[jeff]

Welcome to the Q4 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/

[CoachEmUp]

@pharaoh you've been grinding pretty hard in here (and previous REG thread) so I'm sure you're in good shape. I'm starting to get worried, I haven't routinely scored this low (or even close to it) on the other two tests I took.

[hanyun]

Hi everyone! Quick clarification question-

An individual taxpayer reports the following information:

US Treasury bond income – $100
Municipal bond income – $200
Rental income – $500
Investment interest expense – $1000

What amount of investment interest can the taxpayer deduct in the current year?

A. $800
B. $100
C. $1100
D. $300

Answer B, “Investment interest expenses deduction is an itemized deduction limited to net investment income. Taxable interest is included in net investment income. Rental income and tax exempt interest are not. Therefore the limitation is the $100 US Treasury bond income.”

Why is rental income not included in investment income? I know rental income is reported on Schedule E and it is “passive income” unless certain exceptions apply. However my review book (Becker R2-24) also says that Included as Investment (Taxable) Income is Rents. Is that not rental income? I would really appreciate any clarification.

[pharaoh]

@hanyun I know rental income confused me so much and I have it in my notes exactly “Rental activities are considered passive even if taxpayer is materially participating”

The investment interest expense deducted in itemized should offset the interest income in Schedule B. Rental Income is in Sch E

FAR 8/2016
AUD 1/2017
REG TBD
BEC TBD

[pharaoh]

I don't think this is right

Porter, the sole shareholder of Preston Corp., transferred property to the corporation as a contribution to capital. Two years later, Corley transferred property to the corporation in exchange for a 10% interest in corporate stock. The property transferred was valued as follows:

Porter’s Transfer Corley’s Transfer
Basis $50,000 $250,000
Fair market value 200,000 500,000

What amount represents the corporation's basis in the property received?

A.$700,000

Correct B.$550,000

C.$450,000

D.$300,000

FAR 8/2016
AUD 1/2017
REG TBD
BEC TBD

[pcunniff]

2 questions.

1) I thought investment interest exp is an itemized deduction on schedule a, not B.

2) why is muni interest income not considered investment income? Because it’s government regulated?

Let me know!

[pcunniff]

There is a becker question that also tripped me up if someone could assist-

Kent Corp. is a calendar year accural basis C-corp. In yr 1, kent made a NONLIQUIDATING distribution of prop with adj basis of 150,000 and FMV of 200,000 to Reed, its sole shareholder.

The following pertains to Kent Corp

Reeds basis in Kent stock at 1/1 = $500,000
Accumulated earnings 1/1 = $125,000
Current E & P Year 1= $60,000

What is taxable as dividend income to Reed for year 1?

Answer = $200,000

I calculated and got $185,000 for E&P. I am having trouble with the ordering rules as I know after E&P you would recognize a capital gain. I thought everything up to basis is return of capital? In this question – it would be 500k. Can someone assist?

Thanks!

[pharaoh]

@pcunniff
1) You are right, the investment income goes on Sch B and the expense on Sch A. Same like Gambling you put the income on the face but the loss is on Sch A. Why? I have no clue lol 🙂

2)Muni bonds and some state type of bonds are just tax free

FAR 8/2016
AUD 1/2017
REG TBD
BEC TBD

[pcunniff]

Interest and dividends show up on schedule B. Investment expenses on schedule A are limited to investment income (less expenses) (which are also on schedule A). They say its like gambling loss rules because gambling losses are misc itemized deductions that are not subject to the 2% AGI test. However, they are limited to winnings (like investment expenses are to investment income).

Does that make sense now?

[pcunniff]

Can someone please answer my question above on corp distributions?

[pcunniff]

.

[pcunniff]

@hanyun

Professor Carnes actually stated that rents should be removed from the list as it is not investment interest and should only be on schedule E.

[pharaoh]

@pcunniff – that question is very tricky

This is a property distribution, so it is distributed at FMV and the corp will recognize gain of 50k that you will add to the current earnings

so you add that 50k to the 185k that you calculated

FAR 8/2016
AUD 1/2017
REG TBD
BEC TBD

[pcunniff]

If we add the 50k to the 185k — that answer is 235k, not 200k. I guess I am trying to understand how the gain and e&P that gets us to 200. I agree, though.

I think all the E&P would be used and you would add 50k to the 185k. Unfortunately, the answer is 200k. How and why is the answer (200k)?

[pharaoh]

@pcunniff the distributed property is 200k which is distributed as dividends that they are asking for. The total of AEP and CEP of 235k is the max limit for how much is taxable.

If we assume the total of AEP and CEP is 235k including gain and the distributed property was 250k, in this case 235k will be taxable (which is your limit) and the additional 15k will be considered return of capital

FAR 8/2016
AUD 1/2017
REG TBD
BEC TBD

[Matt]

My best guess.

It's a non-liquidating distribution, as opposed to a liquidating or partially liquidating distribution.
In other word, none of the $200,000 distribution was a non-taxable return of basis.

Accumulated earnings 1/1 = $125,000
Current E & P Year 1= $60,000

The info states current E and P year 1.
The question asks current taxable dividend for year 1.

The information on Current E and P could theoretically have been at some point in the middle of the year.
What did the explanation state as the reason for 200,000?

FAR 74

[Author]

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