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AFM462 Lecture Notes - Lecture 7: Fide, Property Income

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lemonbeetle804
27 Dec 2019
School
University of Waterloo
Department
Accounting & Financial Management
Course
AFM462
Professor
David Lin

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Document Summary

Benefit is not deductible to the corporation if it is solely to a shareholder (not to an employee) as it was not incurred to earn income. Like a dividend without a gross-up and credit. If the benefit is a previously owned asset, then the corporation is deemed to have disposed of the asset at fmv when transferred. Benefit is included in shareholder"s income in year received as property income. Owner-manager capacity: a person operates in his capacity as a shareholder i f he receives a benefit that would not have been received by an ordinary employee. Bona fide transaction: occurs where a shareholder deals with the corporation in the same manner or capacity as a customer or as a supplier. General rule: the principal of a loan made to a non-corporate shareholder or non - arm"s length person is required to be included in income of the borrower in the year in which the loan was made.

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Related Questions

22) Boxer Corporation buysequipment in January of the current year with a 7-year class lifefor $15,000. The corporation expensed the $15,000 under Sec. 179.The deduction in the year of purchase for E&P purposes due tothe acquisition and expensing of the equipment is
A. $14,000
B. $15,000
C. $1,500
D. $3,000
23) Maxwell Corporation reportsthe following results:
Year CurrentE&P Distributions
2005 $6,000 $4,000
2006 5,000 1,000
2007 1,000 -0-

Maxwell's dividends-received deduction is
A. $5,000
B. $12,000
C. $0
D. $7,000
24) Identify which of thefollowing statements is false.
A. At formation, acorporation's E&P depends on the amount of capital contributedby the shareholders.
B. Adjustments totaxable income when computing E&P do not include tax exemptinterest.
C. For E&Pdividend distribution purposes, property as defined in Sec. 317(a)includes money.
D. The function ofE&P is to provide a measure of a corporation's economic abilityto pay dividends.
25) Exit Corporation hasaccumulated E&P of $24,000 at the beginning of the current taxyear. Current E&P is $20,000. During the year the corporationmakes the following distributions to its sole shareholder who has a$22,000 basis for her stock.
Date AmountDistributed
April 1 $20,000
June 1 20,000
August 1 15,000
November 1 5,000

The treatment of the $15,000 August 1 distribution would be
A. $4,000 is taxableas a dividend from accumulated E&P, and $11,000 is tax-free asa return of capital
B. $5,000 is taxableas a dividend from current E&P and $10,000 is tax-free as areturn of capital
C. $15,000 is taxableas a dividend; $5,000 from current E&P and the balance fromaccumulated E&P
D. $15,000 is taxableas a dividend from accumulated E&P
26) Current E&P does notinclude
A. tax-exemptinterest income
B. life insuranceproceeds where the corporation is the beneficiary
C. federal income taxrefunds from prior years
D. All of the theseare included
27) Identify which of thefollowing statements is true.
A. Section 179property must be expensed ratably over a 5-year period whencomputing E&P.
B. Losses on propertysales to related parties are not deductible when computingE&P.
C. Distributions madeout of accumulated E&P are allocated ratably between multipledistributions made during the tax year.
D. All arefalse.
28) Crossroads Corporationdistributes $60,000 to its sole shareholder Harley. Crossroads hasearnings and profits of $55,000 and Harley's basis in her stock is$20,000. After the distribution, Harley's basis is
A. $20,000
B. $60,000
C. $5,000
D. $15,000
29) Hogg Corporation distributes$30,000 to its sole shareholder, Ima. At the time of thedistribution, Hoggs' E&P is $14,000 and Ima's basis in herstock is $10,000. Ima's gain from this transaction is
A. $20,000 capitalgain
B. $30,000 capitalgain
C. $6,000 capitalgain
D. $14,000 capitalgain
30) One consequence of aproperty distribution by a corporation to a shareholder is
A. the amount of thedistribution is increased by any liability assumed by theshareholder
B. any liabilitiesassumed by the shareholder do not reduce the shareholder'sbasis
C. the shareholder'sbasis in the distributed property is the same as the distributingcorporation's basis
D. the holding periodof the distributed property includes the holding period of thedistributing corporation
31) Identify which of thefollowing statements is true.
A. The distributingcorporation's E&P must be reduced by the FMV of nontaxablestock rights distributed to shareholders.
B. A stock redemptioncan be used to withdraw some assets from a corporation prior to asale of the business.
C. A shareholder canredeem part of his stock and recognize a capital gain if thecorporation has only one shareholder.
D. All arefalse.
32) Which of the following isnot a reason for a stock redemption?
A. desire byremaining shareholders to retain control
B. No outside marketexists for the stock.
C. Redemption ofshares is a good corporate investment.
D. desire byshareholders to reduce the corporate tax liability
33) Elijah owns 20% of ParkCorporation's single class of stock. Elijah's basis in the stock is$8,000. Park's E&P is $28,000. If Park redeems all of Elijah'sstock for $48,000, Elijah must report dividend income of
A. $0
B. $48,000
C. $40,000
D. $28,000

Thomas and Miles are equal partners in a​ partnership, whichuses the calendar year as its tax year. On September​ 1, this​year, Katie contributed​ $60,000 cash for a​ one-third interest inthe partnership. The partnership reports a​ $24,000 ordinary lossfor the tax year ending on December 31 of this year. The lossallocation to Katie​ (new partner) is

A. ​$0.
B. ​$2,667.
C. ​$4,000.
D.​$8,000.

A corporation has the following capital gains and losses duringthe current​ year: ​LTCG: ​$25,000 ​LTCL: ​15,000 ​STCG: 8,000​STCL: 4,000 The tax result to the corporation is
A. $10,000 NLTCG included in gross income and taxed at ordinary​rates; $4,000 NSTCG included in gross income and taxed at reducedrates.
B. ​$10,000 NLTCG is included in gross income and taxed at reduced​rates; and​ $4,000 NSTCG included in gross income and taxed atordinary rates.
C. $14,000 included in gross income and taxed at reducedrates.
D.$14,000 included in gross income and taxed at ordinary rates.

Stephanie owns a​ 25% interest in a qualifying S corporation.​Stephanie's basis in the stock was​ $40,000 at the end of the yearafter adjustments are made for capital contributions anddistributions​ (but not operating​ results). Stephanie also loanedthe S corporation​ $10,000 this year. The S corporation incurred a​$240,000 ordinary loss this year. Assume that next year the S​corporation's ordinary income is​ $160,000. ​ Stephanie's basis inher stock at the end of next year is A.$10,000.
B.$20,000.
C. $30,000.
D. ​$40,000.

Tara transfers land with a​ $690,000 adjusted basis and a​$700,000 FMV to a corporation in a Sec. 351 transfer. Immediatelyafter the​ transfer, Tara owns​ 100% of the corporationlongdash—stock with a FMV of​ $615,000. In​ addition, $85,000 ofliabilities are assumed by the corporation with respect to thetransfer. No other property is transferred.​ Tara's recognized gainon the transfer is
A. $15,000.
B. ​$0.
C. $5,000.
D. $10,000.

Jenkins Corporation has the following income and expense itemsduring the current​ year: Net loss from operations​ (beforedividend​ income) ​($ 25,000) Dividends from​ 25% ownedcorporations ​150,000 The allowed​ dividends-received deductionis
A. $125,000.
B. $100,000.
C. ​$150,000.
D. $120,000.

Please build the answer in your own words based on flowing textfrom studding book (provide the example):

text from book:

Group Term Life Insurance Plans.

Many employers offer group term life insurance as part of theiremployee benefit package. Life insurance coverage is normallycalculated as a multiple of the employee’s annual salary, roundedup to the nearest thousand ($1,000.00). The premiums paid by theemployer for coverage under a group term life insurance policy areconsidered a taxable benefit to the employee. If the employershares the premium cost with the employee, for example, theemployer pays half and the employee pays half, then the taxablebenefit would only be the portion of the premiums the employerpays, or 50%. Group term life insurance taxable benefitcalculations are based on the premium rates and sales taxes theemployer pays and the amount of coverage provided. Premium ratesare expressed per $1,000.00 of coverage on a monthly basis. Thetaxable benefit must be calculated on a pay period basis forinclusion in the employee’s taxable income.

The following formula calculates the employee’s monthly taxablebenefit:

Coverage amount = Annual salary x coverage multiplier Roundcoverage amount up to nearest $1,000.00 Monthly taxable benefit =Coverage amount x premium rate $1,000.00 To ensure that the benefitis included in the employee’s income as it is earned or enjoyed,the monthly benefit must be annualized and then prorated on a payperiod basis, as follows: Pay period taxable benefit = Monthlytaxable benefit x 12 Pay period frequency

"Example: Rhonda Gold’s life insurance coverage, through heremployer’s group plan is two times her annual salary of $30,300.00.Her employer pays the insurer 100% of the cost of her lifeinsurance coverage at a premium rate of $1.00 per $1,000.00 ofcoverage per month. Rhonda is paid on a weekly basis; her taxablebenefit is calculated as follows: Coverage amount = Annual salary xcoverage multiplier Round coverage amount up to nearest $1,000.00 =($30,300 x 2) = $60,600.00 = $61,000.00 (rounded) Monthly taxablebenefit = coverage amount x premium rate $1,000.00 = $61,000 x$1.00 $1,000.00 = $61.00"

Group Sickness and Accident Insurance Plans.

These are group plans that provide employees with income for aperiod of time, should the employee be away from work for reasonsof sickness or accident. A group plan is generally one thatprovides coverage to a class or association of employees. There canalso be multiple plans for a group of employees, for example, oneplan for clerical staff and one for management staff. The types ofsickness and accident insurance plans considered in this categoryinclude:

? short term disability plans (wage loss replacement, weeklyindemnity)

? long term disability plans

? accident insurance plans (accidental death anddismemberment)

If an employer pays the premiums for group short-term orlong-term disability plans there is no taxable benefit implicationfor the employee, however employer-paid accidental death anddismemberment (AD&D) premiums are considered a non-cash taxablebenefit. As a result, employer-paid AD&D premiums, plus the 8%RST (Manitoba and Ontario), the 9% tax on insurance premiums(Québec) and the 6% PST (Saskatchewan) as applicable, areconsidered pensionable for C/QPP contributions and taxable forfederal and provincial income taxes. Employer-paid premiums for anon-group plan are considered a non-cash taxable benefit in alljurisdictions. A non-group plan is one that generally does notcover a group or association of employees. For example, if theorganization pays the premiums for a long-term disability plan foronly the president of the organization, this would be considered anon-cash taxable benefit to the president. When the benefit istaxable it is also pensionable for C/QPP contributions; however, asit is a non-cash benefit, it is not insurable, and no EI or QPIPpremiums are deducted. GST and HST are not included in the value ofthis type of benefit, but the provinces of Manitoba, Ontario,Québec and Saskatchewan assess sales tax on AD&D insurancepremiums.

Question : Your organization, located in Manitoba,will be enhancing the group benefits plan offered to employees intwo months by adding accidental death and dismemberment (AD&D)coverage and vision care coverage. The organization will pay 50% ofthe cost of the AD&D premiums and 50% of the cost of the visioncare premiums, with the employees paying the other 50% of eachpremium. The Manager of Finance, Laura Bruce, has requested thatyou, as the Payroll Supervisor, prepare a communication for theemployees, explaining how these new benefits will impact their netpay.

(200 – 350 words)