Enrolled Agent Exam Tip - Corporate Transactions
In the business section of the enrolled agent exam
, the IRS will want to know you have an understanding of the transactions between a business and its' owners. Specific areas that frequent the EA test are transactions between partners and partnerships, and property transactions between shareholders and corporations. In our enrolled agent course, and on the EA exam, you can safely assume any reference to a "corporation" refers to a C corporation, unless indicated otherwise. The following tips can help give you an edge on exam day. Please review them carefully.
For this discussion, we will focus on corporations. An important area to master is the concept of "control." To be in control of a corporation, the transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock, and at least 80% of the outstanding shares of each class of nonvoting stock. You must recognize the transaction receives different treatment when a taxpayer has control. To determine whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply:
Stock owned, directly or indirectly, by a corporation, partnership, estate, or trust is treated as being owned proportionately by or for its shareholders, partners, or beneficiaries,
Treat an individual as owning the stock owned, directly or indirectly, by or for the individual's family. This includes shares held in a trust. Family includes only brothers and sisters (including half brothers and half sisters), a spouse, ancestors, and lineal descendants,
Any individual owning (other than by applying rule 2) any stock in a corporation is treated as owning the stock owned directly or indirectly by that individual's partner.
Funding Transactions
Most of the questions on the exam regarding funding transactions test your understanding of basis on contributed property and gain recognition. Also tested is the contribution of services in exchange for ownership. If a shareholder contributes property to a corporation in exchange for stock in that corporation, the transaction is usually a taxable event, unless immediately afterward the shareholder is in control of the corporation (351 exchange). This rule applies both to individuals and to groups who transfer property to a corporation.
Here are the steps for determining if a gain is recognize by any shareholders:
Determine if shareholders exhibit "control." If yes, proceed to next step.
Determine if any shareholders must recognize a gain. Does a shareholder receive anything in return?
Determine the shareholders basis in the corporate stock. Generally, the stock basis is the same as the adjusted basis of the property transferred increased by any gain recognized by the shareholder and decreased by distributions to the shareholder.
Determine the basis of the property in the hands of the corporation.
Example - Two shareholders each contribute property to a corporation in exchange for stock with a fair market value (FMV) of $50,000. Each shareholder now owns 50% of the corporation.
Shareholder A - Contributes $30,000 in cash and a trailer with a basis of $15,000 and a FMV of $20,000.
Shareholder B - Contributes a tractor with a basis of $20,000 and a FMV of $60,000. The corporation pays $10,000 to Shareholder B in the transaction.
Even if the shareholders are not related parties, you should consider all shares of the transferors when applying the principal of control. The combined ownership of these shareholders is more than 80% immediately after the transaction. They have control and the transaction is a 351 exchange. The exchange is non-taxable unless the shareholder receives money, property or a relief of liabilities.
Shareholder A - Does not receive any property and does not recognize a gain. The basis of stock for this shareholder is $45,000, the adjusted basis of property and money transferred to the corporation.
Shareholder B - Must recognize a gain up to the amount of property received ($10,000). The basis of stock for this shareholder is $20,000. Basis is unchanged because it increases by the $10,000 gain recognized by the shareholder and decreases by the $10,000 distribution to the shareholder.
Corporation - Contributions to the capital of a corporation, whether or not by shareholders, are paid-in-capital. These contributions are not taxable to the corporation. The corporation's basis of property contributed by a shareholder is the same as the basis the shareholder had in the property, increased by any gain the shareholder recognized on the exchange. The corporation has a $15,000 basis in the trailer and an adjusted basis of $30,000 in the tractor.
Alternate Scenario - Shareholder A contributes $10,000 in services, $20,000 in cash and a trailer with a basis of $15,000 and a FMV of $20,000. Shareholder A must recognize income of $10,000 in this case as the value of stock received for services is income to the recipient.
by: Sawyer Adams
Distance learning University In India Learn From Someone Else And Become Successful In Your Life E-learning Vs Classroom Learning How To Accelerate Learning Inspirational Graduation Quotes Can Help You Reach Your Goal 000-061 Exam Resources Learn To Have More Discipline For More Success 000-085 Exam Question Is Leadership Something That Is Learned Or Are Leader Born? 000-100 braindumps Learning To Be A Drummer - The Basics Learn To Improve Your Bad Eyesight It Can Be Fun And Easy To Learn Spanish