7.1 Unified Transfer Tax System

1. Unified Transfer Tax System

Lifetime taxable gifts and death time transfers are taxed on a cumulative basis.

2. Unified Transfer Tax Credit

Exclusion $11,400,000 - Unified Credit $4,505,800 (2019)

6 Trust and Estate

1. Income Taxation Rules for Estates and Trust

No double taxation of income earned by an estate or trust (i.e. fiduciary income) occurs.

2. Form 1041: Income Tax Return of Estate and Trusts

1) Filing requirement and the due date
GI: more than $600
Due: 15th day of the fourth month

2) Taxable year
Trust: calendar year
Estates: calendar year or fiscal year

3) Estimated tax payment
Generally the same as individuals
Estates are exempted for 2 years

4) Gross Income
Generally the same as individuals

5) Deductions
(1) Deductions for expenses
- Trustee fees
- Executor's fees
- Interest
- Taxes
- Investment advice fees
- Tax return preparation fees
- Expenses to produce income
- Business expenses to carry on a trade or business

(2) Charitable Contribution: unlimited

(3) Personal exemption
- Simple trust: $300
- Complex trust: $100
- Estate $600

(4) Income distribution deduction
Lesser of (a) actual distribution to beneficiaries or (b) Distributable Net Income (DNI)

(5) Distributable Net Income (DNI)
Estate / Trust Gross Income
 - Estate / Trust Deductions
= Adjusted Total Income
 + Adjusted Tax-Exempt Interest
 - Capital Gains
=Distributable Net Income (DNI)

(6) Tax rate schedule (progressive tax rate)

(7) tax credit

5 Exempt Organizations

1. Exempt Organizations

1) Sec. 501 (c) (3) Organization
(1) Organization test: the articles of organization must limit to sec. 501 (c) (3)
- Religious
- Charitable
- Scientific
- Literary
- Educational
- Testing for public safety
(2) Operational test
No part of the net earnings may inure to the benefit of any private shareholders or individual.
No substantial part of the activities may be non-exempt activities (e.g., influence legislation).
The organizations may not directly participate or intervene in any political campaign.

* To obtain exempt status, the organization must apply and approved by the IRS
* Tax-exempt organizations may be in the form of a corporation, trust, fund, foundation.

2) Public charity vs. private foundation
(1) Public charity
The following four distinct categories are NOT private foundation:
a) Maximum (50% type) charitable deduction donees
b) Broadly publicly-supported organizations receiving more than 1/3 of their annual support form members and the public and less than 1/3 from investment income and unrelated business income.
c) Public safety testing organizations
(2) Private foundation

3) Filing requirement
An annual information return, Form 990/990-EZ (or 990 PF) by May 15

2. Unrelated Business Income

UBI in excess of $1,000 is subject to tax

UBI is:
a) Derived from an activity that constitutes a trade or business,
b) Regularly carried on, and
c) Not substantially related to the organization's tax-exempt purposes.

Exceptions to UBI tax
(1) Any activity where all of the work is performed by unpaid workers (volunteers).
(2) The sale or exchange of property not held primarily for sale to customers in the ordinary course of trade or business.
(3) The business carried on for the convenience of students, patients, members of 501 (c) (3) organizations.
(4) Income from the research of a college or hospital.
(5) Dividends, interest, and royalties (except income from debt-financed investments)
(6) Activity limited to exempt organizations by state law (e.g., bingo)
(7) Rents from real property, rents from personal property leased with real property (if less than 50% is attributable to the personal property), other than income from debt-financed property.

4.9 S Corporation and LLC

1. Eligibility Requirements

1) Domestic corporation
2) Only one class of stock
3) Shareholders must individual, estate and qualified trust can be shareholders
4) No nonresident alien individual shareholders
5) 100 shareholders or less (family members are counted as one)

2. Election of S Corporation Status

All shareholders (voting and nonvoting) must consent to a valid election.
If the election is made at any time on or before the 15th day of the third month (March 15) of the election year, the election is effective on the first day of the tax year.

3. Effect of S Corporation Election on Corporation

1) No tax on S corporation
However, S corporation is subject to special taxes: the built-in gain tax, excessive passive investment income tax, and LIFO recapture tax.

2) A taxable year and the due date
S corporations file Form 1120S and must adopt the calendar year unless a valid business purpose for a different taxable year(fiscal year) is established.
The return is due by the 15th day of the third month (March 15) after the close of the tax year.

3) Pass-thru & Form 1120S
S corporations report both separately and non-separately stated items of income and/or loss. (see 3.3 Partnership Information Return)

(1) Fringe benefits
a) Deductible fringe benefits: employee owning 2% or less of the share
b) Non-deductible fringe benefits: for a more than 2% employee shareholder

(2) Mid-year change of ownership
Allocations to shareholders are per day, per-share basis

4. Effect of S Corporation Election on Shareholders

1) Loss limitation
At-risk: adjusted basis in stock + direct loans to the corporation

2) Shareholder's basis of stock
Original basis
+ Additional investment
+ All income
- All loss
- Distributions received
= Shareholder's adjusted basis

5. Taxability of Distributions to Shareholders

1) With NO C corporation earnings and profits
(a) Return of capital - nontaxable and reduces shareholder's stock basis
(b) Capital gain - taxable to extent distribution exceeds stock basis

2) With C corporation earnings and profits
(a) AAA (accumulated adjustment account) - nontaxable and reduces shareholder's stock basis
(b) AEP - taxable as a dividend and does NOT reduce shareholder's stock basis
(c) Return of capital - nontaxable and reduces shareholder's stock basis
(d) Capital gain - taxable to extent distribution exceeds stock basis

6. Termination of S Corporation

1) When S corporation status terminates
(1) The corporation fails to meet any eligibility requirements for S corporation status
(2) Greater than 50% of the shareholder consent to a revocation
(3) More than 25% of the corporation's gross receipts come from passive investment income for 3 consecutive years and the corporation had C corporation earnings and profits at the end of each year.

2) Re-electing: 5 years

7. Limited Liability Company

A single-member LLC: sole proprietorship
At least two owners: partnership or C corporation (Form 8832 Entity Classification Election)

4.8 Corporate Reorganization

1. Tax-Free Reorganization

A) Statutory mergers and consolidations

B) Stock for stock exchange

C) Stock for asset exchange

D) Corporation divisions

E) Recapitalization

F) Change in identity, form or place of organization

G) Bankruptcy

4.7 Distributions from Corporation

1. Ordinary (Current/Nonliquidating) Distribution

1) Dividends defined
Current earnings and profits, accumulated  earnings and profits

2) Amount of distributions (to the shareholder): FMV

3) Three categories of distributions
(a)  earnings and profits: dividend - taxable
(b) Stock basis: the return of capital - nontaxable (reduces stock basis)
(c) Capital gain distribution - taxable

4) Order of distribution allocation
Current earnings and profits first and then accumulated earnings and profits

5) Matching cash dividends to source
(1) Current earnings and profits are allocated on a pro-rata basis for each distribution.
(2) Accumulated earnings and profits are applied in chronological order

6) Shareholder's Taxable Amount: FMV
* Corporation shareholder: DRD

7) Stock dividends: generally not taxable

8) Constructive dividends
(a) Excessive salary paid to shareholder-employees
(b) Sale of assets below fair market value
(c) Interest-free loans or "loans" to shareholders where no intent to repay

9) Distribution of appreciated property (taxable on the corporation)
The corporation recognizes gain (but not loss) as if the property had been sold for its FMV

2. Stock Redemptions

1) Exchange (sale): capital gain or loss
(2) The redemption is substantially disproportionate or
(3) All of the shareholder's stock is redeemed.

2) Dividend: ordinary income

3. Complete (Liquidating) Distribution

Shareholder: taxable - capital gain/loss

Corporation recognize gain or loss as if the distributed property were sold to the distributee for FMV (taxable event)

4. Liquidation of Subsidiary

No gain/loss is recognized when the parent owns at least 80%

4.6 International Tax Issues

1. The U.S. Taxation of Foreign Transactions

1) Worldwide tax system

2) Territorial tax system (after 2018)
Foreign-source portion of dividends received: 100% DRD (owns 10% or more)

3) Transition tax (one-time deemed repatriation tax)

2. Subpart F Income

Controlled foreign corporation (CFC)
Subpart F income: passive investment income or active income tied to are "related party".
(1) Foreign personal holding company (PHC) income
(2) Foreign base company sales income
(3) Foreign base company service income

3. Global Intangible Low-Taxed Income (GILTI) Tax

4. Foreign-Derived Intangible Income (FDII) Deduction

5. Base Erosion and Anti-abuse Tax (BEAT)