husband cash of? $25,000 per year for eight years. The agreement does not explicitly state that the payments are excludable from gross income. does the ex-wife h

Yes. According to Secs.? 71(a) and? (b), the wife includes? $25,000 per year.? Also, the divorce agreement must explicitly state that the husband has no liability to make payments after the? wife's death.

Under a divorce agreement executed in the current? year, an? ex-wife receives from her former husband cash of? $25,000 per year for eight years. The agreement does not explicitly state that the payments are excludable from gross income If the former husba

Yes, the husband deducts $25,000 per year. The alimony is deductible for AGI.

Whenever Treasury Regulations are issued under this? section, what type are they likely to? be: legislative or? interpretative? Explain.

Legislative. According to Sec.? 385(a), "The Secretary is authorized to prescribe such regulations as may be necessary or? appropriate....

Assume Treasury Regulations under Sec. 385 have been finalized. Will they be relevant to estate tax? matters? Explain.

Yes. Section? 385(a) states that the regulations will be applicable? "for purposes of this? title." "This? title" is Title 26 of the federal statutes. Because Title 26 encompasses all tax? statutes, the regulations would be relevant for estate tax purpose

Which IRC? section(s) does Rev. Rul.? 2001-29 interpret?? (Hint: consult the official pronouncement of the? IRS.)

Rev. Rul.? 2001-29 interprets? Section(s)
355 and 856.

A friend notices that you are reading the Internal Revenue Code of 1986. Your friend inquires why you are consulting a 1986? publication, especially when tax laws change so frequently. What is your? response?

It is updated for every statutory change to Title 26 subsequent to 1986. Therefore it includes the? post-1986 tax law changes enacted by Congress and today reflects the current state of the law.

Does Title 26 contain statutory provisions dealing only with income? taxation? Explain.

No. Title 26 deals with all taxation matters? including, income? tax, estate? tax, gift? tax, employment? tax, alcohol and tobacco? tax, and excise tax.

Which subsection discusses the general rule for the tax treatment of a property? distribution? Refer to IRC Sec 301

Subsection (c)
discusses the tax treatment of property distributions in general.

Refer to IRC Sec 301. Where should one look for exceptions to the general rule

One should look through the entire chapter for any exceptions.

Refer to IRC Sec 301. What type of Treasury REgulations would relate to subsection e?

Legislative decisions would relate to subsection e.

Why should tax researchers note the date on which a Treasury Regulation was? adopted?

The date should be noted on a Treasury Regulation because the IRC may have been revised subsequent to that? date, meaning the regulation may not interpret the current version of the IRC.
B.
Discrepancies can occur between the IRC and Treasury Regulations

Distinguish between? proposed, temporary, and final Treasury Regulations.

Proposed regulations are not? authoritative, but they do provide guidance concerning how the Treasury Department interprets the IRC. Temporary? regulations, which are binding on the? taxpayer, often are issued after recent revisions to the IRC so that tax

Distinguish between interpretative and legislative Treasury Regulations.

Interpretative regulations make the? IRC's statutory language easier to understand and apply. They also often provide computational illustrations. In the case of legislative? regulations, Congress has delegated the rulemaking on a specific topic to the Tr

Which type of regulation is more difficult for a taxpayer to successfully? challenge, and? why?

Legislative? regulation, since Congress has delegated its rulemaking authority to the Treasury Department.

Explain the legislative reenactment doctrine.

Under the legislative reenactment? doctrine, a Treasury Regulation is deemed to have been endorsed by Congress if the regulation was finalized before a related IRC provision was enacted and in the? interim, Congress did not amend the statutory provision t

Discuss the authoritative weight of revenue rulings.

Revenue rulings are
not as authoritative as court opinions, Treasury Regulations, or the IRC
. They represent interpretations by an interested? party,
the IRS
.

As a practical? matter, what consequences are likely to ensue if a taxpayer does not follow a revenue ruling and the IRS audits his or her? return?

If the IRS audits the? taxpayer's return, the IRS likely will
contend that the taxpayer should have followed the ruling and, therefore, owes a deficiency
.

In which courts may litigation dealing with tax matters? begin? ?

the U.S. district court for the? taxpayer's jurisdiction
the U.S. Court of Federal Claims
.
the Tax Court

Discuss the factors that might be considered in deciding where to litigate.

The taxpayer might consider
the published precedent pertaining to the issue in each court
. The taxpayer might prefer to avoid expending cash to pay the proposed deficiency. If? so, the taxpayer would want to litigate in the
Tax Court
. If the taxpayer wo

Describe the appeals process in tax litigation.

Appeals from Tax Court and U.S. district court
decisions are made to the circuit court of appeals for the taxpayer's geographical jurisdiction . U.S. Court of Federal Claims decisions are appealable to the Court of Appeals for the Federal Circuit
. Appeal

May a taxpayer appeal a case litigated under the Small Cases Procedure of the Tax? Court?

No. A taxpayer may not appeal a case litigated under the Tax? Court's Small Cases Procedure.

Explain whether the following decisions are of the same precedential? value: (1) Tax Court regular? decisions, (2) Tax Court memo? decisions, and? (3) decisions under the Small Cases Procedures of the Tax Court.

Tax Court regular and memo decisions
have about the same precedential value.
Decisions issued under the Small Cases Procedure of the Tax Court have little or no
precedential value.