ACC610 Syllabus Advanced Federal Taxation

ACC610DiscussionsWeek 1 - Discussion 1- Income Tax Law

ACC610DiscussionsWeek 1 - Discussion 2- Corporate Tax Reform

ACC610AssignmentsWeek 1 - Assignment- Week 1 Exercises

 

ACC610DiscussionsWeek 2 - Discussion 1- Characterizing the Distribution

ACC610DiscussionsWeek 2 - Discussion 2- Taxes for Ownership

ACC610AssignmentsWeek 2 - Assignment- Week 2 Exercises

 

ACC610DiscussionsWeek 3 - Discussion 1- Property Contribution

ACC610DiscussionsWeek 3 - Discussion 2- Liquidating Distribution

ACC610AssignmentsWeek 3 - Assignment- Week 3 Exercises

 

ACC610DiscussionsWeek 4 - Discussion 1-AEP

ACC610DiscussionsWeek 4 - Discussion 2- Tax Implications for Profit-Making Entities

ACC610AssignmentsWeek 4 - Assignment- Week 4 Exercises

 

ACC610DiscussionsWeek 5 - Discussion 1- Qualified Tuition Programs

ACC610DiscussionsWeek 5 - Discussion 2- Trusts

ACC610AssignmentsWeek 5 - Assignment- Week 5 Exercises

 

ACC610DiscussionsWeek 6 - Discussion 1- Advising for Potential Tax Loss

ACC610DiscussionsWeek 6 - Discussion 2- Circular 230

ACC610AssignmentsWeek 6 - Final Paper

ACC610DiscussionsWeek 1 - Discussion 1 - Income Tax Law

Example:“Jane, a single taxpayer, had $80,000 in taxable income in 2017. Under the tax laws before the Tax Cuts and Jobs Act (TCJA), she was eligible for a personal exemption of $4,050 and a standard deduction of $6,350. After the TCJA, the personal exemption was eliminated, and the standard deduction was increased to $12,000. Calculate Jane’s taxable income and tax liability under both the pre-TCJA and post-TCJA laws.”

Solution:

Pre-TCJA Calculation (2017):

• Taxable income: $80,000
• Personal exemption: $4,050
• Standard deduction: $6,350
• Adjusted taxable income: $80,000 - $4,050 - $6,350 = $69,600
• Using the 2017 tax brackets, Jane’s federal tax liability would be calculated based on her adjusted taxable income.

Post-TCJA Calculation (2018):

• Taxable income: $80,000
• Personal exemption: $0 (eliminated)
• Standard deduction: $12,000
• Adjusted taxable income: $80,000 - $12,000 = $68,000
• Using the 2018 tax brackets, Jane’s federal tax liability would be calculated based on her adjusted taxable income.

Comparison:Jane’s taxable income decreased slightly under the TCJA, but the elimination of the personal exemption could potentially offset the benefits of the higher standard deduction, depending on her specific tax bracket. The overall impact would be assessed by comparing her final tax liability under both scenarios.

ACC610DiscussionsWeek 1 - Discussion 2 - Corporate Tax Reform

Example:“ABC Corporation had $1,000,000 in taxable income in 2017. Before the TCJA, the corporate tax rate was 35%, but after the TCJA, the corporate tax rate was reduced to 21%. Calculate the difference in tax liability for ABC Corporation before and after the TCJA.”

Solution:

Pre-TCJA (2017):

• Taxable income: $1,000,000
• Tax rate: 35%
• Tax liability: $1,000,000 x 35% = $350,000

Post-TCJA (2018):

• Taxable income: $1,000,000
• Tax rate: 21%
• Tax liability: $1,000,000 x 21% = $210,000

Difference:

• Tax savings due to TCJA: $350,000 - $210,000 = $140,000

ABC Corporation saved $140,000 in federal taxes due to the reduction in the corporate tax rate from 35% to 21% under the TCJA. This significant tax savings could be used by the corporation for reinvestment, dividend distribution, or stock repurchase.

ACC610AssignmentsWeek 1 - Assignment - Week 1 Exercises

Example:“Calculate the federal income tax for a married couple with a combined taxable income of $120,000 under both the 2017 tax laws (pre-TCJA) and the 2018 tax laws (post-TCJA). Assume they do not itemize deductions and have no dependents.”

Solution:

Pre-TCJA Calculation (2017):

• Taxable income: $120,000
• Personal exemptions: $4,050 x 2 = $8,100
• Standard deduction: $12,700 (for married filing jointly)
• Adjusted taxable income: $120,000 - $8,100 - $12,700 = $99,200
• Using the 2017 tax brackets, calculate the federal tax liability based on the adjusted taxable income of $99,200.

Post-TCJA Calculation (2018):

• Taxable income: $120,000
• Personal exemptions: $0 (eliminated)
• Standard deduction: $24,000 (for married filing jointly)
• Adjusted taxable income: $120,000 - $24,000 = $96,000
• Using the 2018 tax brackets, calculate the federal tax liability based on the adjusted taxable income of $96,000.

Comparison:

• The couple’s taxable income decreased under the TCJA, resulting in a lower tax liability. The larger standard deduction under the TCJA offsets the loss of personal exemptions, leading to a modest tax benefit.

ACC610DiscussionsWeek 2 - Discussion 1 - Characterizing the Distribution

Example:“XYZ Corporation declares a $10,000 dividend. Shareholder Sarah, who owns 10% of the corporation’s shares, receives $1,000. XYZ Corporation has $50,000 in accumulated earnings and profits (E&P) and $20,000 in current E&P. Determine how Sarah’s $1,000 dividend is characterized for tax purposes.”

Solution:

• Step 1: Assess E&P: The total E&P for XYZ Corporation is $50,000 (accumulated) + $20,000 (current) = $70,000.
• Step 2: Characterize the Dividend: Sarah’s $1,000 dividend is fully covered by the corporation’s E&P. Therefore, the entire $1,000 is considered a taxable dividend, taxed at the qualified dividend rate applicable to Sarah (typically 15% or 20% depending on her income level).
• Step 3: Tax Implications: Sarah will report the $1,000 as dividend income on her tax return, subject to the applicable qualified dividend tax rate.

ACC610DiscussionsWeek 2 - Discussion 2 - Taxes for Ownership

Example:“A partner, Mark, joins ABC Partnership by contributing a piece of land valued at $200,000 with an adjusted basis of $120,000. Discuss the tax implications of Mark’s contribution for both him and the partnership.”

Solution:

• Mark’s Basis in Partnership Interest: Mark’s basis in his partnership interest will be equal to his adjusted basis in the land, which is $120,000.
• Partnership’s Basis in the Land: The partnership’s basis in the land will be the same as Mark’s adjusted basis, $120,000, not the fair market value. This is because the contribution is tax-free under IRC Section 721.
• No Gain/Loss Recognized: Since this is a contribution of property to a partnership in exchange for a partnership interest, Mark does not recognize any gain or loss on the transaction under Section 721.
• Future Tax Considerations: If the partnership sells the land later for more than $120,000, the partnership will recognize a gain, and Mark will be allocated a portion of this gain according to his partnership interest.

ACC610DiscussionsWeek 3 - Discussion 1 - Property Contribution

Example:“Emily, a shareholder, contributes machinery to her company, XYZ Corp., in exchange for additional shares. The machinery has a fair market value (FMV) of $150,000 and an adjusted basis of $100,000. Discuss the tax implications of this property contribution under Section 351 of the IRC for both Emily and the corporation.”

Solution:

• Qualification under Section 351: Emily’s contribution qualifies as a tax-free exchange under Section 351 since she is contributing property to the corporation solely in exchange for stock and will maintain control (at least 80% of the corporation’s stock) after the exchange.
• Emily’s Basis in the Stock: Emily’s basis in the stock received will be the same as her adjusted basis in the machinery, which is $100,000.
• Corporation’s Basis in the Machinery: XYZ Corp. will take on Emily’s adjusted basis in the machinery, which is $100,000, not the fair market value.
• No Immediate Gain/Loss: Emily does not recognize any gain or loss on the contribution, despite the difference between the FMV and her basis. The gain is deferred until XYZ Corp. disposes of the machinery.

ACC610DiscussionsWeek 3 - Discussion 2 - Liquidating Distribution

Example:“ABC Corp. decides to liquidate and distribute its assets to shareholders. Sarah, a shareholder, receives $50,000 in cash and property with an FMV of $100,000. Sarah’s adjusted basis in her stock is $80,000. Determine the tax implications of this liquidating distribution for Sarah.”

Solution:

• Step 1: Determine Total Liquidating Distribution: Sarah receives a total of $50,000 (cash) + $100,000 (property) = $150,000.
• Step 2: Calculate Gain/Loss: Sarah’s gain or loss is calculated by subtracting her stock basis from the total distribution received.
  • Gain = $150,000 (distribution) - $80,000 (basis) = $70,000
• Step 3: Characterization of the Gain: The $70,000 gain is treated as a capital gain and is taxed at the long-term capital gains rate if Sarah held the stock for more than a year.
• Step 4: Basis in Property Received: The basis of the property received by Sarah will be its fair market value, $100,000.

ACC610AssignmentsWeek 3 - Assignment - Week 3 Exercises

Example:“XYZ Corporation is liquidating. It distributes cash of $200,000 and a building with an FMV of $400,000 to its sole shareholder, Tom. Tom’s adjusted basis in his stock is $300,000. Calculate the gain Tom recognizes and his basis in the building.”

Solution:

• Step 1: Calculate Total Distribution: Tom receives $200,000 in cash + $400,000 in property = $600,000.
• Step 2: Calculate Gain: The gain is the difference between the total distribution and Tom’s adjusted basis in the stock.
  • Gain = $600,000 - $300,000 = $300,000
• Step 3: Recognize Gain: Tom will recognize a $300,000 capital gain, which will be taxed as long-term capital gain if he held the stock for more than one year.
• Step 4: Basis in the Building: Tom’s basis in the building will be its FMV at the time of distribution, which is $400,000.

ACC610DiscussionsWeek 4 - Discussion 1 - AEP (Accumulated Earnings Tax)

Example:“ABC Corporation has accumulated earnings of $800,000. The IRS suspects that the corporation is avoiding dividend distribution to shareholders to prevent taxation. ABC Corp. has reasonable needs of $500,000 for business expansion. Calculate the potential Accumulated Earnings Tax (AET) liability for ABC Corp. if the IRS deems $300,000 as excess accumulated earnings.”

Solution:

• Step 1: Determine Excess Accumulated Earnings:
  • Total Accumulated Earnings = $800,000
  • Reasonable Business Needs = $500,000
  • Excess Accumulated Earnings = $800,000 - $500,000 = $300,000
• Step 2: Calculate AET: The AET rate is 20%.
  • AET Liability = $300,000 x 20% = $60,000
• Step 3: Implication: ABC Corp. would owe an Accumulated Earnings Tax of $60,000, which could have been avoided by distributing dividends or reinvesting in the business with more clarity on the use of retained earnings.

ACC610DiscussionsWeek 4 - Discussion 2 - Tax Implications for Profit-Making Entities

Example:“Sarah is considering converting her sole proprietorship to an S corporation. Her business currently generates $150,000 in net income annually. Discuss the tax implications of this conversion, focusing on self-employment taxes and potential benefits of S corporation status.”

Solution:

• Self-Employment Taxes (Sole Proprietorship): As a sole proprietor, Sarah would pay self-employment tax on the entire $150,000 of net income. The self-employment tax rate is 15.3%, which means she would pay approximately $22,950 in self-employment taxes.
• S Corporation Election: If Sarah elects to be taxed as an S corporation, she can pay herself a reasonable salary, say $80,000, subject to payroll taxes, and treat the remaining $70,000 as a distribution, which is not subject to self-employment tax.
  • Payroll Taxes on Salary: $80,000 x 15.3% = $12,240
  • Savings on Self-Employment Tax: $22,950 (Sole Proprietorship) - $12,240 (S Corporation) = $10,710
• Benefit of S Corporation: By converting to an S corporation, Sarah could potentially save $10,710 annually on self-employment taxes, assuming the IRS agrees that $80,000 is a reasonable salary.

ACC610AssignmentsWeek 4 - Assignment - Week 4 Exercises

Example:“Assume ABC Corp. has retained earnings of $1,200,000. The IRS considers $400,000 to be excess, as the corporation could have distributed this amount as dividends. Calculate the potential Accumulated Earnings Tax liability and discuss the actions the corporation could take to avoid this tax.”

Solution:

• Step 1: Determine Excess Accumulated Earnings:
  • Retained Earnings = $1,200,000
  • Reasonable Business Needs = $800,000
  • Excess Accumulated Earnings = $400,000
• Step 2: Calculate AET:
  • AET Rate = 20%
  • AET Liability = $400,000 x 20% = $80,000
• Step 3: Avoiding AET: ABC Corp. could distribute the excess earnings as dividends to shareholders or reinvest the funds in business activities that qualify as reasonable needs, thus reducing or eliminating its AET liability.

ACC610DiscussionsWeek 5 - Discussion 1 - Qualified Tuition Programs

Example:“John and Mary have set up a 529 plan for their daughter’s college education. They contribute $10,000 annually to the plan. Discuss the tax benefits of this contribution, including the potential state tax deduction and the tax-free growth of the 529 plan.”

Solution:

• Tax-Free Growth: Contributions to a 529 plan grow tax-free, meaning John and Mary will not pay federal taxes on any earnings within the plan.
• Tax-Free Withdrawals: If the funds are used for qualified education expenses, such as tuition, fees, and books, the withdrawals are also tax-free.
• State Tax Deduction: Depending on their state of residence, John and Mary may be eligible for a state tax deduction on their contributions. For example, if their state allows a deduction of up to $10,000 per year, they could reduce their state taxable income by the full amount of their contribution.
• Potential Savings: If they save $10,000 annually in a 529 plan that grows at an average annual rate of 6%, the plan could accumulate significant tax-free growth over time, enhancing their ability to pay for their daughter’s college education without tax liabilities.

ACC610DiscussionsWeek 5 - Discussion 2 - Trusts

Example:“Emily creates a revocable trust and transfers $500,000 in assets into it. She retains the right to revoke the trust at any time. Discuss the tax implications for Emily during her lifetime and upon her death.”

Solution:

• During Lifetime:
  • Income Tax: Since the trust is revocable, Emily is considered the owner of the trust assets for tax purposes. All income generated by the trust assets is reported on her individual tax return, and she pays taxes on that income.
  • No Immediate Gift Tax: Because the trust is revocable, there is no completed gift for gift tax purposes, and no gift tax return is required when the assets are transferred into the trust.
• Upon Death:
  • Estate Tax: Upon Emily’s death, the assets in the trust are included in her estate for estate tax purposes. If the estate exceeds the federal estate tax exemption, the estate may owe estate taxes.
  • Step-Up in Basis: The assets in the trust receive a step-up in basis to their fair market value at the time of Emily’s death, which can reduce capital gains taxes for the beneficiaries if they sell the assets.

ACC610AssignmentsWeek 5 - Assignment - Week 5 Exercises

Example:“John establishes an irrevocable trust and transfers $200,000 in assets to it. The trust generates $10,000 in income annually. Determine who is responsible for paying taxes on the trust income and discuss the potential tax implications for both John and the beneficiaries.”

Solution:

• Trust Taxation:
  • The irrevocable trust is considered a separate tax entity. It is required to file its own tax return (Form 1041) and pay taxes on its income unless the income is distributed to the beneficiaries.
  • If the trust retains the $10,000 of income, it will pay taxes on that income at trust tax rates, which are typically higher than individual rates.
• Beneficiary Taxation:
  • If the trust distributes the income to the beneficiaries, the income is taxed to the beneficiaries rather than the trust. The beneficiaries will include the distributed income on their personal tax returns and pay taxes at their individual tax rates.
  • The trust can deduct the amount of income distributed to the beneficiaries, reducing its taxable income.

ACC610DiscussionsWeek 6 - Discussion 1 - Advising for Potential Tax Loss

Example:“Tom, an investor, owns shares in ABC Corp. that have declined in value from $50,000 to $30,000. He is considering selling these shares to realize a capital loss. Discuss the tax implications of realizing this loss and how it could be used to offset other income. Additionally, consider the potential impact of the wash sale rule if Tom repurchases the same stock shortly after the sale.”

Solution:

• Realizing the Capital Loss:
  • If Tom sells the shares at $30,000, he realizes a capital loss of $20,000 ($50,000 original value - $30,000 sale price).
  • This $20,000 loss can be used to offset any capital gains Tom has realized during the year. If Tom has no other capital gains, he can use up to $3,000 of the capital loss to offset ordinary income, with the remaining $17,000 carried forward to future tax years.
• Wash Sale Rule:
  • If Tom repurchases the same or substantially identical stock within 30 days before or after the sale, the wash sale rule would disallow the capital loss deduction. The disallowed loss would be added to the basis of the repurchased stock, deferring the tax benefit until the new stock is sold.
  • To avoid the wash sale rule, Tom should wait at least 31 days before repurchasing the same stock.

ACC610DiscussionsWeek 6 - Discussion 2 - Circular 230

Example:“Sarah, a tax practitioner, is advising a client on a complex tax matter. Discuss the ethical obligations Sarah has under Circular 230, particularly focusing on due diligence, competence, and avoiding conflicts of interest. Provide an example of how Sarah might violate these standards and the potential consequences.”

Solution:

• Due Diligence:
  • Circular 230 requires Sarah to exercise due diligence in preparing and filing tax returns and in providing advice to her clients. She must ensure that the information she uses is accurate and complete.
  • Example of Violation: If Sarah knowingly uses false or misleading information provided by the client without verifying its accuracy, she would be violating the due diligence requirement.
  • Consequences: Such a violation could lead to penalties, suspension, or disbarment from practice before the IRS.
• Competence:
  • Sarah must possess the necessary knowledge, skill, and experience to handle the tax matter competently. If she lacks expertise, she must seek assistance or refer the client to another professional.
  • Example of Violation: If Sarah advises on international tax matters without understanding the relevant laws and fails to consult an expert, she could be deemed incompetent under Circular 230.
  • Consequences: Incompetence could result in disciplinary action by the IRS, including fines or suspension.
• Avoiding Conflicts of Interest:
  • Circular 230 prohibits tax practitioners from representing clients if there is a conflict of interest unless the conflict is disclosed and the client consents in writing.
  • Example of Violation: If Sarah represents both a husband and wife in a divorce proceeding where they have conflicting interests regarding the division of tax liabilities, without obtaining consent, she would be violating this provision.
  • Consequences: Failure to avoid or properly manage conflicts of interest could lead to penalties and damage to Sarah’s professional reputation.

ACC610AssignmentsWeek 6 - Final Paper

Example:“Prepare a comprehensive tax planning strategy for a client, XYZ Corporation, considering a potential merger with another company. The strategy should address the tax implications of the merger, including the treatment of net operating losses (NOLs), the impact on corporate tax attributes, and any potential anti-abuse rules that could affect the transaction.”

Solution:

• Net Operating Losses (NOLs):
  • Assess whether XYZ Corporation has any NOLs that could be utilized in the merger. Under Section 382 of the IRC, if there is a change in ownership, the use of NOLs could be limited. Calculate the potential Section 382 limitation based on the value of the company and the long-term tax-exempt rate.
• Corporate Tax Attributes:
  • Analyze how the merger would impact other corporate tax attributes, such as tax credits and depreciation schedules. Determine whether these attributes will carry over or be subject to limitations post-merger.
• Anti-Abuse Rules:
  • Consider the applicability of any anti-abuse rules, such as those that prevent the merger from being solely motivated by tax avoidance. Ensure that the transaction has a substantial business purpose beyond tax benefits.
• Merger Structure:
  • Recommend the most tax-efficient structure for the merger, whether it be a stock-for-stock exchange, asset acquisition, or other form of reorganization under Sections 368 or 351. Discuss the potential tax implications for both companies and their shareholders, including the recognition of gain or loss and the basis in the new shares or assets.
• Final Recommendations:
  • Provide a detailed plan outlining the steps XYZ Corporation should take to minimize its tax liability while complying with all relevant tax laws and regulations. Consider any state and local tax implications, as well as the potential impact on future financial reporting.