Agenda 5/3 BA 128A-1 Questions from lecture Review Chapter 9,10,11,12 Assignment C9-27,35 Additional C10-29,11-47, 12-32,50

Ch 9 - recap partnership profits and losses Partner’s Basis –contribution increase a partner’s basis in the partnership –liability assumed by the partner also increase his/her basis –gain increase partner’s basis –loss decrease partner’s basis until the basis =0 –partner’s personal liabilities assumed by partnership decreases the partner’s basis –partnership distributions are tax free

Contribution of property to partnerships No gain or loss recognized for the partner and partnership if property is cash, tangible and intangible property, services - need to recognized gain if personal liabilities assumed by partnership exceed basis in partnership, recognize gain partnership basis of property contributed = partner’s basis before the transfer Unrealized receivables, basis = 0 holding period includes the transferor’s holding period character of gain also transfers over depreciation recapture also transfers over apply the same rules after formation of partnership

Chapter 11 S-corp Shareholder-related requirements –no more than 75 shareholders –eligible shareholders, no C-corp and partnerships, 7 types of trust, tax-exempt public charity or private foundation OK –US citizens and residents Corporation-related requirements –domestic corp –must not be ‘ineligible’ corp - corp with special federal income tax status –one class of stock

Adv. and Disadv. of S-corp Adv –Exempt from corporate income tax –Pass through losses to SH to offset other types of inceom –Earnings not subject to self-employment tax –Distributed income are not subsequently taxed Disadv. –Corporate tax rates may be lower –S-corp tax SH’s income, not distributions –Not eligible for dividends-received deductions –Special allocation not allowed –restricted to calendar year and other loss limitations

Allocation of gains and losses “Per day, per share” basis - equal portion of % stock held and days held Special allocation not allowed Allocation of loss –NOL allowed –loss limited to the sum of the adjusted basis for the SH’s S corp stock plus the adjusted basis of any indebtedness owed directly by the S-corp to the SH –S corp SH cannot increase his/her basis by liabilities assumed in the corp –losses and deductions are deducted from the basis in the following sequence Distributions nondeductible and noncapital expenditures ordinary loss and deduction items –unlimited carryover of loss or deduction item –Special SH loss and deduction limitations At-risk rules Passive Activity limitation Hobby Loss

Chapter 11 Gift Tax Gift and Transfer Tax - Unified Transfer Tax system Gift tax served as –Backstop to estate tax –redistribute wealth Gift exclusion to recipient, taxable only to donor Unified rate scheme for both taxes maximum 55%

Gift Tax Subject to phase out, benefit of lower rates phased out until avg rate is 55%, phase-out also apply to unified credit after gift > $10m Gift valued at FMV at date of gift Post appreciation of gift does not matter Unified credit - reduced $ for $ of tax computed for gifts and estates

Gift tax formula Aggregate amount of gifts for individuals minus 1/2 of gift splitting for the individual plus 1/2 of gift splitting from spouse minus annual exclusions minus marital deductions minus charitable deductions = taxable gifts of current period plus taxable gifts for all prior periods = cumulative taxable gifts tax on cumulative gifts of prior periods (current rates) minus tax on taxable gifts of prior periods (current rates) = tax on taxable gifts of current period minus unified credit for the period - unified credit used in prior periods = tax payable for current period (not less than 0)

Exlusions and Deductions Exclusions –$10,000 per donee –unlimited donees –indexed after 1998 Deductions –Marital deduction in excess of exclusions –Charitable deduction

Gift splitting Automatic for community property Election for common property –enable gifts to be taxed at lower marginal rates only applied to gifts made in the portion of year of marriage