Business Administration - Accounting & Financial Planning FIN401 Lecture Notes - Lecture 13: Canada Savings Bond, Debenture, Capital Account

1.( T or F ) An individual who directly owns real estate andearns net rental income for the tax year January 1 – December 31,2018 will have an effective tax rate of 29.6% on it.

2.( T or F ) Jumbo LLC, is treated as a partnership and is ownedby 50% by two individuals, Rod and Tom. Jumbo LLC acquired BighornCenter, an industrial rental property for $2 million and collectsrent from tenants. When Bighorn Center’s value increases to $3million, Jumbo refinances the debt and distributes $500,000 to bothRod and Tom. Rod and Tom treat the $500,000 as ordinary incomesubject to a 39.6% tax rate.

3.( T or F ) A gain resulting from the sale of REIT shares whenthat REIT is domestically controlled will not result in any U.S.federal income tax withholding for non-U.S. holders of the REITstock.

4.( T or F ) A general partnership can be taxed as a corporationif so elected under the check the box rules.

5.( T or F ) An individual investor can own 100% of a REIT.

6.( T or F ) Since dividends are not UBTI, a tax exempt investorwill not have UBTI on dividend income when debt is used to purchasethe stock that paid the dividend.

7.(T or F) An individual, who qualifies as a real estateprofessional, can treat a particular rental real estate activity asnon-passive even when that individual does not materiallyparticipate in the real estate activity.

8.(T or F) Withholding tax to non-US investors on interestincome and dividends may be reduced under the terms of atreaty.

9. Assume a building, owned by a REIT, increases invalue and the REIT that owns it sells the building for $120 millionand then makes a capital gain distribution to its shareholders.Which of the following is true regarding a U.S. individualinvestor's tax treatment:

A. The gain on the sale will be taxed at the ordinary income taxrate.

B. The gain on the sale will be taxed at the capital gain taxrate.

C. There is no tax on the net gain at the shareholder level.

D. The tax treatment is the same for the US investor as it isfor the foreign investor.

E. None of the above.

11. Provide the tax that would be applied for each ofthe following:

1. Withholding tax on passive-typeincome (interest, dividends, etc..) for non-US investors withrespect to US source income. _______________.

2. Tax imposed on a foreigncorporation based on a deemed distribution of US branchoperations____________________.

3. Withholding tax on US businessincome income that is effectively connected with a United Statestrade or business. ______________.

13. Which of the following would cause the largestproblem for an individual who wants to be taxed as a real estateprofessional (which one would be the most difficult to overcome ifan individual wanted to be treated as a real estateprofessional)?

A. The individual owns only rental real estate properties andspends all of his/her time managing them.
B. The individual works for herself as a commissioned real estatebroker and invests in one rental property on the side.

C. The individual works full time for a company that is activein a real estate trade or business (periodically requiringovertime) but has no ownership in the company.

D. The individual owns and operates a hotel where she spends2,000 hours per year and she also invests in a small portfolio ofrental real estate properties.

E. None of the above would cause problems for an individual tobe classified as a real estate professional.

14. What are the highest tax rates for each of thefollowing scenarios?

____. Operating income from a hotel earned by a foreigncorporation (excluding branch profits tax)

____. Interest income earned by a foreign corporationfrom a US borrower

____. Net rental income earned by an U.S. individual(exclude the passthrough deduction)

____. Capital gain earned by an U.S.individual

____. Interest income earned by a U.S.corporation

____. Capital gain earned by an U.S.corporation

____. Depreciation recapture on the sale of U.S. realestate (Section 1250 property) for an individual

____. Depreciation recapture on the sale of U.S. realestate (Section 1245 property) for an individual

15. Identify the following as "ECI" (effectivelyconnected income) or "Not ECI" (not effectively connected income)if earned by a foreign person:

________Rental income from an actively managed storage center inFlorida

________ Interest income from loans to non-U.S. corporateborrowers.

________ A gain on the sale of a shopping center located inBermuda.

Proof read please

In deciding which entity to use for a new business, it is good to review the benefits and disadvantage of each one. A corporation According to e-text (page 1094) A corporation is liable to third person for the act of it is officers, employees, and agent to the same extent that a natural person is liable act of agents and employees. Because of the corporation is a separate legal person debt, the debts that owe are ordinarily the obligation of the corporation only. It is good to know the advantage and the person itself is not responsible of the corporation debts because nobody want debts that goes after their personal properties. I think that’s the reason business owner choose a form of corporation however, the double taxation of appreciated assets on sale or dissolution is a bad disadvantage but it can be a right choice for certain situation because nobody wants to hold liable for their business debts, or personal income or any other personal assets. An owner always wants taxable profit and retain growth to pay down their business debts, even though the corporations taxes are extremely higher than a LLC, but I still recommended a business to choose a corporation that better benefit for them. A LLC taxes are lower but owner is personally obligator to any debts. It is good to know that corporation can also deduct disability insurance for owner-employees which is a significant advantage, reduced gain for capital gain and audit potential for tax liability A corporation enjoys limited liability, while partner is personal liable for the business. Frost, T. S. (1984). In regard to taxes, a corporation can generate tax saving if the corporate tax rate is lower than the personal one and if earning is retained in the corporation. the worse part will be the shareholder because they can be held personally liable for corporate debt and the creditor can now go after the shareholder property and their bank account and other assets that satisfy their dues. Frost, T. S. (1984). Tax aspects of the form of doing business. Dun and Bradstreet, Inc.D & B Reports, 22(1), 58. Starkman, J. (2007). Advantages of a C corporation. The Tax Adviser, 38(10), 617-618.

36. Which of the following statements regarding the basis ofmutual fund shares is TRUE?

a. If the mutual fund shares were purchased at various time andprices, the basis can be determined using the average basismethod.

b. The average basis of mutual fund shares can be determined usingthe single-category method.

c. The basis of mutual fund shares can be determined using thesecurities

d. All of these statements are true

37. Which of the following statements regarding the reporting ofsales of stock is true?

a. Short-term and long-term capital gains and losses are reportedon form 8949 and carried to Schedule D

b. Total capital gain is computed by combining net short- termgains and losses and net long-term gains and losses

c. Under certain circumstances, short-term and long-term capitalgains and losses may be aggregated and reported directly onSchedule D.

d. All of these statements are true,

38. In 2015, Mike Johnson had taxable income of 100,000. Thisamount included short-term capital losses of 1,000 and long-termcapital of 10,000. He had no other capital transactions in prioryears. What is Mike’s capital loss carryover to 2016?

a. 0

b. 1,000

c. 8,000

d. 11,000

39. Lelani purchases 200 shares of XYZ for 1,500 in 2013. XYZhad no earnings or profits in 2014 or 2015. Lelani received a 1,000return of capital in 2014 and a 1000 return of capital in 2015.What should be reported on her 2015 tax return.

a. 500 capital gain

b. 1000 dividend income

c. 1000 capital gain

d. 500 dividend income.

40.Which of the following statements regarding the basis ofmutual fund shares is FALSE? The basis of mutual fund shares can bedetermined by using the:

a. Double-category method

b. average basis

c. Specific share identification method

d. First-in first -out method

41. If the holding requirement for statu tory stock options isNOT met, the sale of the stock is considered a

a. Qualified sale

b. Ordinary disposition

c. Nonqualified sale

d. Disqualifying disposition