[jeff]

Welcome to the Q3 2017 CPA Exam Study Group for REG. 🙂

Introduce yourselves and let your fellow NINJAs know when you plan to take your REG exam.

The Five Steps (NINJA Framework): https://www.another71.com/pass-the-cpa-exam/

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[Holly]

@CPA I think it's because he also contributed cash $20,000 + $40,000 – $50,0000 = $10,000 would be the shareholder's basis. The question asks for the tax basis of the property for the corporation and not the basis of the shareholder. The total assets contributed are greater than the liability assumed, so the corporation would keep the same NBV.

BEC - 79
REG - 85
AUD - 5/27/16

[Holly]

Here's one for y'all:

Preliminary taxable income ($50,000) – this number doesn't include the information in the line below
$6,000 of charitable contributions and $11,000 of dividends received from a 15%-owned domestic corporation

What is the taxable income (loss)

BEC - 79
REG - 85
AUD - 5/27/16

[JB]

@Holly,

Is it $(46,700)?

[JB]

Did they meet the 80% control test?

Get It Right, CPAs, has been retained to review its client's corporate formation calculations for 2016. Maria, Roger, and Novak created Grassroots Tennis, Inc., which began operations on March 1, 2016. Maria contributed four assets in exchange for 40% of GTI stock. Roger performed recruiting services before operations began in exchange for 15% of GTI stock. Novak contributed cash in exchange for 35% of GTI stock and contributed bookkeeping services after operations began in exchange for 10% of GTI stock. One thousand (1,000) shares were issued. Documentation for the contribution of assets and services can be found in the Exhibits tab. After an initial review of the documentation, a staff associate from Get It Right has drafted a letter to Maria. Kate, a partner in charge of the GTI engagement, has asked you to review the documentation and revise the letter, correcting any errors.

[Anonymous]

I am getting $47,300-wouldn't it be sad if I got it wrong, I took REG on Thursday…

[Holly]

@JB yes!

No, they don't meet control because services accounts for 25%?

BEC - 79
REG - 85
AUD - 5/27/16

[JB]

Wiley's response:

In this problem, the 80% requirement is met because the shareholders contributing property (Maria and Novak) own 85% of GTI stock after the transaction. Therefore, they recognize no gain on the property contributed.

I'm so confused!!

[Holly]

@jb okay so it's by shareholder and not contribution?

Maria 40
Novak 35+10 (Services)
Roger 15 (Services)

I just looked and in my Becker book it says – shareholder who contributes ONLY services is not counted as part of the control group for purposes of the 80 percent control

BEC - 79
REG - 85
AUD - 5/27/16

[CPAIN2K17]

@Holly & @JB

Is this computation correct:

Prelim taxable income (50,000)
Add dividends 11,000
Total (39000)
DRD is .7*11,000 (7,700)
Total (46,700)

Can't take charitable contribution because of loss?

[Holly]

@cpain2k17 yes, that's right

BEC - 79
REG - 85
AUD - 5/27/16

[BBHYX]

Hi guys, have a question about corporate stock redemption.

Lets say you (the shareholder) have a 1000 gain from a stock redemption.

If it was disproportionate, that gain is a taxed as a capital gain.

If it was a proportionate redemption, it is taxed as ordinary income. <– for this part, does the company's E&P matter? For example, if the company had negative E&P and accumulated E&P, is it still ordinary income? Or does it become return of capital? Thanks for any clarification!

[dave]

@Holly, in regards to @jb‘s question: Yes shareholders who ONLY contribute services does not count towards the ownership test. However, Novak first contributed 35% of cash and THEN contributed 10% of services, so then I am assume the question is based on the fact it isn't the only form of basis contributed.

I was looking it up in Becker, but it doesn't seem to specify other than that if a shareholder only contributes services then it isn't counted as a part of the control group (like you mentioned before). Becker needs to have better explanations if questions as tricky as that show up on the exam, we shouldn't have to assume ;(.

Best,

[CPA so close, so far away]

In reference to the question about the 351 transfer. I do not see anything in Becker regarding the services combined with property. However, when I took an advanced corporate tax class in college a year ago, we learned 351 in much more detail. If I remember correctly, if the FMV of services is X % of the property you are transferring it will count for the control test. I believe it was 20% or something.

[Radez]

Hi Holly, jb and CPA so close,

If it helps, here is a link to an analysis that describes the sec 351 nuances in more detail: https://scholarship.law.wm.edu/cgi/viewcontent.cgi?article=1057&context=tax

Specifically, page 2, sub-paragraphs ii and iii discuss both the treatment of contributors who provide both property and services, as well as the limitations thereon, (property should be 10% of FMV of services in order to qualify as part of the transferor group). These paragraphs cite the relevant authority as well.

In theory, if you had a situation where two people contributed 20k of property for 20% and one person contributed 10k of cash and 100k of services for 80%, the transferor group would still have control and sec 351 would still apply.

Treas. Reg. § 1.351-1(a)(1)(ii) effectively equates equates stock already owned and stock to be received for services contributed, so this threshold likely applies to both cases.

Also, for what it's worth, I doubt the CPA exam is concerned with testing at this nuanced a level. After all, it's supposed to be testing base level knowledge of an entry-level accountant.

[jtvande]

I have seen some people in the BEC thread that put together a document of all the formulas to remember. Has anyone done something similar with the phaseouts and thresholds?

[Author]

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