Sole proprietorships
Taxpayer and business are one and the same. Total control, total liability. Business activity reflected on individual's tax return.
Partnerships
Two or more persons agree to co-ownership of business for profit. Partners are agents of partnership and other partners. Shared control, shared liability. Formation based on agreement (contract). Agreement may be written, oral, or implied and implicates t
Limited Partnerships
Requires at least one general partner and at least one limited partner. General partners manage, and consequently are personally liable. Limited partners merely invest, so liability is limited to investment.
Safe Harbor activities
Limited partners are liable to third parties if the third party reasonably believes the limited partner is a general partner (i.e. the limited partner manages the partnership as if they were a general partner). Safe Harbor activities are activities a limi
Safe Harbor activities include
- acting as an agent/employee of the partnership
- consulting/advising general partners
- (dis)approving amendments to partnership agreement
- voting on dissolution, loans, change in business, removal of general partners
- bringing a derivative suit
- bei
Limited Liability Partnerships
All partners are limited partners. The LLP bears all liability except for torts committed by, or under the direct supervision of, the partner.
Limited Liability Companies
All members have limited liability (i.e. no personal liability).
Member-managed LLC
managed by votes of members. Members act as agents of the LLC.
Manager-managed LLC
managed by manager. Manager alone is agent of the LLC.
Corporations
Business is a separate, perpetual legal entity. Corporation pays taxes on income (i.e. not a tax flow-through organization). Subject to strict operational requirements and regulation. Shareholders' liability is limited to investment, and have minimal cont
Present interests include
1. Fee simple absolute
2. Fee simple defeasible
3. Life interest
4. Leasehold
Fee simple absolute
complete ownership rights
Fee simple defeasible
owner has conditional ownership, subject to revocation upon the happening of some event
Life interest
ownership measured by a limited time period such as the life span of owner
Leasehold
right to possession, but not ownership, for the term of the lease
Future interests include
1. Reversion
2. Remainder
Reversion
Interest of the original transferor following the granting of a life interest or fee simple defeasible. Ownership of property will revert to original transferor at end of life term or upon defeasance
Remainder
Similar to reversion but the interest is held by third party
Concurrent interest include
1. Tenancy in Common
2. Joint Tenancy
3. Tenancy by the Entirety
Tenancy in Common
Tenants share ownership of property in its entirety. No right of survivorship.
Joint Tenancy
Tenants have right of survivorship. When one tenant dies, their interest merges with other joint tenants until a single owner remains.
Tenancy by the Entirety
Form of joint tenancy available only to married couples. Couple viewed as single entity.
Nonpossesory Interests include
1. Easements
2. Profit
Easements
the right to enter another's land for limited use. May be created expressly or by necessity.
Profit
the right to enter another's land and remove items, typically natural resources. Only created by express grant/reservation.
Conveyance of Real Property
how ownership rights are transferred between parties.
Executing a Deed
Affects the rights of the tranferor and the transferee (analogous to attachment in secured transaction law)
Recording a Deed
Gives 3rd parties constructive notice of transferee's ownership. Rights vary by jurisdiction, based on recording statutes.
Recording Statutes include
1. Notice Statutes
2. Race-Notice Statutes
3. (Pure) Race Statutes
Notice Statutes
Bona fide purchaser prevails over prior purchaser who failed to record
Race-Notice Statutes
Bona purchaser prevails over prior purchaser if they record before prior purchaser
(Pure) Race Statutes
Purchaser who records first prevails
Recording a Mortgage
gives 3rd parties constructive notice of mortgagee's interest in mortgagor's real property. Subject to same recording statutes as deeds.
Adverse possession and easement by prescription
grant ownership/access rights to possessor/user of land at the conclusion of a statutory period (anywhere from 5-25 years, but typically 20 years).
Possession/use must be
1) open and notorious; 2) hostile; 3) actual; 4) continuous; and 5) exclusive (for adverse possession, but not easement by prescription)
Income
all income from whatever source derived" unless specifically excluded.
Deductions
amounts subtracted from gross income to arrive at taxable income.
Above the line deductions
Deductions from gross income to arrive at Adjusted Gross Income (AGI). Generally, more advantageous because they're available to all taxpayers, are not subject to income-level-based restrictions, and impact "below the line" deductions that are based on AG
Below the line deductions
Itemized deductions that are subject to income-level-based restrictions
Credits
amounts applied directly to reduce a taxpayer's tax liability. Unlike deductions, credits reduce a taxpayer's tax liability dollar for dollar (i.e. taxpayer's liability is reduced by amount of the credit)
Refundable credits
Amounts of the available credit that exceed the taxpayer's tax liability are refunded to the taxpayer
Nonrefundable credits
Available credit is limited to the taxpayer's tax liability.
US Tax Court
Tax does not have to be paid, no jury trial available
US District Court
Tax must be paid first, jury trial available
US Court of Federal Claims
Tax must be paid first, no jury trial available
Disposition
the term used to describe all transfers of property such as sales, exchanges, gifts, etc. Upon disposition, the general rule is: Value received - Adjusted basis = Gain/Loss
Cost basis
purchase price, including expenses and assumed debt
Acquired by gift
Basis for gain is donor's basis in the property (plus gift tax attributable to appreciation); Basis for loss is the lesser of gain basis or the fair market value (FMV) of the property on the date of the gift.
Inheritance
Basis is the FMV of the property on the date of the decedent's death or the alternate valuation date
Stock
Determination of basis generally follows the above principles. If received as a dividend, basis is the FMV is stock dividend is taxable at distribution. If a stock option is included in taxable income at distribution, the basis is the FMV at the time of d
Taxable exchanges
when property is used in lieu of cash to acquire other property.
Non-taxable exchanges include
like-kind exchanges, involuntary conversions, dispositions of personal residences, and exchanges of insurance policies.
Like-kind exchanges
available for business/investment property only. Generally, no gain/loss recognized on the transfer unless boot is involved. Boot includes the assumption of liabilities (i.e. mortgages). The offset of assumed mortgages causes the recognition of gain (but
Like-kind exchanges
Basis in received property = basis of property given + recognized gain + boot given - recognized loss - boot received
Involuntary conversions
when money/property is received for destroyed, damaged, stolen, or condemned property. The money/property received is not taxed to the extent it is used to for similar or related use property.
Capital assets include
investment and personal use property, but NOT inventory, depreciable or real property used in business, and supplies
For individuals
capital gains/losses are applied to gross income. Net capital losses are subject to a $3,000 cap, with excess losses carried over indefinitely. Carryover loss retains its identity.
For corporations
capital losses only offset capital gains, not ordinary income. Excess losses carryback three years and carryforward five years, with all carryover loss treated as short-term loss.
Section 1231
First net all casualty and theft gains/loss. If there is a net loss, it gets ordinary gain/loss treatment. If there is a net gain, combine the gain with all other Sec. 1231 gain/loss.
Section 1245
Recognized gain on the disposition of depreciable personal property used in a trade or business is treated as ordinary income to the extent of depreciation taken on the asset (depreciation recapture). Any remaining gain is treated Sec. 1231 gain.
Sec. 1250
Recognized gain on the disposition of business real property (other than Sec. 1245 property) is recognized as ordinary income to the extent of depreciation taken in excess of straight-line depreciation. Remaining gain treated as Sec. 1231 gain (unless sub
Sec. 291
Applies to corporation, but not individuals. An additional 20% of gain from a Sec. 1250 disposition of property is recaptured as ordinary income. Remaining gain is treated as Sec. 1231 gain.
partner's basis in the partnership
initially determined by how they acquired their partnership interest.
Capital contribution
partner's basis equals their capital contribution (i.e. what they paid for their interest)
Transfer of property
Partner's basis in the partnership is their adjusted basis in the transferred property. Generally, no gain/loss recognized on the transfer unless the partnership's assumption of an attached mortgage triggers a decrease in the partner's personal liability
Services
The exchange of services for a partnership interest will cause the partner to recognize ordinary income for services rendered. Both the basis in the partnership and the amount of recognized income are based on the FMV of the partnership.
A partner's basis in the partnership is increased by their share of
partnership income; excess deductions for depletion; increases in the partnership's liabilities; and capital contributions (including the assumption of partnership liabilities)
A partner's basis in the partnership is decreased by
distributions from the partnership; the partner's share of ordinary loss; the partner's share of depletion; the partner's share of decreases in partnership liabilities; and the partnership's assumption of the partner's liabilities.
Partnership income & loss
The partnership is a tax flow through structure (the partners are responsible for the tax, not the partnership). All special items must be preserved and reflected on the partner's individual tax return.
Losses limited to at-risk basis
partner's may deduct their share of partnership losses to the extent of their at-risk basis in the partnership. Any unused loss is carried forward until the partner obtains additional partnership basis.
Distributions from Partnerships
- partnership recognizes no gain/loss on distributions to partners
- Partner recognizes gain to extent money received exceeds partnership basis
- Partner's basis in distributed property is limited their basis in the partnership
liquidating distribution
the partner's bases in distributed properties must be adjusted to account for the difference between the partnership's bases in the properties and the partner's basis in the partnership.
liquidating distribution: Basis decrease
when the partnership's bases exceed the partner's basis in the partnership. First to properties with unrealized depreciation, then in proportion to the properties' bases.
liquidating distribution: Basis increase
when the partner's basis in the property exceed the partnership's bases in the properties. First to properties with unrealized appreciation, then in proportion to the properties FMV.
Section 351 Transfers
Transfer of property in exchange for stock where transferors control the corporation immediately after the transfer. Control is defined as at least 80% of combined voting power and at least 80% of each class of nonvoting stock.
No gain/loss on Sec. 351 transfer
unless boot is involved. Boot will cause the recognition of gain, but not loss. The corporation's assumption of a mortgage will cause the recognition of gain to the extent the mortgage exceeds the transferor's basis in the transferred property.
Shareholder's basis in stock
adjusted basis in the transferred property, plus any recognized gain, less any boot received
Corporation's basis in transferred property
the transferor's adjusted basis, plus any gain recognized by the transferor. For depreciated property, the corporation's basis is limited to the property's FMV. For multiple properties the reduction is allocated in proportion to depreciation.
Section 1244
allows shareholders to deduct an ordinary loss on the sale/worthlessness of Small Business Corporation (SBC) stock
Small Business Corporation (SBC)
aggregate capital does not exceed $1mil. and less than 50% of income from passive investments.
Section 1244
-Shareholder must have paid for the stock (either cash/property)
-Shareholder must be original holder of the stock (purchased from the SBC)
-Ordinary loss limited to $50,000
-When depreciated property is exchanged for Sec. 1244 stock, solely for the purpo
Affiliated group
two or more corporations related through common ownership may elect to file a consolidated return.
Affiliated group
- Requires at least 80% ownership of combined voting power and total value of stock
- Intercompany dividends are eliminated for tax purposes
- Intercompany transactions result in deferred gains/losses until a restoration event (transfer outside of affilia
Controlled Groups
corporations with certain levels of common ownership, that are subject to certain shared tax limitations.
Parent-Subsidiary
80% ownership of voting power or value of stock (or affiliated group that opts out of combined return)
Brother-Sister
5 or less persons combined own 50% of voting power or value of stock, identically
Combined
Member of brother-sister group is parent to a subsidiary
Dividend
distribution out of earnings and profits. Dividends do not affect the shareholder's stock basis
Ordinary distributions are allocated in this order
1) Dividends (to extent of share of earnings & profits); 2) return of stock basis (non-taxable return of capital); and 3) Gain (distribution exceeds stock basis)
S Corporation
taxed like partnerships (flow-through structure, with similar adjustments basis in stock), but shareholders have no personal liability
S Corporation
- Shareholders are taxed on their allocated share of income, regardless of distribution
- Items are allocated on a per share, per day basis (day of disposition allocated to person disposing of shares)
- Affected shareholders may agree to alternative "clos
Distributions from S Corporations
- Nontaxable to the extent of AAA (reduces AAA & stock basis concurrently)
- Distributions in excess of AAA are ordinary dividends to the extent Accumulated Earnings & Profits (AEP)
- Remaining distributions are nontaxable to the extent of remaining basis
unified transfer tax
made up of the gift tax, estate tax, and generation skipping tax.
Gift Tax
Paid by transferor. Tax on property transferred during the transferor's lifetime
Gift
transfer for less than adequate compensation
Taxable gifts
gross gifts less deductions.
Deductions include:
Annual exclusion, Gift-splitting, Educational/Medical exclusion, Political gifts, Charitable gifts, Marital deduction
Annual exclusion
$14,000 per donee for present interests
Gift-splitting
spouses may consent to treat gift by one spouse as made 1/2 by both spouses (doubles annual exclusion, enables use of spouse's transfer tax credit)
Educational/Medical exclusion
Unlimited exclusion of amounts paid by donor on behalf of donee directly to educational organization or health care provider
Political gifts
unlimited exclusion of amounts to a political organization
Charitable gifts
deductible without limitation (net of annual exclusion)
Marital deduction
generally, deduction unlimited for gifts to donor's spouse
Estate Tax
Tax on the property of the tax payer at the time of death
Gross estate
FMV of all property in which the decedent had an interest at the time of death
Income Taxation of Trusts & Estates
Generally same principles as apply to individuals. However, trusts/estates may claim an Income Distribution Deduction for distributions to beneficiaries which reduces taxable income to the extent it's distributed to beneficiaries.
Distributable Net Income (DNI):
the amount of trust/estate income subject to taxation
Simple trust
1) all income paid to beneficiaries; 2) no charitable contributions; and 3) no distribution of corpus
- Income taxed to beneficiaries not trust.
- Beneficiaries taxed on required distributions, not actual distributions
- DNI prorated to amount of required
Complex trust
- all trusts other than simple trusts
2-Tier system:
- 1st tier includes required distributions and distributions that may be paid of corpus or income to the extent they are paid out of income.
- 2nd tier includes all other distributions actually paid.
-
Grantor Trust
Trust in which grantor retains substantial control of trust
Income taxed to grantor, rather than trust or beneficiaries
Elements establishing a grantor trust include
- Trust income may/will be distributed to grantor or grantor's spouse
- Grantor may revoke trust
- Grantor holds reversion worth more than 5% of trust corpus
- Grantor can deal with trust property in nonfiduciary capacity
- Grantor controls beneficiaries
Tax-Exempt Organizations
Organizations specifically designated in the Internal Revenue Code as tax-exempt (26 USC 501)
Unrelated Business Income (UBI):
- Tax-exempt organizations are subject to tax on UBI
-Must meet all three requirements:
Income stemming from a
1) trade or business; 2) regularly carried on; that is 3) unrelated to the organization's tax-exempt purpose
Tax Planning
Timing, Income/Deduction Shifting, Conversion
Timing
Accelerate deduction, defer recognition of income
Income/Deduction Shifting
move income to lower tax-rate payers, move deductions to higher tax-rate payers
Conversion
Convert ordinary income to income taxed at a preferential rate