Northern Oklahoma College Tax Research Paper Assignment

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Research Paper Assignment

Assignment.It is uncommon for anyone employed in the field of taxation, whether they be accountants, attorneys or IRS employees, to know, every section in the Internal Revenue Code, their unique requirements, the rules in the Treasury Regulations accompanying each section, and recent rulings, procedures and court cases by heart.Therefore, in the field of taxation, whether it be individual or corporate, substantial research is performed (in essence, meaning that everything will be open book) on questions which are posed to you by your clients.Once the research is performed, the answer must be communicated to either your supervisor or your client in clear and concise terms.As with most things, the communication of tax and/or any information is a skill of which practice makes perfect.As such, as part of your grade for this course, each of you will be required to do the following:

  • Choose a topic related to individual income tax, , you should do appropriate research using our text, the CCH Tax Research network, and all other reputable resources that are available for your disposal (does not include Wikipedia, etc.).the topic is (Tuition deduction)

2. write a two (2) page memorandum on your chosen topic (Tuition deduction)

Objectives.The objectives of this assignment are (1) to research tax-related topics online and/or in print, and (2) to enhance the written and communication skills of the student.

Required.Include at least, the following: (1) a statement of the issue, i.e. “What amount can I deduct for college tuition and related expenses on the 2017 individual return?;” (2) Answer the question with references to specific IRC sections, Treasury Regulations, or Revenue Rulings/Procedures, and court cases, and (3) attach copies of all references to your memorandum.

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Client Memorandum DATE ______________________________________________________________________________ Client: Issue: Tax Consequences of Corporate Contributions and Distributions Introduction The purpose of this Client Memorandum is to provide guidance with respect to the tax consequences of corporate contributions and distributions for corporate shareholders and the possibility of the assignment of depreciation deductions from one taxpayer to another. Corporate Distributions The first proposed course of action is the distribution of depreciated property to a shareholder (“Shareholder”). In order to determine the amount distributed, Section 301(b) of the Internal Revenue Code (the “Code”) instructs us to look at the fair market value of the distributed property, reduced by any liability(ies) assumed by the shareholder. Under §301(c)(1), distributions that are dividends within the meaning of §316 must be included in gross income. In testing for dividend status, the regulations under §316 first look to current and accumulated earnings and profits. Any distributions that are not dividends under §316 are then treated as a recovery of the shareholder’s basis and any excess over basis is generally treated as a gain from the sale or exchange of stock. However, under 311(a)(2) of Code, the general rule is that no gain or loss shall be recognized to a corporation on the distribution, not in complete liquidation, with respect to its stock, of property. Although there is an exception to the general rule of non-recognition, it deals with distribution of appreciated property and is therefore irrelevant here. Therefore, upon the distribution of fully depreciated property to the Shareholder of Oldco, there will not be any gain or loss to Shareholder. Since we do not have all the information regarding the company’s earnings and profits, nor the basis of the shareholder, or the fair market value of the property, we will be unable to estimate or approximate the portion, if any, which would be taxable to the shareholder as a result of this transaction. Finally, Shareholder will have a holding period in the property equal to that which the corporation had in the property under §1223(2). Depreciation Deduction Assignments Client Memorandum 2 DATE The next proposed course of action is for Shareholder who received the Corporate Contributions distribution from the original company (“Oldco”) to combine the property & Formation which he received from Oldco with similar property he individually owned prior to the distribution and contribute all of the property to a newly formed Company (“Newco”) in exchange for stock, followed by a sale of the stock to a third party (“Buyer”). Initial Contribution On the initial contribution of the property to Newco, the general rule is that a shareholder does not recognize gain or loss on the transaction. Specifically, §351(a) of the Code provides that no gain or loss shall be recognized if property is transferred to a corporation (1) by one or more persons (2) solely in exchange for stock (3) if the transferors of property are in control of the corporation immediately after the exchange. Control is defined in §368(c) as the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. The problem here is that Shareholder plans to immediately sell his shares in Newco to Buyer. Such a plan could lead him open to a challenge by the Internal Revenue Service (the “Service”) because under current law the control requirement of §351 is not satisfied if the transferor (Shareholder here) agrees beforehand to transfer enough of his stock in the corporation to lose control or if such a transfer is an integral part of the plan of incorporation. 1 The Step Transaction Doctrine The Service’s argument that the control requirement of §351 is not satisfied is based upon the Step Transaction Doctrine. The Step Transaction Doctrine is a doctrine utilized by the Service to determine if one transaction is complete in itself or if it is just one of a series of transactions and should be viewed as a whole. If the Service feels like the Doctrine should apply, they can and will re-order and re-characterize entire taxpayer transactions. From looking at case law, it appears that courts and the Service have intermittently and interchangeably used three (3) tests in determining whether to apply the Step Transaction Doctrine – the Binding Commitment test, the End Result test and the Interdependence test – and have held that the finding of the satisfaction of only one of these tests is sufficient to apply the Step Transaction Doctrine to a so-called series of related taxpayer transactions. 2 Binding Commitment Test In 1976, in Intermountain Lumber Co., the U.S. Tax Court seemed to adequately sum up the Binding Commitment test by saying: If the transferee, as part of the transaction by which the shares were acquired, has irrevocably foregone or relinquished at that time the legal right to determine whether to keep the shares, ownership in such shares is lacking for purposes of section 351. By contrast, if there are no restrictions upon freedom of action at the time he acquired the shares, it is immaterial how soon thereafter the transferee elects to dispose of his stock or whether such disposition is in accord with a Client Memorandum 3 DATE preconceived plan not amounting to a binding obligation. 3 Under the Binding Commitment test, “a determination must be made whether, after the first step occurs, the parties were under a binding commitment to take the later steps.” 4 In a case decided in 1978, a corporation who bought the assets of another corporation (hereinafter “Buying Corporation” and “Original Corporation”) and then liquidated Original Corporation was forced to recapture depreciation deductions under §1245 of the Code and therefore tried to argue that the incorporator of Original Corporation should not have received §351 treatment, but instead should have recognized a gain on the sale of his assets to Original Corporation; thereby, relieving Buying Corporation from any recapture/ordinary income liability on the liquidation of Original Corporation. 5 Buying Corporation tried to assert that the incorporator was not entitled to §351 treatment because he failed the control requirement by having a “plan to part with control” at the time Original Corporation was formed. 6 The 9th Circuit Court of Appeals reviewed the facts of the case, mainly focusing on the following facts: (1) Original Corporation was incorporated in October of 1965; (2) the agreement by incorporator and a third party to sell stock was reached sometime after January of 1965; (3) incorporator followed the formal incorporation requirements in Washington; and (4) Buying Corporation had not established by a preponderance of the evidence that a pre-existing obligation or plan was in existence for incorporator to sell his interests in Original Corporation at the time of the formation of Original Corporation. 7 Therefore, the Curt held “the transfer of assets [by incorporator] to Kennewick (Original Corporation) is governed by Section 351. Therefore, the “old and cold” defense seemed to work in this particular case. 10th Circuit Precedent Application to Shareholder End Result Test Under the End Result test, “purportedly separate transactions will be amalgamated into a single transaction when it appears that they were really component parts of a single transaction intended from the outset to be taken for the purpose of reaching the ultimate result.” 8 Although Revenue Ruling 70-140 provides only limited facts, it appears that the Service applied the End Result Test to a transaction whereby a shareholder of X corporation contributed assets which he owned individually to X corporation in return for X corporation stock and then transferred that stock to Y corporation for Y stock. The Revenue Ruling’s holding provided “the two steps were part of a 4 Client Memorandum DATE prearranged integrated plan and may not be considered independently of each other for federal income tax purposes.” Application to Shareholder Interdependence Test The Interdependence test “requires an inquiry as to whether on a reasonable interpretation of objective facts the steps were so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series.” 9 An illustration of the Interdependence test is found in Manhattan Building Co., a 1922 case which was based on §351’s predecessor, in Manhattan Building Co., the court said “[t]he test is, were the steps taken so interdependent that the legal relations created by one transaction would have seen fruitless without a completion of the series.” 10 Application to Shareholder Conclusion The 10th Circuit made it clear that if a taxpayer and his or her series of transactions did not pass even one of the three tests underlying the Step Transaction Doctrine, then the Step Transaction Doctrine would be applied to defeat a taxpayer’s claim of the application of §351 for non-recognition of gain. Based on the above analysis ….. Tax Consequences of the Step Transaction Doctrine If the Service successfully argues that the Step Transaction Doctrine should apply in shareholder’s case, then the transaction would be termed a “busted §351 transaction.” The tax consequences of a busted §351 transaction would be to turn the transaction into a taxable asset-for-Newco stock exchange, and more specifically as follows: • • • • The contribution of the assets of shareholder to Newco would be treated as a sale under §1001. Shareholder would likely realize a gain on the “sale” of the assets – which would be determined by subtracting his adjusted basis in the assets from his amount realized (which would be equal to the fair market value of the assets). o Gain would likely result because the facts indicate that the property has been fully depreciated. o Since the property sold consists of fully depreciated property, then part of the gain would be ordinary income to Shareholder due to §1245 and its depreciation recapture provisions. Shareholder’s basis in the stock would be equal to the fair market value of the assets – calculated by utilizing his substituted basis in the assets and adding to that his recognized gain. Newco’s basis in the assets is determined under §362(a)(2) and will be equal to the fair market value of the assets (transferred basis in the 5 Client Memorandum • DATE asset + recognized gain to transferor). When Shareholder sells the assets to Buyer, Buyer would take a cost basis in the stock under §1012 and it is unlikely that Shareholder would recognize a gain or loss. In conclusion, while Shareholder would have to recognize gain on the “sale” of the property to Newco (a tax burden), both he and Newco would receive a step-up in basis of their property to fair market value (a tax benefit). Since the assets in Newco would be stepped up to fair market value they could be depreciated, thereby giving Newco a tax benefit. Also, on the future sale of the stock of Newco to Buyer, there would be no adverse tax consequences to any party and Buyer would receive a cost basis in the Newco stock. Tax Consequences if § 351 is Found to Apply If the Service and/or the courts determine that §351 does apply, the following tax consequences will occur: Shareholder’s Basis in Newco Stock Shareholder’s basis in Newco stock will be determined in reference to §358 of the Code. Section 358 provides “where §351 applies, the basis of the property received under §351 without the recognition of gain or loss shall be (in formulaic form): • • • Shareholder’s Sale of Newco Stock to Buyer Basis of property transferred (“transferred basis”) Less: o Fair market value of any other property, besides money, received by the taxpayer o The amount of any money received by the taxpayer ƒ Includes Assumption of liability – see §358d o Recognized loss Plus: o Amount which was treated as a dividend o Recognized gain by taxpayer on exchange As to the question of whether gain or loss would be recognized on the subsequent sale of the stock, Section 1001 of the Code would govern. Section 1001 provides that a gain is realized when the amount realized on a sale or exchanged is greater than the adjusted basis that the seller had in the asset. If this is the case, under §1001(d), unless otherwise provided all realized gains must be recognized. Therefore, depending on the numbers involved, there may or may not be gain involved on the contemplated sale. To determine the character of the gain, assuming there would be one on the contemplated sale, we must first recognize that the corporate stock would be a capital asset under §1221 of the Code, therefore any gain would be a capital one. However, whether the capital gain was a short-term or a longterm capital gain would depend upon the holding period, or how long the Client Memorandum 6 DATE shareholder had held the stock. A short-term capital gain is a gain on property in which the seller owned the property for less than a year, and a long-term capital gain is just the opposite (i.e. where the seller owned the property for greater than a year). In our situation, §1223(1) provides in a §351 exchange, as we have here, the holding period of the contributed property is determined by including the period which the shareholder held the transferred property, if the transferred property is a capital asset or a §1231 asset. Therefore, we could tack onto the original shareholder’s holding period in the distributed property and his own personal property as long as they were considered capital assets or §1231 assets. After the information was gathered to answer this question, the tax preparer would then net the shareholder’s net short-term capital gains versus his net short-term capital losses, and vice versa (long-term gains versus long-term gains), to help determine the individual’s taxable income for the year. ENDNOTES 1 Bittker & Eustice: Federal Income Taxation of Corporations and Shareholders, Paragraph 3.09. Associated Wholesale Grocers, Inc. v. U.S.C.A.10, 927 F.2d 1517 (10th Cir. 1991). 3 Intermountain Lumber Co. & Subsidiaries, et al. v. C.I.R., 65 T.C. 1025 (1976). 4 TAM 8735009, 1987 WL 421355 citing C.I.R. v. Gordon, 391 U.S. 83, 96 (1968). 5 Culligan Water Conditioning of Tri-Cities, Inc. v. U.S.C.A. Wash., 567 F.2d 867 (9th Cir. 1978). 6 Id. at 870. 7 Id. 8 Id. citing King Enters., 418 F.2d at 516 (1966). 9 Id. citing Paul & Zimet, “Step Transactions,” Selected Studies in Federal Taxation 200, 254 (2d Series 1938). 10 Manhattan Building Co., 27 TC 1032, 1042 (1957). 2
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Running head: TAX RESEARCH

1

Tax Research Paper on Tuition Deduction
Student’s Name:
Institutional Affiliation:
Date Due:

TAX RESEARCH

2
Tax Research Paper on Tuition Deduction

Client Issue: Tax Research Paper on Tuition Deduction
Introduction: Education remains one of the key social services that is provided by the
government. Education in children's lives has a profound effect on their overall quality of life
and probability to secure employment opportunities to better themselves and those around them.
Taxation, on the other hand, is one of the strategies used by governments to generate revenues to
enable them to provide critical services such as basic education. While taxation may be
beneficial to the government, it is always disadvantageous to most households because it reduces
their disposable income. Tax credits and deductions are therefore essential because they help a
taxpayer to reduce the tax expenses he/she has to pay. For students, tax credits through tuition
deducti...


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I was struggling with this subject, and this helped me a ton!

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