[jeff]

Welcome to the Q4 2016 CPA Exam Study Group for REG.

If this is your first post in the study group – please post your target exam date (just the time frame to preserve your anonymity), and your past history with this exam (optional, of course).

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

[Reg_Slayer]

(total distribution from c-corp) – (allocated dividend income) = return of capital, but ONLY TO THE EXTENT OF BASIS IN THE STOCK.

any portion in excess of that is CAPITAL GAIN.

[The.Underdog]

Zero Corp. is an investment company authorized to issue only common stock.
During the last half of 2016, Edwards owned 450 of the 1,000 outstanding shares of stock in Zero. Another 350 shares of stock outstanding were owned, 10 shares each, by 35 shareholders who are neither related to each other nor to Edwards.

Zero could be a personal holding company if the remaining 200 shares of common stock were owned by

	A.  An estate where Edwards is the beneficiary.
Domestic and foreign corporations satisfying the personal holding company stock ownership and income tests are personal holding companies. As such, the corporation will be subject a 20 percent penalty tax on undistributed personal holding company income. The stock ownership test is satisfied if, at some time during the corporation's tax year, 50 percent or more of the corporation's stock was directly or indirectly owned by five or fewer individuals.
An individual indirectly owns stock if it is owned by the individual's family or partner. Family includes the individual's brothers, sisters, spouse and lineal descendants and ancestors. An individual will not be considered to be the constructive owner of the stock owned by nephews, cousins, uncles, aunts, and any of his/hers spouses relatives. Constructive ownership also may exist if the individual is a partner in a partnership or the beneficiary of an estate that is a shareholder. The income test is satisfied if 60 percent or more of the corporation's adjusted ordinary gross income is personal holding company income.

With 450 shares, Edwards already directly owns 45 percent of Zero Corp.'s outstanding stock. If an estate where Edwards is the beneficiary owns the remainder of the corporation's 200 shares of stock, Edwards would directly or indirectly own 65 percent of the corporation. An ownership exceeding the 50 percent direct or indirect ownership percentage is needed to satisfy the stock ownership test.

Hence, Zero Corp. could be a personal holding company if the remaining 200 shares were owned by an estate where Edwards is the beneficiary. <strong>Each response given to this question satisfies the stock ownership test for a personal holding company because, in each response, 5 or fewer individuals would own more than 50 percent of the corporation's stock. However, this response is the best as it concentrates over 50 percent ownership under the control of one individual.</strong>

	B.  Edwards' brother-in-law.
	C.  A partnership where Edwards is not a partner.
	D.  Edwards' cousin.

LOL SO EVERY CHOICE IS RIGHT. ARE YOU KIDDING ME>!> #Rage

FAR - 86
AUD - 93
REG - 8/31/16
BEC -84

[jonm857]

Again… Becker's wording. As you can see below, they have a note saying the partnership's basis = “NBV or debt assumed”, but if you read the paragraph it says nothing about debt assumed. Which is it??

B - 81
A - 87
R - 73
F - July 5th

[jonm857]

Here's what I've got for year ends and due dates

C-Corporation (“substantial flexibility”) –
If a calendar year-end, the due date is April 15th.
If a fiscal year-end other than June 30, the due date is 3 1/2 months after year end.
If a June 30 year-end, the due date is September 15th.

S- Corporation
Required to have a calendar year-end, unless there is a valid business purpose. The due date is March 15th, or 2 1/2 months after year end for non-calendar year ends.

Partnerships
Generally a calendar year is required, unless there is a maximum 3-month deferral elected. The due date is March 15th, or 2 1/2 months after year end for non-calendar year ends.

Estates
Any year-end is allowed. If the alternate valuation method is elected, there is a 6-month limit to value the estate. The due date for form 706 is 9 months after death.

Trusts
Generally required to have a calendar year-end, and the due date is April 15th.

Gift returns
The due date is April 15th.

B - 81
A - 87
R - 73
F - July 5th

[jonm857]

Need help understanding this concept. Not grasping it:

Failure to pay penalty:

“The penalty is one-half of 1 percent per month (or any fraction thereof) up to a maximum of 25% of the unpaid tax.”

B - 81
A - 87
R - 73
F - July 5th

[Reg_Slayer]

@jonm857

1)

find my post from yesterday about this sim.

failure to pay = $unpaid tax * .5% * #months/12
failure to file = $unpaid tax * 1% * #months/12

2)

Book value of property contributed, and amount of debt assumed by partner/shareholder are both things that can increase basis.

[jonm857]

Thanks. Is this right, then??

let's say I had unpaid tax of $30,000 and did not pay for 4 months.

30,000 x .5% X (4/12) = 5000 penalty?

Surely the .5% is actually .005 when you go type it into the formula. In which case the penalty would've been just $50.

Right?

B - 81
A - 87
R - 73
F - July 5th

[Reg_Slayer]

@The.Underdog

a. HIMSELF = CONSTRUCTIVE OWNERSHIP
B. Edwards' brother-in-law. = NOT CONSTRUCTIVE OWNERSHIP
C. A partnership where Edwards is not a partner. = NOT CONSTRUCTIVE OWNERSHIP
D. Edwards' cousin. = NOT CONSTRUCTIVE OWNERSHIP

544 constructive ownership rules:
An individual is considered as owning the stock owned by his family including ONLY brothers and sisters, spouse, ancestors, and lineal descendants.

PHC:
five or fewer individuals own more than 50% of the value of its stock at any time during the last half of its taxable year.

[sonja90]

@jon do you have question for late filing and penalties?
I think in your example it should be 500 penalty?

April 15 was the tax day deadline for most people. If you are due a refund there is no penalty if you file a late tax return. But if you owe tax, and you failed to file and pay on time, you will usually owe interest and penalties on the tax you pay late. You should file your tax return and pay the tax as soon as possible to stop them. Here are eight facts that you should know about these penalties.
Two penalties may apply. If you file your federal tax return late and owe tax with the return, two penalties may apply. The first is a failure-to-file penalty for late filing. The second is a failure-to-pay penalty for paying late.

Penalty for late filing. The failure-to-file penalty is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. It will not exceed 25 percent of your unpaid taxes.

Minimum late filing penalty. If you file your return more than 60 days after the due date or extended due date, the minimum penalty for late filing is the smaller of $135 or 100 percent of the unpaid tax.

Penalty for late payment. The failure-to-pay penalty is generally 0.5 percent per month of your unpaid taxes. It applies for each month or part of a month your taxes remain unpaid and starts accruing the day after taxes are due. It can build up to as much as 25 percent of your unpaid taxes.

Combined penalty per month. If the failure-to-file penalty and the failure-to-pay penalty both apply in any month, the maximum amount charged for those two penalties that month is 5 percent.

File even if you can’t pay. In most cases, the failure-to-file penalty is 10 times more than the failure-to-pay penalty. So if you can’t pay in full, you should file your tax return and pay as much as you can. Use IRS Direct Pay to pay your tax directly from your checking or savings account. You should try other options to pay, such as getting a loan or paying by debit or credit card. The IRS will work with you to help you resolve your tax debt. Most people can set up an installment agreement with the IRS using the Online Payment Agreement tool on IRS.gov.

Late payment penalty may not apply. If you requested an extension of time to file your income tax return by the tax due date and paid at least 90 percent of the taxes you owe, you may not face a failure-to-pay penalty. However, you must pay the remaining balance by the extended due date. You will owe interest on any taxes you pay after the April 15 due date.

No penalty if reasonable cause. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show reasonable cause for not filing or paying on time. There is also penalty relief available for repayment of excess advance payments of the premium tax credit for 2014.

[sonja90]

I would just read through these 🙂 just in case

Summary of Preparer Penalties under Title 26
IRC § 6694 – Understatement of taxpayer’s liability by tax return preparer.
IRC § 6694(a) – Understatement due to unreasonable positions. The penalty is the greater of $1,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund.
IRC § 6694(b) – Understatement due to willful or reckless conduct. The penalty is the greater of $5,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund.
IRC § 6695 – Other assessable penalties with respect to the preparation of tax returns for other persons.
IRC § 6695(a) – Failure to furnish copy to taxpayer. The penalty is $50 for each failure to comply with IRC § 6107 regarding furnishing a copy of a return or claim to a taxpayer. The maximum penalty imposed on any tax return preparer shall not exceed $25,000 in a calendar year.
IRC § 6695(b) – Failure to sign return. The penalty is $50 for each failure to sign a return or claim for refund as required by regulations. The maximum penalty imposed on any tax return preparer shall not exceed $25,000 in a calendar year.
IRC § 6695(c) – Failure to furnish identifying number. The penalty is $50 for each failure to comply with IRC § 6109(a)(4) regarding furnishing an identifying number on a return or claim. The maximum penalty imposed on any tax return preparer shall not exceed $25,000 in a calendar year.
IRC § 6695(d) – Failure to retain copy or list. The penalty is $50 for each failure to comply with IRC § 6107(b) regarding retaining a copy or list of a return or claim. The maximum penalty imposed on any tax return preparer shall not exceed $25,000 in a return period.
IRC § 6695(e) – Failure to file correct information returns. The penalty is $50 for each failure to comply with IRC § 6060. The maximum penalty imposed on any tax return preparer shall not exceed $25,000 in a return period.
IRC § 6695(f) – Negotiation of check. The penalty is $500 for a tax return preparer who endorses or negotiates any check made in respect of taxes imposed by Title 26 which is issued to a taxpayer.
IRC § 6695(g) – Failure to be diligent in determining eligibility for earned income credit. The penalty is $500 for each failure to comply with the EIC due diligence requirements imposed in regulations.
IRC § 6700 – Promoting abusive tax shelters
The penalty is for a promoter of an abusive tax shelter and is generally equal to $1,000 for each organization or sale of an abusive plan or arrangement (or, if lesser, 100 percent of the income derived from the activity).
IRC § 6701 – Penalties for aiding and abetting understatement of tax liability.
The penalty is $1000 ($10,000 if the conduct relates to a corporation’s tax return) for aiding and abetting in an understatement of a tax liability. Any person subject to the penalty shall be penalized only once for documents relating to the same taxpayer for a single tax period or event.
IRC § 6713 – Disclosure or use of information by preparers of returns.
The penalty is $250 for each unauthorized disclosure or use of information furnished for, or in connection with, the preparation of a return. The maximum penalty on any person shall not exceed $10,000 in a calendar year.
IRC § 7206 – Fraud and false statements.
Guilty of a felony and, upon conviction, a fine of not more than $100,000 ($500,000 in the case of a corporation), imprisonment of not more than three years, or both (together with the costs of prosecution).
IRC § 7207 – Fraudulent returns, statements, or other documents.
Guilty of a misdemeanor and, upon conviction, a fine of not more than $10,000 ($50,000 in the case of a corporation), imprisonment of not more than one year, or both.
IRC § 7216 – Disclosure or use of information by preparers of returns.
Guilty of a misdemeanor for knowingly or recklessly disclosing information furnished in connection with a tax return or using such information for any purpose other than preparing or assisting in the preparation of such return. Upon conviction, a fine of not more than $1,000, imprisonment for not more than 1 year, or both (together with the costs of prosecution).
IRC § 7407 – Action to enjoin tax return preparers.
A federal district court may enjoin a tax return preparer from engaging in certain proscribed conduct, or in extreme cases, from continuing to act as a tax return preparer altogether.
IRC § 7408 – Action to enjoin specified conduct related to tax shelters and reportable transactions
A federal district court may enjoin a person from engaging in certain proscribed conduct (including any action, or failure to take action, which is in violation of Circular 230).
Note: Please see the Internal Revenue Code, corresponding Treasury Regulations, and other related published guidance for additional information on each penalty section.

[SONA]

Please help me with this question. Isn't the property received by the c corp, s corp, and partnership's basis is the adjusted basis of the shareholder/partner transferring the property? I don't agree with the answer. Question from Ninja mcq

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
You are correct, the answer is B.

When property is transferred to a corporation, the basis of any property received is the fair market value (FMV) at the time of the transfer. Porter's transfer two years ago had an FMV of $50,000, but the current FMV does not have an impact on the corporation's basis in the property. The basis in Corley's contribution is the current FMV, and their basis in the property does not affect the corporation's basis. The total basis in property contributed to the corporation is the $50,000 original contribution (FMV) from Porter, plus the $500,000 current contribution (FMV) for Corley, which equals a total of $550,000.

[sonja90]

okay peps i'm done with studies 🙂 I will read my notes once more tonight.
Going to see how does outside looks LOL

Good luck to everyone!!! May out performance on the exam make up for how boring we were while studying 🙂

[Reg_Slayer]

@SONA:

porter = sole shareholder = at least 80% = use basis.
corley = 10% interest = not at least 80% = use fmv

[jonm857]

@SONA

you have to look at this way. A shareholder recognizes a gain if 1) he does not meet the 80% control test, or 2) boot is received.

Here, corley does not share in the 80% control group. He only has a 10% interest, meaning Porter by himself has 90% and isnt sharing 80% with anybody.

So Corley has to recognize a gain on his contribution, which is
FMV – adjusted basis, or $250,000.

Now the corporation has to include that gain in its basis. So add the 250,000 gain to the adjusted basis, and you get $500,000.

Then add Porters basis of $50,000.

B - 81
A - 87
R - 73
F - July 5th

[SONA]

Yesssss. Thanks a lot for the explanation.

Too many rules.

[Author]

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