Pearson s Federal Taxation Corporations, Partnerships, Estates & Trusts (2019 edition) Textbook Updates

Transcription

1 Pearson s Federal Taxation Corporations, Partnerships, Estates & Trusts (2019 edition) Textbook Updates Several chapters Rev. Proc Notice Chapter 1 Tax Research Page 32 Table of Updates Sorted by Chapter Chapter 2 Corporate Formations and Capital Structure Page 6 Page 21 Page 32 Page 35 Problem C:2-28 Problem C:2-30 Problem C:2-43 Chapter 3 The Corporate Income Tax Page 6 Page 12 Page 44 Problem C:3-8 Problem C:3-34 Problem C:3-57 Appendix B, pp Chapter 4 Corporate Nonliquidating Distributions Page 24 Page 25 Page 35 Page 46 Problem C:4-47 Problem C:4-53 Problem C:4-58 1

2 Chapter 5 Other Corporate Tax Levies Problem C:5-31 Problem C:5-33 Chapter 6 Corporate Liquidating Distributions Problem C:6-32 Problem C:6-36 Problem C:6-54 Chapter 7 Corporate Acquisitions and Reorganizations Chapter 8 Consolidated Tax Returns Problem C:8-32 Problem C:8-47 Problem C:8-54 Chapter 9 Partnership Formation and Operation Page 14 Page 18 Pages 18 & 19 Problem C:9-57 Chapter 10 Special Partnership Issues Problem C:10-43 Chapter 11 S Corporations Page 16 Problem C:11-29 Problem C:11-32 Problem C:11-57 Chapter 12 The Gift Tax Chapter 13 The Estate Tax Chapter 14 Income Taxation of Trusts and Estates Chapter 15 Administrative Procedures 2

3 Chapter 16 U.S. Taxation of Foreign-Related Transactions Page 13 Problem C:16-45 Problem C:

4 Posted 8/2/2018: Table of Updates Sorted by Date of Posting on Web Site Chapter 3 The Corporate Income Tax Page 6 Page 12 Page 44 Problem C:3-8 Problem C:3-57 Chapter 8 Consolidated Tax Returns Problem C:8-54 Chapter 9 Partnership Formation and Operation Page 14 Chapter 16 U.S. Taxation of Foreign-Related Transactions Page 13 Problem C:16-45 Problem C:16-54 Posted 8/21/2018: Chapter 1 Tax Research Page 32 Chapter 4 Corporate Nonliquidating Distributions Problem C:4-58 Posted 9/10/2018: Chapter 8 Consolidated Tax Returns Problem C:8-32 Posted 9/14/2018: Chapter 3 The Corporate Income Tax Appendix B, pp Posted 9/20/2018: Chapter 2 Corporate Formations and Capital Structure Page 21 Problem C:2-43 (cont.) 4

5 Posted 9/20/2018 (cont.): Chapter 9 Partnership Formation and Operation Problem C:9-57 Posted 9/28/2018: Chapter 4 Corporate Nonliquidating Distributions Problem C:4-47 Posted 11/6/2018: Several chapters Notice Chapter 2 Corporate Formations and Capital Structure Problem C:2-28 Problem C:2-30 Chapter 3 The Corporate Income Tax Problem C:3-34 Chapter 6 Corporate Liquidating Distributions Problem C:6-32 Problem C:6-36 Problem C:6-54 Posted 11/20/2018: Several chapters Rev. Proc Chapter 5 Other Corporate Tax Levies Problem C:5-33 Posted 2/13/2019: Chapter 2 Corporate Formations and Capital Structure Page 6 Page 32 Page 35 (cont.) 5

6 Posted 2/13/2019 (cont.): Chapter 4 Corporate Nonliquidating Distributions Page 24 Page 25 Page 35 Page 46 Problem C:4-53 Problem C:4-58 Chapter 5 Other Corporate Tax Levies Problem C:5-31 Chapter 8 Consolidated Tax Returns Problem C:8-47 Chapter 9 Partnership Formation and Operation Page 18 Chapter 10 Special Partnership Issues Problem C:10-43 Chapter 11 S Corporations Problem C:11-29 Problem C:11-32 Posted 3/4/2019: Chapter 11 S Corporations Page 16 Posted 4/12/2019: Chapter 9 Partnership Formation and Operation Pages 18 & 19 Chapter 11 S Corporations Problem C:

7 Textbook Updates Several chapters Rev. Proc (11/20/2018) The IRS has issued its annual Revenue Procedure with the inflation-adjusted amounts for the tax rate schedules, standard deduction, etc. Here is a link to Rev. Proc , which has these inflation-adjusted amounts for 2019: Notice (11/6/2018) The IRS has issued its annual notice with the inflation-adjusted amounts for qualified retirement plans, e.g., maximum IRA contribution. Here is a link to Notice , which has these amounts for 2019: Chapter 1 Tax Research Page 32 (8/21/2018) This is inadvertently a page from the Individuals version of the textbook. Here is a link to the page that should appear: Corporations Page 1-32 Chapter 2 Corporate Formations and Capital Structure Page 6 (2/13/2019) The third point under Tax Disadvantages should say an NOL can carry back if incurred before 2018 (a post-2017 NOL generally does not carry back). Page 21 (9/20/2018) The sentence before Example C:2-31 should read as follows: This rule also applies if the corporation reduces a property s basis under the loss property limitation rule discussed below. 34b 34b Reg. Sec (c)(3)(i). Page 32 (2/13/2019) The second paragraph under the Securities heading should say an NOL can carry back two years if incurred before A post-2017 NOL generally carries forward indefinitely, but its use in a carryforward year is subject to an 80% of taxable income limitation (see Chapter C:3 for further discussion). Page 35 (2/13/2019) The second point under Avoiding Nonrecognition of Gain Under Sec. 351 should say the top tax rate applicable to corporate-level capital gains is 21% (not 35%). 7

8 Problem C:2-28 (11/6/2018) The beginning of the Solution Manual s answer should say that the sole proprietorship option and the S corporation option with distribution result in in the lowest total tax (not the C corporation option). The remainder of the solution shows that this is the case. Problem C:2-30 (11/6/2018) In Part h of the Solution Manual s answer, Subpart g should say that the machinery s holding period begins four years ago, when Fran purchased it. Although Jet s basis is reduced to the machinery s FMV under Sec. 362(e)(2), Reg. Sec (c)(3)(i) nevertheless states that such basis is determined by reference to the transferor s basis for purposes of Sec. 1223(2). Problem C:2-43 (9/20/2018) The Solutions Manual s answer for part f should say that Barbara s stock has a split holding period because she received it in exchange for cash and Sec property in a transaction qualifying for Sec. 351 (see footnote 31 on page 19). The answer correctly states that Sam s holding period starts on the day after the exchange date. The Solutions Manual s answer for part g should say, in the last item (part f), that the holding period for Barbara s stock starts the day after the exchange date because the transaction did not qualify for Sec. 351 and Sec. 1223(1) thus does not apply. The answer correctly states that Sam s holding period starts on the day after the exchange date. Chapter 3 The Corporate Income Tax Page 6 (8/2/2018) In Example C:3-2, the last sentence should say that the $40,000 net capital gain is taxed using the 21% corporate tax rate described above (rather than the regular corporate tax rates). Page 12 (8/2/2018) In Example C:3-9, the last sentence should refer to April 15 of next year (not March 15). Page 44 (8/2/2018) In Step 10, the State effective tax rate should be 6.55% (not 5.55%), and the Total effective tax rate should be 25.95% (not 24.95%). The calculations shown for these effective tax rates are correct. Problem C:3-8 (8/2/2018) The problem should read Describe three ways in which the treatment of charitable contributions by individuals and corporate taxpayers differ. Problem C:3-34 (11/6/2018) In the Solution Manual s answer for part a, remove the word temporary before Treasury Regulations. 8

9 Problem C:3-57 (8/2/2018) In the debit column, Federal income taxes should be $108,465 (instead of $165,920), and Net income should be $511,535 (instead of $454,080). Appendix B, pages (9/14/2018) On page 20, lines 4a and 11 should be $361,490 (not $372,000). This is the net income for Example C:3-42. On page 22, line 32 should report the $9,000 as a temporary difference (not a permanent difference). This affects the following lines on pages 39 and 40: (a) (b) (c) (d) Page 22: Line 32: 25,000 (9,000) 16,000 Line 38: 289, ,000 (97,510) 293,000 Page 21: Line 27: (289,510) (101,000) 97,510 (293,000) Line 29a: 361,490 (81,000) 94, ,000 Line 30: 361,490 (81,000) 94, ,000 A revised Sch. M-3 is available. (The page numbers in red boxes at the top right corner are for the Comprehensive version of the textbook, which differs from the page numbers for the Corporations version.) Chapter 4 Corporate Nonliquidating Distributions Page 24 (2/13/2019) In the third line preceding Example C:4-37, the three dividends-received deduction percentages should be 50%, 65%, or 100% (not 70%, 80%, or 100%). Page 25 (2/13/2019) In the fourth line, the dividends-received deduction should be $11,700 (0.65 $18,000). It should not be $14,400 (0.80 $18,000). Page 35 (2/13/2019) The second line of the second column should refer to 37% (not 39.6%). Page 46 (2/13/2019) In Problem C:4-58 (which starts on page 45), part b should refer to a $30,736 qualified business income (QBI) deduction; it should not be $35,200. The deduction is limited to 20% of taxable income (computed without the QBI deduction) in excess of the net capital gain. See also the item below regarding the Solution Manual s answer for Problem C:4-58. Problem C:4-47 (9/28/2018) In the Solutions Manual s answer, the last sentence should refer to a 65% dividends-received deduction for the distribution (not 80%). 9

10 Problem C:4-53 (2/13/2019) In the Solutions Manual s answer for part b, Bailey is entitled to a 65% dividends-received deduction (not 80%). Problem C:4-58 (8/21/2018 & 2/13/2019) In part b, Brian s self-employment tax should be $20,635 (not $20,486). The Solution Manual s answer for this part of the problem should be as follow (amounts in bold italics are affected): Brian s $152,946 taxable income and $48,932 total tax liability are calculated as follows: Operating gross profit $290,000 Minus: Business deductions: Depreciation $ 25,000 Other operating expenses 89,000 Total deductions (114,000) Net income from business $176,000 Plus: Long-term capital gain 30,000 Minus: One-half self-employment tax ( 10,318) AGI $195,682 Minus: Standard deduction $ 12,000 Qualified business income deduction a 30,736 Total deductions ( 42,736) Taxable income $152,946 Ordinary taxable income ($152,946 - $30,000 LTCG) $122,946 Tax on ordinary income [$14, ($122,946 - $82,500)] $ 23,797 Tax on long-term capital gain ($30,000 x 0.15) 4,500 Total income tax $ 28,297 Self-employment tax b 20,635 Total tax $ 48,932 a $176,000 x 0.20 = $35,200, limited to 0.20 x ($195,682 $12,000 $30,000) = $30,736. The qualified business income deduction is not a deduction for AGI. b $176,000 net income from business x = $162,536; ($128,400 x 0.124) + ($162,536 x 0.029) = $20,635. Chapter 5 Other Corporate Tax Levies Problem C:5-31 (2/13/2019) In the Solution Manual s answer, the second part of the accumulated earnings credit s determination should be $66,300 ($90,000 ($30,000 $6,300)), not $90,000. As this is less than the first part of the determination, the accumulated earnings credit is still $125,

11 Problem C:5-33 (11/20/2018) In the Solutions Manual s answer for part i, the references to a consent dividend and to a deficiency dividend should be for $79,945 (not $80,810), which is the UPHCI from part h. Chapter 6 Corporate Liquidating Distributions Problem C:6-32 (11/6/2018) The question for part c should read as follows: What is the basis to Stacy and Monique for each property received in the liquidation in Parts a and b? Problem C:6-36 (11/6/2018) In the first sentence of part b, ignore the word equal. Problem C:6-54 (11/6/2018) In the paragraph before Required, the remaining cash should be $364,315 instead of $367,315. In the Solution Manual s answer for part c, the 21% tax on the taxable gain should be $39,690 instead of $36,690, which also makes the total liquidation proceeds $364,315 instead of $367,315. The revised solution follows: c. 2021: E&P gain on asset sale ($1,366,000 - $1,337,000) 29,000 Tax on taxable gain * ( 39,690) Balance before liquidating distribution $328,315 (disappears upon liquidation) * Sales proceeds $1,366,000 Adjusted basis of assets 1,177,000 Taxable gain $ 189,000 Tax on gain (21%) $ 39,690 Liquidation Able (60%) Baker (40%) Liquidation proceeds (1) $218,589 $145,726 Basis of stock surrendered (2) ( 16,000) ( 22,000) LTCG on liquidation (3) $202,589 $123,726 Tax on LTCG at 23.8% (4) $ 48,216 $ 29,447 After-tax proceeds (1-4) $170,373 $ 116,279 Chapter 7 Corporate Acquisitions and Reorganizations 11

12 Chapter 8 Consolidated Tax Returns Problem C:8-32 (9/10/2018) The problem should refer to Problem C:8-31 (not C:8-32). Problem C:8-47 (2/13/2019) The first line of the solution manual s answer should say $293,600 (not $290,800). The solution later correctly calculates consolidated taxable income as $293,600. Problem C:8-54 (8/2/2018) The third sentence should specify July 10 of Year 2 (not Year 3). Chapter 9 Partnership Formation and Operation Page 14 (8/2/2018) In Example C:9-17 (which starts on the previous page), note b should read as: Partnership interest months deferred = Total. Page 18 (2/13/2019) Under Prop. Reg. Sec A-3(b)(2)(ii), which came out after publication of the 2019 edition, the exclusion for capital gains and losses includes any item treated as capital gain or loss under Sec Example C:9-20 thus should show a QBI deduction of $25,000 ($125, ), not $25,400. Taxable income is $155,169 (not $154,769). Also, the Additional Comment on page 19 is no longer relevant. Pages 18 & 19 (4/12/2019) Although Sec depreciation recapture is included in partnership ordinary income, it is not included in the definition of self-employment income (Reg. Sec (a)-6). Here is a corrected version of Example C:9-20 (changes in bold italics): Assume the same facts as in text Example C:9-19. In addition, Rita is married (to someone other than Harry), files a joint tax return, and claims the standard deduction. Other than partnership items, Rita has a $4,000 short-term capital loss at the individual level, and her spouse earns a salary of $80,000. Rita s self-employment (SE) tax is $16,955 ($120, ). Rita s joint taxable income is calculated as follows: 12

13 Share of partnership ordinary income ($250, ) $125,000 Spouse s salary 80,000 Sec. 1(h) net capital gain: Share of partnership net LTCG ($15, ) $7,500 Minus: Share of partnership net STCL ($1, ) (500) STCL from other sources (4,000) Plus: Share of partnership qualified dividends ($6, ) 3,000 Share of partnership Sec gain ($4, ) 2,000 Total Sec. 1(h) net capital gain (for purposes of QBI calculation) 8,000 Minus: One-half SE tax ($16, ) (8,478) Adjusted gross income $204,522 Minus: Standard deduction (2018) (24,000) QBI deduction (calculation below) (25,000) Taxable income $155,522 Excess taxable income without regard to the Sec. 1(h) net capital gain and QBI deduction is $172,522 ($125,000 + $80,000 $8,478 $24,000). (Note: The standard deduction in 2019 is $24,400.) Thus, the QBI deduction is the lesser of: Combined QBI ($125, ) $25,000 or 20% of excess taxable income ($172,522 x 0.20) $34,504 The exclusion for capital gains and losses includes any item treated as capital gain or loss under Sec See Prop. Reg. Sec A-3(b)(2)(ii). Thus, the Sec gain is excluded from qualified business income. Also, the Sec gain is excluded from the definition of excess taxable income because it is part of the net capital gain subject to the Sec. 1(h) preferential tax rates. Qualified dividends are excluded for the same reason. The W-2 and service limitations are not a factor in this example because the married filing jointly taxable income is less than $315,000 (2018 threshold). Problem C:9-57 (9/20/2018) In the Instructor s Resource Manual s solution, Line 1c should be $2,337,000 (not $2,237,000). This is merely a typo; the Line 3 amount is based on the correct Line 1c amount. Chapter 10 Special Partnership Issues Problem C:10-43 (2/13/2019) In part a of the Solutions Manual s answer, the portion of John s gain treated as unrecaptured Sec gain should be $36,000 ($60, ), not $60,

14 Chapter 11 S Corporations Page 16 (3/4/2019) In Example C:11-11, the excess net passive income tax should be $7,108 ($33, ); it should not be $11,846. Problem C:11-29 (2/13/2019) In part c of the Solutions Manual s answer, the election will take affect on the first day of 2020 (not 2019). Problem C:11-32 (2/13/2019) In the last sentence of the first paragraph of the Solutions Manual s answer, Peter and Alice cannot reelect S corporation status after a five-year waiting period because all shareholders (including the partnership) must consent and because a partnership is an ineligible shareholder. Problem C:11-57 (4/12/2019) In the Solutions Manual s answer for part a, the deductible LTCL and deductible STCL should be $4,000 and $5,000 respectively (not zero; there is $40,000 of capital gain on land against which the capital losses can be deducted). Taxable income thus should be $65,950 (not $74,950), and the C corporation tax should be $13,850 (not $15,740). The $8,700 charitable contribution deduction is correct (i.e., the adjusted taxable income on which its 10% limitation Chapter 12 The Gift Tax Chapter 13 The Estate Tax Chapter 14 Income Taxation of Trusts and Estates Chapter 15 Administrative Procedures 14

15 Chapter 16 U.S. Taxation of Foreign-Related Transactions Page 13 (8/2/2018) In Example C:16-11, the third line of the last column s heading should read as: (3) = (1) (2) Problem C:16-45 (8/2/2018) In principle, because Hamilton s share of Subpart F income reflects Beauvais current earnings, the denominator in the formula for allocating this share (as well as Hamilton s deemed paid taxes) into Hamilton s Passive Income and General Limitation Income Baskets should be based on Beauvais current earnings. Because, however, the breakdown in Beauvais foreign passive income and foreign manufacturing income directly relates to Beauvais E&P of $4 million, which by assumption is based on U.S. rules, the authors have used $4 million in the denominator. In future editions, Hamilton s allocative share of Subpart F income and deemed paid taxes will directly relate to Beauvais current earnings, not Beauvais E&P, which could be both current and accumulated. Solutions manual revised solution: a. Of Hamilton s share of Beauvais Subpart F income, $59,000 = $35,000 of Subpart F income + a corresponding $24,000 gross-up should be placed in Hamilton s Passive Income Basket $531,000 = $315,000 of Subpart F income + a corresponding $216,000 gross-up should be placed in Hamilton s General Limitation Basket Beauvais Subpart F income taxable to Hamilton is calculated as follows: 20% $1,750,000 Subpart F income = $350,000 Of this amount, $35,000 is placed in Hamilton s Passive Income Basket, calculated as follows: $350,000 Subpart F income $400,000 Beauvais Passive Income $4,000,000 Beauvais E&P = $35,000 In addition, $315,000 is placed in Hamilton s General Limitation Basket, calculated as follows: $3,600,000 Beauvais Manufacturing Income $350,000 Subpart F income = $315,000 $4,000,000 Beauvais E&P Beauvais foreign taxes deemed to have been paid on Hamilton s share of Subpart F income is calculated as follows: 15

16 20% $1,200,000 Foreign Taxes = $240,000 Of this amount, $24,000* is placed in Hamilton s Passive Income Basket as a creditable foreign tax and corresponding gross-up, calculated as follows: $240,000 foreign taxes $400,000 Beauvais Passive Income $4,000,000 Beauvais E&P = $24,000 In addition, $216,000* is placed in Hamilton s General Limitation Basket as a creditable foreign tax and corresponding gross-up, calculated as follows: $240,000 foreign taxes $3,600,000 Beauvais Manufacturing Income $4,000,000 Beauvais E&P = $216,000 * Assuming that Country M taxes investment income and manufacturing income at the same rate. b. Hamilton s current year foreign tax credit is $490,506, based on the following formula: Foreign Taxes Actually or Deemed to be Paid, not to exceed the following limit: U.S. Tax Liability Thus, the calculation becomes, Foreign Source Taxable Income Worldwide Taxable income $630,000 Total Foreign Taxes = $390,000 in foreign taxes actually paid on Hamilton s manufacturing income + $240,000 in foreign taxes deemed to be paid on Hamilton s share of Subpart F income, not to exceed the following limit: $1,000,000 Manufacturing + $350,000 Subpart F + $240,000 Gross-up $799,000 U.S. Tax Liability $2,000,000 Worldwide + $350,000 Subpart F + $240,000 Gross-up = $490,506 tax credit limitation c. Within each basket, excess credits should be carried back one year and applied to Hamilton s U.S. income tax liability for that year. Then, within the same basket, any remaining excess should be carried forward up to ten years and applied to Hamilton s U.S. tax liability for each successive year. Thus, within the General Limitation Basket, the foreign tax credit is $163,810, calculated as follows: $216,000 in foreign taxes deemed to be paid on Hamilton s share of Subpart F General Limitation income, not to exceed the following limit: $799,000 $315,000 Subpart F + $216,000 Gross-up $2,000,000 Worldwide + $350,000 Subpart F + $240,000 Gross-up = $163,810 tax credit limitation 16

17 Within the General Limitation Basket, the $52,190 (i.e., $216,000 $163,810) excess credit should be carried back one year and applied to Hamilton s U.S. income tax liability for that year. Then, within the General Limitation Basket, any remaining excess should be carried forward up to ten years and applied to Hamilton s U.S. tax liability for each successive year. Within the Passive Income Basket, the foreign tax credit is $18,201, calculated as follows: $24,000 in foreign taxes deemed to be paid on Hamilton s share of Subpart F Passive Income, not to exceed the following limit: $35,000 Subpart F + $24,000 Gross-up $799,000 $2,000,000 Worldwide + $350,000 Subpart F + $240,000 Gross-up = $18,201 tax credit limitation Within the Passive Income Basket, the $5,799 (i.e., $24,000 $18,201) excess credit should be carried back one year and applied to Hamilton s U.S. income tax liability for that year. Then, within the Passive Income Basket, any remaining excess should be carried forward up to ten years and applied to Hamilton s U.S. tax liability for each successive year. Problem C:16-54 (8/2/2018) In the second sentence, ignore in Country T for seven years. 17