{365} Days A Path towards Elite Powerlifting

Day 768

DIET

Perfect bodybuilding diet.

EXERCISES

30 minutes of rowing on a concept2 machine with a total distance of about 6,500 meters (about 4 miles).

COMMENTS

Busy day, getting used to these.

I made it into the Green MAGnitude and Purple Wraath commercials. Check them out in the bodybuilding.com product page!

http://www.bodybuilding.com/store/clabs/mag.html

http://www.bodybuilding.com/store/clabs/purple.htm

Just click the video!

INTERESTING CPA TIDBITS OF THE DAY

Figuring out gain and losses between the corporation and the shareholder can be pretty confusing. I will try to distinguish each different scenario to create a clearer picture. Again, this is for corporate tax only. I will do partnership tax tomorrow.

Stock Issuance

Corporation - Never recognize gain or loss when issuing own stock or bonds in exchange for money or property. (No G/L)

Shareholder Contributed Property w/o Boot

Corporation - Never recognize gain or loss.

If money or property is received from a non-shareholder,for example stimulus money or money provided by a city for a company to come in. The property purchased by the money will have a 0 basis. This makes 100% sense because the full property sale in the future will be completely taxable. If there is money left over after acquisition of property, existing property basis that the corporation owns will be reduced. Makes sense, free money means a taxable gain in the future. Reducing basis means increased tax potential later on.

Shareholder Contributed Property w/ Boot

Shareholder - If something is received by the shareholder other than stock, we realize a gain (not loss) to the extent of the FMV of the boot received. Assumption of a liability is typically not seen as a boot. This makes sense because liabilities can be netted with the value of the property transferred.

With tax, there are always exceptions. A liability is considered a boot if there is no business purpose of tax avoidance purpose with the liability. Gain recognition is also triggered if the liability exceeds the adjusted basis of the property. This is logical, the company is assuming your massive liability, which is pretty much identical to a cash payment. You need to recognize gian.

If both these exceptions occur, the first exception about tax avoidance and no business purpose takes priority. This is scary!

Let's shift our gears to basis. Shareholder's basis in STOCK equals basis of property transferred + gain recognized (makes sense since recognition of gain = more tax = increase basis in all tax scenarios) - FMV of boot received (what you get in return, not yet taxed until sold, so logically reduce basis) - liabilities assumed by corporation except those deductible when paid (makes sense, like a cash payment, we will need to pay tax on this later, so reduce basis).

Corporation's basis in PROPERTY is pretty simple. If money or property is received from a shareholder, the basis the corporation recognizes is the shareholder's carry over basis plus any gain recognized by the shareholder. This is logical because if gain is taxed, we don't want to double tax this, so we increase the basis like the other tax rules I have discussed.

Stocks for Services

Like partnerships. Shareholders must recognize ordinary income (taxable income) when performing a service in exchange for ownership. The basis in the stock is equal the the income recognized. If the stock possesses restrictions, the shareholder does not have income until the restrictions pass.

Related Party Rules

Like all things, loss is disallowed when a corp sells an asset to a related party. A related party constitutes > 50% ownership of the stock. This makes sense because when you have GREATER than 50% ownership, you have control of the company. The loss is potential deferred and follows related prty rules upon sale of asset.

Transfer to a Controlled Corporation (Section 351)

No gain or loss is recognized is property is transferred to a corporate in exchange for stock if the transferors (the original possessors of the property) control the corporation. Property includes everything but services. Stock does not include convertible securities, options or warrants. And control is the classic 80% or greater voting power AND non voting class of stock. These rules are logical since you are basically giving the property to yourself because you control the corporation.

Update:

Typically basis is calculated using a carryover basis increased by gain recognized by transferor (shareholder). In a loss scenario, we take a step-down basis (increasing taxable base) for the property transferred to the corporation and utilize the traditional carryover basis for the stock. Since we look at property in aggregate, we need to allocate the built in loss to the properties that triggered the net loss in a proportional manner. This seems very logical and consistent with tax law. If you disallow loss, you must recapture it at a later (future) time when property is sold.

Non-Liquidiating Distributions to Shareholders

Up until now, we have talked about property transfers TO the corporation. What happens when company's distribute property BACK to shareholders?

Shareholder - Net distribution is determined by the FMV net of liabilities. The character of the distribution is dividend income (to the extent of earnings and profits), return of stock basis (for distributions greater than earnings and profits) and finally capital gain (if distribution is greater than the stock basis). This makes sense. When we run out of E&P, we must dip into our basis. When we hit a 0 basis, we can never go negative so everything in excess is a capital gain.

The basis of the property received is the FMV at distribution. If liabilities end up greater than FMV, the FMV = liabilities = basis. This makes sense, why would you accept property with massive liabilities on it? You would require a higher basis to reduce the taxable base.

Corporation - Gain (not loss) is recognized to extent FMV is greater than adjusted basis of property. Like the above rule, if liabilities is greater than FMV, the FMV = the liability itself. It is interesting to note that liability has nothing to do with gain recognition. What happens in a loss scenario?

Complete Liquidation Scenario

Shareholders - Net distributions (FMV net of liabilities) is treated as a payment for stock. Generally a gain or loss is recognize. The property basis is equal to the FMV. This makes sense since we are basically discontinuing the organization.

Corporation - Recognize gain or loss on disposition of asset. Related party rules apply limiting losses (loss disallowed if on a non-prorata basis). If property is a contribution of capital or Section 351 transfer, within 5 years preceding distribution, no loss is recognized. (See Controlled Transfer above) If corporation acquires the property mentioned above within 2 years of the adoption of the plan of liquidation, any built-in loss is disallowed and post-contribution loss is allowed.

Liquidition of Subsidiary

Parent Corporation - No gain or loss is recognized on receipt of property of any 80% of more owned subsidiary. All tax attributes (NOL, CC CF) transfer to the parent corporation.The basis in the subsidiary stock disappears.

Subsidiary Corporation - No gain or loss recognized if the above applies. If subsidiary has debt outstanding to the parent, nonrecognition also applies to property distributed in satisfaction of the debt. If <20% ownership, gain (but not loss) is recognized for minority shareholders. Gain or loss must be recognized on exchange of minority shareholder stock for corporate property. Look up.