India. Descuento en el Plan de Opción de Compra de Acciones (ESOP) como Deducción en la Computación del Ingreso bajo los Beneficios de la Cabeza y Ganancias de los Negocios
"Opción de compra de empleados" significa la opción dada a los directores, funcionarios o empleados de una empresa, que otorga a dichos directores, funcionarios o empleados el beneficio o el derecho a comprar o suscribir en una fecha futura los valores ofrecidos por la compañía A un precio predeterminado 1. En Employee Stock Option Plan (ESOP), el empleador ofrece a sus empleados y / o directores y / o directores la opción de comprar acciones de la Compañía en una tarifa con descuento. No existe ninguna disposición específica en la Ley del Impuesto sobre la Renta de 1961 que dé deducción del descuento otorgado a los empleados en ESOP. Con el fin de decidir la cuestión de que, si el descuento en la emisión de opciones de acciones de empleados es admisible como deducción en el cálculo de los ingresos bajo los beneficios de cabeza y las ganancias de los negocios. Un banco especial fue constituido en Banglore por el Honorable Presidente del Tribunal de Apelación del Impuesto sobre la Renta (ITAT) sobre una referencia por el Banco de División en el caso de M / s. Biocon Limited vs The Dy. Comisionado del Impuesto sobre la Renta (LTU), Bangalore [ITA No.368 / B / 2010 y Or. (SB), decisión pronunciada el 18 de julio de 2017].
Los hechos del caso fueron los siguientes:
Sra. Biocon Limited se dedica a la fabricación de Enzimas e ingredientes farmacéuticos. Formuló ESOP 2000 y se creó un fideicomiso bajo el nombre y estilo de "Biocon India Limited Employees Welfare Trust" para dar efecto a la ESOP
Para el ejercicio de evaluación 2003-2004 M / s Biocon Limited lanzó ESOP 2000 en virtud de la cual concedió la opción de acciones con un valor nominal de INR10 al mismo tipo alegando que el precio de mercado de dichas acciones era de 919 INR, reclamando el descuento total por Opción en INR 909.
La diferencia entre el supuesto precio de mercado y el precio de ejercicio, a 909 INR por opción por un importe total de 6,52 millones de rupias, se reclamó como compensación a los trabajadores que se repartirían durante el período de carencia de cuatro años.
Una deducción de INR 3,38 crore se reclamó para la evaluación año 2003-2004 en la fuerza de las directrices SEBI.
M / s Biocon Limited alegó que el costo de compensación de la opción de compra de acciones de INR 3,38 millones de rupias era deducible u / s 37 (1) de la Ley ya que todas las condiciones requeridas fueron satisfechas.
El Oficial Evaluador (AO) rechazó dicha reclamación por el hecho de que no existía una disposición específica que permitiera al evaluado deducir en este sentido 37 (1).
El letrado CIT (A), citado por la orden impugnada de fecha 13 de noviembre de 2009, confirmó el rechazo del gasto de ESOP de 3,38 millones de rupias, que pasó a ser objeto de la cuestión ante el tribunal especial.
El Tribunal Especial, observó que la cuestión que se le ha planteado puede responderse en los tres pasos siguientes, a saber,
¿Es permisible alguna deducción de dicho descuento?
En caso afirmativo, ¿cuándo y cuánto?
Posterior ajuste a descuento
I. ¿SE PERMITE ALGUNA DEDUCCIÓN DE ESTE DESCUENTO?
Los ingresos sostenían que el descuento en ESOP en primer lugar no es un gasto en sí mismo, en segundo lugar, es un recibo de capital corto o, como mucho, un tipo de gastos de capital y en tercer lugar también es un pasivo contingente.
Sobre la cuestión de si el descuento en ESOP es gasto, el banco hizo las siguientes observaciones?
Cuando se lea el artículo 43 (2) de la Ley conjuntamente con el artículo 37 (1), el significado del término 'gasto' Resulta ser la misma que figura en la parte anterior de la definición de la sección 2 h) de la Ley de gastos de 1957, a saber, No sólo `pagando & # 39; Pero también 'incurrir'. Volviendo a nuestro contexto, se observa que al comprometerse a emitir acciones con prima descontada, la empresa no paga nada a sus empleados, sino que incurre en la obligación de emitir acciones a un precio descontado en una fecha futura en lugar de sus servicios, que es Nada más que un gasto u / s 37 (1) de la Ley.
En cuanto a la cuestión de si el descuento en virtud de ESOP un corto capital recibió el banco hizo las siguientes observaciones?
Durante el período de consolidación de derechos, las opciones otorgadas a los empleados se conceden con ellos. Este período comienza con la concesión de la opción y termina cuando las opciones así concedidas se conceden a los empleados después de servir a la compañía durante el período acordado. Mediante la concesión de las opciones, la empresa obtiene una especie de garantía de su empleado para prestar servicios ininterrumpidos durante el período de concesión y como contrapartida se compromete a compensar a los empleados con una cierta cantidad dada en forma de prima descontada sobre la emisión de Comparte.
Cuando una empresa se compromete a emitir acciones a sus empleados con una prima descontada en una fecha futura, el objetivo principal de este ejercicio no es aumentar el capital social sino obtener ganancias asegurando los esfuerzos consistentes y concentrados de sus empleados dedicados durante el período de adquisición . Tal descuento es interpretado, tanto por los empleados como por la compañía, como nada más que una parte del paquete de remuneración. En otras palabras, tal prima descontada sobre las acciones es un sustituto de dar incentivo directo en efectivo para hacer uso de los servicios de los empleados. No hay diferencia en dos situaciones a saber. Uno, cuando la empresa emite acciones al público a precio de mercado y una parte de la prima se da a los empleados en lugar de sus servicios y dos, cuando las acciones se emiten directamente a los empleados a un tipo reducido. De ello se desprende que el descuento sobre la prima en el marco de ESOP es simplemente una de las modalidades de indemnización de los trabajadores por sus servicios y forma parte de su remuneración. El único objeto de emitir acciones a los empleados con una prima descontada es compensarles por la continuidad de sus servicios a la compañía. Por poco de imaginación, podemos describir tal descuento como un recibo de capital corto o un gasto de capital. No es más que el costo de los empleados incurrido por la empresa.
En cuanto a la cuestión de si el descuento en virtud de ESOP es un pasivo contingente el banco hizo las siguientes observaciones?
Un pasivo incurrido definitivamente por un deudor es deducible a pesar de que su cuantificación puede tener lugar en un año posterior. El mero hecho de que la cuantificación no sea precisamente posible en el momento de incurrir en el pasivo no haría un pasivo determinado un contingente.
El hecho de que los empleados tengan derecho a ejercer opciones al final del período de adquisición y sólo entonces se determinará el monto real del descuento, es similar a la cuantificación de la responsabilidad precisa que se produce en una fecha futura, Perturbar la responsabilidad que se produjo al final de cada año en el uso de los servicios.
Normalmente se prevé en los esquemas de ESOP que las opciones adquiridas que caduquen debido a opciones sin ejercicio y / o no adquiridas que se cancelen debido a la renuncia de los empleados o de otro tipo, estarían disponibles para la concesión en una fecha futura o estarían disponibles Para ser concedido nuevamente en una fecha futura. Si lo consideramos a nivel micro a medida que cada empleado individual, puede parecer contingente, pero si lo vemos a nivel macro en cuanto al grupo de empleados como un todo, pierde la etiqueta de 'contingente' Porque tales opciones de caducidad están en juego para los demás empleados elegibles. En cualquier caso, si algunas de las opciones permanecen sin invertir o no se ejercen, el descuento hasta ahora reclamado como deducción debe ser revertido y ofrecido para impuestos en ese último año. Por lo tanto, consideramos que el descuento en relación con las opciones adquiridas durante el año no puede ser considerado como un pasivo contingente.
II. Como ESOP es un gasto deducible u / s 37 (1), la siguiente pregunta es que `cuando & # 39; Y por 'cuánto & # 39; ¿Debería concederse la deducción?
La deducción por un gasto es permisible al incurrir en responsabilidad y la misma no puede ser perturbada simplemente debido a alguna dificultad en la cuantificación apropiada. Es necesario distinguir entre una situación en la que no se ha incurrido en un pasivo y una situación en la que se incurre en la responsabilidad, pero su cuantificación no es posible en el momento de los hechos. Mientras que en el primer caso no puede permitirse la deducción, en el segundo caso, debe concederse una deducción por una suma determinada sobre una base racional que representa el importe de la responsabilidad incurrida.
Un empleado se convierte en derecho a las acciones a una prima descontada durante el período de adquisición dependiendo de la duración del servicio prestado por él a la empresa. En todos estos sistemas, es al final del período de adquisición de derechos que la opción es ejercible aunque el derecho proporcional a la opción se adquiere prestando servicio al final de cada año.
Una empresa bajo el sistema mercantil puede legítimamente reclamar la deducción por la prima total descontada que representa el costo de los empleados durante el período de consolidación de derechos a la tasa a la cual hay la adquisición de opciones en los empleados.
Aunque la empresa se ve obligada a emitir acciones en el momento del ejercicio de la opción, pero es en lugar de la responsabilidad de compensación de los empleados que incurrió durante el período de consolidación de derechos mediante la obtención de sus servicios. De lo anterior se desprende que la empresa incurre en obligación de emitir acciones a la prima descontada sólo durante el período de adquisición. El pasivo no se incurre en la etapa de otorgamiento de opciones ni cuando dichas opciones son ejercidas.
El pasivo para pagar la prima descontada se incurre durante el período de adquisición y el monto de dicha deducción se debe averiguar según los términos del esquema ESOP considerando el período y el porcentaje de adquisición durante dicho período. Por lo tanto, estamos de acuerdo con la conclusión sacada por el tribunal en el caso de SSI Ltd., que permite la deducción de la prima descontada durante los años de adquisición sobre una base recta, lo cual coincide con el razonamiento anterior.
III. Si algún ajuste posterior se justifica en el momento del ejercicio de las opciones, a las deducciones anteriores permitió la cantidad de descuento?
El Banco se bifurcó, la pregunta en dos situaciones.
yo. Las opciones permanecen sin vencimiento o caducan al final del período de ejercicio.
Con respecto a la primera situación, el Banco observó que el monto del descuento reclamado como deducción anterior con respecto a las opciones sin vencimiento / caducidad, debe ser gravado como ingreso en la ocurrencia de tales eventos.
Ii. Las opciones son ejercidas por los empleados después de poner en servicio durante el período de concesión.
Con respecto a la segunda situación, el Tribunal observó que
El descuento de ESOP, que no es otra cosa que la recompensa por los servicios, es un requisito imponible al empleado en el momento del ejercicio de la opción, y su valoración se debe hacer considerando el valor justo de mercado de las acciones en la fecha en que la opción Se ejerce.
Puesto que la remuneración a los empleados bajo ESOP es la cantidad de descuento w. rt. El precio de mercado de las acciones en el momento del ejercicio de la opción, el costo de los empleados en manos de la empresa también debe ser w. r.t. La misma base.
Dado que el monto real del costo de los empleados puede determinarse con precisión solamente en el momento del ejercicio de la opción por parte de los empleados, el monto provisional del descuento utilizado como deducción durante el período de adquisición debe ser ajustado a la luz del descuento real sobre la base de El precio de mercado de las acciones en el momento del ejercicio de las opciones. Puede hacerse haciendo ajustes adecuados hacia el norte o hacia el sur en el momento del ejercicio de la opción.
En cuanto al aspecto Fiscalidad con respecto a los principios de contabilidad, el Bench hizo las siguientes observaciones
Se ha observado que en general hay tres etapas que tienen efecto sobre el ingreso total de la empresa en el ciclo de vida de ESOP, a saber. I) durante el período de carencia, ii) en el momento de la anulación / caducidad de las opciones y iii) finalmente en el momento del ejercicio de las opciones.
Lo que es cierto para fines contables no tiene que ser necesariamente cierto para la tributación.
Los principios fiscales están consagrados en la legislatura. Poder legislar recae en el Parlamento. Normas de contabilidad o Guía de Orientación, etc., por cualquier denominación que se emita, emitida por cualquier organismo autónomo o incluso estatutario, incluyendo el Instituto de Contadores Públicos de la India, o para el caso, el SEBI sólo tienen por objeto prescribir la forma en que las transacciones deben Ser contabilizados en libros o reflejados en las cuentas anuales. Estas directrices no tienen la fuerza de una ley del Parlamento. Dado que el tema del impuesto sobre el ingreso recae en la Lista de la Unión, de acuerdo con la Parte XI de la Constitución de la India, sólo el Parlamento puede legislar sobre su alcance.
Bajo el título «Beneficios y ganancias de negocios o profesiones», hay secciones que otorgan deducciones con respecto a gastos o asignaciones específicas. Del mismo modo, existe el artículo 37 (1), que otorga deducción por gastos no especificados en otras secciones, si se cumplen las condiciones estipuladas en el apartado. Todos los demás conceptos de gastos que cumplan las condiciones requeridas, obtienen la deducción en virtud del artículo 37 (1). Para decirlo en términos simples, esta sección es una disposición específica para conceder la deducción con respecto a las categorías no especificadas o generales de los gastos. El descuento en ESOP es un gasto general y por lo tanto cubierto por la disposición específica de la sección 37.
Los principios de contabilidad no tienen absolutamente ningún papel que jugar en la determinación del ingreso total bajo la Ley. La esencia del asunto es que los principios de impuestos deben ser seguidos. Si un principio contable está en conformidad con el mandato del principio de tributación y se hace referencia a dicho principio contable al decidir la emisión, ello no significa que se haya seguido el principio contable. Simplemente significa que se ha seguido el principio de tributación y se ha tomado nota simplemente del principio de contabilidad, que está en consonancia con dicho principio fiscal.
Que el descuento bajo ESOP es en la naturaleza del coste de los empleados y es por lo tanto deducible durante el período de consolidación de derechos w. r.t. El precio de mercado de las acciones en el momento de la concesión de opciones a los empleados. El monto del descuento reclamado como deducción durante el período de consolidación de la obligación se debe revertir en relación con las opciones de desmantelamiento / caducidad en el momento apropiado. Sin embargo, en el momento del ejercicio de la opción se requiere un ajuste a la renta por el importe de la diferencia en el importe del descuento calculado con referencia al precio de mercado en el momento de la concesión de la opción y al precio de mercado en el momento del ejercicio de opción. Ningún principio contable puede ser determinante en la cuestión del cálculo del ingreso total bajo la Ley. Por lo tanto, la pregunta ante el banco especial se contesta afirmativamente sosteniendo que el descuento en la emisión de Opciones sobre acciones para empleados es admisible como deducción en el cálculo del ingreso bajo el título «Beneficios y ganancias de una empresa o profesión».
Conclusión
El Banco Especial de ITAT ha sostenido que el descuento en la emisión de ESOP será permitido como deducción en el cálculo de los ingresos bajo el título "Beneficios y ganancias de negocios o profesión" Ya que forma parte de la retribución de los trabajadores. El Banco también sostuvo que la deducción en el momento de la concesión de las opciones tiene que hacerse sobre el valor de mercado de las acciones, ya que el monto exacto del descuento que estará disponible como deducción sólo puede determinarse en el momento del ejercicio de las opciones, La diferencia llegó en descuento debe ser adecuadamente ajuste. Hasta el momento en que la decisión de la Corte Especial sea impugnada por el Departamento de Ingresos o una sentencia contradictoria sea aprobada por un foro judicial superior, la cuestión de descuento en la emisión de ESOP si es permisible como gasto empresarial se liquida por una vez.
1. El artículo 2 (15A) de la Ley de Sociedades de 1956
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Capítulo 10
Cálculo de Ingresos Tributarios e Impuestos a Pagar por Individuos
Metas de aprendizaje
Visión de conjunto
& Para; 10.000 Cálculo de la renta imponible para un individuo
& # 34; Ingreso tributable & # 34; Se define en la Ley como el ingreso neto del contribuyente para el año, más o menos las deducciones permitidas por la División C. Mientras que la Parte I, División B, de la Ley se centra en el cálculo de los ingresos fiscales, la División C contiene las reglas estatutarias Para determinar la renta imponible de la renta neta para los propósitos del impuesto. Lo siguiente ilustra los tres pasos distintos en el cálculo del impuesto sobre la renta. Estos pasos se aplican tanto a corporaciones como a individuos.
La División C incluye una serie de deducciones permitidas, incluyendo las reglas relativas a estas deducciones, pero sólo algunas de ellas se aplican a individuos. Las deducciones de la División C aplicables a las personas incluyen las siguientes:
Las opciones de acciones de empleados, las donaciones de caridad de acciones de acciones de empleados, las acciones recibidas bajo un plan de distribución de beneficios diferido, los préstamos de reubicación de viviendas, la compensación de trabajadores, la asistencia social, las exenciones de tratados y organizaciones internacionales y los votos de pobreza perpetua.
Sección 110.2 & # 8212; deducción por pagos de suma global.
Sección 110.6 & # 8212; deducción por ganancias de capital sobre propiedades agrícolas y acciones de una corporación de pequeñas empresas calificada.
Sección 110.7 & # 8212; deducción para residentes del norte.
Sección 111: deducción por pérdidas acumuladas incluyendo las pérdidas no patrimoniales, las pérdidas netas de capital, las pérdidas agrícolas restringidas y las pérdidas agrícolas.
Como se muestra, las deducciones permitidas son muy específicas y, por lo tanto, no estarán disponibles para todos los contribuyentes. Cuando una persona reclama más de una deducción en el mismo año de impuesto, se proporciona una regla de orden.
& 10.010 Divisiones Diversas & # 160; C Deducciones y Adiciones
10,032 Propuesta legislativa y política gubernamental
Los ingresos y las pérdidas se calculan para un año de impuesto, que es un período algo arbitrario. Durante un período más largo, se podría esperar que las pérdidas compensen los ingresos, y sólo el ingreso neto sea imponible en ese período más largo. La disponibilidad de un período de remanencia para las pérdidas tiene por objeto ampliar el período dentro del cual las pérdidas pueden compensar los ingresos. El estatuto prevé que las pérdidas se devuelvan contra los ingresos de años anteriores o contra los ingresos de años futuros. Por lo tanto, los contribuyentes reciben un cierto alivio del riesgo económico de una actividad y se les proporciona el estímulo para perseverar. Sin embargo, la necesidad de limitaciones es crucial. Las limitaciones, junto con las reglas generales generales que se aplican a la utilización o restricción de diversos tipos de pérdidas, se discutirán en este capítulo.
El comentario de los capítulos anteriores ha aludido al hecho de que las pérdidas que no pueden aplicarse en el año en que ocurren debido a una restricción en la División B pueden deducirse en la División al llevar las pérdidas de tres años a través de las modificaciones Devuelve y / o aplica el saldo de las pérdidas a ejercicios futuros, sujeto a cualquier restricción adicional como se indica a continuación.
10,035 Acumulaciones de pérdidas no patrimoniales
A & # 34; pérdida no-capital & # 34; (No-CL) disponible para el traspaso es un término definido. Para los individuos, la definición puede resumirse en forma computacional como sigue:
Tenga en cuenta que para convertirse en una pérdida no patrimonial, la pérdida de un año corriente de fuentes que no son de capital debe, en esencia, exceder los ingresos de todas las otras fuentes en el año en curso. Las pérdidas no patrimoniales podrán prorrogarse como sigue, aplicándose primero las primeras pérdidas:
Tenga en cuenta que la porción de una pérdida permisible de inversión de negocios, que se discute con cierto detalle en los Capítulos 7 y 13, no se utiliza en el año de pérdida, se convierte en una pérdida no patrimonial y está disponible para su remanencia de la manera que acabamos de describir.
10,040 Acumulaciones netas de pérdidas de capital
ITA: 111 (8) & # 34; pérdida neta de capital & # 34;
A & # 34; pérdida neta de capital & # 34; (CL neto) para un año de impuesto particular disponible para remanente a otro año se define como el exceso de las pérdidas de capital permitidas sobre las ganancias de capital imponibles para ese año particular más las pérdidas permisibles de inversión de negocios no absorbidas en el período de retraso de siete años como un - la pérdida de capital, como se mencionó anteriormente. Las pérdidas netas de capital pueden ser llevadas de regreso por tres años y hacia adelante indefinidamente. Es importante señalar que las pérdidas de capital netas para un año determinado se calculan utilizando la tasa de inclusión de ese año. Las siguientes son las tasas históricas de inclusión.
Ganancias de capital Tasa de inclusión:
Dado que las pérdidas netas de capital pueden surgir en años con distintas tasas de inclusión de ganancias de capital que se deduzcan de otras ganancias de capital imponibles netas computadas por otras tasas de inclusión, es necesario convertir las pérdidas netas en capital a la tasa de inclusión de ganancias Se deduce la pérdida de capital neta. Las pérdidas de capital netas realizadas en un año con una tasa de inclusión más baja deben incrementarse cuando se trasladan a un año con una tasa de inclusión más alta. Las pérdidas netas de capital realizadas en un año con una tasa de inclusión más alta deben disminuir cuando se vuelven a llevar a un año con una tasa de inclusión más baja.
El importe de la pérdida neta de capital que se deducirá en el año, teniendo en cuenta las diferencias en las tasas de inclusión, se calcula utilizando la siguiente fórmula:
(A) las plusvalías netas imponibles del ejercicio; y
(B) el total de cada monto para diferentes años de pérdidas de capital netas determinado por la fórmula
A & # 160; es el monto de la pérdida neta de capital que surge de un año de pérdida determinado & # 34; Y reclamado en la División C en el año en curso;
B & # 160; es la tasa de inclusión para el año en el que se deducirá la pérdida neta de capital; y
C & # 160; es la tasa de inclusión para el año en que se realizó la pérdida.
Por ejemplo, una pérdida de capital neta de $ 9,000 realizada en 1999 con su tasa de inclusión de 3/4 se convertiría a $ 6,000 en 2008 con su tasa de inclusión de 1/2 (es decir, $ 9,000 & # 215; 1/2/3/4 = $ 6,000) . Conceptualmente, la pérdida de capital neta de $ 9,000 en 1999 resultó de una pérdida de capital de $ 12,000 (es decir, $ 9,000 y # 215; 4/3). La misma pérdida de capital de $ 12,000 en 2008 resultaría en una pérdida de capital neta de $ 6,000 (es decir $ 12,000 & # 215; 1/2).
Tenga en cuenta que tanto las palabras & # 34; Y & # 34; reclamado & # 34; Se utilizan en referencia a las pérdidas netas de capital. La palabra & # 34; reclamó & # 34; Parece referirse a pérdidas de capital netas en su monto original no ajustado como se calcula en el año de pérdidas & # 34; A la tasa de inclusión para ese año. La palabra & # 34; deducida & # 34; Parece referirse a las pérdidas netas de capital después de haber sido ajustadas por la fórmula a la tasa de inclusión apropiada para el año en el que se compensarán las ganancias de capital imponibles.
Larry Loser tenía pérdidas de capital netas de $ 10.000 en el año de impuesto que terminaba el 31 de diciembre de 1987 y $ 2.000 en cada uno de los años de impuestos que terminaban el 31 de diciembre de 1989, y 1989. Tenía plusvalías de $ 5,000 en 1998, $ 4,000 en 1999 y $ 3,000 en 2008. No ha tenido otras ganancias o pérdidas de capital.
Determinar el monto máximo que se deducirá en los años de impuesto 1998, 1999 y 2008.
NOTA A LA SOLUCIÓN
(1) & # 160; El $ 10,000 de la pérdida de capital neta de 1987 es una cantidad fraccionada calculada a una tasa de inclusión de 1/2. Esta cantidad se ajusta a la tasa de inclusión de 1998 de 3/4 como sigue:
La pérdida de capital neta de $ 2,000 de 1989 es una fracción calculada a una tasa de inclusión de 2/3. Esta cantidad se ajusta a la tasa de inclusión de 1998 de 3/4 como sigue:
La pérdida de capital neta de $ 2,000 de 1994 es una fracción calculada a una tasa de inclusión de 3/4. Por lo tanto, no es necesario ajustarlo para su uso antes del 28 de febrero de 2000.
(2) & # 160; Las pérdidas se ajustan de la tasa de inclusión de 3/4 (según lo ajustado anteriormente) a la tasa de inclusión de 1/2 como sigue:
Estos factores de ajuste no hacen más que convertir la pérdida fraccionada de un año en una pérdida total dividiendo por 1/2. 2/3 o 3/4 en el denominador (es decir, el ítem C en la fórmula) y luego calcular la pérdida neta de capital a la tasa de inclusión para el año de la deducción multiplicando por 3/4. 2/3. O 1/2 en el numerador (es decir, el ítem & # 160; B en la fórmula). Por lo tanto, 10.000 dólares divididos por 1/2 es de $ 20.000, que fue la pérdida de capital completo en 1987 antes de la tasa de inclusión de 1/2 se aplicó. Entonces $ 20,000 multiplicado por 3/4 produce $ 15,000 que es la pérdida de capital neta declarada en términos de una tasa de inclusión de 3/4 utilizada antes del 28 de febrero de 2000.
Tenga en cuenta que las pérdidas traspasadas del año de pérdidas & # 34; Son los del primer año de pérdidas. Esto se ilustra en el cálculo de la transferencia neta de pérdidas de capital presentado anteriormente. Téngase en cuenta, asimismo, cómo las pérdidas netas de capital deducidas en un año determinado, modificadas por los ajustes de las diferentes tasas de inclusión, se limitan a las ganancias netas de capital imponibles de ese año.
10,045 Pérdida de explotación
Cuando un contribuyente incurre en una pérdida de explotación de una explotación, las pérdidas del año en curso generalmente no se tratan de manera diferente a las pérdidas que se tratan para cualquier otro tipo de negocio que resulte en una pérdida no patrimonial, O las consideraciones de la granja de la manía se aplican.
Cuando la agricultura no es la principal fuente de ingresos del contribuyente, la CRA tratará frecuentemente de aplicar las reglas de pérdidas agrícolas restringidas. Estos han sido la fuente de considerable litigio fiscal a lo largo de los años. La dificultad de la disposición está en la redacción donde la principal fuente de ingresos de un contribuyente para un año de impuesto no es la agricultura ni una combinación de agricultura y alguna otra fuente de ingresos.
10,045.10 La agricultura como principal fuente de ingresos
77 DTC 5213 (S. C.C.)
En Moldowan v. La Reina. El Tribunal Supremo definió los principales criterios para determinar si un contribuyente está llevando a cabo un negocio agrícola como su principal fuente de ingresos como:
&toro; Tiempo dedicado al negocio agrícola;
&toro; Capital comprometido con el negocio; y
&toro; El beneficio real y potencial como indicativo de una expectativa razonable de beneficio.
Según la Corte Suprema de Canadá (CSC), estos criterios se consideraron entre otros hechos relevantes. Por ejemplo, en este caso, el Sr. Moldowan dedicó todo su tiempo en julio y agosto a la cría de caballos e invirtió una cantidad significativa de capital en el desarrollo de un hipódromo y establos. El contribuyente también tenía otras inversiones y era un hombre de negocios a tiempo completo. El juez Dickson, escribiendo para el S. C.C. Describió a Moldowan como uno de los muchos negocios y, aquí, la propiedad y la formación de los caballos se consideraba un negocio secundario. El S. C.C. Señaló que la Ley del Impuesto sobre la Renta considera tres clases de agricultores:
&toro; Aquellos a quienes se puede esperar razonablemente que la agricultura sea su principal fuente de ingresos;
&toro; Aquellos para quienes la agricultura se lleva a cabo como un negocio secundario; y
&toro; Aquellos que siguen cultivando como pasatiempo.
& Para; 10,045.20 Sideline agricultura empresa
En general, las personas que llevan a cabo una actividad agrícola secundaria se someterá a las restricciones de las pérdidas de la granja. Esta categoría supone (y debe demostrarse cuando sea necesario) que existe una expectativa razonable de beneficio de la operación agrícola. El monto de las pérdidas agrícolas que se pueden deducir de otras fuentes de ingresos durante un año de impuesto está restringido. El monto de la pérdida de la granja de una empresa agrícola secundaria que se puede deducir durante el año en curso es el menor de:
&toro; La pérdida real; y
&toro; $ 2,500, más la mitad de los $ 12,500 siguientes de pérdidas por un año (máximo $ 8,750). Las pérdidas de la granja por más de $ 8,750 se convierten en pérdidas agrícolas restringidas y no pueden ser utilizadas durante el año. Las pérdidas agrícolas restringidas son deducibles de conformidad con el párrafo 111 (1) (c), al calcular el ingreso imponible para los tres años de impuestos anteriores como un traspaso de pérdidas, o en los siguientes 20 años de impuesto como pérdida aplazada. Una pérdida agrícola restringida de otros años sólo es deducible en el cálculo de la renta imponible en la medida del menor de los ingresos agrícolas netos en el año y los ingresos calculados según la sección 3. A menos que haya ingresos agrícolas en el año, No ser deducible al llegar a la base imponible.
& Para; 10,045.30 Perdidas de la granja de la afición
A & # 34; afición & # 34; Agricultor es una categoría de una operación agrícola que la CRA o los tribunales consideran que no tienen expectativas razonables de beneficio. La razón de distinguir una granja de la afición de una empresa agrícola es asegurar que los agricultores aficionados no obtener deducciones de los gastos incurridos para aficiones personales. La pérdida incurrida se considera un gasto personal o vivo, y por lo tanto, no deducible. Este tratamiento es consistente con el tratamiento de cualquier otra afición donde no hay una expectativa razonable de beneficio.
& Para; 10,060 Deducción de Ganancias de Capital & # 8212; Visión General Histórica
Las personas pueden albergar hasta $ 750,000 de ganancias de capital en acciones de corporaciones calificadas de pequeñas empresas, propiedades agrícolas calificadas o propiedades pesqueras calificadas reclamando una deducción de ganancias de capital en el cálculo de la renta imponible.
La deducción de las ganancias de capital se originó en 1985. El presupuesto federal de 1985 introdujo una deducción acumulativa de por vida para ganancias de capital imponibles netas (TCN neta) para individuos (que no sean fideicomisos) residentes en Canadá. El propósito anunciado de esta deducción era proporcionar un incentivo para la inversión. Hasta el presupuesto federal de febrero de 1992, la deducción era virtualmente irrestricta en cuanto al tipo de ganancias de capital en una disposición. El presupuesto federal de febrero de 1992 impuso una restricción a la deducción de las ganancias de capital resultante de la disposición, después de febrero de 1992, de la mayoría de los bienes inmuebles (es decir, terrenos y edificios), descritos como bienes inmuebles no calificativos. Dado que todo el propósito de la presente ley es gravar una fracción de las ganancias de capital, la introducción de esta disposición creó una complejidad considerable en la legislación para acomodar esta excepción.
El presupuesto federal del 22 de febrero de 1994 eliminó la deducción de las ganancias de capital general de por vida de $ 100,000 por las ganancias realizadas en las disposiciones de bienes que ocurren después de la fecha del presupuesto. Sin embargo, el presupuesto no eliminó la exención de las ganancias de capital de por vida para las acciones de una corporación calificada de la pequeña empresa o para la propiedad agrícola calificada que existía en 1992.
El presupuesto que eliminó la exención general de ganancias de capital de 100.000 dólares de por vida contenía una provisión que permitiría a un individuo reconocer la totalidad o parte de las ganancias sobre la propiedad de capital del contribuyente acumuladas hasta el 22 de febrero de 1994. Generalmente, Una elección con su declaración de impuestos de 1994 para reconocer una cantidad de ganancia acumulada que podría ser compensada por la exención de ganancias de capital disponibles. La ganancia que fue reconocida por esta elección reducirá las futuras ganancias de capital al incrementar el costo de la propiedad elegida o crear una cuenta especial que pueda ser derivada por futuras ganancias de capital sobre esos activos. Estas cuentas especiales se denominan saldo de ganancias exentas. Para bienes de capital elegibles y saldo de ganancias de capital exentas; Para fondos mutuos.
La deducción de ganancias de capital disponible en acciones de corporaciones calificadas para pequeñas empresas se discutirá en el Capítulo # 13;
& Para; 10.065 La finca residencial CGD
La CGD máxima puede reclamarse como una deducción de cualquier ganancia de capital en propiedad agrícola calificada (QFP). QFP se define en la subsección 110.6 (1) como:
&toro; real property, used in a farming business in Canada by either the taxpayer (including beneficiaries under certain trusts), a spouse or common-law partner, a child or a parent, a corporation (which is a family farm corporation), or a partnership (which is a family farm partnership);
&toro; share capital in a family farm corporation;
&toro; an interest in a family farm partnership; y
&toro; an eligible capital property used in a farming business in Canada.
There are definitions in the Act for each of these four types of QFPs, and also certain "time period" tests are imposed. These definitions and tests are far too extensive to elaborate on in this text.
¶10,066 The Qualified Fishing Property CGD
The maximum lifetime capital gains exemption is extended to include capital gains realized on dispositions (occurring on or after May 2, 2006) of a fishing property, a share of the capital stock of a family fishing corporation, an interest in a family fishing partnership, or a qualified fishing property. The terms "share of the capital stock of a family fishing corporation" and "interest in a family fishing partnership" are defined in a manner similar to the family farming definitions.
One half of gains realized on the disposition of eligible capital property that is qualified fishing property are eligible for the capital gains exemption.
¶10,070 Ordering of Division C Deductions
¶10,075 General ordering rules for Division C
¶10,100 Computation Of Tax For Individuals
The total tax credit is a maximum of $2,880 (i. e. 15% of $9,600 + 15% of $9,600). This tax credit is available if an individual supports his or her spouse. Note, however, that the spouse's tax credit base is reduced by the Division B income of the dependent spouse for the whole year, even if the marriage occurred in the year.
On the other hand, if the individual was living apart from his or her spouse at the end of the year because of a marriage breakdown, only the spouse's income for the year, while married and not separated, is considered.
The CRA's position has been that in the year of marriage both spouses cannot claim each other even if the quantum limitations have been adhered to since they both cannot have supported each other.
ITA: 248(1) "common-law partner"
A common-law partner is treated like a spouse. The term "common-law partner" is defined as two persons, regardless of sex, who co-habit in a conjugal relationship and have done so for a continuous period of at least one year or who is the parent of a child of whom the taxpayer is also a parent.
Hence, the married status tax credit is allowed in a common-law relationship if the conditions in the extended meaning are met and the conditions in paragraph 118(1)( a ) are met.
¶10,150 Equivalent-to-married status for wholly dependent person credit
A tax credit base equal to the tax credit base for married status is provided in respect of a wholly dependent person where the taxpayer is not entitled to a married credit (i. e. an individual who is not married or living in a common-law relationship). This provision might apply to an individual who, at any time in the year, was single, divorced, separated, widowed and who supported a relative. The calculation of the credit is the same as that shown for the married credit, with the Division B income of the wholly dependent person in excess of the threshold reducing the credit.
A number of additional conditions must apply for the tax credit to be available.
ITA: 248(1) "self-contained domestic establishment" IT-513R, par. 11–22
&toro; The dependent person must live, at some time in the year, in the same self-contained domestic establishment as the taxpayer claiming the tax credit. The dependant must be wholly dependent for support on that taxpayer and/or other persons. The taxpayer need not own the residence. A rental unit qualifies.
&toro; The dependant must be related to the taxpayer by blood, marriage or adoption. As a result, nieces, nephews, aunts, uncles and cousins would not qualify as a marital equivalent under this provision (unless they fit the definition of child which is very broad and should be examined).
&toro; Unless the dependant is a child of the taxpayer, the dependant must be resident in Canada.
97 DTC 5081 (F. C.T. D.)
&toro; Unless the dependant is the parent or grandparent of the taxpayer or is dependent by reason of physical or mental infirmity, the dependant must be under 18 years of age at any time in the year. In the case of The Queen v. Mercier . the taxpayer argued that the age requirement for children discriminates against single parents with children 18 years of age or older who, in the opinion of the taxpayer, should qualify for the credit and, hence, violates the Charter of Rights and Freedoms. The Court held that the provision does not violate the equality guarantee of the Charter.
&toro; Only one equivalent-to-married tax credit is available to a taxpayer.
&toro; The dependant cannot be claimed under this tax credit if the dependant has been claimed under the married status credit by another taxpayer.
&toro; Where two taxpayers are eligible for the equivalent-to-married tax credit in respect of the same person or the same domestic establishment, only one person is permitted the tax credit and only one equivalent-to-married tax credit can be claimed for a given domestic establishment. If the taxpayers cannot agree as to who should have the tax credit, then neither can have the tax credit. For example, Tom and Donna, who are both single, support their mother in the same domestic establishment. Either Tom or Donna can have the tax credit, but not both. If they cannot agree, then neither can have the tax credit.
&toro; Where a taxpayer has claimed a dependant under this paragraph, neither the taxpayer nor any other taxpayer can claim that dependant for the 18 years of age or older and infirm credit or the caregiver credit. For example, if a married couple with one infirm child, 20 years of age, separates during the year and the spouse who supports the child claims the child under the equivalent-to-married credit, then that spouse cannot make an additional claim as a dependent child 18 years of age or older and infirm. The other spouse also cannot make a claim for that child even if he or she did, in fact, wholly support the child during part of the year.
&toro; Where an individual is required under the terms of a written agreement or court order to make payments in the year in respect of the support of a child, the individual is not entitled to claim any personal tax credit in respect of the child.
It might be noted that the interpretation of the phrase "at any time in the year is an unmarried person" appears to have the effect of enabling a person who presently qualifies for an equivalent-to-married tax credit and marries during the year to still qualify for this tax credit in the year of marriage, but not subsequently. Of course, the person claiming a dependant would not be allowed a claim for marital status.
¶10,155 Child amount
The child amount is a non-refundable child tax credit for parents based on an amount of $2,038 × 15% = $306 for each child under the age of 18 at the end of the year.
Where the child resides together with the child's parents throughout the year, either of those parents may claim the credit. In other cases, the credit is claimable in respect of a child by the parent who is eligible to claim the wholly dependent person credit for the year in respect of a child (or who would be eligible if that child were the parent's only child).
For the year of the birth, adoption or death of a child, the full amount of the credit is also claimable.
Any unused portion of the credit is transferable to the parent's spouse or common-law partner.
¶10,160 Single status—Basic personal tax credit
The base of the basic personal tax credit is set at $9,600 in 2008 and, when multiplied by 15%, provides a tax credit of $1,440 (rounded) for 2008.
¶10,165 Caregiver credit for in-home care of relative
Individuals are entitled to a credit of up to $614 (i. e. 15% of $4,095) for residing with and providing in-home care for an adult relative. For this purpose, the relatives include the individual's child or grandchild or the individual's or spouse's common-law partner's parent, grandparent, brother, sister, aunt, uncle, nephew or niece. A parent or grandparent must either have attained the age of 65 years or be dependent because of physical or mental infirmity. All other dependent relatives must have attained the age of 18 and be dependent because of mental or physical infirmity.
The base amount of $4,095 is reduced by the dependant's income in excess of $13,986. The credit is not available if the dependant's income exceeds $18,081.
Where an individual is entitled to an equivalent-to-married credit for a dependent, no one can claim the caregiver credit or the credit for infirm dependants age 18 or older in respect of that dependant.
¶10,170 Dependants credit
A dependant is defined to include, for this purpose, a child, grandchild, parent, grandparent, brother, sister, uncle, aunt, niece or nephew of the taxpayer or the taxpayer's spouse or common-law partner. However, the dependants must have attained the age of 18 before the end of the year in order to qualify for the tax credit. Also, the individual must be dependent on the taxpayer because of mental or physical infirmity.
The tax credit is computed for 2008 as:
IT-513R, Appendix A
The CRA indicates that mental or physical infirmity in respect of the dependent person should require the infirm person to be dependent during a considerable period of time and not just temporarily.
Note that the maximum amount of the dependant credit is the same as that of the caregiver credit, but the income threshold is much lower for the dependant credit. Thus, the dependant credit can be eliminated more quickly, making the caregiver credit more attractive, numerically. However, the caregiver credit has the more restrictive condition that the dependant must ordinarily reside in the same self-contained domestic establishment as the taxpayer claiming the credit.
The tax credit available for a dependent person must be shared by all individuals who are entitled to a tax credit in respect of the same dependant. Where these supporting individuals cannot agree on an allocation of the tax credit, the Minister may make the allocation. Furthermore, a taxpayer who is entitled to a deduction for support payments for a spouse is not entitled to claim a tax credit for the spouse. However, the CRA does permit a tax credit claim in the year of separation or divorce. Where an individual is required under the terms of a written agreement or court order to make payments in the year in respect of the support of a child, the individual is not entitled to claim any personal tax credit in respect of the child. This provision is necessary to parallel the non-deductibility of child support payments as discussed in Chapter 9. The subsection ensures that, since the child support payments are not deductible, the supporting parent would not be able to claim this deduction.
¶10,175 Additional amount
Where a taxpayer is entitled to claim a dependant for the equivalent-to-married (ETM) credit, the dependant cannot be claimed under the caregiver credit or the credit for infirm dependants age 18 or older.
Where the caregiver credit or the credit for an infirm dependant age 18 or older would have been larger than the ETM credit, the difference can be claimed under this provision as an additional credit. The effect is to allow the equivalent of the caregiver credit for a person in respect of whom the ETM credit is claimed.
¶10,180 Age credit
The non-refundable age tax credit is computed on a base of $5,276 for 2008. Since the appropriate percentage for the year is 15%, the tax credit for 2008 is $791 (rounded). It is available to an individual who has attained the age of 65 years before the end of the year.
However, this age tax credit is reduced by 15% of the excess of the individual's Division B income over $31,524 and is, thus, completely eliminated when the net income exceeds $66,697.
For example, if an individual's Division B income is $55,000, the age tax credit would be computed as:
¶10,185 Pension income amount
This non-refundable pension tax credit is determined as follows:
Age 65 and Older
The pension credit is equal to 15% of the lesser of:
2. the "pension income"
Pension income includes, but is not limited to:
(a) a payment in respect of a life annuity arising from a superannuation pension fund or plan;
(b) an annuity payment under a registered retirement savings plan or a payment under a registered retirement income fund;
(c) an annuity payment under a deferred profit sharing plan; y
(d) the income portion of other annuity payments.
The pension credit is equal to 15% of the lesser of:
2. the "qualified pension income"
The only difference is to change the definition of pension income to qualified pension income. Qualified pension income includes:
(a) a payment in respect of a life annuity arising from a superannuation pension fund or plan; o
(b) certain annuities or payments received by the individual as a consequence of the death of the individual's spouse.
Certain amounts are not included in pension income or qualified pension income. These excluded amounts are:
(a) the Old Age Pension or Supplement;
(b) the Canada Pension Plan (or provincial plan) pension;
ITA: 248(1) "death benefit"
(c) a death benefit;
(d) the amount of any payment which is included in income and then deducted under another provision such as lump-sum payments from withdrawing from a pension fund, an RRSP or a DPSP, retiring allowances, or pension benefits or DPSP benefits transferred into a spousal RRSP; y
(e) a payment out of or under a salary deferral arrangement, a retirement compensation arrangement, an employee benefit plan, an employee trust or a prescribed provincial pension plan.
¶10,190 Canada employment credit
This non-refundable credit is computed as 15% times the lesser of:
&toro; The individual's employment income for the year, and
¶10,195 Summary of personal tax credits
Exhibit 10-4 provides a summary of the numerical components of the most common personal tax credits.
EXHIBIT 10-4 Section 118 Tax Credits (rounded)
For the purposes of this book, where provincial tax credits are calculated for individuals, a rate of 10% (equal to the lowest provincial rate used in this book) will be applied to the above federal tax credit base, net of any applicable reduction for income in excess of the federal Division B income threshold.
George, age 50, has the following dependants, each of whom has Division B income as indicated for 2008:
Determine the personal tax credits available under section 118 for each of George's dependants for 2008. All of the dependants live with George.
Note that neither of the sons provides a dependant tax credit. They are covered under the Child Tax Benefit system, discussed later in this chapter.
¶10,200 Adoption Expense Tax Credit
The Act provides a non-refundable tax credit of up to $10,643 in the year in which an adoption is completed for eligible adoption expenses incurred during the adoption period. Details of the credit are as follows:
&toro; eligible adoption expenses include:
(i) fees paid to an adoption agency licensed by a provincial or territorial government,
(ii) court costs, legal and administrative expenses,
(iii) reasonable travel and living expenses of the child and the adoptive parents,
(iv) document translation fees,
(v) mandatory fees paid to a foreign institution, and
(vi) any other reasonable expenses required by a provincial or territorial government or an adoption agency licensed by a provincial or territorial government,
&toro; the adoption period is the period that:
(a) begins at the earlier of the time that the child's adoption file is opened with a provincial or territorial ministry responsible for adoption (or with an adoption agency licensed by a provincial or territorial government) and the time, if any, that an application related to the adoption is made to a Canadian court, and
(b) ends at the time of the adoption.
&toro; an eligible child is one who has not reached the age of 18 years at the time that the adoption is completed.
¶10,210 Public Transit Passes Credit
This non-refundable tax credit is based on the total of all amounts paid in the year in respect of eligible public transit passes. The amounts paid for passes for the use of the individual taxpayer, the individual's spouse or common-law partner, or a child of the individual, who has not reached the age of 19 before the end of the year. An eligible public transit pass is a public transit pass that is valid for a period of at least one month of public transit. Public transit includes transit by local bus, streetcar, subway, commuter train, commuter bus, and local ferry. Receipts for passes must be retained for verification purposes.
This credit accommodates:
&toro; electronic payment cards for costs related to the use of public transit for at least 32 one-way trips during an uninterrupted period not exceeding 31 days, and
&toro; weekly passes where an individual purchases at least four consecutive weekly passes.
¶10,220 Children's Fitness Credit
This non-refundable tax credit is based on up to $500 of eligible fees for enrolment of a child under the age of 16 in an eligible program of physical activity. The credit can be claimed by either parent, for the 2008 taxation year and subsequent taxation years. It must be supported by a tax receipt that contains sufficient information for the CRA to monitor compliance.
Eligible expenses include those for the operation and administration of the program, instructors, renting facilities, equipment used in common (e. g. team jerseys provided for the season), referees and judges, and incidental supplies (e. g. trophies). Expenses that are not eligible include the purchase or rental of equipment for exclusive personal use, travel, meals, and accommodation.
An eligible program of prescribed physical activity is defined as:
An ongoing, supervised program, suitable for children, in which substantially all of the activities undertaken include a significant amount of physical activity that contribute to cardio-respiratory endurance, plus one or more of muscular strength, muscular endurance, flexibility and balance.
To recognize the particular challenges that children with disabilities face, the age limit for them to qualify is 18 years instead of 16 years. In addition, a separate $500 non-refundable tax credit for disabled children who spend a minimum of $100 on registration fees for eligible programs is provided. The extra $400 recognizes the extra costs that children with disabilities encounter when involved in programs such as these.
&toro; of ecologically sensitive land.
The 75% of Division B income limit should not be expected to apply in most cases. However, the limit would become an effective limit, if gifts are made in an unusual year of relatively low income or a loss year.
¶10,245 Total charitable gifts
Gifts made to certain types of organizations listed under the definition of "total charitable gifts" may be eligible for the tax credit to a maximum tax credit base of 75% of Division B income. Only the gifts to these specified organizations are eligible and they must be supported by proper receipts.
Where gifts of capital property and works of art, which are inventory to the donor, have a fair market value greater than adjusted cost base or cost amount, and the gift is not cultural property, the taxpayer may make a designation of a transfer price. The taxpayer can designate a transfer price between fair market value and adjusted cost base or cost amount as proceeds of disposition and the value of the gift. Capital gains or income could, thus, be avoided by selecting the adjusted cost base or cost amount; but the value of the gift and the resultant tax credit under these paragraphs would be lower.
If personal-use property is acquired as part of an arrangement under which the property is gifted to a charity, then the $1,000 rule will not apply. This rule is designed to prevent abuses connected with the donation of art and other personal-use property.
¶10,250 Gifts of publicly traded securities
The income inclusion rate for capital gains from gifts of publicly traded securities is reduced to zero for this purpose, instead of the usual 50%. Securities eligible for this treatment include shares listed on a designated stock exchange. The 2007 federal Budget extended the tax-free capital gain rule to donations of such securities to private foundations effective on or after March 19, 2007.
Legislation eliminates tax on capital gains realized on the exchange of unlisted shares and partnership interests for publicly-traded securities, if the publicly-traded securities are then donated to a qualified donee within 30 days of the exchange (in which case, any further capital gain on the donation would also be nil). The unlisted securities must include, at the time they are issued, a condition allowing the holder to exchange them for publicly-traded securities, and the publicly-traded securities must be the only consideration received on the exchange. Special rules apply where the exchanged securities are partnership interests. This applies to donations made on or after February 26, 2008.
¶10,255 Total cultural gifts
Where an artist makes a cultural gift that is a work of art created by the individual and that is property in the artist's inventory, the artist is deemed to have received proceeds of disposition equal to the cost to the artist of the work of art. A cultural gift is included in the definition of "total cultural gifts" and means objects that the Cultural Property Export Review Board has determined meets certain conditions. The result of this provision is that the artist is entitled to a credit based on the full fair market value of the art donated, but has no income to report as a result of the donation and its consequent disposition of the art from inventory. There is no net income limitation and there is a five-year carryforward.
¶10,260 Tickets to events
Where a charitable organization issues receipts for the price of tickets to fund-raising events involving an element of entertainment or other benefit for the donor, only the excess of the amount paid over the fair market value of the benefit received is allowed to be considered part of the charitable gift.
¶10,265 Total Crown gifts
Gifts made to the Government of Canada or to the government of a province are considered to be gifts made to Her Majesty and are defined as Crown gifts. There is a 75% of net income limitation to equal the limitation on other charitable gifts. Again, there is a five-year carryforward on these gifts.
¶10,270 Total ecological gifts
A net income limitation of 100% applies to donations of certain ecologically sensitive land. This provision is meant to encourage the conservation and protection of Canada's environmental heritage and applies to qualified donations of land including qualified donations of covenants, servitudes and easements. As a further incentive, for ecological gifts made on or after May 2, 2006, any capital gain realized on the donation (other than gifts to a private foundation) are subject to a zero capital gains inclusion rate.
¶10,280 Medical Expense Credit
¶10,285 Calculation of the credit
Not all medical and health care costs are fully covered by a provincial health insurance plan or by a private health services plan. Expenses that must be borne by the taxpayer may qualify for the non-refundable medical expense credit. For example, certain cosmetic or elective procedures and a fraction of dental services may not be covered.
The medical expense tax credit is calculated as:
In essence, the federal tax credit is 15% (10% used for provincial tax credit) of medical expenses in excess of the $1,962 for 2008 or 3% of the Division B income threshold. The medical expenses must be proven by filing receipts and must be paid within any 12-month period ending in the year unless the individual dies in the year. Where the individual dies in the year, the medical expenses must be paid by the claimant for the deceased person within any period of 24 months that includes the date of death.
¶10,290 Medical expenses
The legislation includes over 30 detailed paragraphs outlining the very technical rules and conditions defining medical expenses. A brief description of these paragraphs is provided below; however, a careful examination of these provisions and an Interpretation Bulletin must be made in order to determine the eligibility of each item.
ITA: 118(6), 118.4(2); IT-519R2, par. 3
( a )—This paragraph includes in the tax credit base general medical expenses (illness, hospitalization, etc.) paid to dentists, nurses and medical practitioners (a wider term than medical doctors for the taxpayer, his or her spouse and dependants of the individual. Hence, either spouse may qualify for a tax credit for the expenses of each other. For other dependants, the definition includes most individuals related to the taxpayer and dependent on the taxpayer for support.
( b ), ( b .1), ( b .2), ( c ), and ( d )—These five provisions deal with full-time or part-time attendants or attendants for the care of an individual eligible for the impairment credit and/or full-time care in a nursing home, group home or otherwise. Each provision has its own unique conditions. The amount eligible for the credit in respect of attendant care for an individual eligible for the impairment credit is limited to $10,000 ($20,000 in the year of death). More than $10,000 can be claimed in respect of an individual, but no impairment credit or attendant care deduction can be claimed in respect of that individual.
( e )—This category of expense, for care and training for the mentally or physically handicapped, is not completely medical in nature.
( f ), ( g ), and ( h )—These provisions deal with the transportation of taxpayers to medical centres. Note that for travel expenses envisaged in paragraph ( h ), individuals may choose a detailed or simplified method to calculate certain travel expenses. The detailed method would use actual costs, substantiated by receipts. The simplified method applies to meals and vehicle expenses which can be based on flat rates. The flat rate for meals is $15 per meal to a maximum of $45 per day, per person. The flat rate for vehicle expenses is based on the province or territory in which the individual travels and varies by province or territory. (See Chapter 9. under moving expenses, for a detailed list of rates for vehicle expenses.)
( i ), ( i .1)—These provisions deal with certain specific medical equipment or products.
( j )—These paragraph allows for the expenses of eyeglasses, etc. for the taxpayer, his or her spouse or a dependant.
( k )—The cost of specialized equipment dealing with oxygen and of insulin and of other specified substances is allowable by virtue of this paragraph.
( l )—This paragraph permits certain specific expenses related to the care of a trained dog who assists the blind or deaf and the cost of an animal trained to assist an individual who has a severe and prolonged physical impairment.
( l .1)—This paragraph allows a reasonable cost for arranging a bone marrow transplant or organ transplant.
( l .2), ( l .21)—These paragraphs allow expenses for modifying a home if an individual is confined to a wheelchair for a long period of time, lacks normal physical development, or has a severe and prolonged mobility impairment.
( l .3)—This paragraph allows expenses for rehabilitative therapy to adjust for speech or hearing loss, including training in lip reading and sign language.
( l .4)—Amount paid on behalf of an individual with a speech or hearing impairment for sign language interpretation or real-time captioning services if the payment is made to a person who is in the business of providing such services.
( l .41)—Amount paid on behalf of an individual with a mental or physical impairment for note-taking services if the payment is made to a person who is in the business of providing such services and the individual has been certified as requiring those services.
( l .42)—The cost of voice recognition software used by an individual with a physical impairment if the individual has been certified as requiring that software.
( l .43)—This paragraph allows expenses for reading services used by an individual who is blind or who has a severe learning disability, if the need for the service is certified in writing by a medical practitioner and paid to persons engaged in the business of providing such services;
( l .44)—This paragraph allows expenses for deaf-blind intervening services used by an individual who is both blind and profoundly deaf (if paid to persons engaged in the business of providing such services);
( l .5)—This paragraph allows a maximum of $2,000 incurred to move an individual to housing that is more accessible or in which the individual is more mobile or functional.
( l .6)—This paragraph allows reasonable expenses relating to alterations to a home driveway to facilitate access to a bus by an individual with a severe and prolonged mobility impairment.
( l .7)—This paragraph allows the lesser of $5,000 and 20% of the cost of a van adapted within six months of its purchase for use by an individual using a wheelchair.
( l .8)—This paragraph allows reasonable expenses incurred to train an individual to care for a relative having a mental or physical infirmity. The relative must be either a member of the taxpayer's household or dependent on the taxpayer for support.
( l .9)—This paragraph allows expenses for remuneration for therapy provided to the patient because of the patient's severe and prolonged impairment.
( l .91)—This paragraph allows expenses for remuneration for tutoring services that are rendered to, and are supplementary to the primary education of, the patient who has a learning disability or mental impairment.
( m )—This paragraph provides the statutory authority for a regulation which supplements the equipment listed in paragraphs ( i ) and ( k ), noted above, and may stipulate a dollar limit for claims in respect of a particular device or equipment.
( n )—Drugs and prescriptions, etc. as prescribed by a medical practitioner and administered by a pharmacist, are allowed by virtue of this paragraph.
( o )—This provision allows certain diagnostic services such as x-rays, laboratory tests, etc.
( p )—The cost of dentures made in a province by an authorized person is allowed by this provision.
( q )—This paragraph allows a premium for a private health services plan. To the extent that the premium has been deducted in computing the individuals business income, it is not deductible as a medical expense.
( r )—The incremental cost, to an individual who suffers from celiac disease, of acquiring gluten-free products if the individual has been certified as requiring a gluten-free diet.
( s ), ( t )—These paragraphs allow expenses for drugs or medical devices obtained under Health Canada's Special Access Programme;
( u )—This paragraph allows expenses:
• for the purchase of medical marihuana or marihuana seeds, from Health Canada, for use by a patient who is authorized to possess marihuana for medical purposes under the Marihuana Medical Access Regulations (MMAR) or who holds an Exemption for possession under Section 56 of the Controlled Drugs and Substances Act (CDSA); y
• for the purchase of medical marihuana, for use by a patient who is authorized to possess marihuana for medical purposes under the MMAR or who holds an Exemption for possession under Section 56 of the CDSA, from an individual who possesses a Designated-person Production Licence under the MMAR to cultivate or produce marihuana for medical purposes on behalf of that patient or who holds a designated person Exemption for cultivation or production under Section 56 of the CDSA to cultivate or produce marihuana for medical purposes on behalf of that patient.
Mr. Taxpayer has income under Division B of $25,000 and $30,000 for 2007 and 2008, respectively. His wife and children have no income in these years. He incurs the following receipted medical expenses on behalf of himself, his wife, and three dependent children.
¶10,305 Amount of and conditions for impairment credit
The Act provides the formula for calculating the non-refundable tax credit for an individual with a mental or physical impairment and the conditions for entitlement to the credit. The tax credit for 2008 is $1,053 (i. e. 15% of $7,021). This tax credit is available to taxpayers who have "one or more severe and prolonged impairments in physical or mental functions" that has been certified by a medical doctor. A health professional, other than a medical doctor, may be eligible to certify the impairment. An optometrist may certify the existence of an impairment of sight. An audiologist may certify an impairment of hearing. An occupational therapist may certify the existence of an impairment with respect to an individual's ability to walk or to feed or to dress himself or herself. A psychologist may certify to the existence of an impairment with respect to an individual's ability to perceive, think and remember. A speech-language pathologist may certify a severe and prolonged speech impairment. A physical therapist may certify a marked restriction in walking. Cumulative effects of multiple restrictions must usually be certified by a medical doctor.
The impairment, or the cumulative effect of multiple restrictions, must have caused the individual to be markedly restricted all or almost all of the time in his or her basic activities of daily living. The impairment must have lasted or be expected to last for a continuous period of at least 12 months. Such impairment would include blindness, deafness and other listed impairments. It would also occur where, even with the use of appropriate devices, medication or therapy, the individual is generally unable (or requires an inordinate amount of time) to feed or to dress himself or herself or perform specified fundamental functions.
No claim can be made under this subsection if a claim has been made for a full-time attendant or care in a nursing home. However, a claim for expenses of an attendant costing less than $10,000 in computing the medical expense tax credit will not deny this impairment tax credit.
A supplement amount of $4,095 for 2008 is available for each disabled child under the age of 18 years at the end of the year. The supplement amount is reduced by the excess of the total of child care and attendant care expenses, paid in the year and deducted in respect of the child, over $2,399 (for 2008).
¶10,310 Transfer of impairment credit
A transfer of this credit is available to a taxpayer, if the dependants themselves cannot use all or some part of this credit. The impaired dependant must use as much of the credit as necessary to reduce his or her federal income tax to zero, before the remainder can be transferred. The transfer of the unused part of the impairment credit is available to a taxpayer if:
&toro; the taxpayer claimed an equivalent-to-married credit for the dependant;
&toro; the dependant was the taxpayer's child, grandchild, parent, grandparent (including in-laws), brother, sister, aunt, uncle, nephew or niece, and the taxpayer could have claimed an equivalent-to-married credit for that dependant if the taxpayer did not have a spouse or common-law partner and if the dependant did not have any income;
&toro; the dependant was the taxpayer's child or grandchild and the taxpayer claimed them as a dependant or for the caregiver credit;
&toro; the dependant was the taxpayer's child or grandchild and the taxpayer could have claimed them as a dependant or for the caregiver credit if they had no income; o
&toro; the dependant was the taxpayer's parent or grandparent (including in-laws) and the taxpayer could have claimed them as a dependant of for the caregiver credit if they had no income.
The net result of these rules is that if a parent supports two or more disabled children, the parent is entitled to the transfer of the unused portion of the impairment tax credit of those children, even though only one child may be claimed as an equivalent-to-married tax credit. The spousal transfer of this credit is discussed later.
ITA: 118.3(3) ITA: 118.2, 118.3, 118.4 ITA: 118.4(2) IT-519R2, par. 3
The legislation deals with the allocation of the impairment tax credit where more than one individual is entitled to the credit for the same dependant. A definition of impairment is contained in the provision and applies not only to the disability credit, but also to the medical expenses credit. A definition of the term used to describe a medical practitioner is also contained in the provision and appears to codify the description in an Interpretation Bulletin.
¶10,320 Tuition, Education, and Textbook Credits
¶10,325 Tuition fees
The federal tuition fee tax credit is equal to 15% (10% used for provincial tax credit) of eligible tuition fees paid in respect of that year. The Act provides for a tax credit in respect of tuition fees paid to an educational institution in Canada. The fees must be paid to a university, college or other educational institution in respect of courses at a post-secondary school level, or an institution certified by the Minister of Human Resources Development providing courses that furnish a person, who is at least 16 years of age at the end of the year, with skills for an occupation. The total of fees paid to a qualified institution in a year must exceed $100.
Tuition fees for full-time and part-time students include items such as library and laboratory charges. Also, eligible for the credit are mandatory ancillary fees, other than student association fees, required to be paid by all full-time and part-time students for courses at the post-secondary school level. Eligible fees include those charged for health services and athletics. In addition to student association fees, the following are excluded: charges for property to be acquired by students, services not ordinarily provided at post-secondary educational institutions in Canada and tax exempt financial assistance to students. Also, mandatory charges paid for the construction, renovation or maintenance of a building or facility, generally, do not qualify for the credit. A fee that would be eligible, but for the fact that it is not required from all students, may be claimed to a limit of $250.
The tax credit for tuition paid in the year to a university outside Canada is more restricted. The student must be in full-time attendance at a university in a course leading to a degree. The course must be of at least 13 consecutive weeks' duration. A tax credit for fees paid by a Canadian resident who commuted to an educational institution providing courses at the post-secondary level in the United States is allowed. Again, the amount of the fees paid in the year to a particular institution must exceed $100.
¶10,330 Education credit
This federal credit is calculated by a formula which multiplies 15% (10% used for provincial tax credit) of $400 by the number of months in the year during which the individual was enrolled in a qualifying educational program as a full-time student at a designated educational institution. Part-time students at a qualifying post-secondary educational institution who are eligible for the disability tax credit or who, by reason of their certified mental or physical impairment, cannot be enrolled on a full-time basis are treated like full-time students. The enrolment must be proven by filing a certificate issued by the educational institution. Where the student is enrolled at an institution certified by the Minister of Human Resources Development, the purpose of the enrolment must be to obtain or improve skills for an occupation. The terms "designated educational institution" and "qualifying educational program" are defined.
Part-time students (other than students eligible for the impairment tax credit) may claim a federal credit of 15% (10% used for provincial tax credit) of $120 per month during which he or she was enrolled at a designated educational institution and specified educational program. The program must require the student to spend not less than 12 hours in the month on courses in the program.
Post-secondary students enrolled in distance education programs or correspondence courses may meet the full-time or part-time requirements if the courses meet the required standards.
IT-515R2, IT-516R2 IT-516R2, par. 9–12, IT-515R2, par. 9–11
Two Interpretation Bulletins discuss the detailed rules governing the education tax credit and tuition fee tax credit, respectively. These bulletins provide some very important interpretation of the technical terms relating to these credits and should be examined carefully. In particular, note the difference between the interpretation of "full-time attendance" in the two bulletins.
¶10,335 Textbook credit
A non-refundable textbook tax credit is available in addition to the education tax credit. The credit base is:
&toro; $65 for each month for which the student qualifies for the full-time education tax credit amount, and
&toro; $20 for each month that the student qualifies for the part-time education tax credit amount.
¶10,340 Carryforward
The unused portion of a student's tuition fee, education, and textbook tax credits can be claimed by the student in a subsequent taxation year. This allows an indefinite carryforward of these credits by the student to the extent that they are not transferred in the year earned to a spouse or supporting individual. Students are permitted to transfer part of the unused credits and carry forward the remainder.
¶10,345 Transfer of tuition, education, and textbook credits to spouse and parent and grandparent
ITA: 118.8, 118.81, 118.9
The tuition fee, education, and textbook credits may be transferred to a spouse or to a parent or grandparent of the student. To qualify, the student must designate, in writing, an amount transferred to a spouse or to a parent or grandparent. The formula for calculating the amount that may be claimed as a tax credit by the spouse or by the parent or grandparent is the lesser of:
(a) the amount determined by the formula A - B
where A is the lesser of:
ITA: 118.01, 118.02, 118.03
(a) $750 (i. e. 15% of $5,000), and
(b) the student's tuition credit and education credit for the year (excluding unused amounts carried forward).
ITA: 118, 118.3, 118.7
B is the amount of the student's Part I tax payable after deducting credits for personal, age, pension, and employment, public transit passes, children's fitness, mental or physical impairment, EI and CPP, and unused tuition and education, and
(b) the amount designated by the student in writing for the transfer to a spouse or to a parent or grandparent.
In effect, this formula allows the transfer of the excess of up to $750 of a student's tuition, education, and textbook credits over those credits required by the student to reduce federal tax to nil.
Debbie, who is not dependent upon any person, was enrolled as a full-time student at the University of Toronto for eight months during 2008. Debbie provides you with the following information for 2008:
(A) Determine the amount of Debbie's federal tuition and education credits which can be deducted by her parent.
(B) Determine the amount of Debbie's unused federal tuition and education tax credits at the end of 2008.
¶10,350 Credit for interest on student loans
A student may deduct a federal tax credit of 15% (10% used for provincial tax credit) of interest on a federal or provincial student loan payable in respect of the year or in any of the five preceding taxation years. Qualifying loans are those made under the Canada Student Loans Act or a similar provincial statute.
¶10,360 Credit for Employment Insurance Premiums and CPP Contributions
The federal tax credit is equal to 15% (10% used for provincial tax credit) of:
(a) all amounts payable by the individual in respect of an employee's premiums for Employment Insurance;
(b) all amounts payable by the individual as an employee's contributions under the Canada (or Quebec) Pension Plan; y
(c) all amounts payable by the individual as a contribution for self-employed earnings under the Canada (or Quebec) Pension Plan.
For 2008, the Employment Insurance premium rate for the employee is 1.73% of earnings to a maximum annual earnings amount of $41,100. At this level of earnings the maximum level of premium of $711.03 is reached. (Employers must pay a premium of 2.42% (i. e. 1.4 times the employee payment), for a total maximum of $994.62.)
The rate of contribution to the Canada Pension Plan for 2008 is 4.95% of pensionable earnings. The maximum pensionable earnings is $44,900 with a basic exemption of $3,500. Thus, the maximum contribution is calculated as follows:
4.95% of ($44,900 - $3,500) = $2,049.30
For a self-employed individual, the maximum is twice the above amount or $4,098.60.
¶10,370 Transfer of Unused Credits to Spouse or Common-law Partner
The federal dividend tax credit available to an individual is a non-refundable tax credit. There are two rates of dividend tax credit depending on the source of the dividends:
&toro; a rate of 2 / 3 of the gross-up applies to dividends paid by a Canadian-controlled private corporation (CCPC) from income subject to tax at the low rate applicable to active business income (ABI), and
&toro; a rate of 11 / 18 of the gross-up applies to dividends paid by
(i) a public corporation resident in Canada (and any other non-CCPC resident in Canada) from income subject to tax at the general corporate tax rate, and
(ii) a CCPC resident in Canada to the extent that its income (other than investment income) is taxed at the general corporate rate.
Since the gross-up is a fraction of the dividend, the dividend tax credit can be calculated in three different ways depending on the information available:
For the purposes of this book, unless otherwise stated, where provincial tax credits are calculated for individuals, a theoretical dividend tax credit rate will be applied to the grossed up dividend as follows:
&toro; a provincial rate of 6 2 / 3 % where the 25% gross-up apples, and
&toro; a provincial rate of 12% where the 45% gross-up applies.
Theoretically, the combined federal and provincial dividend tax credit should equal the gross-up of 25% or 45% of the dividend or 20% or 31% of the grossed-up dividend. This will be explored in Chapter 12. This would imply a provincial dividend tax credit rate applied to the grossed-up dividend of:
&toro; 6 2 / 3 %, i. e. 13 1 / 3 % federal + 6 2 / 3 % provincial for a total of 20% of the grossed-up dividend, and
&toro; 12%, i. e. 19% federal + 12% provincial for a total of 31% of the grossed-up dividend.
However, provinces, in their use of the tax-on-income (TONI) structure, may specify their own rate of dividend tax credit.
As a result of the reduction in the federal corporate income tax rates, the legislation will adjust the federal dividend gross-up and tax credit to coincide with the corporate tax rate reduction.
¶10,390 Election to transfer dividends to spouse
An election is available to deem taxable dividends from taxable Canadian corporations received by one spouse or common-law partner, who cannot use the dividend tax credit because of low income, to be received by the other spouse or common-law partner. However, this election can only be used if the married personal tax credit claimed by the higher income spouse for the dependent spouse or common-law partner is increased or created by transferring the dividend income in this way. If the election can be made, the taxpayer must include the grossed up dividends transferred from the spouse or common-law partner, but may deduct the dividend tax credit available on the dividends.
Consider the following situations where the low-income spouse has $300 of grossed up dividends from Canadian-resident public corporations plus some other source of income.
In Case 1, an election is available, since after the election, a credit for the spouse has been created. In Case 2, the spousal credit has increased from $360 to $405 by the transfer of the dividends and, hence, the election is available. In Case 3, the election is available, since the spousal credit has increased from $1,035 to $1,080.
¶10,400 Credits for Part-Time and Non-Residents
Generally, for the period of residence in Canada of a part-time resident, the individual can deduct specified tax credits prorated by the number of days that the individual is resident in the year divided by the number of days in the calendar year:
&toro; basic personal amount, married amount, equivalent-to-married amount, dependant amount and caregiver amount;
ITA: 126(7) "tax for the year otherwise payable under this Part" ( a )
The term "tax for the year otherwise payable under this Part" is defined for the purposes of the foreign non-business income tax credit. As it applies generally to individuals, it is the tax payable under Part I of the Act before specified deductions from tax, including the deduction of the dividend tax credit and the credit for employment outside Canada.
The foreign business income tax credit, also, applies to individual taxpayers and is similar in its calculation. The major difference is that any business income tax paid but not deducted is available as an "unused foreign tax credit" to be carried back three years and forward 10 years. This foreign tax credit will be dealt with in more detail, as it applies to corporations, in the next chapter.
Where either non-business or business income taxes paid are not deductible as a credit, all or part of the excess may be eligible for a deduction from an individual's liability for surtax. Furthermore, a non-deductible excess of non-business income tax paid may be eligible for a provincial foreign tax credit.
¶10,500 Federal Political Contribution Tax Credit
A tax credit is available for contributions to a registered federal political party or a candidate for election to the House of Commons. Receipts signed by the registered agent of the party or the official agent of the candidate are required to substantiate the credit claimed. The maximum credit is $650 which is reached with a contribution of $1,275 or more on the following sliding scale:
¶10,510 Tax on Old Age Security Benefits
The Part I.2 tax results in the repayment of federal Old Age Security benefits included in computing the taxpayer's income, to the extent that the taxpayer's income is in excess of an indexed threshold ($64,718 for 2008). The repayment is computed as:
Note that the amount of this tax is deductible from income; however, offsetting the Part I.2 tax in part (b), above, through the deduction removes the potential double tax on this amount, as discussed in Chapter 9.
Jimena Buck, a widow, received the Old Age Security benefit of $6,000 in 2008. Her Division B income, excluding the deduction for the Part I.2 tax, is $70,000.
Outline all of the tax implications of receiving the Old Age Security benefit in this case.
¶10,520 Tax Reduction on Retroactive Lump-Sum Payments
When an individual receives a lump-sum payment in a year that relates to prior years, the graduated tax rate schedule, when applied to the lump sum, may result in more income tax payable in the year of receipt than in the prior years had the lump sum been spread over those previous years. The legislation provides for a reduction of tax on the following lump sums:
&toro; income from an office or employment or income received because of the termination of an office or employment, received under the terms of a court judgment, arbitration award or in settlement of a lawsuit;
&toro; superannuation or pension benefits, other than non-periodic benefits;
&toro; spouse or child support payments; y
&toro; employment insurance and other benefits that may be prescribed by regulations.
The right to receive the lump sum must have existed in a prior year. For the tax reduction to apply, the lump sum received in the year must be at least $3,000.
The amount of income that is eligible for this special treatment is deducted in arriving at taxable income and then subject to notional tax. The notional tax is calculated as if the lump-sum payment had actually been received in the year to which it related. Interest, calculated at a prescribed rate, is added to the tax to reflect the fact that the notional tax was not actually paid in a previous year.
This calculation will not affect any income-based benefits or deductions in those prior years.
¶10,530 Application of Rules for Computation of Tax and Credits
Example Problem 1
The following 2008 correct computation of taxable income for John Q. Citizen has been prepared for your analysis:
(1) John, age 67, and his wife Jill, age 64, are both resident in your province. Jill has no income and is blind.
(2) John has made the following selected payments in 2008:
(3) John's employer correctly withheld the following amounts:
(4) John filed his return on April 30, 2009.
Compute the total amount of federal taxes payable for the year.
This "minimum amount" minus a special foreign tax credit is then compared to regular Part I tax, net of all non-refundable tax credits (generally, before adding the 48% surtax for income not earned in a province). The greater amount becomes the basis of federal Part I tax for the year. The special foreign tax credit, which is basically equal to the greater of the foreign tax credit determined under normal rules or 15% of foreign income is the only credit available to a taxpayer subject to minimum tax.
All other tax credits, such as dividend tax credits and political donation credits will not be deductible from the minimum amount. In addition, even where the minimum amount is less than Part I tax, the restricted tax credits will be available only to the extent that Part I tax payable for the year does not go below the minimum amount.
¶10,550 Adjusted taxable income
The provision sets out the rules for computing adjusted taxable income, being a recalculation of taxable income using certain assumptions set out in the section. The CRA's form T691, for simplicity, starts with regular taxable income and adds back or subtracts amounts to arrive at adjusted taxable income. The amounts added back include:
&toro; the portion of the loss (including a share of a partnership loss) from certified film or videotape properties that relates to CCA or carrying charges such as interest and financing charges;
&toro; losses on resource properties as a result of certain incentive deductions such as Canadian exploration expense, Canadian development expense, depletion allowance, or Canadian oil and gas property expense;
&toro; 30% of the excess of capital gains over capital losses for the year;
&toro; 3 / 5 of the employee stock option deductions and the other share deductions;
¶10,800 REVIEW QUESTIONS
¶10,825 MULTIPLE CHOICE QUESTIONS
¶10,850 EXERCISES
¶10,875 ASSIGNMENT PROBLEMS
Paragraph 3( a ) of the Income Tax Act requires that all sources of income be included. It is necessary to disclose each source of income in the computation of net income for tax purposes. Identify the source of income that would include each of the following:
(a) Dividend income from a Canadian-controlled private corporation.
(b) Loss from a sole proprietorship.
(c) Cashier's income from a grocery store.
(d) Commissions earned from sales with a real estate company.
(e) Research consulting fees.
(f) Rental income earned on a single dwelling.
(h) Gain on the sale of land by a real estate development company.
(i) Profit from the sale of shoes earned in an incorporated company.
(j) Employment insurance income.
(k) Dividend income earned from a foreign investment.
(l) Tips earned as a hair stylist.
Blake, a recent accounting program graduate, earned the following during the year:
(a) In accordance with section 3 of the Income Tax Act . compute Blake's net income for tax purposes for the year.
(b) Assume that Blake has a non-capital loss carryforward from five years ago of $3,000. Compute his taxable income for the year.
Consider the following two taxpayer situations.
Compute each taxpayer's net income for the year, utilizing the aggregating formula of section 3 of the Income Tax Act . Where necessary, compute the net capital loss or the non-capital loss.
Jeffrey Lowe is an associate in a local law firm. He also has a number of sources of income from various investments and sideline businesses. Jeffrey has provided you with the following information for 2008:
Calculate Jeffrey's 2008 net income for tax purposes in accordance with section 3 of the Income Tax Act .
Marginal tax rates, or the tax rate applicable to the next dollar of income earned, are relevant to many decisions. Jacob earns $90,000.
Calculate Jacob's marginal tax rate using the federal and notional provincial rates provided in this chapter.
ITA: Division B, C
The following tax information is extracted from Mrs. Hawkins' books and records:
The following balances are losses carried forward from December 31, 2007:
During the latter part of 2008, Mrs. Hawkins moved from Montreal to Toronto to commence working for Leaves Co. Ltd. She received a $100,000 housing loan from Leaves Co. Ltd. which she used to help purchase a house in Toronto. Mrs. Hawkins received the interest-free loan on October 1, 2008.
Mrs. Hawkins previously worked for Les Habitants Co. Ltée (a public company). Prior to leaving Les Habitants Co. Ltée, Mrs. Hawkins exercised the stock option that she held in Les Habitants Co. Ltée. Mrs. Hawkins was able to purchase 2,000 listed common shares of Les Habitants Co. Ltée for $4 per share (the fair market value of the shares at the time the option was granted). The shares were trading at $10 per share at the time she exercised her option to purchase the shares.
Assume that the prescribed interest rate for the last quarter of 2008 is 7%.
Calculate Mrs. Hawkins' income and taxable income in 2008, in accordance with the ordering rules of Divisions B and C. Ignore the leap-year effects.
The following information has been provided by your client, Mr. Stanley Norman:
(1) The above capital gains do not include capital gains from qualified farm property or qualified small business corporation shares.
(2) Mr. Norman had a $21,000 net capital loss which was realized in 2004.
(3) Mr. Norman has not had a capital gain prior to 2006 and did not claim a net capital loss in the period 1985 to 2005.
Dealing with each item line-by-line across the years, rather than one year at a time:
(A) determine Mr. Norman's income from the sources indicated for 2006 to 2008 according to the ordering rules in section 3, and
(B) determine Mr. Norman's taxable income from the sources indicated from 2006 to 2008 according to the ordering rules in Division C after amending the returns.
The following selected tax information has been taken from the books and records of your client, Mr. Taxloss.
The following balances are losses carried forward from December 31, 2006:
Mr. Taxloss was not a member of a registered pension plan and, hence, his pension adjustment for the relevant years was nil. His earned income for 2006 was $33,250.
Prepare a schedule for the calculation of income and taxable income for 2007 and 2008, in accordance with the ordering rules under Divisions B and C, after applying any loss carryforward and loss carryback provisions through an amended return. (Deal with each item line-by-line across the years, rather than computing income one year at a time.)
Mr. and Mrs. Ataila immigrated to Canada on May 1. Mr. Ataila earned $12,400 in Argentina and $72,400 as a senior geologist in Canada. Mrs. Ataila is a homemaker, and mother of three small children. Her child care expenses totalled $4,580 for the time she spent planning her entry into the workforce.
Mr. and Mrs. Ataila have approached you for assistance with their Canadian tax returns.
Discuss what you believe are the areas of their returns that they are most interested in.
Mrs. Plant, age 47, is married and has three children: Amanda, age 24, Joan, age 17, and Courtney, age 16. Her own income for tax purposes of $60,000 includes employment income of $52,000.
Amanda has been certified as impaired by a medical doctor. Her only income is $6,000 from social assistance payments relating to her disability. She took a university course on a part-time basis for four months. Mrs. Plant paid her tuition fees of $300.
Joan attended a university on a full-time basis in another city for eight months, had employment income for tax purposes of $4,200 from a summer job while living at home and received a $2,500 scholarship. Mrs. Plant paid Joan's tuition fees of $3,000 and Joan paid her own moving costs to and from the university which were $150 each way.
Courtney, who is attending high school, had employment income for tax purposes of $2,800 from summer employment and a part-time job.
Mr. Plant, age 50, has the following sources of income:
(A) Calculate the non-refundable tax credits available to Mrs. Plant for 2008. Compute Joan's taxable income to determine if any of her tuition, education, and textbook tax credits will be available to Mrs. Plant. Prepare detailed calculations supporting your claim. All ages are given as of the end of 2008.
(B) Determine whether Mrs. Plant is entitled to claim the Canada Child Tax Benefit.
Angelina and Romeo are the divorced parents of Maria, who is 10 years old. Angelina and Romeo have joint custody and Maria lives every second month with the other. Both Angelina and Romeo have claimed Maria for the eligible dependent tax credit.
Is the claim by Angelina and Romeo allowed?
ITA: 118, 118.2–118.9; IT-513R
Mrs. Hopeful, age 66, separated from her husband on October 17, 2008. She started receiving support payments from Mr. Hopeful of $2,500 per month in November 2008. All of the support payments made commencing in November 2008 are considered to be pursuant to the divorce settlement. Of the $2,500 monthly payment, $1,000 is for the support of their daughter, Rachel. (In 2008, Mr. Hopeful earned a salary of $100,000 per year and also earned other investment income.) Mrs. Hopeful has income of $26,200.
Their eldest daughter Rachel is 40 and infirm and lives with Mrs. Hopeful since she is severely mentally handicapped. She has been certified as impaired by a medical doctor. A part-time attendant helps care for Rachel at a cost of $12,000 per year. Rachel has no income.
Discuss the tax credits related to her daughter Rachel that are available to Mrs. Hopeful.
Mr. Unfortunate provides you with the following medical expenses and additional information for himself and members of his family who live with him, when he asks you to prepare his 2008 tax return.
Assume that you have correctly computed the incomes under Division B for 2008 as follows:
Discuss the tax implications of Mr. Unfortunate claiming the above medical expenses for each of 2008 and 2009. Assume that all income amounts for 2009 will be the same as those for 2008.
ITA: 82, 118, 118.8
Mr. and Mrs. Realestate, ages 55 and 50, received the following income during 2008:
Calculate Mrs. Realestate's federal tax (ignoring the foreign tax credit) under the following situations:
Levin Takes Aim at Stock Option Deductions
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Once, stock options seemed a source of almost infinite wealth. Today, they seem to be the source of endless accounting debates.
In the latest twist, Sen. Carl Levin (D-Mich.) is blaming the way companies account for stock options expenses and deduct taxes for them as a major contributor to the U. S. tax gap — that is, the gap between the income that companies report on their financial statements and the income they report to the IRS. Levin is working on a bill that could require companies to report the same stock option expense to both investors and tax authorities.
Levin unsuccessfully introduced similar legislation in 1997 and 2003, but could gain more traction in the Democrat-led Congress. This time, Levin can count on increased public awareness of stock option issues, thanks to formal investigations of improperly granted stock options and the heightened scrutiny of executive pay by influential investor groups that followed disclosures of high severance packages for outgoing CEOs of poorly performing companies. Rep. Barney Frank has already re-introduced a bill designed to pare down excessive executive compensation that passed the House earlier this year. That legislation would give shareholders a nonbinding, advisory vote on executives’ pay packages.
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Because of differences between tax and GAAP accounting, companies typically report different financial results to investors and the IRS. In a hearing of the Permanent Subcommittee on Investigations on Tuesday, however, Levin said stock options are the only form of compensation method that allows companies to report two different sets of figures on their financial statements and their tax returns. “In most cases, the resulting tax deduction has far exceeded the expense shown on the company books,” he said.
Under GAAP, companies account for stock-option expense based on the fair value of the options at the date they are granted to the employee and amortize that amount over the vesting period. However, the company’s tax deduction is not taken until the employee exercises the options — at which point the company’s deduction mirrors whatever amount the employee declares as income from the exercised options. If the stock performed well over the life of the option, the company is likely to deduct an amount that is higher than the amount expensed for GAAP purposes.
At the same time, companies can take a financial hit from options that remain underwater — that is, options that expire before the stock price makes them worth exercising. In that case, companies record a fair value expense under GAAP, but never get to deduct the expense from their taxes. “The possible financial impact on an individual company of a large number of unexercised stock options is additional evidence that stock option accounting and tax rules are out of kilter,” Levin said Tuesday.
Under Levin’s plan, the annual tax deduction would match the expenses shown on the company’s books in the same year. Thus, companies would receive their deduction earlier, and they could deduct stock options that have vested but will never be exercised. “It would treat stock options in the same manner as every other form of corporate compensation by allowing a deduction in the same year that the compensation was granted,” he said.
There’s a certain irony to the idea that stock options are one of the largest causes of a gap between GAAP and tax accounting. There is widespread agreement that the proliferation of stock options was the $1 million cap on the tax deductibility of top executives’ salaries put in place by Congress in 1993. That change to the tax code limited the amount companies could deduct for their executives’ cash compensation but exempted one compensation tool: stock options. In fact, noted Sen. Norm Coleman (R-Minn.), the committee’s ranking member, that effort drove stock option use — and the gap between the pay of executives and the average worker — to historic highs.
Indeed, until recently, companies were not required to record any expense at all for at-the-money stock option grants, making the subsequent tax deduction for option expenses all the more lucrative. In 2005, despite fierce resistance from much of the business community, the Financial Accounting Standards Board required publicly traded companies to expense their stock options and carry the charge on their balance sheets by January 1, 2006, under FAS 123R.
Based on IRS tax returns before companies were required to use FAS 123R, the book-to-tax difference between December 2004 and June 2005 totaled $43 billion. This number — calculated from M-3 Schedules, where large companies reconcile their books and tax return figures with the IRS — will likely decrease in future years now that 123R requires companies to record an expense when options are granted, according to Kevin Brown, IRS acting commissioner.
John White, director of the Securities and Exchange Commission’s Division of Corporate Finance, cautioned the committee on basing assumptions on data collected before FAS 123R went into effect. He listed several issues the committee should keep in mind when making comparisons between taxes and financial statements, including: the stock-option expense is based on fair value but the tax deduction is based on intrinsic value at the exercise date; and the decision to grant an option and to exercise it are made by two different parties (employer and employee, respectively).
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nonqualified stock options deduction
Fast growing technology companies depend on stock options to compensate employees and encourage further strenuous growth, as illustrated by thereportedly intense opposition among Massachusetts and California technology companies to the FASB's pending proposal to charge stock options againstcorporate earnings.
Daryl Guppy - FX for Equity Traders nonqualified stock options deduction.
Consistent with this view and the interpretive positions taken by the SEC staff in analogous contexts, the Microsoft shares subsequently acquired byJ. P. Morgan through the exercise of the options that it had purchased could be used, without registration or the delivery of any prospectus, to closeout open borrowing transactions related to the short sales entered into for hedging purposes. Nonqualified stock options deduction.
The cooperative must show its 2017 tax year on the 2017 Form 1120-C and take into account any tax law changes that are effective for taxyears beginning after December 31, 2017.
Nonqualified stock options deduction - Read more
Description nonqualified stock options deduction
What are the tax consequences? They are essentially the same as with a traditional nonqualified stock option plan. There is no income to the employee(or deduction to the employer) at the time of grant or vesting. If the employee chooses to sell the option, he will have ordinary income on the saleproceeds. The employer must withhold income and payroll taxes and deliver the net proceeds to the employee. The employer receives a compensationdeduction at that time. If the employee chooses to exercise the option, he has compensation income equal to the excess of the fair market value of thestock over the strike price. Again, the employer must withhold, and there is a compensation deduction available.
nonqualified stock options deduction.
Tax Implications of Stock Options: As with any type of investment, when you realize a gain, it's considered income.
While there wasn't much tax difference between an option under a tax qualified Incentive Stock Option Plan (an "ISOP"), and a nonqualified stockoption until recently, the Clinton tax bill's top rate of 36% on ordinary income reintroduced a significant benefit for capital gains income, whichremains taxable at only 28%.
An annuity you buy on your own, rather than through a qualified employer sponsored retirement plan or individual retirement arrangement, is anon-qualified annuity. nonqualified stock options deduction.
nonqualified stock options deduction. Is there some theoretical tax benefit for employees that is left on the table if you use NQOs rather than ISOs? Yes (including employment taxsavings), but again, for simplicity’s sake, and clarity, and transparency, and to reduce the likelihood of misunderstandings, and to preservefor companies the tax deduction, I recommend NQOs.
Employees can offer any number of vested options for sale, even if the options are underwater. Of course, an option that is significantly underwatermay have little or no value. Employees can also place limit orders, i. e. they can stipulate the minimum price at which they are willing to sell. Google expects that this program will enhance the utility of its stock option program because employees will be able to see, on a daily basis, thattheir options have value—not just the intrinsic value (i. e. the difference between market price and strike price), but also the time value (i. e. thevalue of the right to hold the option for potentially greater gains). Also, employees will be able to cash out the time value after the options becomevested.
Video nonqualified stock options deduction
Since an ISOP produces capital gains income, it seems timely to review the differences between ISOPs and nonqualified options: Nonqualified stock options deduction make money.
As Professor Hall noted in the article referenced earlier, the Microsoft/J. P. Morgan transferable option experience answered many of the securitieslaw questions that surround a transferable option program. The critical issue of registration under Section 5 of the Securities Act of 1933 was dealtwith by focusing on whom should be considered the "real" purchasers of the Microsoft shares that J. P. Morgan would acquire through the exercise of theMicrosoft options it was purchasing, and who therefore should be entitled to the protections afforded by registration under the Securities Act, including its prospectus delivery requirements. Presumably with a view toward complying with interpretive letters issued by the Securities andExchange Commission in the context of short sales used to hedge positions taken in derivatives transactions, Microsoft and the SEC staff apparentlyagreed that purchasers of Microsoft stock in the short sales effected by J. P. Morgan to hedge its position in Microsoft options were the "real"purchasers. As a result, a registration statement on Form S-3 was filed by Microsoft to register (in a Rule 415 shelf offering) J. P. Morgan's shortsales of Microsoft stock as a primary offering by Microsoft. J. P. Morgan was named as an underwriter in the related prospectus. This analyticalframework, of course, reflected the fact that neither the transfer of the options to, nor the exercise of the options by, J. P. Morgan could beeffected pursuant to a registration statement on Form S-8, the form typically used to register securities issued pursuant to employee benefit plans. nonqualified stock options deduction.
In other ways, though, qualified and nonqualified annuities are alike. You can choose between fixed or variable contracts, and the annuity can beeither deferred or immediate.
Because all eligible stock options will be modified to permit their sale under the TSO program, Google has indicated that it will take a stock-basedcompensation charge on the date the program is initiated equal to the difference between the value of the modified stock options and their valueimmediately prior to the modification. Going forward, Google expects that the fair value of each option granted that incorporates this transferabilityfeature will be greater than it would have been before the TSO program was initiated (because of a longer expected option life), resulting in morestock-based accounting expense per option.
The cooperative has a tax year of less than 12 months that begins and ends in 2017, and(nonqualified stock options deduction make money.|)
File the 2017 return for calendar year 2017 and fiscal years that begin in 2017 and end in 2017. For a fiscal or short tax year return, fill in the tax year space at the top of the form.
Editor's Note: Along with the additions and updates below, we comprehensivly updated all of our tax-return content for the 2017 tax season, including our popular annotated diagrams of Form 8949 and Schedule D in the section Reporting Company Stock Sales. The amount of updated tax-return content is too great to list here, but it can all be found in the Tax Center .
What is a "substantial risk of forfeiture" and how does it affect the taxation of restricted stock?
When I file an extension to complete my tax return after the IRS deadline, are there any mistakes I should avoid that involve stock grant income?
If I move to another country to work, will I still have to pay US taxes on option exercises, restricted stock vesting, and stock sales? Can I avoid double taxation?
After I exercise NQSOs, will I need to make estimated tax payments?
When my restricted stock vests, will I need to make estimated tax payments?
If I exercise ISOs and hold the stock (triggering AMT for the spread) or sell the stock in a disqualifying disposition, will I need to make estimated tax payments?
Are there any strategies for paying estimated taxes on income from stock options and restricted stock?
If I exercise stock appreciation rights (SARs), will I need to make estimated tax payments?
Has the likelihood of a tax audit increased?
What is the tax deduction for donations of my company stock?
If I gift stock that has met the holding periods for Section 423 ESPPs, what is the tax treatment?
Stock Option Terms: What You Can Expect
Why do companies grant stock options, restricted stock, and other equity awards?
Do equity awards really motivate employees?
What is a typical vesting schedule? Do you have any data on vesting schedules and their design?
How common are stock options, restricted stock, performance shares, and ESPPs outside the US? Do surveys show trends?
Are stock plans affected by the Supreme Court's decision on same-sex marriage?
Do companies make stock option or restricted stock grants to directors? Any survey data on director grants?
Does vesting continue while I am on a leave of absence or a sabbatical?
Any data on vesting schedules for restricted stock?
What are the main models for stock option valuation, and how do they differ?
What is a "net options" exercise?
¡NUEVO! Why would a privately held company grant RSUs and not stock options?
Any data on vesting schedules for restricted stock?
What is a "substantial risk of forfeiture" and how does it affect the taxation of restricted stock?
When my restricted stock vests, will I need to make estimated tax payments?
Are there any strategies for paying estimated taxes on income from stock options and restricted stock?
I am eligible for vesting acceleration at retirement but have not actually retired, so why has my restricted stock been taxed? Is the treatment different for RSUs?
If I move to another country to work, will I still have to pay US taxes on option exercises, restricted stock vesting, and stock sales? Can I avoid double taxation?
Can my company require me to retain a certain amount of company stock from a stock option exercise or a restricted stock grant?
How do I make a timely and complete Section 83(b) election?
If I make a Section 83(b) election to be taxed on the value of my restricted stock at grant, can I pay the taxes by selling shares or by having my company withhold shares or lend me money?
Is the payout of restricted stock units ever delayed when vesting is accelerated?
After I exercise NQSOs, will I need to make estimated tax payments?
Are there any strategies for paying estimated taxes on income from stock options and restricted stock?
If I move to another country to work, will I still have to pay US taxes on option exercises, restricted stock vesting, and stock sales? Can I avoid double taxation?
Dr. Strange Tax, Or: How I Learned To Stop Worrying And Love The AMT
Are there guidelines for calculating AMT trigger points? For example, if my spouse and I earn $100,000, will we trigger the AMT when I exercise ISOs?
If I move to another country to work, will I still have to pay US taxes on option exercises, restricted stock vesting, and stock sales? Can I avoid double taxation?
Can the annual limit of $100,000 in exercisable ISOs be adversely affected by any post-grant events, such as job termination or the acceleration of vesting in a merger?
Chapter 11
Computation of Taxable Income and Tax After General Reductions for Corporations
Learning Goals
Visión de conjunto
¶11,000 Computation Of Taxable Income For A Corporation
¶11,025 Purpose
The purpose of the deduction is to prevent the double taxation of corporate income. When dividends are paid, the source of the dividends is usually after-tax retained earnings of the payer corporation. If a recipient corporation were to pay tax on the dividends it receives, the income that gave rise to the dividends would effectively be taxed twice. A provision prevents that second imposition of tax at the level of the recipient corporation. In fact, retained earnings can, in many cases, be flowed through any number of shareholder corporations in the form of taxable dividends without attracting tax under Part I. When the retained earnings are ultimately paid as dividends to an individual shareholder, the dividend gross-up and tax-credit mechanism will operate to reduce, at the individual taxpayer level, the potential double taxation of income generated by a corporation.
¶11,025.10 Concept of integration of individual and corporate tax on income
The dividend deduction for corporate shareholders is the second building block of the theory of integration. The first building block, the dividend gross-up and tax credit for individual shareholders, was previously discussed in Chapters 6 and 10. The function of the dividend deduction for a corporation is to remove some of the potential multiple taxation of dividend income as the income moves through a series or chain of corporations.
Simply stated, the integration concept, discussed in more detail in Chapter 12. requires that a tax system should be designed so that a taxpayer is indifferent (i. e. pays the same amount of tax), no matter what type of entity or person earns the income. In the context of corporations and their shareholders under a perfectly integrated tax system, the total tax burden should be identical whether the individual receives the income directly or indirectly, as a shareholder, from dividends through the corporate structure.
The Canadian income tax system is not perfectly integrated. Near perfect integration occurs numerically where the combined corporate rate of tax (federal and provincial) is equal to:
&toro; 20% for Canadian-controlled private corporations on their business income eligible for a low rate of tax, and
&toro; about 31% for Canadian-resident corporations on their business income subject to the higher general rate of tax.
However, even at these rates there are flaws in the system. For example, the dividend tax credit should represent the underlying tax paid by the corporation. However, under our present income tax system, even when the corporation has not paid any tax due to losses, for example, shareholders still receive a dividend tax credit.
¶11,025.20 Application of the concept of integration
To illustrate the corporate dividend deduction aspect of integration, assume that there is a chain of three taxable Canadian corporations: A Ltd. a Canadian-resident public corporation, owns 100% of B Ltd. which in turn owns 100% of C Ltd. Also, assume that each of the corporations is taxed at a combined rate of 35%, and the individual shareholders of A Ltd. are all taxed at a combined rate of 40%; all of the after-tax income is passed up to the next level in the form of eligible dividends, i. e. eligible for the 45% gross-up and tax credit in the hands of an individual shareholder. In the absence of a corporate deduction for dividends received from another corporation the following would result.
The result of this example is that on the $1,000 of income initially earned by C Ltd. the ultimate tax burden is $762. The dividend deduction, as discussed above, eliminates the corporate tax in both B Ltd. and C Ltd. The tax burden remaining would be composed of the $350 on the income earned initially by C Ltd. and the tax of $85 on the $943 grossed-up dividend received by the individual shareholders calculated as follows:
The total income tax is now $435 compared to $762. However, as can be seen, there is still some degree of double taxation even with the dividend tax credit when the corporate tax rate is at this level (i. e. $435 versus $400 under perfect integration).
¶11,025.30 Conclusion
From the above example, one can conclude that where dividend income flows through a series of corporations there will be only two incidents of income tax. Initially, the corporation that earns the business or property income will pay income tax and eventually the individual shareholder who receives the income in the form of a dividend will also pay some income tax. In the next chapter, the topic of integration will be expanded even further with different corporate rates and other factors.
¶11,030 Dividends paid from untaxed income
Over the years, the intercorporate dividend deduction has created problems which the government has attempted to rectify. For example, a corporation may pay a dividend from income that was not taxed in the payer corporation. This might occur when income for accounting purposes is higher than income for tax purposes, due to a more rapid write-off of assets for tax purposes. The utilization of carried-over losses may also offset income, so that some amounts that are distributed as dividends may not be taxed fully in the corporation that pays the dividend. This is usually due to timing differences between the payment of the dividend and the offset of losses. In these cases, there is a breakdown of the assumption that underlies the intercorporate dividend deduction, namely, that the dividend deduction prevents double taxation because the income that gave rise to the dividends was taxed in the payer corporation. This problem is compounded when individual shareholders gross up the dividends and deduct a dividend tax credit, on the assumption that the payer corporation or a predecessor corporation paid tax on the income it distributed as dividends. The purpose and effect of the dividend gross-up and tax-credit mechanism will be discussed more fully in the next chapter.
¶11,035 "After-tax financing"
Another problem that is linked with the intercorporate dividend deduction occurs when what has become known as "after-tax financing" is undertaken. A corporation that has generated losses in the past may not find debt financing attractive. This is because the deduction for interest expense provides no immediate tax relief where the corporation does not have to pay tax currently. Instead, the interest expense deduction merely increases the corporation's non-capital losses which may be deductible in the future or may expire. Alternatively, a corporation with unused losses could issue preferred shares to another corporation, such as a financial institution, to obtain the necessary financing. The result is that the corporation that issues the preferred shares will, obviously, not receive a deduction for dividends paid on the preferred shares. However, the financing corporation, because of the intercorporate dividend deduction, will not ordinarily pay tax on the dividends it receives. Consequently, because interest income is taxable and dividends are ordinarily not, the financing corporation may be prepared to lend funds at a rate lower than the market rate of interest. Rules are designed to eliminate the benefits of after-tax financing on "term preferred shares", "short-term preferred shares" and collateralized preferred shares.
¶11,040 Dividends paid on shares subsequently sold for a loss
The intercorporate dividend deduction is also linked to a potential problem when dividends are received on shares held by a corporation for a short period and subsequently sold at a loss. Such dividends would ordinarily be deductible in computing taxable income, or in the case of certain dividends (e. g. capital dividends), would be tax exempt. On the other hand, the loss on the disposition of the shares would be deductible as an allowable capital loss (if the shares were held as a capital property), or as a business loss (if the shares were held as inventory). It may be argued that, to some extent, the loss on disposition may have been caused by the payment of the dividend; for example, witness the normal decline in the value of shares after the ex-dividend date.
Consequently, there are rules that, when certain conditions are present, will reduce the corporation's capital loss or inventory loss by an amount equal to the aggregate of certain types of dividends received on such shares prior to the disposition. The loss reductions will occur if one of the following conditions is present:
(a) the corporation owned the shares for less than 365 continuous days immediately prior to the disposition date, or
(b) the corporation owned more than 5% of the issued shares of any class of the capital stock on which the dividends were received.
The type of dividends that will reduce such capital losses are essentially taxable dividends (deductible in computing the corporation's taxable income), and tax-exempt capital dividends received on the shares during the period of ownership. Similarly, inventory losses are reduced by deductible taxable dividends received by any taxpayer-shareholder plus non-taxable dividends received.
¶11,050 Charitable Donations
While individuals are provided with a non-refundable tax credit for various donations, as discussed in Chapter 10. corporations are permitted a deduction in Division C. The types of donation that provide a corporation with this deduction are the same as the types of donation that provide an individual with a tax credit. Also, a corporation's deduction for gifts is, generally, limited to 75% of the corporation's net income for tax purposes under Division B. However, the deduction is limited to 100% of the amount of a taxable capital gain in respect of gifts of appreciated capital property. As well, the deduction limit is 100% of any CCA recapture arising on the gift of depreciable capital property.
Any unused donations for a given year can be carried forward five years to be deducted in a carryforward year. The total claim for donations carried forward to a year and current donations made in that year cannot exceed the Division B income limit. The maximum donation need not be deducted in a given year, such that undeducted amounts are available within the carryforward period. To be deducted, a donation must be proven, if necessary, by a receipt that contains prescribed information.
¶11,060 Loss Carryovers
The rules governing the deductibility of net capital losses and non-capital losses are the same for corporations and individuals. A capital loss carryover from the current year may be carried back to a prior year in which income included capital gains and non-capital losses. The capital loss would then be offset against the capital gain, reducing the amount of non-capital losses needed to minimize taxes payable for the prior year. This increases the non-capital losses available to be carried over into the current year. The carryforward of non-capital losses, restricted farm losses, and farm losses arising in the 2006 and subsequent taxation years is 20 years.
The following table shows the carryover period for net and non-capital losses.
¶11,065 Non-capital loss
A non-capital loss for a particular year, as it affects a corporation (for the purposes of this text), is generally defined to include:
This definition is designed to offset the current year's losses from various sources (items (E) and (D)) against the current year's income from other sources (item (F)). Then the balance or the unabsorbed excess loss can be carried over and deducted in another year. Non-capital losses and farming and fishing losses may be carried back three taxation years and forward 20 taxation years. To carry losses back to a taxation year for which a return has been filed, the corporation need only file one form (Schedule 4) and not a full, amended tax return.
IC 84-1, par. 11
Although a 20-year carryforward period is quite long, it is possible for carried-over losses to expire. Recognize that 20 years is a very long time for a business to sustain losses with no income earned to offset those losses. Most businesses would not last that long with those losses. However, planning should be undertaken to ensure that the losses are utilized within the carryover period. Income can be increased to absorb non-capital losses by omitting optional or permissive deductions such as capital cost allowances, cumulative eligible capital amounts, scientific research and experimental development expenditures or reserves. The deduction of these amounts can be deferred to future years when there is offsetting income. The Canada Revenue Agency (CRA) usually permits the revision of a permissive deduction for a prior year. An Information Circular indicates that a letter to the director of the taxpayer's district taxation office that outlines the requested revisions will be sufficient if other conditions set out in paragraphs 9 and 10 are met. In addition, the corporation should consider the sale of unnecessary or redundant assets to generate income which could be used to absorb losses. The CRA may also allow the substitution of one type of loss for another, as long as the year in which the substitution is made is still open to assessment (as discussed in Chapter 14 ). For example, a non-capital loss may have been carried back to a year in which there was a net taxable capital gain. Subsequently, an allowable capital loss may arise. The resultant net capital loss may be carried back and substituted for the non-capital loss, leaving the freed non-capital loss available for carryforward.
The operations of Bigloss Ltd. generated the following data for its December 31, 2008 taxation year:
In its 2007 taxation year, its first profitable year in several, Bigloss Ltd. had taxable income under Division C of $40,000.
Compute the non-capital loss for Bigloss Ltd. in 2008 and determine the amount of that loss that can be carried back to 2007.
Before calculating the non-capital loss for 2008, a review of the construction of section 3 income would be useful in understanding the basic concept. The following calculation reorganizes the above information using the ordering and application rules in section 3.
Note that the denominator C in the fraction B/C, in effect, divides the net capital loss A by the inclusion rate of the loss year. Thus, when the 1997 net capital loss of $45,000, which is a 3 / 4 amount, is divided by 3 / 4 . the result is $60,000, which was the full capital loss in 1997. Then, B, which is the inclusion rate for the year in which the loss is being deducted, is multiplied by the full loss, the result is 2 / 3 of $60,000, or $40,000, which is the net capital loss for 2000.
To deal with the carryover of these losses conceptually, it may be easier to carry full amounts of capital losses realized either back or forward against full gains in the carryover year. Then the appropriate inclusion rate could be applied to the net full gains in the carryover year. Unfortunately, as discussed below, the definition of net capital loss (i. e. the amount available for carryover) is given in terms of the fractional allowable capital losses.
The amount of net capital loss realized in 1997 and deducted in 2000 and 2001 and, hence, the amount of net capital loss available for carryforward after 2001 can be reconciled as follows:
¶11,080 Restrictions and ordering of deductions
A taxpayer can choose how much, if any, of its previously unclaimed carried-over losses to deduct in a particular year and in which order to deduct such losses and other Division C deductions. However, the taxpayer must deduct a loss of a particular type (that is, non-capital loss, net capital loss, restricted farm loss or farm loss) in the chronological order in which the loss was incurred. Logic would suggest that those deductions in Division C, which are more restricted in their deductibility, be claimed as soon as possible and before those deductions which are less restricted.
There are two basic types of restriction on losses available for carryover.
(1) The first is a restriction on the type of income against which the loss carryover can be deducted. This type of restriction is often referred to as "streaming".
(2) The other is a restriction on the number of years a loss can be carried over.
For example, a net capital loss can only be applied against net taxable capital gains, but is unrestricted as to carryforward time. A non-capital loss can be applied against any source of income, but is time-restricted. A restricted farm loss is restricted both as to the type of income against which it can be applied and to time. Therefore, restricted farm losses should usually be deducted first. Between net capital losses and non-capital losses, the decision depends on whether taxable capital gains are anticipated. If there are current taxable capital gains and an examination of the corporation's balance sheet indicates no accrued or prospective capital gains, then net capital losses should probably be deducted before non-capital losses.
EXHIBIT 11-2 Summary for Carryover Rules for Division C Deductions
¶11,085 Choice to deduct net capital losses to preserve non-capital losses
Item E in the definition of non-capital loss enables taxpayers, at their option, to deduct net capital losses to preserve non-capital losses. The purpose of this choice is to correct a long-standing anomaly in the legislation which inadvertently penalized taxpayers in certain specific situations, as shown in the example below. Whether a taxpayer decides to utilize this option depends upon whether the corporation is expected to generate, in the near future, adequate business income or taxable capital gains.
The non-capital loss can be increased by the amount of any net capital loss actually deducted for that year. The only restriction on the deduction of a net capital loss is that there is a net taxable capital gain in the year that is at least equal to the net capital loss being deducted. For example, assume that a corporation (or an individual) has in 2008 a business loss of $100,000, a net taxable capital gain of $40,000 and an adjusted net capital loss of $60,000 carry forward. The tax consequences are as follows:
If the definition of non-capital loss did not contain the addition for net capital losses deducted, a corporation could deduct $40,000 of the net capital loss of $60,000 (equal to the net taxable capital gain) but would not do so because such a deduction would have no impact upon the taxable income which would still be zero. In addition, if the $40,000 was deducted, the taxpayer would no longer have a potential use of the $40,000 net capital loss in the future when the taxpayer is in a taxable position.
The non-capital loss for the 2008 taxation year without the addition would be:
The result is that the net taxable capital gain has been used to offset the business loss resulting in a lower non-capital loss (i. e. $60,000 versus $100,000). The taxpayer may or may not be happy with this result depending upon the taxpayer's expected future income sources. Since net capital losses can only be applied to net taxable capital gains (i. e. $40,000) a potential net capital loss deduction has been blocked by the current business loss of $100,000.
The addition of deducted net capital losses to the non-capital loss balance provides a positive tax consequence to claiming a net capital loss deduction, even though the deduction has no impact upon the taxable income as shown below.
However, as a result of the deduction of net capital losses, the non-capital loss is increased by a net capital loss deducted:
The result is that $40,000 of the net capital loss carryover has been deducted under Division C to offset the $40,000 of net taxable capital gain under paragraph 3( b ). This preserves the full $100,000 of business loss to be carried over as a non-capital loss, which can be deducted from any source of income in a carryover year.
The following data summarize the operations of Parliamentary Fertilizers Limited, a Canadian-controlled private corporation, for the years 2005 to 2008 ended December 31.
The corporation has a net capital loss balance of $18,750 which arose in 1997.
Calculate the taxable income of the company for each of the years indicated, on the assumption that future other business income and taxable capital gains are uncertain, and tabulate the losses available for carryover at the end of 2008. (For the purposes of this type of problem, dealing with each item, line-by-line, across the years, will help keep track of carryovers more easily than dealing with income one year at a time.)
—NOTES TO SOLUTION
(1) Items aggregated from the various non-capital sources under paragraph 3( a ) cannot be negative. Losses from these sources are deducted under paragraph 3( d ).
(2) Allowable capital losses are only deductible to the extent of taxable capital gains under paragraph 3( b ). The remainder is available for carryover to another year.
(3) Losses from the various non-capital sources and from allowable business investment losses are only deductible under paragraph 3( d ). However, the net income amounts after the deductions in paragraph 3( d ) cannot be negative. Note that the excess of the deductions in paragraph 3( d ) over the aggregate income in paragraph 3( c ) is only one component of the addition to the non-capital loss carryover balance computed below.
(4) Income for the year cannot be negative. There is no statutory order in which Division C deductions must be taken. However, the time and source restrictions of loss carryovers, as previously discussed, should be taken into account. In addition, where the income under Division B is not large enough to cover all potential Division C deductions, then the dividend deduction under section 112 should always be taken first. Dividends from taxable Canadian corporations are the only Division C deduction for corporations which do not have a carryover clause.
(5) Dividends from taxable Canadian corporations should be deducted first in case there is not enough income for any further Division C deductions. Undeducted dividends cannot be carried over.
(6) A deduction in the computation of taxable income should not be taken if it reduces the balance to a negative number, since normally negative taxable income has no meaning. The one exception to this rule is in respect of net capital losses which can be added to the non-capital loss balance if they are deducted in a particular year.
(7) The deduction of charitable donations is limited to 75% of Division B income for the year. Donations not deducted in the year they are made, can be carried forward to the next five taxation years. However, the Division B income limitation applies to the sum of donations carried forward and current donations. Since the unused donations of a particular taxation year have a time restriction of 5 years, it would be advisable to claim them prior to claiming current year donations.
(8) Deductions for net capital loss carryovers are restricted to the extent of the net taxable capital gains included in paragraph 3( b ) for the carryover year.
Subsection 111(1.1) adjusts the 2005 net capital loss deduction by a formula which corrects for the fact that in the loss year (1997) the inclusion rate for capital gains was three-quarters, while in the year that the loss is being claimed (i. e. 2005) the inclusion rate is one-half.
Since the inclusion rate is the same for 2006 and 2007, no adjustment is necessary for the 2006 capital loss:
When control of the corporation is acquired by another person or another group of persons, a corporation's ability to carry forward or carry back non-capital losses or farm losses is severely restricted. In addition, net capital losses, losses from property and allowable business investment losses (ABILs) that are unutilized at the time of the acquisition of control may not be carried forward—they simply expire.
IT-302R3, pars. 3–6
As mentioned previously, the loss utilization restrictions become operative when control of a corporation is acquired by another person or another group of persons. The acquisition of control is considered to occur when control over the voting rights (i. e. de jure control that exists where more than 50% of the votes necessary to elect the Board of Directors is held) of the corporation is acquired by a person or group of persons. While it is clear that control refers to voting control, some uncertainty exists as to how the CRA will interpret the phrase "group of persons" for the purposes of these rules. The CRA has indicated that it will look for evidence of a group's intention to "act in concert" to control a corporation.
Corporations are often unable to generate appropriate or sufficient income to utilize losses and, hence, are unable to recover taxes previously paid or reduce taxes payable. Consequently, such loss corporations become attractive targets for acquisition by profitable corporations which, through a variety of strategies, could shelter their income from tax by utilizing the losses of the acquired corporation. Because such strategies ultimately result in reduced tax revenues, the government, understandably, does not view such transactions with favour. As a result, over the years the government has introduced increasingly restrictive legislation to curb such transactions which are sometimes referred to as "tax-loss trading".
Two of the more common loss utilization strategies are outlined as follows:
(1) In the first, after control of the loss corporation is acquired, the operations of the income-earning acquirer corporation and the loss corporation are restructured so that income is generated in the latter corporation. For example, the assets of a profitable business or division in the income-generating corporation are transferred to the loss corporation. Usually the transfer will be accomplished by means of a tax-free rollover by moving profit-generating assets to the loss corporation (discussed in Chapter 16 ). The income that is so generated is used to absorb the losses of the loss corporation.
(2) The second strategy involves implementing intercompany transactions which produce expense deductions to the income-generating corporation while generating income for the loss corporation. Interest on loans, rental contracts and commission contracts are examples of such intercompany transactions.
The legislative restrictions which are aimed at curtailing the utilization of tax losses, are based on certain transactions and events which are deemed to occur when there has been an acquisition of control. These transactions and events, as well as other rules that comprise the restrictions, are discussed below.
¶11,100 Deemed year-end
The corporation is deemed to have a taxation year-end immediately before the time of the acquisition of control of the corporation (referred to hereinafter as the "deemed taxation year-end"). The result is that various adjustments that are normally made at a year-end, are required to be made before the acquisition of control. For example, the requirement that inventory be valued at the lower of cost or market at a taxation year-end will cause any accrued losses in inventory to be realized. This adjustment will increase the corporation's pre-acquisition non-capital losses or farm losses. As will be explained later, such pre-acquisition losses are available for carryforward, but only after certain restrictive conditions are satisfied. The advent of the deemed year-end causes other adjustments (discussed below) to increase the corporation's pre-acquisition of control non-capital losses and farm losses.
As a result of the deemed year-end, the corporation is required to satisfy the normal compliance requirements of filing tax returns, reviewing unpaid amounts, determining the status of charitable donations and loss carryovers and their carryforward period, etc.
However, a short taxation year that may result from an acquisition of control will not advance the replacement period required to benefit from the rollovers available for an involuntary or voluntary disposition. These rollovers allow a full 24 months and 12 months after an involuntary and voluntary disposition, respectively, from the end of the short taxation year in which such a disposition occurs.
Unless the deemed year-end coincides with the corporation's normal year-end, the corporation may have two taxation years lasting less than 24 months in total. To illustrate this, assume that a corporation whose normal taxation year-end is December 31, experiences an acquisition of control on April 1, 2008. The corporation will have a deemed year-end of March 31, 2008. If the corporation chooses to return to its original taxation year-end of December 31, the corporation will have two taxation years ending in the 12-month period ending December 31, 2008. The first taxation year will be 3 months long, the second 9 months long. If the corporation chose a date for its subsequent taxation years to be, say, March 31, as permitted, it would then have two taxation years lasting a total of only 15 months—namely, the deemed taxation year ending on March 31, 2008 will be 3 months long and the taxation year ending March 31, 2009 will be 12 months long. The foregoing example can be illustrated with the following diagram:
The upshot of this is that the normal 276-month (3 years back plus 20 years forward) carryover period for non-capital losses is reduced. This, in itself, represents a constraint in that the corporation has a shorter period over which to generate income to utilize the losses. A short taxation year will also cause any capital cost allowance or small business deduction (discussed in Chapter 12 ) to be proportionately reduced.
¶11,105 Accrued or unrealized losses on inventory
A taxpayer is required to value its inventory at the end of each taxation year. The Act requires that each item of inventory be valued at the lower of cost and market (LCM), while the Regulations permit valuation at the fair market value of the entire inventory. Either way, the result is that any accrued or unrealized inventory losses are realized in the deemed taxation year, thus, decreasing the taxpayer's income or increasing its non-capital losses or farm losses in the pre-acquisition period.
¶11,110 Accrued or unrealized losses on accounts receivable
The restrictions and their consequences that apply to accrued inventory losses are parallelled in the provisions that relate to accrued losses on accounts receivable. The largest amount that a corporation could deduct as a reserve for doubtful accounts for each separate trade receivable, must be claimed as an actual bad debt in the deemed taxation year. That is, where there has been an acquisition of control, the normal method of computing a reserve by aging the accounts and applying a fixed percentage to each age category is not permitted. Instead, each debt must be considered individually as to its collectibility and, if collection is doubtful, the debt must be written off as a bad debt. The amount deducted is deemed to be a separate debt and any amount or amounts subsequently received in respect of the separate debt must be included in income.
As is the case in accrued inventory losses, accrued losses on accounts receivable become part of time-limited non-capital or farm losses, which are deductible only if certain restrictive conditions are satisfied.
¶11,115 Accrued or unrealized losses on depreciable capital property
Accrued or unrealized losses on depreciable capital property are measured as the amount by which:
(a) the undepreciated capital cost (UCC), at the deemed year-end, in a prescribed class
exceeds the aggregate of:
(b) the fair market value of all the property in the class at the deemed year-end, plus
(5) The adjusted cost base at December 1, 2008, remains at $110,000 and the UCC remains at $104,000, since no election was made.
(6) The corporation's income for tax purposes for the year ending December 31, 2009, is $15,000 as computed by section 3. The corporation may apply the losses of the ladies' shoe retail business against the total of the corporation's income from that business and from the sale of similar products. The result of the aggregation is, therefore, $12,000, being nil from the ladies' shoe retail business plus $12,000 from the sale of similar products with the $8,000 taxable capital gain being excluded. Thus, the maximum deduction is $12,000.
(7) This amount is available for carryforward as follows:
The 2007 loss expires on December 31, 2026, i. e. in 20 taxation years, including the deemed taxation year at November 30, 2008, and the one-month taxation year at December 31, 2008. The November 2008 loss expires on December 31, 2027, i. e. in 20 taxation years.
(8) The corporation's income for tax purposes for the year ending December 31, 2009, is $15,000. However, the corporation may make a deduction to the extent of nil under this assumption because the ladies' shoe retail business generated no income in the year and there was no income from the sale of similar products or services by the assumption made in this alternative.
(9) This amount is available for carryforward as follows, assuming a December 31 taxation year-end is chosen:
—$34,000 (being the 2007 loss of $37,500 - $3,500 claimed in the December 31, 2008 year) expires on December 31, 2025;
—$19,500 (see note (7)) expires on December 31, 2027, i. e. 20 taxation years.
(10) On the assumption that the optional net capital loss deduction is taken in order to increase the non-capital losses for the deemed taxation year.
(11) The adjusted cost base balance at December 1, 2008 is $126,000, being the deemed proceeds of disposition in the deemed disposition elected upon.
(12) The adjusted cost base balance (i. e. capital cost, in the case of depreciable property) at December 1, 2008, for future capital gains purposes, is $118,000, being deemed proceeds of disposition in the deemed disposition elected upon. The UCC $114,000 at the same date is increased by all of the recapture of $6,000, but only 1 / 2 of the capital gain of $8,000 elected as deemed proceeds on the deemed disposition, (i. e. $104,000 + $6,000 + 1 / 2 × $8,000).
(13) The addition of $19,500 to the non-capital loss balance is logical, since the $19,500 represents the loss from business sources for the deemed year-end.
¶11,160 Taxable Income of a Corporation in General
Recall that the starting point for the calculation of a corporation's taxable income is its net income for tax purpose computed under Division B. Where financial statements have been prepared using generally accepted accounting principles, it may be necessary to adjust income for financial accounting purposes to income for tax purposes as determined by Division B. This usually involves a reconciliation process, introduced in previous chapters. Generally, expenditures deducted for financial accounting purposes but not deductible for tax purposes, must be added to financial accounting income, and expenditures not deducted for financial accounting purposes but deductible for tax purposes may be deducted in the reconciliation. To perform this reconciliation in the preparation of a corporate tax return, Schedule 1 is completed.
Frenzied Taxpayers Limited reported a net loss for financial accounting purposes of $53,000 for 2007 and a net income of $126,000 for 2008. It showed a provision for income taxes of $113,000 for 2008 only. Expenses deducted for financial accounting purposes in both years included: charitable donations of $15,000 per year, depreciation of $105,000 per year and bond discount amortization of $5,000 per year. The corporation included in financial accounting income, in both years, dividends from taxable Canadian corporations of $23,000 and dividends of $15,300 net of a 15% withholding tax from foreign corporations which were not foreign affiliates. The corporation had no capital gains in either year.
In 2007, capital cost allowance of $14,800 (i. e. less than the maximum of $14,844) had been taken on a brick building purchased in 2001 (Class 1) leaving an undepreciated capital cost balance of $356,250 on January 1, 2008, the beginning of the 2008 taxation year. In addition, $44,800 in capital cost allowance had been taken on equipment leaving an undepreciated capital cost balance of $179,200 on January 1, 2008. In 2008, no additions or disposals were made to these classes of assets.
The corporation had non-capital losses of $18,000 available for carryover until 2010 and a 1999 net capital loss of $5,000 available for carryover.
Calculate the taxable income of the corporation for the years indicated.
—NOTES TO SOLUTION
(1) Income tax is not an expenditure made to produce income. It is an appropriation of profits after they have been earned.
(2) This is not an expenditure made to produce income for tax purposes, but an appropriation of profits after they have been earned. However, a foreign tax credit may be available in the computation of tax.
(3) Donations, normally, are not deductible in the computation of income, but are deductible in the computation of taxable income of a corporation.
(4) Bond discount amortizations are prohibited, but payments reflecting bond discounts are deductible at the earlier of redemption or maturity.
(5) Capital cost allowances for 2008 were computed as follows:
(6) Even though $23,000 was deducted, only $15,100 of the dividends deducted have any effect since there is no loss carryover for dividends not deducted. Even where there is a loss from business and property, the addition to the non-capital losses of dividends deducted under section 112 is offset by the paragraph 3( c ) income which in fact includes the dividends in question. The dividend deduction only neutralizes the paragraph 3( c ) inclusion, as can be seen by a substitution of these numbers in the definition of non-capital loss.
(7) The amount of charitable donations that may be deducted in a year is limited to 75% of income as computed in Division B of Part I. However, charitable donations not deducted in the current year can be carried forward five years.
(8) Non-capital losses would not be deducted in 2007, because after the dividends have been deducted, there is no income against which to absorb them in that year.
(9) Net capital loss carryovers cannot be deducted in 2007 and 2008 because there were no taxable capital gains against which to absorb them in these years. However, if there are net taxable capital gains available under paragraph 3( b ) in the future or in the 3 years before 2007 (to the extent the taxable capital gains have not been offset by allowable capital losses), there is a potential increase in the non-capital losses at the taxpayer's discretion. The decision to utilize this option will depend upon which source of income will be generated first, business income or net taxable capital gains.
¶11,200 Basic Computation Of Tax For All Corporations
¶11,210 Objectives of Provisions Affecting Taxation of Corporations
Although a corporation is regarded as a separate entity, in an economic sense the separation of a corporation and its shareholders may be artificial. However, the flexibility provided by corporations, often involving tax planning, has resulted in considerable complexity of the legislation pertaining to the taxation of corporations. This legislation appears to have three main objectives.
The first objective is the alleviation of the multiple taxation of corporate income by taxing income at the level of the corporation and, then, at the level of the shareholder on dividends received from after-tax corporate earnings. The Act attempts to integrate these two taxes primarily by way of the dividend gross-up and tax credit mechanism. If the system of integration were perfect, it would completely eliminate the double taxation of corporate income, as previously discussed at the beginning of this chapter and demonstrated in Chapter 12. The Canadian system of integration is not perfect in this sense, but it does remove much of the effect of double taxation on investment income and some types of business income. The examination of this aspect will be continued in detail in the next chapter.
ITA: 55(2) ITA: 110.6, 245, 246
The second objective of these provisions is to prevent the avoidance of tax through the use of a corporation. In prior years, there was a considerable incentive to convert amounts that would normally be distributed to individual shareholders as dividends into amounts that resulted in capital gains. This was known as "dividend stripping" and many provisions were put in place to stop this practice. The incentive to convert dividends into capital gains was renewed with the introduction of the capital gains deduction which continues for shares of qualified small business corporations. Major anti-avoidance provisions are found in the Act. However, in making distributions to corporate shareholders, there has been an incentive to convert what might be taxed as a capital gain into a non-taxable intercorporate dividend. Hence, provisions to prevent such "capital gains stripping" have been implemented.
The third objective of these provisions is to provide tax incentives to certain types of corporations. The small business deduction, which will be discussed in the next chapter, is probably the most important of these. The small business deduction will be shown to substantially reduce tax for a Canadian-controlled private corporation. The manufacturing and processing profits deduction will be alluded to. Investment tax credits, including the credit for scientific research expenditures, will be discussed.
¶11,212 Types of Corporations
The Canadian corporate tax system draws a distinction among types of corporations. For the purpose of this text, we need to consider three types:
&toro; a private corporation;
&toro; a Canadian-controlled private corporation; y
&toro; a public corporation.
Certain tax preferences, such as the small business deduction, or tax accounts, such as the capital dividend account, apply to only certain types of corporations. Hence, the need to distinguish the types of corporations is important.
¶11,213 Private corporation
The Act defines a "private corporation" as one that is resident in Canada and not controlled by one or more public corporations (or a prescribed federal Crown corporation). A private corporation has certain tax preferences or considerations, as discussed in Chapter 12. such as a capital dividend account and a refundable dividend tax on hand account.
In public practice, much tax consulting work is done for private corporations, since they are more numerous than public corporations. Some types of private corporations enjoy the most favourable tax rates. Some tax credits are also more favourable for private corporations than for public corporations, such as the investment tax credit on scientific research and experimental development expenditures. Remember, private corporations include not only small and medium-sized companies; they include large-sized companies as well. There are numerous large private corporations operating in Canada—a prime example is McCain Foods, owned by the McCain family.
¶11,214 Canadian-controlled private corporation (CCPC)
A "CCPC" is defined as a private corporation that is a Canadian corporation that is not controlled, directly or indirectly, in any manner whatever, by one or more non-residents, by one or more public corporations, or by a combination of the two. Also, no class of its shares are listed on a designated stock exchange. Notice that the definition is negative. That is, there is no requirement that it be Canadian-controlled, it just cannot be controlled by non-residents or public corporations. Consequently, a Canadian private corporation that is controlled 50% by Canadian residents and 50% by non-residents is a CCPC.
One of the principal tax advantages of a CCPC is the small business deduction. From an individual's perspective, capital gains deduction eligibility is based on the corporation having CCPC status. Also, a CCPC and its shareholders enjoy the highest level of integration.
¶11,215 Public corporations
Public corporations are those resident in Canada and which have a class of shares listed on a "designated stock exchange" in Canada, as designated by the Minister of Finance. Public corporations do not enjoy any of the tax preferences available to private corporations. The tax system has become almost fully integrated at the public corporation level, as a result of the higher gross-up and the tax credit for eligible dividends.
¶11,216 Diagrammatic summary of types of corporations
The figure below shows the three basic types of corporations.
¶11,220 General Rates for Corporations
¶11,225 Overview of rates and credits
ITA: 123 ITA: 123.2–127 ITA: 123.4 ITA: 124 ITA: 125, 125.1 ITA: 126 ITA: 127
The general federal rate of tax to be paid on the taxable income of all corporations under Part I of the Act is 38%. However, the basic federal rate of 38% is subject to modification, depending on the type of corporation. The Act provides for a tax rate reduction for corporations. Another provision reduces the federal tax payable, in recognition of provincial income taxes, by an amount equal to 10% of the corporation's taxable income earned in a province or territory of Canada. Two other provisions reduce federal tax payable, for certain corporations, by means of the small business deduction and manufacturing and processing profits deduction, respectively. Foreign tax credits are available to reduce federal tax payable. Another provision exists for a number of tax credits, including the political contribution tax credit, the investment tax credit, and the apprenticeship job creation tax credit, which reduce the amount of federal tax payable.
¶11,235 Effect of provincial corporate tax rates
In addition to the federal taxes imposed, each province levies an additional income tax on a corporation's taxable income. Furthermore, the taxable income calculation may vary from province to province because of provincial taxing statutes. The provincial rate varies from province to province, but on the whole lies between 2.5% and 16%.
¶11,240 Effect of corporation type
As mentioned previously, the type and status of the corporation has a bearing on how its income is taxed. There are three major classifications of corporations to be concerned with. These are described in ¶11,212 to ¶11,216.
As a result of the combined federal and provincial rate and several of the modifications to that rate, the rates of tax applicable to Canadian corporations will vary from a low of about 22.0% to a high of about 35.5%, depending on the classification of the corporation and the type of income earned.
¶11,245 General rate reduction
The Act provides a corporation with a deduction from tax, computed by multiplying the corporation's "general rate reduction percentage" by its "full-rate taxable income". The "general rate reduction percentage" is 8.5% in 2008. The "full-rate taxable income" of a corporation, generally, is a corporation's taxable income that has not benefited from special rate reductions, such as the manufacturing and processing profits deduction (alluded to later in this chapter) and the small business deduction (discussed in Chapter 12 ), among others. The amount of the rate reduction is dependent on the nature of the corporation. Paragraph ( a ) of the definition of "full-rate taxable income" applies to corporations other than Canadian-controlled private corporations (CCPCs). For the purposes of this chapter, full-rate taxable income is the amount of the corporation's taxable income minus income, if any, eligible for the manufacturing and processing profits deduction. Examples of this calculation are presented later in this Chapter.
The general rate reduction will increase to 8.5% for 2008, 9.0% for 2009, 10.0% for 2010, 11.5% for 2011, and 13.0% for 2012 and later calendar years.
The following table shows the future federal corporate tax rates as currently proposed.
¶11,250 Abatement from Federal Tax for Income Earned in a Province
Part IV of the Regulations provides the prescribed method to determine the taxable income earned in a province by a corporation. The term "taxable income earned in the year in a province" by a corporation is defined as being the aggregate of the taxable incomes of the corporation earned in the year in each of the provinces. The Regulations also set out the method of calculating the taxable income earned in a particular province during the year. The taxable income earned in a particular province is that taxable income which is attributable to a permanent establishment that the corporation has in the province. If a company has no permanent establishment in a province, it will not have earned any taxable income in that province for the purposes of the abatement.
The term "permanent establishment" is defined as a fixed place of business of the corporation, including an office, a branch, a mine or oil well, a farm, a timber land, a factory, a workshop or a warehouse. Where the corporation does not have a fixed place of business, its permanent establishment is the principal place in which the corporation's business is carried out. A corporation is deemed to have a permanent establishment in a place, if the corporation carries on business through an employee or agent, established in a particular place:
(a) who has general authority to contract for his or her employer or principal; o
(b) who has a stock of merchandise owned by his or her employer or principal from which he or she regularly fills orders which he or she receives.
However, the fact that a corporation has business dealings through a commission agent, broker or other independent agent, or maintains an office solely for the purchase of merchandise, does not of itself mean that the corporation has a permanent establishment. The use of substantial machinery or equipment in a particular place at any time in a taxation year constitutes a permanent establishment in that place as does the ownership of land in a province by a corporation that, otherwise, has a permanent establishment in Canada. The CRA indicates that the application of the criteria for a permanent establishment set out in the Regulations will often involve questions of fact which must be answered by the circumstances of each case.
¶11,265 Cases on the meaning of permanent establishment
61 DTC 1222 (Ex. Ct.)
The case of M. N.R. v. Panther Oil and Grease Manufacturing Co. of Canada Ltd. presents a specific fact situation. Here the taxpayer had a factory in Ontario, but maintained a sizable sales force throughout Canada under the direction of district sales managers. These sales managers were under the direction of division managers, one of whom lived in Quebec. He had an office, not listed as the company's, in his home. The division and district managers kept a small quantity of the company's goods on hand for small orders when quick delivery was requested. However, most orders were filled from Ontario.
It was held that the extensive sales organization in Quebec, itself, constituted a branch in that province and district managers constituted "agencies" of the company. It was also found that the stock of merchandise from which small orders were filled qualified as a permanent establishment.
64 DTC 660 (T. A.B.)
In the case of Enterprise Foundry (N. B.) Ltd. v. M. N.R. . the appellant was incorporated in New Brunswick, but all of its sales were made to customers in Quebec. About 40% of its orders were filled from a stock of merchandise maintained in a public warehouse in Montreal. The taxpayer's key employee had the authority to deliver goods from the stock of merchandise and also had general authority to contract for his employer. It was held that there was a permanent establishment in Quebec.
The taxpayer corporation, whose head office was in Ontario, manufactured electrical appliances which it sold exclusively to wholesalers throughout the country. The company employed a sales representative and junior salesmen in the Province of Quebec. Orders received by the sales representative, who had no authority to accept them, were forwarded to head office and, if accepted there, the goods were shipped directly to the purchaser. During the years in question, the Quebec representative maintained an office in his home at his own expense. There was no agreement with the company to set up the office, but he found it convenient to do so. The company supplied him with company stationery and literature, price sheets, catalogues, sales promotional material and inter-office memoranda. He was also supplied with substantial quantities of samples of the company's products the value of which varied from $4,700 to $11,000 to be used in demonstrations and in promoting sales. The telephone directory did not list the representative's residence as the company's place of business and there was no business sign of any type on the premises. The office was used for taking orders and for training junior salesmen.
During six months of one year, the company maintained a stock of appliances valued at about $120,000 in rented warehouse space in Montreal and filled Quebec orders from this stock. The company had no employees at that warehouse; the handling of goods there was carried out by the warehouse personnel. The company had no control over any part of the warehouse and the public had no knowledge of the company's goods being stored there.
Determine whether or not the company has a "permanent establishment" in the Province of Quebec by reference to Regulation 400(2).
[Reference: M. N.R. v. Sunbeam Corporation (Canada) Ltd. . 61 DTC 1063 (Ex. Ct.).]
¶11,300 Tax Deductions/Credits
—NOTES TO SOLUTION
(1) If the Canadian income tax effects on foreign investment income could be isolated, as in the case where the corporation's only source of income was foreign non-business income (other than from real property), such as interest income, it would be considered to be earned in the province of which the taxpayer is a resident and, therefore, would be eligible for the federal tax abatement. As a result, it is the tax otherwise payable (B) after the abatement on which the non-business income tax deduction is based. On the other hand, foreign business income is assumed to be earned in a permanent establishment in the foreign country and, therefore, is not eligible for the federal tax abatement. Thus, the tax otherwise payable (C) before the abatement is the relevant base for the business income tax deduction.
(2) Note how these credits against Canadian tax do not exceed foreign tax paid on the foreign income. These reductions of Canadian tax are also restricted to the estimated amount of Canadian tax paid on the foreign income.
Example Problem 2
Reconsider the facts in Example Problem 1 with the additional information that income for tax purposes of $472,000 includes manufacturing and processing profits of $296,471 (MP, as determined by the Regulations) that will earn a tax deduction of $25,200 at 8.5% of MP. Assume that the foreign tax credits remain the same.
Calculate total tax payable under Part I using a 11% provincial rate of tax applied to federal taxable income earned in a province.
—NOTES TO SOLUTION
¶11,800 REVIEW QUESTIONS
¶11,825 MULTIPLE CHOICE QUESTIONS
¶11,850 EXERCISES
All of the voting shares of Loser Limited, a manufacturer of widgets, have been acquired by Holdco Ltd. an investment holding company. At the time of the acquisition on March 10, 2008, Loser Limited had non-capital business losses of $600,000 generated in 2007. Loser Limited also had $30,000 of net capital losses carried forward from 1999. As well, at the time of the acquisition, it was discovered that the balance of undepreciated capital cost in its Class 8 was $70,000 while the fair market value of the assets in that class was only $40,000. The balance in its cumulative eligible capital account (being from the acquisition on August 31, 2007, of an exclusive customer list) was $50,000 while the fair market value of the customer list was $68,000. The corporation's inventory had a cost of $630,000, while its market value was $680,000. The book value of the corporation's receivables was $240,000, while its realizable value was estimated at $225,000. The corporation's only non-depreciable capital property, land, had accrued gains of $56,000 over its cost of $200,000. Loser Limited has a December 31 year-end.
The corporation had business losses of $3,000 from January 1 to March 9, 2008.
The holding company will inject added capital and augment the management of Loser Limited in an attempt to turn Loser's widget manufacturing business around.
(A) What are the tax implications of the acquisition of the shares of Loser Limited by Holdco Ltd. assuming the maximum election under paragraph 111(4)( e ) is made?
(B) Determine the minimum amount of elected proceeds under paragraph 111(4)( e ) to offset expiring losses, if the accrued gains on the land were $100,000 instead of the $56,000 and Loser Limited had an additional loss arising from property of $10,000.
Reconsider the example problem of Frenzied Taxpayers Limited in this chapter in ¶11,160. If $7,900 less capital cost allowance had been taken in 2007, all $23,000 of the inter-company dividends could have been deducted, pursuant to section 112, in 2007.
Re-calculate the taxable income of the corporation for the years indicated after taking $7,900 less in capital cost allowance for Class 8 in 2007. Comment on whether the corporation is in a better tax position at the end of 2008 with respect to capital cost allowance and taxable income under this alternative.
Puttingitall Together Limited, a Canadian corporation, had its net income under Division B computed as follows for the year ending December 31:
During the year the corporation made charitable donations of $80,000. Its carryforward position from the previous year was as follows:
Compute the corporation's taxable income for the current year.
Exporter Limited is a Canadian public company carrying on a part of its business through an unincorporated branch in Japan. Its income from that business in Japan for the current taxation year ended December 31 was 77,575,723 yen. The corporation paid income tax instalments on that income during the year of 31,006,289 yen. During the year the exchange rate was 1 yen = .009793 Canadian dollars.
During its current taxation year ended December 31, Exporter's income under Division B was $2,500,000 excluding the income from Japan. During the year, the corporation received dividends of $100,000 from taxable Canadian corporations. This amount was included in the computation of Division B income. The corporation was also able to deduct $25,000 of its net capital losses carried forward. There was no foreign investment income during the year.
Compute the corporation's foreign business tax credit for the year.
Maxprof Limited is a Canadian public company with the following income under Division B for its taxation year ended December 31, 2008:
During the year the company made donations of $69,000 to registered charities and $5,750 to federal political parties. It was carrying forward non-capital losses of $127,600. It is considered to earn 86% of its taxable income in Canada, as computed by the Regulation.
Compute the federal Part I tax payable for the year.
¶11,875 ASSIGNMENT PROBLEMS
The following data summarize the operations of Red Pocket Limited for the years of 2005 to 2008 ended September 30.
The corporation has a net capital loss balance of $13,500 which arose in 1999.
Compute the taxable income for Red Pocket Limited for the years indicated and show the amounts that are available for carryforward to 2009. (Deal with each item line-by-line across the years, rather than computing income one year at a time.)
On November 1, 2008, Chris purchased all the issued shares of Transtek Inc. from an acquaintance, Tom. Transtek carries on a transmission repair business and has done so since its incorporation on January 1, 2007. In addition to the transmission repair business, Transtek rents out a small building it owns. Neither the transmission repair business nor the rental endeavour has been successful.
When Chris purchased Transtek, his financial projections indicated that Transtek would have significant income within two years. Chris credited Transtek's failure to Tom's brash personality and laziness. Chris, on the other hand, has a strong work ethic and has many contacts in the automotive industry to refer work to him.
The values of the capital assets owned by Transtek at the time of purchase by Chris are as follows:
Chris selected June 30, 2009, as the first fiscal year-end for Transtek after his purchase. The following is a schedule of Transtek's income (and losses) from its inception, January 1, 2007, through June 30, 2010.
(A) Discuss the tax implications of the acquisition of Transtek Inc. on November 1, 2008, ignoring all possible elections/options.
(B) Determine the tax consequences of the acquisition of Transtek Inc. under the assumption that:
(i) the maximum amount of all elections/options is utilized; y
(ii) the partial amount of all elections/options is utilized so that only enough income is generated to offset most or all of the losses which would otherwise expire on the acquisition of control.
In 2006, a chain of bakeries, called Buscat Ltd. commenced operation. The industry is highly competitive and because of Mr. Buscat's lack of marketing skills, the corporation incurred losses in the first three taxation years of operations as follows:
On July 1, 2009, Mr. Buscat decided to sell 75% of his common shares to Mr. Bran, owner of Buns Plus Ltd. Mr. Bran has been in the business of supplying bread dough, pastry dough and bun bags for 10 years and has been very successful. Buns Plus Ltd. has two divisions: a bakery and a coffee shop, which it intends to transfer to Buscat Ltd.
The following income tax data relates to Buscat Limited's operations from January 1, 2009 to June 30, 2009:
During the later part of the 2009 calendar year, the bakery/coffee shop of Buns Plus Ltd. was transferred to Buscat Ltd. For the six-month period ending on December 31, 2009, Buscat Limited had net income of $90,000 from all its businesses.
The net income earned was as follows:
In the 2010 taxation year, Buscat Ltd. expects to earn $250,000, of which $65,000 will be from the original Buscat bakery business and $20,000 from the coffee shop business.
Prepare an analysis of the income tax implications of the acquisition of shares. In your analysis, consider the two election options from which an election choice is most likely to be made.
The controller of Video Madness Inc. has prepared the accounting income statement for the year ended April 30, 2008: Video Madness Inc. Income Statement For the Year Ended April 30, 2008
Prepare a schedule reconciling the accounting net income to income for tax purposes and taxable income. Indicate the appropriate statutory reference for your inclusions or exclusions.
The taxpayer, whose head office was in Manitoba, manufactured and sold various fans. Local sales agencies were maintained in Ontario and in Quebec. At the Ontario agency, two qualified representatives handled business under the company name. They were authorized to sign quotations. Contracts could be made, terms of payment arranged and credit given without reference to the head office in Winnipeg. The company name was displayed for public visibility, was used on calling cards, and was listed in the telephone directory. The Ontario agency, occupying one-half of a building with warehouse facilities, maintained an inventory worth about $6,000. Orders for standard-sized fans were filled from stock-in-trade. Orders for large fans were filled from the head office in Winnipeg. The Quebec agency was substantially similar to that in Ontario.
61 DTC 1063 (Ex. Ct.)
Determine whether or not the company has a "permanent establishment" in the provinces of Ontario and Quebec. In reaching a conclusion, compare this situation with the case of M. N.R. v. Sunbeam discussed in this chapter.
Barltrop Limited is a Canadian public company involved in the software consulting business. Its controller provided you with the following information related to its 2008 taxation year ended December 31:
Barltrop Limited has permanent establishments in the U. S. B. C. and Alberta. Its gross revenues and salaries and wages data have been allocated as follows:
Assume that the British Columbia corporation tax rate is 12% and the Alberta rate is 10%. Also, assume that taxable income for Alberta is computed on the same basis as federal taxable income.
Gross revenues exclude income from property not used in connection with the principal business operation of the corporation.
Compute the total tax payable by the company for the 2008 taxation year, including provincial tax. Show all calculations.
Infotech is a public company in its first year of business in the information technology industry. It operates out of a plant in Ottawa, Ontario. In 2008, it incurred $2,200,000 of scientific research and experimental development expenditures (SR&ED) which qualify for deduction under subsection 37(1) of the Act. The breakdown of these expenses is as follows:
Infotech's federal income tax rate after abatement is 19.5%. Its taxable income before deducting the $2,200,000 claim under section 37 is $3,200,000.
(A) Compute the maximum investment tax credit available to Infotech in 2008.
(B) Compute the company's net federal Part I tax payable after the investment tax credit, assuming a maximum section 37 deduction is claimed.
(C) What is the amount, if any, of the investment tax credit carryover?
(D) Compute the company's deduction or income inclusion in the following year if no further SR&ED expenditures are made.
Up, Up and Away Limited is a public corporation that manufactures hot air balloons in the province of New Brunswick. For the year ended September 30, 2008, its accounting income statement was as follows:
Selected Additional Information
Calculate the total taxes payable for 2008 using a 13% provincial rate of tax.
Tecniquip Limited is a public corporation whose head office is located in Toronto, Ontario. The activities of the corporation are carried on through permanent establishments in the provinces of Ontario and Alberta, and in the United States.
The following is an allocation of selected items for the fiscal year ended December 31, 2008.
In computing income from manufacturing, the corporation claimed a deduction of $150,000 under subsection 37(1) of the Act for scientific research and experimental development (SR&ED). $100,000 of the deduction related to expenditures of a current nature and $50,000 was the cost of equipment purchased during the year for use by it in scientific research and experimental development carried on in Canada. No SR&ED expenditures are expected to be made in 2009.
During the year, the corporation made charitable donations totalling $50,000 and claimed non-capital losses of $60,000 and the net capital losses carried forward from 1999 of $9,000.
The M&P profits tax deduction has been correctly computed as $67,529 on MP of $794,459.
Compute the federal Part I tax payable and provincial tax at 12% for Ontario and 10% for Alberta, assuming that taxable income allocated to those provinces is the appropriate provincial tax base. Show all calculations, whether or not necessary to your final answer.
¶11,880 Advisory Case
King Enterprises Inc.
Ian King has operated a successful office supply wholesaling business, King Enterprises Inc. for many years. Last week, he called to tell you that he is interested in putting an offer in on the shares of a company that is in some financial difficulty, Royal Forms Inc. ("Royal").
Royal is in the business of producing custom, as well as standard, forms for business use. In fact, Royal is a supplier of King Enterprises. This company has been in business for the past eight years, but has been losing money for the past six years. Last year they sold the land and building they used in their operations in a depressed real estate market, in order to get some cash. Their big problem seems to be that they are undercapitalized.
Ian sees this purchase as a real opportunity for him to pick up a company at a bargain price, turn it around to profitability and, at the same time, reduce King Enterprises' tax liability with the losses. He would like you to prepare a report for him on the tax issues before he decides whether to make an offer.
26 U. S. Code § 246A - Dividends received deduction reduced where portfolio stock is debt financed
Dividends received deduction reduced where portfolio stock is debt financed
(a) General rule In the case of any dividend on debt-financed portfolio stock, there shall be substituted for the percentage which (but for this subsection) would be used in determining the amount of the deduction allowable under section 243 or 245(a) a percentage equal to the product of —
70 percent (80 percent in the case of any dividend from a 20-percent owned corporation as defined in section 243(c)(2)), and
100 percent minus the average indebtedness percentage.
(b) Section not to apply to dividends for which 100 percent dividends received deduction allowable Subsection (a) shall not apply to —
qualifying dividends (as defined in section 243(b) without regard to section 243(d)(4)),[1] and
dividends received by a small business investment company operating under the Small Business Investment Act of 1958.
(c) Debt financed portfolio stock For purposes of this section —
The term “debt financed portfolio stock” means any portfolio stock if at some time during the base period there is portfolio indebtedness with respect to such stock.
(2) Portfolio stock The term “portfolio stock” means any stock of a corporation unless —
(A) as of the beginning of the ex-dividend date, the taxpayer owns stock of such corporation —
possessing at least 50 percent of the total voting power of the stock of such corporation, and
having a value equal to at least 50 percent of the total value of the stock of such corporation, or
(B) as of the beginning of the ex-dividend date —
the taxpayer owns stock of such corporation which would meet the requirements of subparagraph (A) if “20 percent” were substituted for “50 percent” each place it appears in such subparagraph, and
stock meeting the requirements of subparagraph (A) is owned by 5 or fewer corporate shareholders.
(3) Special rule for stock in a bank or bank holding company
If, as of the beginning of the ex-dividend date, the taxpayer owns stock of any bank or bank holding company having a value equal to at least 80 percent of the total value of the stock of such bank or bank holding company, for purposes of paragraph (2)(A)(i), the taxpayer shall be treated as owning any stock of such bank or bank holding company which the taxpayer has an option to acquire.
(B) Definitions For purposes of subparagraph (A)—
The term “bank” has the meaning given such term by section 581.
(ii) Bank holding company
The term “bank holding company” means a bank holding company (within the meaning of section 2(a) of the Bank Holding Company Act of 1956).
(4) Treatment of certain preferred stock
For purposes of determining whether the requirements of subparagraph (A) or (B) of paragraph (2) or of subparagraph (A) of paragraph (3) are met, stock described in section 1504(a)(4) shall not be taken into account.
(d) Average indebtedness percentage For purposes of this section —
(1) In general Except as provided in paragraph (2), the term “average indebtedness percentage” means the percentage obtained by dividing —
the average amount (determined under regulations prescribed by the Secretary) of the portfolio indebtedness with respect to the stock during the base period, by
the average amount (determined under regulations prescribed by the Secretary) of the adjusted basis of the stock during the base period.
(2) Special rule where stock not held throughout base period
In the case of any stock which was not held by the taxpayer throughout the base period, paragraph (1) shall be applied as if the base period consisted only of that portion of the base period during which the stock was held by the taxpayer.
(3) Portfolio indebtedness
The term “portfolio indebtedness” means any indebtedness directly attributable to investment in the portfolio stock.
(B) Certain amounts received from short sale treated as indebtedness
For purposes of subparagraph (A), any amount received from a short sale shall be treated as indebtedness for the period beginning on the day on which such amount is received and ending on the day the short sale is closed.
(4) Base period The term “base period” means, with respect to any dividend, the shorter of —
the period beginning on the ex-dividend date for the most recent previous dividend on the stock and ending on the day before the ex-dividend date for the dividend involved, or
the 1-year period ending on the day before the ex-dividend date for the dividend involved.
(e) Reduction in dividends received deduction not to exceed allocable interest
Under regulations prescribed by the Secretary, any reduction under this section in the amount allowable as a deduction under section 243 or 245 with respect to any dividend shall not exceed the amount of any interest deduction (including any deductible short sale expense) allocable to such dividend.
The regulations prescribed for purposes of this section under section 7701(f) shall include regulations providing for the disallowance of interest deductions or other appropriate treatment (in lieu of reducing the dividend received deduction) where the obligor of the indebtedness is a person other than the person receiving the dividend.
[1] See References in Text note below.
References in Text
The Small Business Investment Act of 1958, referred to in subsec. (b)(2), is Pub. L. 85–699. Aug. 21, 1958. 72 Stat. 689. as amended, which is classified principally to chapter 14B (§ 661 et seq.) of Title 15, Commerce and Trade. For complete classification of this Act to the Code, see Short Title note set out under section 661 of Title 15 and Tables.
Section 2(a) of the Bank Holding Company Act of 1956, referred to in subsec. (c)(3)(B)(ii), is classified to section 1841(a) of Title 12. Banks and Banking.
2017—Subsecs. (a), (e). Pub. L. 113–295 struck out “, 244,” after “section 243”.
2004—Subsec. (b)(1). Pub. L. 108–311 substituted “section 243(d)(4)” for “section 243(c)(4)”.
1988—Subsec. (a). Pub. L. 100–647 struck out at end “The preceding sentence shall be applied before any determination of a ratio under paragraph (1) or (2) of section 245(a).”
1987—Subsec. (a)(1). Pub. L. 100–203 substituted “70 percent (80 percent in the case of any dividend from a 20-percent owned corporation as defined in section 243(c)(2))” for “80 percent”.
1986—Subsec. (a). Pub. L. 99–514, § 1804(a). substituted “or 245(a)” for “or 245” and inserted “The preceding sentence shall be applied before any determination of a ratio under paragraph (1) or (2) of section 245(a).”
Subsec. (a)(1). Pub. L. 99–514, § 611(a)(4). substituted “80 percent” for “85 percent”.
Effective Date of 2017 Amendment
Amendment by Pub. L. 113–295 not applicable to preferred stock issued before Oct. 1, 1942 (determined in the same manner as under section 247 of this title as in effect before its repeal by Pub. L. 113–295 ), see section 221(a)(41)(K) of Pub. L. 113–295. set out as a note under section 172 of this title .
Effective Date of 1988 Amendment
Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514. to which such amendment relates, see section 1019(a) of Pub. L. 100–647. set out as a note under section 1 of this title .
Effective Date of 1987 Amendment
Amendment by Pub. L. 100–203 applicable to dividends received or accrued after Dec. 31, 1987. in taxable years ending after such date, see section 10221(e)(1) of Pub. L. 100–203. set out as a note under section 243 of this title .
Effective Date of 1986 Amendment
Amendment by section 611(a)(4) of Pub. L. 99–514 applicable to dividends received or accrued after Dec. 31, 1986. in taxable years ending after such date, see section 611(b) of Pub. L. 99–514. set out as a note under section 246 of this title .
Amendment by section 1804(a) of Pub. L. 99–514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A. to which such amendment relates, see section 1881 of Pub. L. 99–514. set out as a note under section 48 of this title .
“The amendments made by this section [enacting this section] shall apply with respect to stock the holding period for which begins after the date of the enactment of this Act [ July 18, 1984 ] in taxable years ending after such date.”
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989. see section 1140 of Pub. L. 99–514. as amended, set out as a note under section 401 of this title .
Tax Deduction for Worthless Securities
If you're like many investors, you've lost money on some of your investments. It's not a hopeless situation, though. You may be able to recoup or recover some of your losses by taking a tax deduction for worthless securities.
Like many things in the tax code, though, there are special rules and restrictions on the deduction.
Valores
Stocks, including stock options
Bonds
Notes, papers, or "debt instruments" for debts owed by a corporation or government
Securities don't include stocks or debt instruments that aren't offered to the public for purchase or sale, or those issued by individuals.
Securities Must Be Worthless
To qualify for the deduction, your securities must be completely worthless - worth $0. A drop in the market value of your stock or securities, even if it's big, doesn't qualify for the deduction because your stock still has value.
You have to show your securities are worthless, and that's not always easy to do. Generally, though, you have to show:
The corporation that issued the securities has no value at the time you claim the deduction
There's no reasonable expectation the corporation will have any value in the future
Some "identifiable event" happened during the year in which the corporation became worthless that caused, established, or at least evidenced the worthlessness. An "event" can be many things, like bankruptcy or theft of all of the corporate assets
Again, if there's any chance the securities could have value, they're not worthless. For example, if ABC Company files Chapter 11 bankruptcy, your stock may still have value during or even after the bankruptcy.
Under rules that went into effect in 2008, worthless securities also include those you abandoned after March 12, 2008. To "abandon" a security, you have to give up all rights in the security and you can't take anything in exchange for it, like money or other stock. So, the new rules may make it easier for you to claim the deduction even when the stock isn't completely worthless.
Determining if your securities are worthless can be complicated. Talk to your tax lawyer or financial advisor to make certain that you're claiming the deduction at the right time.
Taking the Deduction
Most individuals hold securities as capital assets meaning they're held as investments - to make money. When you sell capital assets, you have capital gains and capital losses. which get special tax treatment. This can be complicated, but in general:
Capital gains and losses are either long-term . meaning that you held the asset for at least one year and one day before you sold it; or short-term . where you held it for less than one year
Capital losses are used first to offset capital gains of the same kind, so long-term losses off-set long-term gains. If you don't have any capital gains, or if your capital losses are more than capital gains, you can deduct the capital loss against your other income, up to $3,000 in any tax year. If your overall capital loss is more than $3,000, the excess carries over to the next year
Long-term gains get taxed at a much lower rate (usually 0 to 15 percent for most taxpayers) than ordinary income, such as your salary, which can be as high as 35 percent. Short-term gains are taxed at your highest tax rate, just like your salary, up to 35 percent
You report worthless securities as a capital loss on Schedule D of your Form 1040. The amount of your deduction is your basis in the worthless securities. Generally, your basis is the purchase price of the securities, plus any brokerage fees. For purposes of the deduction, you're considered to have sold the worthless security at a loss on the last day of the year in which it becomes worthless.
For example: On June 1, 2009 you bought 1,000 shares of ABC Corp. for $10,050 ($10 per share, plus $50 brokerage commission). In March 2008, you can verify that the stock is worthless. Also in 2009, you sell 1,000 shares of XYZ Corp. for a long-term capital gain of $5,000. On your 2010 return, you can:
Treat the worthless ABC stock as a long-term capital loss because, even though you held for it for less than one year at the time it became worthless, it's treated as a sale at a loss on December 31, 2009, and so the one-year-and-one-day rule is satisfied
Reduce your long-term capital gain on the XYZ stock to $0 by applying the loss from the ABC stock. This will lower your amount of taxable income, and so it will lower the amount of taxes you may owe for 2010
Carryover the remainder of the ABC worthless stock loss to 2009 ($10,050 - $5,000 = $5,050), which you can use as a long-term capital loss to offset your 2011 capital gains, if you have any
Did You Miss a Deduction?
Mainly because of the difficulty in establishing when exactly a security becomes worthless, you're given a chance to recover your loss if you don't claim the deduction in the year your securities become worthless.
You can file a claim for a credit or refund due to the loss by filing an amended tax return for the year the security became worthless. You have to file it within seven years from the date your original return for that year had to be filed, or two years from the date you paid the tax, whichever is later.
Questions for Your Attorney
About a year ago I bought some stock when it was $25 per share. Today, it's worth $1.35 per share. For tax purposes, is it better for me to sell now and take a capital loss, or should I wait and see if the stock becomes completely worthless?
Can I claim a deduction for worthless securities in my 401(k)?
What can happen if the IRS doesn't agree that my stock is worthless?
How to Divide Stock Options in a Divorce in Ontario
Divorce is a time of emotional upheaval. It can be difficult to think clearly about all the legal things that need to be done when you are so upset. However, there are a great deal of things to consider when going through a divorce. One of those things is how to divide stock options.
What Are Stock Options?
Stock options are given to employees at a company. They give these workers the right to buy a certain number of shares in the company at a set price.
To Whom Do They Belong?
When you’re going through a divorce in Ontario, stock options that have been granted but haven’t been exercised yet are considered the property of both spouses. That means that in a divorce, they’re divided.
How is Property Divided?
The general rule is that the value of any property you acquired over the course of your marriage and that you still own at the time of your divorce must be split equally between the two spouses. Because stock options are considered property of both spouses (even though only one spouse received them), their value is divided evenly between the two parties.
How Is the Value of Stock Options Determined?
There are two ways to determine the value of stock options that haven’t been exercised yet. The first is the valuation method. That means that an actuary assigns a value to the stock options. Then, they’re included in the sum of the family property. How does the actuary assign a value? He or she uses a complicated mathematical formula.
The second method is called “if and when.” In this situation, the stock options aren’t assigned a value; rather, each spouse owns a certain percentage of the stock options. When the stock options are exercised, each owner receives their share of the profits, and they don’t need to share them.
Ontario’s court systems seem to favour the valuation method, because it is in keeping with provincial family law.
Things to Know about Stock Option Valuations
Because you’ll most likely wind up getting a stock option valuation if you’re undergoing a divorce in Ontario, there are a few things of which you should be aware.
Vesting restrictions prevent an employee from exercising stock options until certain conditions are met (such as he or she might not be able to exercise the options for a number of years, or that he or she has to meet specific performance requirements).
When the stock options are exercised, you’ll have to pay income tax on them. The actuary will take this into account when he or she values the stock options and adjust their value accordingly.
The actuary will also look at the exercise date of the stock options. All stock options have an expiration date, and that’s when the stock is at its highest value. If you cash in your stock options before the expiration date, they’ll be worth less.
If you’re going through a divorce, its important to have a divorce lawyer by your side. At Haber & Associates, we can help you get through this trying time. Contact us today for more details.
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June 2010 - view full issue
Canadian Tax Changes for Employee Stock Options
The Canadian federal budget (the "Budget"), announced and effective March 4, 2010, introduced some notable changes to the tax ramifications of employee stock options.
Employees that acquire shares of their employer pursuant to an employee stock option agreement (or a tandem stock appreciation right, settled in shares) are required to include as income the difference between the value of the security at the time the option is exercised and the amount actually paid by the employee on the exercise of the option as a taxable employment benefit. This continues to be the case. The changes made relate largely to the timing of the inclusion and the availability of a tax deduction, meant to reduce the value of the taxable benefit (in some cases) to mirror capital gains treatment.
Under the pre-existing regime, employees of publicly traded companies were entitled to defer recognition of the taxable benefit until the time at which the shares were sold where certain conditions were met. Under the Budget rules, this deferral would no longer be available in respect of options of publicly traded companies that are exercised after March 4, 2010. This change does not affect the deferral that is available for options in respect of Canadian-controlled private corporations.
That said, individual taxpayers who have previously elected to defer taxation of their stock option benefits until the year of disposition are able to take advantage of a special election which, broadly, limits their tax liability to the proceeds of disposition in respect of the optioned shares. This relief, which is meant to assist taxpayers that hold shares that are now worth less than their tax liability in respect of those shares, is available to employees who exercised their options before 2010, provided the election is filed before the tax filing deadline for 2010.
The federal budget also clarifies that the disposition of rights under an option agreement to a non-arm's length party results in a taxable employee benefit at the time of disposition. This is meant to serve as a clarification of the existing law.
Stock appreciation rights ("SARs") entitle an employee to elect to receive either shares in the employer or a cash payment. Under the pre-existing SAR regime, employees that elected to receive a cash payment were entitled to a deduction equal to 50% of the taxable benefit, while the employer was entitled to deduct the cost of the cash payment to the employee. Under the proposed rules, it will no longer be permissible for both the employer and the employees to obtain deductions in respect of the cash payment. Instead, in order for employees to deduct 50% of the taxable benefit, the employer will be required to file an election agreeing to forego the tax deduction that would otherwise be available to the employer in respect of the cash payment.
The federal budget further clarifies the rules in respect of withholding by an employer, requiring the employer to withhold at the source in respect of all stock option benefits granted in or after January 1, 2011, except where otherwise provided.
Claiming Foreign Taxes: Credit or Deduction?
Key Points
If you own foreign investments, you're probably paying foreign tax.
You can avoid double taxation by claiming either an itemized deduction or a tax credit on your income taxes.
You may be required to report foreign accounts to the IRS.
If you own foreign investments—either directly via a stock or bond, or indirectly through an exchange-traded fund or mutual fund—the issuing foreign country may withhold taxes on your investment income.
Fortunately, U. S. tax law prevents double taxation by allowing you to claim either an itemized deduction for foreign taxes paid (or accrued), or a foreign tax credit on your U. S. income tax return.
Tip: Find out if you paid foreign tax
Take a look at Form 1099-DIV. Annual foreign taxes paid should be listed in Box 6.
Itemized deduction or tax credit?
Generally, you must choose to take either a credit or a deduction for all your qualified foreign taxes. For those who itemize deductions on Schedule A of Form 1040, taking a deduction for foreign taxes paid is the easiest way to go.
However, an itemized deduction only reduces your taxable income, whereas an income tax credit can provide a dollar-for-dollar reduction of your actual tax liability.
For example, if you're in the 33% income tax bracket, a $200 deduction would only reduce your taxes by $66 (assuming full deductibility), whereas a tax credit would provide a $200 reduction in tax liability (if you are eligible for the entire credit).
Taking a tax credit seems like the obvious choice, right? Unfortunately, the foreign tax credit has limitations and requires you to fill out Form 1116, which can be complex (more on this below).
Claiming a credit
The amount of foreign tax credit you're allowed to claim is limited to the lesser of the amount of foreign tax paid or the U. S. tax liability on the same income.
If your U. S. tax liability were the same or higher than the foreign tax paid, you would be eligible to claim the full credit. In other words, you avoid double-taxation but always end up paying tax at the highest tax rate.
If you paid more foreign tax during the current year than you can claim as a credit, you can carry back the excess for one year (that is, file an amended return for the previous tax year) or forward the excess for 10 more years. The ability to carry back or carry forward any unused tax credit only applies if you file Form 1116, and is restricted by the amount of excess limit available in those carryback or carryforward years.
For example, if you pay $350 in foreign tax but only owe $250 in U. S. tax on the same amount, you would have $100 in unused foreign tax that you could carry forward or carry back. However, in order to apply that amount to future tax years (or the previous tax year), you need to have excess to use in those tax years.
IF foreign tax paid in current year =
AND current year U. S. tax due =
THEN potential carryback to prior year or forward =
In the hypothetical example below, you could either carryback or carryforward that $100 because both years have an excess limit of at least $100.
Even if you're limited in the amount of credit you can claim, you're probably better off taking the credit rather than claiming an itemized deduction in most cases. One problem with taking the credit, however, is that Form 1116 is complex and can take a lot of work to complete.
Even when using tax-preparation software or a professional preparer, you still have to figure out how much foreign tax was paid to each separate country. In the case of mutual funds, this information is generally provided by the fund annually but the IRS will allow you to aggregate foreign sourced income for mutual funds on Form 1116 (see links to Form 1116 Instuctions and IRS Publication 514 below).
You'll also need to figure your carrybacks or carryforwards separately for each limit income category. The passive income category, which includes dividends and interest income, is one of five income categories.
Fortunately, if you pay $300 or less in foreign taxes for the year ($600 for married filing jointly), you can claim the credit without having to fill out Form 1116, though additional eligibility rules apply.
For example, all of your foreign income must be passive income and reported to you on a payee statement such as Form 1099-DIV or Form 1099-INT. See the Form 1116 Instructions and IRS Publication 514 for more detailed information.
Deferred accounts
Since you don't pay current taxes on investment income in your IRA or 401(k), there's no deduction or credit currently available for foreign taxes paid on investments held in these accounts.
Think of it as a timing issue: The amount you pay in foreign taxes today reduces your retirement assets, and therefore reduces the amount of tax the IRS is able to collect when you start making withdrawals.
A Roth account is another story since qualified withdrawals are tax-free in the United States. In the case of a Roth, you're just out the money. However, it could still make sense to hold foreign investments in tax-advantaged retirement accounts. There are many other factors to consider apart from what might be a relatively immaterial amount of foreign tax.
Get the facts on FATCA
In an ongoing effort by the federal government to prevent illegal activities through the use of offshore accounts and trusts, FATCA (Foreign Account Tax Compliance Act) is designed to enhance existing U. S. law surrounding the reporting and withholding requirements connected to foreign accounts. Foreign account and asset ownership reporting is a complex area with significant penalties for failure to comply. If you hold a title, directly or indirectly, to a foreign financial account or trust you should consult your own tax professional for questions about individual compliance matters.
FATCA is closely related to the FBAR (Report of Foreign Bank and Financial Accounts). For more information on both, here are some IRS resources that you might find helpful:
Take charge of your taxes
No matter how you choose to handle your foreign taxes, just be sure to claim something. Otherwise, you could end up paying more than you should.
I hope this enhanced your understanding of taxes. I welcome your feedback—clicking on the thumbs up or thumbs down icons at the bottom of the page will allow you to contribute your thoughts. (If you are logged into Schwab. com, you can include comments in the Editor’s Feedback box.)
Income in Respect of a Decedent (Portfolio 862)
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This Portfolio is part of the Estates, Gifts & Trusts Portfolio Library, a comprehensive resource including nearly 100 estate tax Portfolios, practice tools, primary sources and timely news.
DESCRIPTION
Tax Management Portfolio, Income in Respect of a Decedent, No. 862-3rd, discusses the scheme for taxing “income in respect of a decedent” (IRD). The IRD scheme is intended to eliminate, as much as possible, the consequences of death on the operation of the income tax laws. It accomplishes this goal largely by preventing the basis step-up rule from operating on a decedent's receivables in situations where income tax forgiveness would be inappropriate. IRD has been defined as the amounts to which the decedent was entitled as gross income. IRD generally is taxed to the decedent's estate or to the beneficiary acquiring the right to receive the amount. One of the most difficult questions in the area of IRD is determining which receivables are subject to IRD treatment. This Portfolio, which has a detailed discussion on receivables, is helpful in answering this question. This Portfolio also contains a detailed discussion and analysis of the federal estate and income tax computations that arise in connection with items of IRD. Specific analysis is provided on the following areas: determining the taxable recipient and the time, character, and amount of taxable IRD; deductions in respect of a decedent; the income tax deduction for federal estate tax; and planning techniques. This Portfolio may be cited as Acker, 862-3rd T. M. Income in Respect of a Decedent.
AUTHORS
ALAN S. ACKER
Alan S. Acker, University of Illinois (B. S. 1974), Illinois Institute of Technology – Chicago Kent School of Law (J. D. 1977); member of Ohio, Illinois and Virginia Bars; adjunct professor of law at Capital University Law and Graduate Center, Columbus, Ohio, 1992–present; DePaul College of Law, Chicago, Illinois, 1984–1985; member of American, Ohio, Illinois, and Columbus Bar Associations; member of American Institute of Certified Public Accountants, and Ohio CPA Society; Fellow of American College of Trusts and Estates Counsel; contributor to Journal of Taxation, Taxation for Lawyers, Review of Taxation of Individuals and other legal publications; lecturer at various tax seminars.
TABLE OF CONTENTS
Compensation deduction from NQSO exercise.
The IRS, in Rev. Rul. 2003-98, provided guidance on which taxpayer, among several parties in a purchase or merger, can deduct employees' exercise of target nonqualified stock options (NQSOs). The ruling generally holds that the target can take the deduction in the situations described below.
Example 1: In year 1, X began employment with T Corp. and was granted NQSOs to purchase T's common stock. The NQSOs have no readily ascertainable fair market value (FMV) at grant and are not exercisable until January 1 of year 4. On November 15 of year 4, A Corp. acquired all of T's outstanding shares for cash, but did not make a Sec. 338(g) election. T thereafter conducts its business as A's wholly owned subsidiary. Both corporation are accrual-basis taxpayers with a tax year ending September 30.
On the acquisition date, X surrendered his TNQSOs to A for A NQSOs with no readily ascertainable FMV. On January 15 of year 5, while employed by T, X exercises his A NQSOs and receives substantially vested A stock.
Example 2: The Facts are the same as in Example 1, except that, on January 15 of year 5, under an agreement, A cancels the NQSOs for a payment (in cash or shares) to X.
Example 3: The facts are the same as in Example 1, except that, instead of exchanging T NQSOs for A shares on the acquisition date, the T NQSOs remain in effect. On January 15 of year 5, under an agreement, A cancels the T NQSOs and pays X (in cash or value-equivalent substantially vested A shares) the excess of the FMV of the stock subject to the NQSOs over their exercise price.
Example 4: The facts are the same as in Example 1, except that on November 4 of year 4, A and T merge under state law, with A as the survivor, in a merger that qualifies as a complete liquidation under Sec. 332.
Income: Under Sec. 83(a), when property is transferred to any person in connection with the performance of services, he or she must include in income (as compensation) the excess of the property's FMV over the amount (if any) paid for the property. FMV is determined when the transferee's rights to the property are either transferable or not subject to a substantial risk of forfeiture.
Segundo. 83(e)(3) contains an exception for options; it provides that the transfer of an option is not includible in income if it has no readily ascertainable FMV at grant. Instead, income is generally recognized when the option is exercised or otherwise disposed of. Under Temp. Regs. Segundo. 1.83-7T, however, this does not apply to sales or dispositions of NQSOs to a person related to the service provider that occur after July 1, 2003. For this purpose, a person is not related to a service provider if he or she is a service recipient as to the option or the option grantor.
In each of the above examples, because the T NQSOs had no readily ascertainable FMV when granted, X did not recognize income on account of the grant.
Deduction: Under Sec. 83(h) and Regs. Segundo. 1.83-6 generally, a service recipient can take a Sec. 162 deduction for the amount included in the service provider's income, for the tax year in which or with which ends the service provider's tax year in which the amount is included in gross income. Kegs. Segundo. 1.83-6(a)(3) contains an exception--if property transferred is substantially vested on transfer, the service recipient can take the deduction under its accounting method.
If a shareholder transfers property to an employee (or independent contractor) for services performed to the corporation, the transaction is a contribution by the shareholder of such property to the corporation's capital and, immediately thereafter, the corporation's transfer of such property to the employee or independent contractor. The transfer is deemed to be for services performed by the employee for die corporation, if either (1) the property is substantially nonvested at the time of transfer or (2) an amount is includible in the employee's gross income at that time.
In Examples 1, 2 and 4 above, the replacement of T NQSOs with A NQSOs does not cause X to recognize income under Sec. 83(a). In Examples 1 and 4, X recognizes income under Sec. 83(a) in year 5, the year in which the A NQSOs are exercised. In Examples 2 and 3, X also recognizes income under Sec. 83(a) in year 5, the tax year in which A canceled the substituted A NQSOs or cancelled the T NQSOs.
As to which party gets the deduction, Sec. 83(h) and Regs. Segundo. 1.83-6 require that T recognize the expense in Examples 1-3. A's payment or transfer is treated as (1) A's capital contribution to T (and T is treated as purchasing the stock from A in the case of a stock transfer to X); and (2) T's payment of cash (or transfer of stock) to X.
In Example 4, because of the merger and liquidation under Sec. 332, A succeeds to and takes into account T's tax items under Sec. 381. Because A assumed T's obligation under A's NQSOs after the merger date, and because T would have otherwise been entitled to deduct the liability, A can deduct the item when paid or accrued as if it were T. Accordingly, A can deduct the income X included under Sec. 83(a).The amount is determined on January 15 of year 5, when the NQSOs are exercised. Because the stock is substantially vested when transferred, A can deduct the compensation included in X's income for the tax year ending September 30 of year 5.
In FSA 200206003, key officers of Target were granted NQSOs having no readily ascertainable FMV. The NQSO plan provided that in the event of a change in Target's control, all NQSOs would become exercisable and be cancelled and exchanged for cash. Target subsequently merged with an acquirer in a Sec. 368(a)(1)(A) transaction accounted for under the pooling-of-interest method. The NQSO plan was amended because Target's NQSO cashout provision would have violated the pooling-of-interest method. Instead, key officers would receive acquirer stock for their NQSOs. Under Securities and Exchange Commission rules, "affiliates" of either company could not sell stock acquired on account of the merger for a period of 30 days before the merger and until financial results covering at least 30 days of post-merger operations were published. On the day before the merger closing date, most of the affected employees made a Sec. 83(b) election For the acquirer shares to be received.
The Service reasoned that, because the shares could not be sold For a period, they were not substantially vested under Regs. Segundo. 1.83-3(k) when transferred to the key employees. Because of this, the special timing rule under Regs. Segundo. 1.83-3(k) (which would have given accrual-basis Target the deduction in its final year) did not apply. Instead, the general timing rule under Sec. 83(h) applied; the deductions attributable to the employees' Sec. 83(b) elections belonged to the acquirer.
FROM M. HOWARD PELL, CPA, PKF NEW YORK, NEW YORK, N Y
COPYRIGHT 2003 American Institute of CPA's No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2003, Gale Group. Todos los derechos reservados. Gale Group is a Thomson Corporation Company.
Income Tax Federal Tax Changes
The Governor signed House Bill 742 into law which is the annual Internal Revenue code update. Consequently, for taxable years beginning on or after January 1, 2017, except as discussed below, Georgia has adopted the provisions of all federal acts (as they relate to the computation of Federal Adjusted Gross Income (AGI) or federal taxable income for non-individuals) that were enacted on or before January 1, 2017. For 2017, the I. R.C. Section 179 deduction is limited to $500,000 and the related phase out is $2,000,000 . Georgia has not adopted the Section 179 deduction for certain real property.
Georgia has not adopted I. R.C. Section 168(k) (the 30%, 50% and 100% bonus depreciation rules) except for I. R.C. Section 168(k)(2)(A)(i) (the definition of qualified property), I. R.C. Section 168(k)(2)(D)(i) (exceptions to the definition of qualified property), and I. R.C. Section 168(k)(2)(E) (special rules for qualified property) and Georgia has not adopted I. R.C. Section 199 (federal deduction for income attributable to domestic production activities).
Georgia has also not adopted the following:
The exclusion of $2,400 of unemployment income for 2009, I. R.C. Section 85(c).
Additional itemized deduction for the sales tax on the purchase of a new vehicle in 2009, I. R.C. Sections 164(a)(6) and 164(b)(6). Please note: Georgia also does not allow the increased standard deduction for sales tax on the purchase of a new vehicle in 2009 because Georgia has its own standard deduction.
The election to increase the normal two year net operating loss carryback to 3, 4, or 5 years for tax years 2008 and 2009, I. R.C. Sections 172(b)(1)(H) and 810(b)(4).
The transition rule that would allow a taxpayer to revoke a prior election to forego the net operating loss carryback period.
Deferral of debt income from reacquisitions of business debt at a discount in 2009 and 2010 which is federally deferred for up to five years, then included ratably over five years, I. R.C. Section 108(i).
Modified rules for high yield original issue discount obligations, I. R.C. Sections 163(e)(5)(F) and 163(i)(1).
New York Liberty Zone Benefits, I. R.C. Section 1400L
50% first year depreciation for post 8/28/2006 Gulf Opportunity Zone property, I. R.C. Section 1400N(d)(1)
50% bonus depreciation for most tangible property and computer software bought after May 4, 2007 and placed in service in the Kansas Disaster Area, I. R.C. Section 1400N(d)(1)
50% bonus depreciation for “qualified reuse and recycling property”, I. R.C. Section 168(m)
50% bonus depreciation in connection with disasters federally declared after 2007, I. R.C. Section 168(n)
Increased ($8,000) first-year depreciation limit for passenger automobiles if the passenger automobile is “qualified property,” I. R.C. Section 168(k)
15 year straight-line cost recovery period for certain improvements to retail space, I. R.C. Sections 168(e)(3)(E)(ix), 168(e)(8), and 168(b)(3)(I)
Modified rules relating to the 15 year straight-line cost recovery for qualified restaurant property (allowing buildings to now be included), I. R.C. Section 168(e)(7)
5 year depreciation life for most new farming machinery and equipment, I. R.C. Section 168(e)(3)(B)(vii)
Special rules relating to Gulf Opportunity Zone public utility casualty losses, I. R.C. Section 1400N(j)
5 year carryback of NOLs attributable to Gulf Opportunity Zone losses, I. R.C. Section 1400N(k)
5 year carryback of NOLs incurred in the Kansas disaster area after May 3, 2007, I. R.C. Section 1400N(k)
5 year carryback of certain disaster losses, I. R.C. Sections 172(b)(1)(J) and 172(j)
The election to deduct public utility property losses attributable to May 4, 2007 Kansas storms and tornadoes in the fifth tax year before the year of the loss, I. R.C. Section 1400N(o)
Special rules relating to a financial institution being able to use ordinary gain or loss treatment for the sale or exchange of certain preferred stock after Dec. 31, 2007, I. R.C. Section 1221
Temporary tax relief provisions relating to the Midwestern disaster area, I. R.C. Sections 1400N(f) and 1400N(k)
Depreciation Differences. Depreciation differences due to the Federal acts mentioned above should be treated as follows (If the taxpayer has depreciation differences from more than one Federal act, it is not necessary to make a separate adjustment for each act):
Depreciation must be computed one way for Federal purposes and another way for Georgia purposes. To compute depreciation for Federal purposes, taxpayers should use the current year IRS Form 4562 and attach it to the Georgia return. This should be entered on the other addition line of the return.
Depreciation must also be computed for Georgia purposes. Taxpayers should use Georgia Form 4562 to compute depreciation for Georgia purposes and attach it to the Georgia return. This should be entered on the other subtraction line of the return.
Federal deduction for income attributable to domestic production activities (IRC Section 199). This adjustment should be entered on the addition line of the applicable return. An adjustment to the Georgia partnership or S Corporation return is not required if the partnership or S Corporation is not allowed the Section 199 deduction directly, but instead passes through the information, needed to compute the deduction, to the partners or shareholders.
Other Differences. Other differences should be placed on the other addition or subtraction line of the applicable return. Attach a statement to the return explaining these differences.
Additionally, the provisions listed above may have an indirect effect on the calculation of Georgia taxable income. Adjustments for the items listed below should be added or subtracted on your Georgia income tax form.
When property is sold for which the bonus depreciation was claimed, there will be a difference in the gain or loss on the sale of the property.
The depreciation adjustment may be different if the taxpayer is subject to the passive loss rules and is not able to claim the additional depreciation on the Federal return.
Other Federal items that are computed based on Federal Adjusted Gross Income or Federal Taxable Income will have to be recomputed if the provisions of the Federal Acts are claimed.
Furthermore, in 2003 the IRS started requiring separate reporting, to shareholders of S Corporations and partners of partnerships, for the gain from asset sales for which an I. R.C. Section 179 deduction was claimed. Georgia follows the separate reporting treatment of the gain and the Section 179 deduction. Accordingly, the gain should not be reported directly on the S Corporation or partnership return, but the gain, along with any Georgia adjustment to the gain (due to the Federal acts), should be reported separately to the shareholders or partners.
Claiming a loss from worthless securities.
It gets worse
It isn't enough to show that your stock was entirely worthless in the year you claimed your deduction. You also have to show that it was not entirely worthless in the preceding year. You aren't allowed to choose which year you claim the loss. You have to claim it in that single, unique year in which the stock changed from being almost-but-not-quite-worthless to utterly-without-doubt-worthless.
As a general rule, you need an "identifiable event" that establishes the worthlessness of the stock. Bankruptcy can qualify — it appears that old WorldCom shares became worthless when the company (now MCI) came out of bankruptcy in April 2004, because the court's ruling extinguished all rights of the former shareholders — but stock can retain some value even during and after a bankruptcy. You may need another event that establishes zero value for your shares, such as liquidation of the corporation or events indicating it has gone out of business with no assets left to distribute.
Dealing with uncertainty
You may find yourself in a situation where it simply isn't clear whether your shares continue to have any value. You don't know whether to claim your loss this year or wait for a sign from the heavens. There are two pieces of standard advice for people in this situation, although neither one gives a great solution.
One is to try to sell the shares, perhaps to a cooperative broker, as described earlier. You may not find a way to do that, or the cost of doing it may be more than you want to pay. And you aren't necessarily home free even if you succeed. Technically, if the shares became worthless in an earlier year (before you sold them), you're required to claim the loss in that earlier year, and the loss you claimed on the sale of the shares can be disallowed.
The other standard piece of advice is based on a frequently quoted opinion by a sympathetic judge. Noting the taxpayer's dilemma, the judge wrote that the only safe practice would be "to claim a loss for the earliest year when it may possibly be allowed and to renew the claim in subsequent years if there is any reasonable chance of its being applicable for those years." ( Young case, 2d Cir. 1941). Apparently you would "renew the claim in subsequent years" only if the IRS disallowed the earlier claim, since you can't double claim the loss. In any event, the special statute of limitations for this type of loss (see below) takes some of the pressure off, so it probably isn't a good idea to claim the loss in a year when it may seem possible, but highly dubious, that the stock has become worthless.
Nowadays we can search the Internet for information about companies. If the stock is no longer listed on an exchange, check for a pink sheet listing or other indication that the shares still have value. Ideally, you want to document three things:
The stock had no value at the end of the year you claimed the deduction.
An identifiable event occurred, establishing worthlessness.
The stock still had some value at the end of the preceding year.
Abandonment
At long last, in 2008, the Treasury adopted regulations saying you can establish the worthlessness of securities by abandoning them. The regulations do not explain the steps that would constitute abandonment, but it seems reasonably clear that gifting or donating securities is not the same as abandonment: you have to give up all rights to the shares, including the right to determine who would enjoy the benefit if they somehow recovered value.
Note also that the regulations say abandonment itself doesn't create the loss; instead, it merely establishes worthlessness. That means you're still playing within the rules for worthless securities. The date of your loss is the last day of the taxable year in which the abandonment occurs, not the date of the abandonment. Also, you can't claim an ordinary loss when abandoning a security if you would have a capital loss under the usual rules for worthless securities.
Claiming the loss
When you're ready to claim the loss, you have to show it on Schedule D as a capital loss.* You can't claim a theft loss, for example, on the theory that the stock became worthless because the executives were a bunch of crooks — even if that's true.
The amount of the loss is determined by your basis for the shares. You may have seen the stock go sky high before it sank into oblivion, and that can leave you feeling like you lost a lot more than the amount you paid for the shares. You can't include that unrealized profit in the amount of your deduction.
You have to report the loss as if you sold the shares for zero dollars on the last day of the taxable year. That's true even if the event that establishes worthlessness occurs earlier in the year.
* There are limited exceptions under which losses on certain small business shares can be treated as ordinary losses rather than capital gains.
Statute of limitations
In a pinch, you can amend a prior year return to claim the loss. Recognizing the difficulty of determining which year to claim the deduction, Congress provided a special seven-year limitation period for reporting a loss from worthless securities — more than double the usual three-year period. If you're just now realizing that some of your shares became worthless four or five years ago (or six or seven), you still have time to amend your return to claim the loss. The clock runs out seven years after the due date of the return for the year the stock became worthless.
Relacionado
Delaware law clearly permits the authority to grant stock options to be delegated to one or more officers of the corporation. Specifically, Section 157(c) of the DGCL provides that the Board or Compensation Committee may delegate to one or more officers the ability to (1) designate officers or employees of the corporation or its subsidiaries to be recipients of rights or options and (2) determine the number of rights or options to be received by such officers and employees. The delegation must specify the total number of rights or options that the officers may award.
Options granted pursuant to such a delegation should not be made to Section 16 reporting officers because the grant of options by an officer, rather than the Compensation Committee, will not be exempt from short swing profits rules of Section 16 of the Securities Exchange Act of 1934.
The delegation needs to be specific and should include: 1) the maximum number of options that may be granted; 2) a general description of the class of eligible optionees (for example, “Employees in Division A”); and 3) a form of grant agreement which provides all relevant terms and conditions for the option grant, except for the name of the optionee and the number of shares. Providing a form grant agreement is important because Section 157(c) is very limited and does not provide the ability for the Committee to delegate to officers the authority to determine terms and conditions of option grants, including vesting schedules.
Finally (although this is not a statutory requirement under the DGCL), the program, as approved by the Board or Compensation Committee, should include fairly specific direction regarding the dates on which grants will be made. For public companies, grants should be made during open trading “window” periods. Further, the Compensation Committee should consider whether additional timing restrictions (for example, requiring that grants be made on the first day or first two days of the window period or only during the window period in a specific month) might be desirable. The basis for this recommendation regarding timing is that a number of cases which have alleged “spring-loading” of option grants – i. e. making of option grants right before announcements that would cause the value of stock to rise. (See In re Tyson Foods, Inc. Consolidated Shareholder Litigation . 919 A.2d 563 (2007) and the subsequent unpublished decision in the same case 2007 WL 2351071 (Del. Ch. 2007); In re Ditech Networks, Inc. Derivative Litigation . 2008 WL 820705 (N. D.Cal. 2008); and Desimone v. Barrows . 924 A.2d 908 (2007). The related concern of “bullet-dodging” which involves making a grant shortly after negative information is publicly disclosed appears less troublesome, particularly where there is a well-established practice of making grants at a particular time. (See Desimone for discussion of this point.)
While it is unlikely that a plaintiff would prevail based on one fortuitously timed grant date, I think that setting limits regarding dates when grants can be made and documenting these limits in advance of making grants is a good governance practice and would also substantially reduce the risk that a plaintiff would bring a claim similar to those in the cases cited above.
11 Tax Deductions You Can't Actually Write Off
Although the tax code permits a wide range of deductions for taxpayers in various situations, thousands of filers routinely claim deductions for various types of expenses that are in fact non-deductible. Here is a list of some of the more common non-deductible expenses that show up on tax returns each year.
Spousal and Child Support Many taxpayers try to deduct these two forms of familial support on their returns. However, alimony is the only type of income paid by one ex-spouse to another that can be deducted. (Find out how to deal with the tax issues that arise for divorced parents with dependent children in Taxing Times For Divorced Parents .)
Unreimbursed Work Expenses Although self-employed taxpayers can deduct every dollar of work-related expenses, W-2 employees can only deduct unreimbursed expenses in excess of 2% of their adjusted gross incomes - and only those who are able to itemize their deductions.
Above-the-Line Deduction for Roth IRA Contributions Unlike traditional IRA contributions, there is no deduction for Roth IRA contributions because the income distributed from them is tax-free, whereas traditional IRA and retirement plan distributions are taxable as ordinary income.
529 Plan Contributions Taxpayers who contribute money to the 529 plan sponsored by their own state can often take a deduction for their contributions up to a certain limit on their state returns. However, there is no federal deduction available for this.
Political Contributions Cash or property donations to any qualified 501(c)(3) organization are deductible, but political parties do not fall into this category. Unfortunately, but that $100 you sent in to get the candidate of your choice elected doesn't go anywhere on the 1040.
Homeowners' Insurance The only time that this can be deducted is for those who either use part of their home for business or for those who own rental properties. Homeowners outside these categories cannot deduct their homeowners' or rental insurance under any circumstances. (Learn how fixing a few pipes can be more profitable tax-wise than adding a new roof in Tax Deductions For Rental Property Owners .)
Life Insurance Premiums Except for coverage available inside Section 125 Cafeteria Plans and a small amount that can be purchased inside a qualified plan, life insurance premiums are non-deductible for individuals. Group life insurance premiums can be deducted by employers within certain limits.
Dependents Whom You Cannot Claim Many separated and divorced couples race to claim some or all of their dependents each year whether they can or not. The IRS has a fairly clear, albeit complex set of rules that determine who gets to claim which kids. In some cases, one parent will get to claim the dependency exemption, while the other is eligible for the Child Tax Credit or Dependent Care Credit.
However, both parents often try to claim the same dependent in the same year, thus causing the return of the one who files second to be rejected. Those in this category who are legitimately entitled to claim a dependent or dependents must take up their case with the IRS and furnish proof, such as a divorce decree, that establishes their eligibility.
Substantial Contributions of Tangible Property to Charities Although the entire amount of any property that is donated to charity can be deducted eventually, the dollar limits for this type of contribution are lower than for cash. Cash contributions of up to 50% of adjusted gross income (AGI) are deductible, but property donations have a limit of 20% or 30% of AGI.
Make sure that your property does not exceed these income limits in the year that you give it to your charity. (Being generous has never been more (financially) rewarding! Check out Give To Charity; Slash Your Tax Payment .)
Passive Losses Tax losses that are generated from certain types of investments or activities, such as partnerships, can only be written off against passive income, which is defined as income for which the recipient had no material role in generating. Passive losses cannot be deducted against active income, such as earnings or investment income.
Capital Losses Although capital losses can be used to offset any amount of capital gains, they can only be deducted against $3,000 of other income each year. If you flushed your $50,000 nest egg down the toilet last year in the stock market and had no gains to declare it against, then you will only be able to deduct $3,000 of that loss as a long or short-term loss each year.
If you try to write the entire balance off at once, the IRS will gently inform you that you will have to prorate the loss for the next 17 years. Unless, of course, you reap a large gain in the future, in which case you can write off as much of the remaining loss as there is against whatever amount of gain you have earned.
The Bottom Line This is only a list of the more common deductions that taxpayers frequently attempt to claim. If you are unsure whether a specific expense that you incurred during the year is deductible, visit the IRS website at http://www. irs. gov/ or consult your tax advisor. (The receipts you cram into your wallet could be replaced with cash come tax season. Find out how in 10 Most Overlooked Tax Deductions .)
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Deduction Limitations: General (Portfolio 504)
1. 2% Floor on Miscellaneous Itemized Deductions
segundo. Miscellaneous Itemized Deductions
(1) Preclusion of Deductions Allowable in Computing Adjusted Gross Income
(2) Preclusion of Certain Itemized Deductions
(3) Impairment-Related Work Expenses
(4) Specifically Described Miscellaneous Itemized Deductions
(b) Unreimbursed Employee Expenses
(c) Expenses for the Production or Collection of Income
(d) Expenses for the Determination of Tax
(e) Expenses Related to § 183 Not-for-Profit Activities
do. Computation of 2% Floor
(2) Estates and Trusts
re. Coordination with Other Deduction Limitations
(1) Other Deduction Floors
(2) Deduction Ceilings
mi. Allocation of Expenses
F. Treatment of Pass-through Entities
(2) Pass-through Entity
(3) Entities Not Subject to § 67(c) Prohibition
(a) Qualified Estates and Nongrantor Trusts
(b) Publicly Offered RICs
(4) Affected Investor
(5) Affected Expenses
(6) Application to Partnerships
(7) Application to S Corporations
(8) Application to Grantor Trusts
(9) Application to Common Trust Funds
(a) Computation of an Affected Investor's Taxable Income
(b) Reporting Requirements
(10) Application to Nonpublicly Offered RICs
(a) Nonpublicly Offered RIC
(b) Computation of Affected Investor's Taxable Income
(c) Affected RIC Expenses
(ii) RIC Expenses
(iii) Safe Harbor Election
(iv) Net Operating Loss Reduction
(v) De Minimis Exception
(d) Allocation of Affected RIC Expenses to Affected Investors
(ii) Reasonable Allocation Method
(iii) Reliance on Reasonable Estimates
(e) Reporting Requirements: Information Return
(f) Reporting Requirements: Statement to Affected Investor
(g) Reporting Requirements: Statement to Nominee of Affected Investor
(h) Reporting Requirements: Forms
(11) Application to REMICs
(b) Pass-through Interest Holder
(i) REMIC Not a Single-Class REMIC
(ii) Single-Class REMIC
(c) Allocable Investment Expenses
(d) Computation of a Pass-through Interest Holder's Taxable Income
(i) Taxable Year Ending with a Calendar Year or Quarter
(ii) Taxable Year Ending Other Than with Calendar Quarter
(iii) Other Rules
(e) Computation of a Pass-through Interest Holder's Proportionate Share of Allocable Investment Expenses
(f) Reporting Requirements: In General
(g) Reporting Requirements: Single-Class REMIC
(h) Reporting Requirements: Nominees
2. Overall Limitation on Itemized Deductions
segundo. Applicable Amount
do. Taxpayers to Whom the § 68 Limitation Applies
re. Computation of Limitation
mi. Certain Itemized Deductions Excepted
F. Coordination with Other Limitations
3. Dividends Received Deduction Limitation
segundo. Limited Dividends Received Deductions
do. Dividends Received Limitation Amount
(2) Modified Taxable Income
(3) Applicable Percentage
B. Limitations Equal to an Income or Similar Amount
1. Not-for-Profit Activity Deduction Limitation
segundo. Limitation Amounts
re. Not-for-Profit Activity
How Charitable Tax Deductions Work
Charitable tax deductions are the IRS's way of rewarding you for making donations to organizations that help people in need. For every contribution you make (cash or otherwise) to a qualified charity, you can shave a little (or a lot) off your adjusted gross income and reduce your own tax burden.
Charitable contributions can take many forms. Cash, check and credit card donations are the most straightforward type of donation -- they're easy write-offs. But you can also donate property, goods, real estate, your time and services, stock options, intellectual property and just about anything else you can think of. This is where things take a turn into more complicated territory. Some of it will be fully deductible, some partially, some not deductible at all. The answers are all to be found in the IRS publications on charitable deductions, but you might need some time (or professional help) to find them.
Hasta la próxima
Whatever you do, if you've made charitable contributions over the year, you must take the itemized deduction option and fill out Schedule A on your federal Form 1040. If you take the standard deduction you won't get the full benefit of your donations.
This article won't get into the nitty-gritty details of the IRS's exhaustive rules on this subject -- if you're a whaling captain, for example, you'll want to look elsewhere for an explanation of the charitable deductions you can take for subsistence bowhead whale hunting activities. But we will give you the basics and some tips on how to make the most of your charitable giving at tax time.
Print | <a data-track-gtm="Byline" href="about-author. htm#cooper"> Alison Cooper </a> "How Charitable Tax Deductions Work" 22 December 2017.<br />HowStuffWorks. com. <http://money. howstuffworks. com/personal-finance/personal-income-taxes/charitable-tax-deduction. htm> 23 March 2017" href="#">Citation & Date
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Other Credits and Deductions
District of Columbia property owners may be eligible for property tax relief. The District offers several programs to assist property owners and first time homebuyers. Select from the following programs to check eligibility and filing requirements. For more information about these tax relief and credit programs, contact our OTR Customer Service Center at (202) 727-4TAX (727-4829).
Assessment Cap Credit
The housing market in the District of Columbia has caused a surge in the assessed value of residential real property. In an effort to limit the increase of real property taxes for homeowners, eligible homeowners will be provided an Assessment Cap Credit.
The Assessment Cap currently provides that a property may not be taxed on more than a 10 percent increase in the property’s assessed value each year. This credit does not reduce the assessed value of your property on the tax roll or the assessment notice, but it will appear as an automatic credit against your real property tax bill. For more information, property owners may call the OTR Customer Service Center at (202) 727-4TAX (727-4829). If you have been denied the Assessment Cap Credit and you believe that you are eligible, please contact the Homestead Unit, PO Box 176, Washington, DC 20044 or call Customer Service at (202) 727-4TAX (727-4829).
First-Time Homebuyer Individual Income Tax Credit
For homes purchased on or before December 31, 2011
This federal tax credit is available to first-time homebuyers in the District of Columbia. The credit is the smaller of:
$5,000, if single, married filing jointly, head-of-household, or qualifying widow(er) ($2,500, if married filing separately) or
The purchase price of the home.
In general, you may claim the credit if:
You purchased a main house during the tax year in the District of Columbia, and
You (and your spouse, if married) did not own any other main home in the District of Columbia during the 1-year period ending on the date of purchase.
Income restrictions and other qualifications may apply. You must file the federal form 1040 to claim this credit. For more information, contact the Internal Revenue Service at (800) 829-1040 or visit the local IRS Taxpayer Assistance Center located at 500 North Capitol Street, NW, Washington, DC.
Historic Properties Program
For information on special District programs for historic real properties, please contact:
DC Office of Planning
Historic Preservation Division
801 North Capitol Street, NE, Suite 3000
NJ Income Tax - Deductions
New Jersey allows only certain deductions from income, see below. Federal deductions such as mortgage interest, employee business expenses, moving expenses, and IRA and Keogh Plan contributions are not allowed on the New Jersey return.
Full-year residents may deduct only amounts paid during the tax year. Part-year residents may only include those amounts paid while they were New Jersey residents.
Medical Expenses. Certain medical expenses in excess of 2% of your gross income may be deducted. In general, medical expenses allowed for Federal income tax purposes are also allowed for New Jersey purposes. Only medical expenses for yourself, your spouse/civil union partner or domestic partner, and your dependents qualify. These expenses must not be reimbursed by your insurance or similar provider. Some examples of allowable medical expenses are: payments for doctor's visits, dental care, hospital care, eye examinations, eyeglasses, medicine, and x-rays or other diagnostic services directed by your physician or dentist. Insurance premiums, including amounts paid under Social Security for Medicare, can be used as medical deductions. You may also deduct transportation costs which are allowable on your Federal return. If you deduct medical expenses in one year and are reimbursed in the next, you must include the reimbursement as income in the year you receive the payment.
Archer MSA Contributions. New Jersey follows the Federal guidelines governing the deduction of Archer MSA contributions. Your contribution may not exceed 75% of the amount of your annual health plan deductible (65% if you have a self-only plan). You must enclose Federal Form 8853 with your New Jersey tax return if you claim this deduction. Excess contributions that you withdraw before the due date of your tax return are not taxable. However, you must report the earnings associated with the excess contributions you withdraw as wages on the "Wages, salaries, tips, and other employee compensation" line of your tax return.
Self-Employed Health Insurance Deduction. If you are considered a self-employed individual for Federal income tax purposes, or you received wages from an S corporation in which you were a more-than-2% shareholder, you may deduct the amount you paid during the year for health insurance for yourself, your spouse/civil union partner or domestic partner, and your dependents. The amount of the deduction may not exceed the amount of your earned income, as defined for Federal income tax purposes, derived from the business under which the insurance plan is established.
Note: For Federal purposes you may be able to deduct amounts paid for health insurance for any child of yours who was under age 27 at the end of 2017. However, for New Jersey purposes you may deduct such amounts only if the child was your dependent. For more information, see Technical Advisory Memorandum TAM 2011-14 .
Alimony and Separate Maintenance Payments. You may deduct the amount of alimony and separate maintenance you paid which was required under a decree of divorce/dissolution or separate maintenance. Do not deduct payments paid for child support.
Qualified Conservation Contributions. You may deduct any contribution you made for conservation purposes of a qualified real property interest in property located in New Jersey. You must enclose a copy of Federal Form 8283 with your New Jersey income tax return if you are required to file Form 8283 with your Federal return.
Health Enterprise Zone Deduction. Eligible taxpayers who provide "primary care" medical and/or dental services at a qualified practice located in or within five miles of a Health Enterprise Zone (HEZ) may be eligible for a deduction on their personal income tax returns. Partners and S corporation shareholders of a qualified practice enter the HEZ deduction amount listed on Schedule NJK-1, Form NJ-1065, or Schedule NJ-K-1, Form CBT-100S. Sole proprietors must calculate the amount of their HEZ deduction. See Technical Bulletin TB-56. Health Enterprise Zones, for eligibility requirements and how to calculate the HEZ deduction.
Alternative Business Calculation Adjustment. If you have losses in certain business-related categories of income, you may be able to use those losses to calculate an adjustment to your taxable income. In addition, you can carry forward unused losses in those categories for up to 20 years to calculate future adjustments. The categories of income that are included in the adjustment calculation are: net profits from business; net gains or net income from rents, royalties, patents, and copyrights; distributive share of partnership income; and net pro rata share of S corporation income. Complete Schedules NJ-BUS-1 and NJ-BUS-2 to calculate the amount of the adjustment or loss carryforward.
Property Tax Deduction/Credit. New Jersey homeowners and tenants may also qualify for either a property tax deduction or a refundable property tax credit.
Last Updated: Friday, 01/15/16
NJ Income Tax - Business Income
If you have losses in certain business-related categories of income, you may be able to use those losses to calculate an adjustment to your taxable income ("Alternative Business Calculation Adjustment "). In addition, you can carry forward unused losses in those categories for 20 years to calculate future adjustments. For tax year 2017, the percentage used to calculate the Alternative Business Calculation Adjustment on Schedule NJ-BUS-2 is 40 percent, up from 30 percent in tax year 2017. The percentage is being phased in over a five-year period and will reach a maximum of 50 percent for tax year 2017 and after.
Sole Proprietorships If you are self-employed, the amount of net income derived from your independent business, trade, or profession must be reported on your New Jersey personal income tax return. Net income is the profit realized from operating your business. It is the amount of business revenues remaining after deducting costs and operating expenses and is calculated using the same accounting method and period used for Federal income tax purposes.
Individual business owners report the net income from the operation of their business in the "Net Profits from Business" section of the NJ-BUS-1, Business Income Summary Schedule. In general, you will enter the same amount that was computed on Federal Schedule C, Schedule C-EZ, or Schedule F and reported on your Federal tax return. However, in order to comply with New Jersey income tax law, it will sometimes be necessary for you to make one or more of the following adjustments to the Federal amount.
Add back any amounts you deducted for taxes based on income.
Subtract any interest income that was included on Federal Schedule C, C-EZ, or F which is exempt for New Jersey purposes but taxable for Federal purposes.
Add any interest income not included on Federal Schedule C, C-EZ, or F from states or political subdivisions outside New Jersey which is exempt for Federal purposes but is taxable for New Jersey purposes.
Subtract the portion of meal and entertainment expenses that were disallowed on Federal Schedule C, C-EZ, or F.
Subtract qualified contributions to a self-employed 401(k) plan. Contributions to a plan in excess of the Federal limits, which are not an allowable deduction for Federal tax purposes, are also not deductible for New Jersey purposes.
Add interest and dividends derived in the conduct of a trade or business.
Add or subtract income or losses derived in the conduct of a trade or business from rents, royalties, patents, or copyrights.
Add or subtract gains or losses from the sale, exchange, or other disposition of the trade or business's property.
Add or subtract the net adjustment from the Gross Income Tax Depreciation Adjustment Worksheet GIT-DEP. Part I, line 7. Be sure to retain the completed worksheet for your records.
Subtract the New Jersey domestic production activities deduction from Form 501-GIT .
Sole Proprietors who are engaged in providing "primary care" medical and/or dental services at a qualified practice located in or within five miles of a Health Enterprise Zone (HEZ) may qualify for a deduction on their New Jersey return. For more information, see Technical Bulletin TB-56. Health Enterprise Zones.
A net loss cannot be reported as such on Form NJ-1040. In the case of a net loss on Schedule NJ-BUS-1, make no entry on the line for reporting net profits from business. A copy of Federal Schedule C, C-EZ, or F for each business must accompany the New Jersey return.
Partnerships If you are a partner in a partnership, the amount of net income derived from the partnership must be reported on your New Jersey personal income tax return. While no tax is imposed directly on a partnership itself, every partnership having a New Jersey resident partner or having any income, gain, or loss from New Jersey sources must file a New Jersey Partnership Return, Form NJ-1065 .
If you are a partner, you will receive a copy of Schedule NJK-1 that will list your share of the income or loss from the partnership. You must report the income (loss) shown on this schedule in the “Distributive Share of Partnership Income” section of the NJ-BUS-1, Business Income Summary Schedule, whether or not the income was actually distributed. The appropriate amount to report appears on the schedule in Column A of the line labeled "Distributive Share of Partnership Income." If the net amount from all Schedule NJK-1s listed on Schedule NJ-BUS-1 is a loss, make no entry on the line for reporting partnership income on your New Jersey personal income tax return. If you did not receive a Schedule NJK-1, you must complete Reconciliation Worksheet A (or Worksheet A - Liquidated) contained in Tax Topic Bulletin GIT-9P. Income From Partnerships, to determine your distributive share of partnership income. You must also enclose with your return a copy of the Federal Schedule K-1 you received from the partnership which did not give you a completed Schedule NJK-1.
Partners in a qualified practice that is engaged in providing "primary care" medical and/or dental services at a location in or within five miles of a Health Enterprise Zone (HEZ) may be eligible for a deduction on their personal income tax return. Partners enter the deduction amount listed on their Schedule NJK-1. For more information, see Technical Bulletin TB-56. Health Enterprise Zones.
A partnership that is not a qualified investment partnership and that is not listed on a United States National stock exchange is required to remit a payment of tax on behalf of all nonresident noncorporate partners and nonresident corporate partners. The Division will credit the tax paid by the partnership to the accounts of its nonresident partners as of the date of its receipt. Individual nonresident partners claim credit for any tax paid on their behalf by the partnership when filing Form NJ -1040NR .
S Corporations If you are a shareholder in a New Jersey S corporation, you will receive a copy of Schedule NJ-K-1 indicating your share of the S corporation's net income or loss. Enter the amount of income (loss) shown on this schedule in the “Net pro rata share of S Corporation Income” section of the NJ-BUS-1, Business Income Summary Schedule. All S corporation income is taxed in the year it is earned by the corporation regardless of when it is actually distributed. If the net amount from all Schedule NJ-K-1s listed on Schedule NJ-BUS-1 is a loss, make no entry on the line for reporting S corporation income on your New Jersey personal income tax return.
Shareholders in a qualified practice that is engaged in providing "primary care" medical and/or dental services at a location in or within five miles of a Health Enterprise Zone (HEZ) may be eligible for a deduction on their personal income tax return. Shareholders enter the deduction amount listed on their Schedule NJ-K-1. For more information, see Technical Bulletin TB-56. Health Enterprise Zones.
If you are a shareholder in an S corporation which did not elect to be a New Jersey S corporation and which did not give you a completed Schedule NJ-K-1 indicating your share of the corporation's net income, you must complete Reconciliation Worksheet B (or Worksheet B - Liquidated) contained in Tax Topic Bulletin GIT-9S. Income From S Corporations, to determine your share of the corporation's income. You must also enclose with your return a copy of the Federal Schedule K-1 you received from each S corporation which did not give you a completed Schedule NJ-K-1.
Additional Resources More information is available in Tax Topic Bulletins GIT-9P. Income From Partnerships and GIT-9S. Income From S Corporations.
For more information on reporting business income see the instructions for NJ-BUS-1, Business Income Summary Schedule, in the income tax return instruction booklet, Form NJ-1040 .
Last Updated: Friday, 01/15/16
Executive Compensation Tax Issues
The following is a brief summary of some of the tax laws regarding reasonable compensation, golden parachute payments, and limitations on compensation deductions.
Reasonable Compensation In General
Section 162 of the Internal Revenue Code allows a deduction for ordinary and necessary business expenses, including reasonable compensation expenses for personal services. As might be expected, the concept of "reasonableness" is somewhat nebulous. In making this determination, courts have applied two tests: (1) the amount test, which analyzes whether the amount of compensation is reasonable in relation to the services performed, and (2) the intent test, which analyzes whether the money paid was intended as compensation.
Generally, the amount test is more important. A variety of factors are used to analyze whether the amount is reasonable: (1) salary history of the individual, (2) dividend history of the corporation, (3) salary scale for employees generally, (4) salary scale in the industry, (5) qualifications of the employee, (6) contribution to the success of the business, and (7) formality and timing of corporate action.
Golden Parachutes: Sections 280G and 4999
Section 280G denies a corporation a deduction for any excess parachute payment, and Section 4999 imposes on the recipient a nondeductible 20% excise tax, in addition to regular income and Social Security taxes. If an acquiring company makes the excess parachute payment, it is not added to the acquiring company's tax basis.
A parachute payment is defined as a payment which violates any generally enforced federal or state securities laws, or which (a) is in the nature of compensation (including stock options valued at their present fair market value at the time of vesting . as well as noncompetition covenants, but excluding certain types of qualified pension plans), (b) is made to "disqualified individuals," and (c) is contingent on a change in corporate ownership or effective control (or ownership of a substantial portion of the corporate assets). A parachute payment is treated as "excess" and hence nondeductible and subject to the excise tax (i) if it exceeds three times the "base amount" and (ii) to the extent it exceeds the greater of "the base amount" (note this is not three times the base amount) or "reasonable compensation." In general, "base amount" equals the disqualified individual's average annualized compensation, which was includable as gross income ("annual includable compensation") for the five years preceding the tax year at issue.
The statute defines the term "disqualified individual" as an individual (1) who is an employee, independent contractor, or other person specified in regulations, who performs personal services for any corporation, and (2) who is an officer, shareholder, or highly compensated individual of the corporation. Officers are determined by examining the facts and circumstances. There is a limit of 50 officers or if less, the greater of 10% of employees or 3 employees. A shareholder must own the lesser of 1% of the value of the corporation's outstanding stock or $1 million of stock. A "highly compensated" individual is defined as one of the highest paid 1% of employees, or, if less, is one of the highest paid 250 employees. However, an employee whose compensation is less than $75,000 is not treated as highly compensated.
The payment must be contingent on the change of control. Numerous issues abound as to what constitutes a change of control.
Section 280G does not apply to private companies without readily tradable securities or to payments from qualified plans. However, private companies must either meet the requirements to be taxed under subchapter S or must have shareholder approval (either prospectively or retrospectively ) of the parachute payment to qualify for this exemption. Shareholder approval is defined as the approval by 75% of the voting power of the corporation. If the person receiving the payment is a shareholder, then his stock is removed from the shareholder base in making this determination.
Section 162(m)'s $1 Million Limit on Deductions
A public corporation's deduction for compensation with regard to a "covered employee" is limited to $1 million per year. This does not modify the reasonableness requirement which continues to apply. A "covered employee" is (1) the corporation’s CEO or someone else acting in that capacity as of the close of the taxable year; or (2) the employee's total compensation must be reported for the taxable year under the Securities Act of 1934 because he or she is one of the four highest compensated officers for that year (other than the CEO).
Unless specifically excluded, the deduction limit applies to all remuneration for services, including cash and in-kind compensation. The limit applies regardless of whether the payment is for services as a covered employee and regardless of when the compensation was earned. The $1 million cap is reduced by any excess parachute payments that the corporation may not deduct.
The limit applies to the year in which the deduction would otherwise be taken. Thus, for example, for nonqualified stock options, the deduction is normally taken in the year the option is exercised.
Certain types of performance based compensation and contributions to qualified plans are excluded from the $1 million limit. Performance goals must be based on objective standards, a compensation committee must approve the goals and certify they have been met, and there must be shareholder approval of the performance based compensation before payment. Stock options are treated as performance based compensation if the requirements for outside director and shareholder approval have been met, because the amount of compensation attributable to the options or other rights would be based solely on an increase in the price of the corporation's stock. Grants of stock options below market value and downside protection for an executive in the event of a decline in the stock price are not covered.
Deduction for Stock Options of a Corporation Other Than a Canadian-Controlled Private Corporation or Options to Purchase Mutual Fund Units
A current or former employee is deemed to receive a taxable benefit in the year he or she acquires a security that is a listed share or a mutual fund unit.
The employee can claim a security option deduction in his or her income tax return if the following conditions are met:
The amount that the employee had to pay to acquire the security is equal to or greater than the result of the following calculation:
the fair market value (This link will open a new window) (FMV) of the security at the time the agreement was reached;
minus the amount the employee paid for the right to acquire the security.
Immediately after the agreement was reached, the employee was dealing at arm's length with the qualifying persons involved (a corporation or a mutual fund trust).
The security is a share covered by subparagraph 110(1)(d)(i.1) of the federal Income Tax Act at the time of sale or issue, as applicable, or would have been covered if the share had been sold or issued to the employee at the time he or she disposed of the rights provided for under the agreement.
The security would have been a mutual fund unit at the time of sale or issue if the trust had not issued units that were different from that unit.
The security would have been a mutual fund unit if it had been sold or issued to the employee at the time he or she disposed of the rights provided for under the agreement, and if the trust had not issued units that were different from that unit.
When calculating the amount an individual must pay to acquire a security, do not take into account currency fluctuations that occur between the time the agreement was reached and the time the security is acquired.
The security option deduction corresponds to 25% of the value of the benefit deemed received in the year, or to 50%, if the benefit is deemed received for a stock option of an SMB engaged in innovative activities (This link will open a new window) for the calendar year in which the stock option is granted. You must enter “L-9” in a blank box on the RL-1 slip (see courtesy translation RL-1-T ), followed by the amount of the security option deduction, unless a deduction is claimed elsewhere in the calculation of the person's income.
Last Updated: March 24, 2017
The Marital Stock Exchange: Who gets the restricted stock in the divorce?
by Suzanne Griffiths and Christopher Griffiths Restricted stock agreements are becoming more and more common in divorce proceedings. The recent increase in these equity compensation plans stems out of a law created by the Financial Accounting Standards Board (FASB). This law, revised in late 2004, requires companies to expense their employee stock options.
In light of this, many companies have begun to use restricted stock instead of stock options. Restricted stock agreements are generally less risky than stock options. With that in mind, employers are beginning to favor restricted stock over stock options to provide employees a greater sense of security.
Generally, a court must divide the assets and compensation each party acquired for services performed during the marriage and exclude compensation for services that will be performed after the marriage is dissolved. This column describes some of the basics for determining whether a restricted stock will be classified as a marital asset or excluded as a separate asset.
Types of Restricted Stock Awards
There are two basic types of agreements that allocate restricted stock: (1) a restricted stock award, and (2) a restricted stock unit award. Under the first type of agreement, the employee receives, in his own personal account, the number of shares outlined in the restricted stock agreement. The second type of restricted stock agreement uses restricted stock units.
A restricted stock unit is simply a promise to deliver stock at a later date. The amount of stock that each unit represents will typically be outlined in the restricted stock agreement. For example, one unit may be equal to one, five, or ten shares of stock. The key distinction between the two types of agreements is that in the first type of agreement, the party owns the stock, and in the second type of agreement, the party owns a promise to deliver stock.
The Substantial Risk of Forfeiture: What Defines a Restricted Share of Stock?
Restricted stock is distinguishable from normal stock in that it carries a substantial risk of forfeiture. A substantial risk of forfeiture is created when the restricted stock is conditioned on uncertain future events occurring. Generally, restricted stock agreements use time or performance related conditions. A time based condition is one that forces an employee to work for a certain period of time before they will receive the stock. An example of this may be restricted stock that vests on the first day of January each year. Performance related conditions relate to factors such as revenue growth, increased customer satisfaction, or other types of goals. An example would be a restricted stock agreement which states that the stock will vest if revenue increases by 5 percent.
The substantial risk of forfeiture occurs when the chance the employee will receive the restricted stock diminishes. For example, if an employee needs to increase revenue by 5 percent in a year and the country falls into a recession, there may be a substantial risk of forfeiture. In a divorce proceeding, it is difficult to determine how substantial the risk of forfeiture may be. Courts cannot just assume that restricted compensation will actually be received and therefore they have discretion and might not include the restricted stock as a marital asset.
Deciphering the Agreement
1. Was the Restricted Stock award given for Past or Future Services?
In general, restricted stock is a marital asset if it is granted for services performed during the marriage. In contrast, if restricted stock is granted for future services which do not occur during the marriage, it will not be marital property. A variety of issues occur when a single contract outlines several different conditions, some past and some future, which must be completed in order for restricted stock to vest. In cases where this occurs, a court will analyze which portion of the restricted stock is a marital asset and which is separate. A court determines this by analyzing what compensation relates to past services and what compensation relates to future services.
2. Are There Ownership Rights in the Stock?
Although the recipient of a restricted stock award cannot sell his or her stock, they may be able to collect dividends or exercise voting rights. An example occurs when companies issue their CEO or top level executives restricted shares of stock. The company wants the executive to be able to vote and receive dividends; however, the company restricts the employee from liquidating his or her interest. These ownership rights lower the risk of forfeiture and therefore provide the employee with a greater chance of receiving future compensation.
The Colorado Supreme Court has found that such ownership rights diminished the risk of forfeiture so much that the "employer could not unilaterally repudiate husband's right to retain stock." In one case, the court found that the restricted stock agreement had both a past and future component. That being said, the court found that the ownership rights diminished the risk of forfeiture and therefore increased the chance the employee would receive the future benefits.
3. Does the Employee have an Enforceable Right in the Stock or a Mere Expectancy?
An important determination is whether the recipient of stock has an enforceable right in the stock or a mere expectancy. The Colorado Supreme Court has stated that, "In determining whether one has an enforceable right to employee stock options, a court must look to the terms of the contract granting such options. If an employee has a presently enforceable right under the contract, regardless of whether the options are presently exercisable, such a right constitutes a property interest rather than a mere expectancy."
The Court held that if an employee has a presently enforceable right under the contract, regardless of whether the options are presently exercisable, such a right constitutes a property interest rather than a mere expectancy. Similar principles apply to restricted stock agreements. The court will analyze whether the stock has any enforceable rights or whether it can be unilaterally confiscated by the company. If the stock rights are a mere expectancy, or are in consideration for services not yet performed during the marriage, then they are typically not marital property.
Court's Equitable Power to Divide the Restricted Stock
Once the Court has determined whether a restricted stock is marital or separate property, it is important to understand how a court will divide such an asset. Under Colorado law, the court "shall divide the marital property, without regard to marital misconduct, in such proportions as the court deems just after considering all relevant factors. " Some examples of this include the following:
(a) The contribution of each spouse to the acquisition of the marital property, including the contribution of a spouse as a homemaker; (b) The value of the property set apart to each spouse; (c) The economic circumstances of each spouse at the time the division of property is to become effective, including the desirability of awarding the family home or the right to live therein for reasonable periods to the spouse with whom any children reside the majority of the time;.
In essence, the court has the ability to allocate any amount of the marital property as it deems necessary and proper. That being said, the restricted stock could be allocated to the employee, the employee spouse, or divided between the two.
A further complication in restricted stock agreements is that most agreements disable the recipient from transferring the restricted shares. Because of these challenges, divorce courts can potentially appoint the employee/recipient of the stock to act as a fiduciary until the stock vests. Once the shares vest, they can be divided between the parties, subject to the court's orders.
Suzanne Griffiths is a vice president at Gutterman Griffiths P. C. Christopher Griffiths is a law clerk at Gutterman Griffiths P. C. They can be reached at Suzanne@ggfamilylaw. com or 303-858-8090.
State of Delaware - Search and Services/Information
How To Calculate Franchise Taxes
Effective August 1, 2010, a domestic stock or non-stock for profit corporation incorporated in the State of Delaware is required to pay annual franchise tax. The minimum tax is $175.00, for corporations using the Authorized Shares method and a minimum tax of $350.00 for corporations using the Assumed Par Value Capital Method. All corporations using either method will have a maximum tax of $180,000.00. Corporations owing $5,000.00 or more make estimated payments with 40% due June 1st, 20% due by September 1st, 20% due by December 1st, and the remainder due March 1st.
The Annual Franchise Tax assessment is based on the authorized shares. Use the method that results in the lesser tax. The total tax will never be less than $175.00, or more than $180,000.00.
Non-Stock for Profit
All non-stock, for profit entities that do not comply with the Exempt Corporation requirements will be required to pay a Franchise Tax of $175.00
Authorized Shares Method
For corporations having no par value stock the authorized shares method will always result in the lesser tax.
5,000 shares or less (minimum tax) $175.00.
5,001 - 10,000 shares - $250.00,
each additional 10,000 shares or portion thereof add $75.00
maximum annual tax is $180,000.00
A corporation with 10,005 shares authorized pays $325.00($250.00 plus $75.00). A corporation with 100,000 shares authorized pays $925.00($250.00 plus $675.00[$75.00 x 9]).
Assumed Par Value Capital Method
To use this method, you must give figures for all issued shares (including treasury shares) and total gross assets in the spaces provided in your Annual Franchise Tax Report. Total Gross Assets shall be those "total assets" reported on the U. S. Form 1120, Schedule L (Federal Return) relative to the company's fiscal year ending the calendar year of the report. The tax rate under this method is $350.00 per million or portion of a million. If the assumed par value capital is less than $1,000,000, the tax is calculated by dividing the assumed par value capital by $1,000,000 then multiplying that result by $350.00.
The example cited below is for a corporation having 1,000,000 shares of stock with a par value of $1.00 and 250,000 shares of stock with a par value of $5.00. gross assets of $1,000,000.00 and issued shares totaling 485,000.
Divide your total gross assets by your total issued shares carrying to 6 decimal places. The result is your "assumed par". Example: $1,000,000 assets, 485,000 issued shares = $2.061856 assumed par.
Multiply the assumed par by the number of authorized shares having a par value of less than the assumed par. Example: $2.061856 assumed par s 1,000,000 shares = $2,061,856.
Multiply the number of authorized shares with a par value greater than the assumed par by their respective par value. Example: 250,000 shares s $5.00 par value = $1,250,000
Add the results of #2 and #3 above. The result is your assumed par value capital. Example: $2,061,856 plus $1,250,000 = $3,311 956 assumed par value capital.
Figure your tax by dividing the assumed par value capital, rounded up to the next million if it is over $1,000,000, by 1,000,000 and then multiply by $350.00. Example: 4 x $350.00 = $1,400.00
The minimum tax for the Assumed Par Value Capital Method of calculation is $350.00.
NOTE: If an amendment changing your stock or par value was filed with the Division of Corporations during the year, issued shares and total gross assets within 30 days of the amendment must be given for each portion of the year during which each distinct authorized amount of capital stock or par value was in effect. The tax is then prorated for each portion of the year dividing the number of days the stock/par value was in effect by 365 days (366 leap year), then multiplying this result by the tax calculated for that portion of the year. The total tax for the year is the sum of all the prorated taxes for each portion of the year.
You may also use our Franchise Tax Calculator for estimating your taxes.
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WASHINGTON (Reuters) — A senior Democratic lawmaker introduced a bill Friday to end what he called a "bizarre" disparity between how stock options are treated under the tax code and how they are treated on corporate books.
A longtime critic of the stock options "book-tax" double standard, Sen. Carl Levin of Michigan introduced similar bills on the issue in 2003 and 1997.
"Our bill would end the double standard of companies deducting more from their taxes than the stock option expenses shown on their books," said Levin, chairman of the Senate Permanent Subcommittee on Investigations.
The "book-tax" gap reflects a difference in how stock options are treated under the tax code and under accounting rules known as Generally Accepted Accounting Principles.
A stock option gives the holder the right to buy a number of shares at a preset price for a specified period.
Options come with an exercise price usually equal to the market price of the shares on the grant date. If the market price rises above the exercise price, the holder exercises the options, buys the shares cheaply and sells them for a profit.
Companies are required under 2005 rules to book an expense equal to the value of stock options on the grant date. But under the tax code, companies can claim a deduction for stock options based on gains realized on the exercise date.
The disparity means that, under the right circumstances, tax deductions for stock options can be far larger than the costs recorded for the same options on a company's books.
Levin said the rules now let companies report "inconsistent stock option expenses on their financial books versus their tax returns, and often produce huge tax windfalls for companies that pay their executives with large stock option grants."
Levin's bill has been endorsed by the Consumer Federation of America, the AFL-CIO labor coalition and other groups.
The bill has no co-sponsors in the Senate and there is no similar legislation in the House.
Aligning tax deductions and book expenses would eliminate an incentive that, Levin said, encourages corporate boards to hand out huge executive stock option grants.
A congressional subcommittee has shown that some U. S. companies have legally avoided paying billions of dollars in taxes in recent years by claiming tax deductions for options that were far larger than the stock option expenses on their books.
For instance, at a hearing in June, the subcommittee said Occidental Petroleum took tax deductions totaling $352.9 million on stock options exercised by executives from 2002 to 2006. But over the same period, the company said that under current accounting standards it would have put expenses on its books of only $29 million on those options.
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Chapter 718: MUNICIPAL INCOME TAXES
Any term used in this chapter that is not otherwise defined in this chapter has the same meaning as when used in a comparable context in laws of the United States relating to federal income taxation or in Title LVII of the Revised Code, unless a different meaning is clearly required. If a term used in this chapter that is not otherwise defined in this chapter is used in a comparable context in both the laws of the United States relating to federal income tax and in Title LVII of the Revised Code and the use is not consistent, then the use of the term in the laws of the United States relating to federal income tax shall control over the use of the term in Title LVII of the Revised Code.
As used in this chapter:
(1) "Municipal taxable income" means the following:
(a) For a person other than an individual, income reduced by exempt income to the extent otherwise included in income and then, as applicable, apportioned or sitused to the municipal corporation under section 718.02 of the Revised Code, and further reduced by any pre-2017 net operating loss carryforward available to the person for the municipal corporation.
(i) For an individual who is a resident of a municipal corporation other than a qualified municipal corporation, income reduced by exempt income to the extent otherwise included in income, then reduced as provided in division (A)(2) of this section, and further reduced by any pre-2017 net operating loss carryforward available to the individual for the municipal corporation.
(ii) For an individual who is a resident of a qualified municipal corporation, Ohio adjusted gross income reduced by income exempted, and increased by deductions excluded, by the qualified municipal corporation from the qualified municipal corporation's tax. If a qualified municipal corporation, on or before December 31, 2017, exempts income earned by individuals who are not residents of the qualified municipal corporation and net profit of persons that are not wholly located within the qualified municipal corporation, such individual or person shall have no municipal taxable income for the purposes of the tax levied by the qualified municipal corporation and may be exempted by the qualified municipal corporation from the requirements of section 718.03 of the Revised Code.
(c) For an individual who is a nonresident of a municipal corporation, income reduced by exempt income to the extent otherwise included in income and then, as applicable, apportioned or sitused to the municipal corporation under section 718.02 of the Revised Code, then reduced as provided in division (A)(2) of this section, and further reduced by any pre-2017 net operating loss carryforward available to the individual for the municipal corporation.
(2) In computing the municipal taxable income of a taxpayer who is an individual, the taxpayer may subtract, as provided in division (A)(1)(b)(i) or (c) of this section, the amount of the individual's employee business expenses reported on the individual's form 2106 that the individual deducted for federal income tax purposes for the taxable year, subject to the limitation imposed by section 67 of the Internal Revenue Code. For the municipal corporation in which the taxpayer is a resident, the taxpayer may deduct all such expenses allowed for federal income tax purposes. For a municipal corporation in which the taxpayer is not a resident, the taxpayer may deduct such expenses only to the extent the expenses are related to the taxpayer's performance of personal services in that nonresident municipal corporation.
(B) "Income" means the following:
(a) For residents, all income, salaries, qualifying wages, commissions, and other compensation from whatever source earned or received by the resident, including the resident's distributive share of the net profit of pass-through entities owned directly or indirectly by the resident and any net profit of the resident, except as provided in division (D)(4) of this section.
(b) For the purposes of division (B)(1)(a) of this section:
(i) Any net operating loss of the resident incurred in the taxable year and the resident's distributive share of any net operating loss generated in the same taxable year and attributable to the resident's ownership interest in a pass-through entity shall be allowed as a deduction, for that taxable year and the following five taxable years, against any other net profit of the resident or the resident's distributive share of any net profit attributable to the resident's ownership interest in a pass-through entity until fully utilized, subject to division (B)(1)(d) of this section;
(ii) The resident's distributive share of the net profit of each pass-through entity owned directly or indirectly by the resident shall be calculated without regard to any net operating loss that is carried forward by that entity from a prior taxable year and applied to reduce the entity's net profit for the current taxable year.
(c) Division (B)(1)(b) of this section does not apply with respect to any net profit or net operating loss attributable to an ownership interest in an S corporation unless shareholders' distributive shares of net profits from S corporations are subject to tax in the municipal corporation as provided in division (C)(14)(b) or (c) of this section.
(d) Any amount of a net operating loss used to reduce a taxpayer's net profit for a taxable year shall reduce the amount of net operating loss that may be carried forward to any subsequent year for use by that taxpayer. In no event shall the cumulative deductions for all taxable years with respect to a taxpayer's net operating loss exceed the original amount of that net operating loss available to that taxpayer.
(2) In the case of nonresidents, all income, salaries, qualifying wages, commissions, and other compensation from whatever source earned or received by the nonresident for work done, services performed or rendered, or activities conducted in the municipal corporation, including any net profit of the nonresident, but excluding the nonresident's distributive share of the net profit or loss of only pass-through entities owned directly or indirectly by the nonresident.
(3) For taxpayers that are not individuals, net profit of the taxpayer;
(4) Lottery, sweepstakes, gambling and sports winnings, winnings from games of chance, and prizes and awards. If the taxpayer is a professional gambler for federal income tax purposes, the taxpayer may deduct related wagering losses and expenses to the extent authorized under the Internal Revenue Code and claimed against such winnings.
(C) "Exempt income" means all of the following:
(1) The military pay or allowances of members of the armed forces of the United States or members of their reserve components, including the national guard of any state;
(a) Except as provided in division (C)(2)(b) of this section, intangible income;
(b) A municipal corporation that taxed any type of intangible income on March 29, 1988, pursuant to Section 3 of S. B. 238 of the 116th general assembly, may continue to tax that type of income if a majority of the electors of the municipal corporation voting on the question of whether to permit the taxation of that type of intangible income after 1988 voted in favor thereof at an election held on November 8, 1988.
(3) Social security benefits, railroad retirement benefits, unemployment compensation, pensions, retirement benefit payments, payments from annuities, and similar payments made to an employee or to the beneficiary of an employee under a retirement program or plan, disability payments received from private industry or local, state, or federal governments or from charitable, religious or educational organizations, and the proceeds of sickness, accident, or liability insurance policies. As used in division (C)(3) of this section, "unemployment compensation" does not include supplemental unemployment compensation described in section 3402(o)(2) of the Internal Revenue Code.
(4) The income of religious, fraternal, charitable, scientific, literary, or educational institutions to the extent such income is derived from tax-exempt real estate, tax-exempt tangible or intangible property, or tax-exempt activities.
(5) Compensation paid under section 3501.28 or 3501.36 of the Revised Code to a person serving as a precinct election official to the extent that such compensation does not exceed one thousand dollars for the taxable year. Such compensation in excess of one thousand dollars for the taxable year may be subject to taxation by a municipal corporation. A municipal corporation shall not require the payer of such compensation to withhold any tax from that compensation.
(6) Dues, contributions, and similar payments received by charitable, religious, educational, or literary organizations or labor unions, lodges, and similar organizations;
(7) Alimony and child support received;
(8) Compensation for personal injuries or for damages to property from insurance proceeds or otherwise, excluding compensation paid for lost salaries or wages or compensation from punitive damages;
(9) Income of a public utility when that public utility is subject to the tax levied under section 5727.24 or 5727.30 of the Revised Code. Division (C)(9) of this section does not apply for purposes of Chapter 5745. of the Revised Code.
(10) Gains from involuntary conversions, interest on federal obligations, items of income subject to a tax levied by the state and that a municipal corporation is specifically prohibited by law from taxing, and income of a decedent's estate during the period of administration except such income from the operation of a trade or business;
(11) Compensation or allowances excluded from federal gross income under section 107 of the Internal Revenue Code;
(12) Employee compensation that is not qualifying wages as defined in division (R) of this section;
(13) Compensation paid to a person employed within the boundaries of a United States air force base under the jurisdiction of the United States air force that is used for the housing of members of the United States air force and is a center for air force operations, unless the person is subject to taxation because of residence or domicile. If the compensation is subject to taxation because of residence or domicile, tax on such income shall be payable only to the municipal corporation of residence or domicile.
(a) Except as provided in division (C)(14)(b) or (c) of this section, an S corporation shareholder's distributive share of net profits of the S corporation, other than any part of the distributive share of net profits that represents wages as defined in section 3121(a) of the Internal Revenue Code or net earnings from self-employment as defined in section 1402(a) of the Internal Revenue Code.
(b) If, pursuant to division (H) of former section 718.01 of the Revised Code as it existed before March 11, 2004, a majority of the electors of a municipal corporation voted in favor of the question at an election held on November 4, 2003, the municipal corporation may continue after 2002 to tax an S corporation shareholder's distributive share of net profits of an S corporation.
(c) If, on December 6, 2002, a municipal corporation was imposing, assessing, and collecting a tax on an S corporation shareholder's distributive share of net profits of the S corporation to the extent the distributive share would be allocated or apportioned to this state under divisions (B)(1) and (2) of section 5733.05 of the Revised Code if the S corporation were a corporation subject to taxes imposed under Chapter 5733. of the Revised Code, the municipal corporation may continue to impose the tax on such distributive shares to the extent such shares would be so allocated or apportioned to this state only until December 31, 2004, unless a majority of the electors of the municipal corporation voting on the question of continuing to tax such shares after that date voted in favor of that question at an election held November 2, 2004. If a majority of those electors voted in favor of the question, the municipal corporation may continue after December 31, 2004, to impose the tax on such distributive shares only to the extent such shares would be so allocated or apportioned to this state.
(d) A municipal corporation shall be deemed to have elected to tax S corporation shareholders' distributive shares of net profits of the S corporation in the hands of the shareholders if a majority of the electors of a municipal corporation voted in favor of a question at an election held under division (C)(14)(b) or (c) of this section. The municipal corporation shall specify by resolution or ordinance that the tax applies to the distributive share of a shareholder of an S corporation in the hands of the shareholder of the S corporation.
(15) To the extent authorized under a resolution or ordinance adopted by a municipal corporation before January 1, 2017, all or a portion of the income of individuals or a class of individuals under eighteen years of age.
(a) Except as provided in divisions (C)(16)(b), (c), and (d) of this section, qualifying wages described in division (B)(1) or (E) of section 718.011 of the Revised Code to the extent the qualifying wages are not subject to withholding for the municipal corporation under either of those divisions.
(b) The exemption provided in division (C)(16)(a) of this section does not apply with respect to the municipal corporation in which the employee resided at the time the employee earned the qualifying wages.
(c) The exemption provided in division (C)(16)(a) of this section does not apply to qualifying wages that an employer elects to withhold under division (D)(2) of section 718.011 of the Revised Code.
(d) The exemption provided in division (C)(16)(a) of this section does not apply to qualifying wages if both of the following conditions apply:
(i) For qualifying wages described in division (B)(1) of section 718.011 of the Revised Code, the employee's employer withholds and remits tax on the qualifying wages to the municipal corporation in which the employee's principal place of work is situated, or, for qualifying wages described in division (E) of section 718.011 of the Revised Code, the employee's employer withholds and remits tax on the qualifying wages to the municipal corporation in which the employer's fixed location is located;
(ii) The employee receives a refund of the tax described in division (C)(16)(d)(i) of this section on the basis of the employee not performing services in that municipal corporation.
(a) Except as provided in division (C)(17)(b) or (c) of this section, compensation that is not qualifying wages paid to a nonresident individual for personal services performed in the municipal corporation on not more than twenty days in a taxable year.
(b) The exemption provided in division (C)(17)(a) of this section does not apply under either of the following circumstances:
(i) The individual's base of operation is located in the municipal corporation.
(ii) The individual is a professional athlete, professional entertainer, or public figure, and the compensation is paid for the performance of services in the individual's capacity as a professional athlete, professional entertainer, or public figure. For purposes of division (C)(17)(b)(ii) of this section, "professional athlete," "professional entertainer," and "public figure" have the same meanings as in section 718.011 of the Revised Code.
(c) Compensation to which division (C)(17) of this section applies shall be treated as earned or received at the individual's base of operation. If the individual does not have a base of operation, the compensation shall be treated as earned or received where the individual is domiciled.
(d) For purposes of division (C)(17) of this section, "base of operation" means the location where an individual owns or rents an office, storefront, or similar facility to which the individual regularly reports and at which the individual regularly performs personal services for compensation.
(18) Compensation paid to a person for personal services performed for a political subdivision on property owned by the political subdivision, regardless of whether the compensation is received by an employee of the subdivision or another person performing services for the subdivision under a contract with the subdivision, if the property on which services are performed is annexed to a municipal corporation pursuant to section 709.023 of the Revised Code on or after March 27, 2017, unless the person is subject to such taxation because of residence. If the compensation is subject to taxation because of residence, municipal income tax shall be payable only to the municipal corporation of residence.
(19) Income the taxation of which is prohibited by the constitution or laws of the United States.
Any item of income that is exempt income of a pass-through entity under division (C) of this section is exempt income of each owner of the pass-through entity to the extent of that owner's distributive or proportionate share of that item of the entity's income.
(1) "Net profit" for a person other than an individual means adjusted federal taxable income.
(2) "Net profit" for a person who is an individual means the individual's net profit required to be reported on schedule C, schedule E, or schedule F reduced by any net operating loss carried forward. For the purposes of division (D)(2) of this section, the net operating loss carried forward shall be calculated and deducted in the same manner as provided in division (E)(8) of this section.
(3) For the purposes of this chapter, and notwithstanding division (D)(1) of this section, net profit of a disregarded entity shall not be taxable as against that disregarded entity, but shall instead be included in the net profit of the owner of the disregarded entity.
(4) For the purposes of this chapter, and notwithstanding any other provision of this chapter, the net profit of a publicly traded partnership that makes the election described in division (D)(4) of this section shall be taxed as if the partnership were a C corporation, and shall not be treated as the net profit or income of any owner of the partnership.
A publicly traded partnership that is treated as a partnership for federal income tax purposes and that is subject to tax on its net profits in one or more municipal corporations in this state may elect to be treated as a C corporation for municipal income tax purposes. The publicly traded partnership shall make the election in every municipal corporation in which the partnership is subject to taxation on its net profits. The election shall be made on the annual tax return filed in each such municipal corporation. The publicly traded partnership shall not be required to file the election with any municipal corporation in which the partnership is not subject to taxation on its net profits, but division (D)(4) of this section applies to all municipal corporations in which an individual owner of the partnership resides.
(E) "Adjusted federal taxable income," for a person required to file as a C corporation, or for a person that has elected to be taxed as a C corporation under division (D)(4) of this section, means a C corporation's federal taxable income before net operating losses and special deductions as determined under the Internal Revenue Code, adjusted as follows:
(1) Deduct intangible income to the extent included in federal taxable income. The deduction shall be allowed regardless of whether the intangible income relates to assets used in a trade or business or assets held for the production of income.
(2) Add an amount equal to five per cent of intangible income deducted under division (E)(1) of this section, but excluding that portion of intangible income directly related to the sale, exchange, or other disposition of property described in section 1221 of the Internal Revenue Code;
(3) Add any losses allowed as a deduction in the computation of federal taxable income if the losses directly relate to the sale, exchange, or other disposition of an asset described in section 1221 or 1231 of the Internal Revenue Code;
(a) Except as provided in division (E)(4)(b) of this section, deduct income and gain included in federal taxable income to the extent the income and gain directly relate to the sale, exchange, or other disposition of an asset described in section 1221 or 1231 of the Internal Revenue Code;
(b) Division (E)(4)(a) of this section does not apply to the extent the income or gain is income or gain described in section 1245 or 1250 of the Internal Revenue Code.
(5) Add taxes on or measured by net income allowed as a deduction in the computation of federal taxable income;
(6) In the case of a real estate investment trust or regulated investment company, add all amounts with respect to dividends to, distributions to, or amounts set aside for or credited to the benefit of investors and allowed as a deduction in the computation of federal taxable income;
(7) Deduct, to the extent not otherwise deducted or excluded in computing federal taxable income, any income derived from a transfer agreement or from the enterprise transferred under that agreement under section 4313.02 of the Revised Code;
(a) Except as limited by divisions (E)(8)(b), (c), and (d) of this section, deduct any net operating loss incurred by the person in a taxable year beginning on or after January 1, 2017.
The amount of such net operating loss shall be deducted from net profit that is reduced by exempt income to the extent necessary to reduce municipal taxable income to zero, with any remaining unused portion of the net operating loss carried forward to not more than five consecutive taxable years following the taxable year in which the loss was incurred, but in no case for more years than necessary for the deduction to be fully utilized.
(b) No person shall use the deduction allowed by division (E)(8) of this section to offset qualifying wages.
(i) For taxable years beginning in 2018, 2019, 2020, 2021, or 2022, a person may not deduct, for purposes of an income tax levied by a municipal corporation that levies an income tax before January 1, 2017, more than fifty per cent of the amount of the deduction otherwise allowed by division (E)(8)(a) of this section.
(ii) For taxable years beginning in 2023 or thereafter, a person may deduct, for purposes of an income tax levied by a municipal corporation that levies an income tax before January 1, 2017, the full amount allowed by division (E)(8)(a) of this section.
(d) Any pre-2017 net operating loss carryforward deduction that is available must be utilized before a taxpayer may deduct any amount pursuant to division (E)(8) of this section.
(e) Nothing in division (E)(8)(c)(i) of this section precludes a person from carrying forward, for use with respect to any return filed for a taxable year beginning after 2018, any amount of net operating loss that was not fully utilized by operation of division (E)(8)(c)(i) of this section. To the extent that an amount of net operating loss that was not fully utilized in one or more taxable years by operation of division (E)(8)(c)(i) of this section is carried forward for use with respect to a return filed for a taxable year beginning in 2019, 2020, 2021, or 2022, the limitation described in division (E)(8)(c)(i) of this section shall apply to the amount carried forward.
(9) Deduct any net profit of a pass-through entity owned directly or indirectly by the taxpayer and included in the taxpayer's federal taxable income unless an affiliated group of corporations includes that net profit in the group's federal taxable income in accordance with division (E)(3)(b) of section 718.06 of the Revised Code.
(10) Add any loss incurred by a pass-through entity owned directly or indirectly by the taxpayer and included in the taxpayer's federal taxable income unless an affiliated group of corporations includes that loss in the group's federal taxable income in accordance with division (E)(3)(b) of section 718.06 of the Revised Code.
If the taxpayer is not a C corporation, is not a disregarded entity that has made the election described in division (L)(2) of this section, is not a publicly traded partnership that has made the election described in division (D)(4) of this section, and is not an individual, the taxpayer shall compute adjusted federal taxable income under this section as if the taxpayer were a C corporation, except guaranteed payments and other similar amounts paid or accrued to a partner, former partner, shareholder, former shareholder, member, or former member shall not be allowed as a deductible expense unless such payments are in consideration for the use of capital and treated as payment of interest under section 469 of the Internal Revenue Code or United States treasury regulations. Amounts paid or accrued to a qualified self-employed retirement plan with respect to a partner, former partner, shareholder, former shareholder, member, or former member of the taxpayer, amounts paid or accrued to or for health insurance for a partner, former partner, shareholder, former shareholder, member, or former member, and amounts paid or accrued to or for life insurance for a partner, former partner, shareholder, former shareholder, member, or former member shall not be allowed as a deduction.
Nothing in division (E) of this section shall be construed as allowing the taxpayer to add or deduct any amount more than once or shall be construed as allowing any taxpayer to deduct any amount paid to or accrued for purposes of federal self-employment tax.
(F) "Schedule C" means internal revenue service schedule C (form 1040) filed by a taxpayer pursuant to the Internal Revenue Code.
(G) "Schedule E" means internal revenue service schedule E (form 1040) filed by a taxpayer pursuant to the Internal Revenue Code.
(H) "Schedule F" means internal revenue service schedule F (form 1040) filed by a taxpayer pursuant to the Internal Revenue Code.
(I) "Internal Revenue Code" has the same meaning as in section 5747.01 of the Revised Code.
(J) "Resident" means an individual who is domiciled in the municipal corporation as determined under section 718.012 of the Revised Code.
(K) "Nonresident" means an individual that is not a resident.
(1) "Taxpayer" means a person subject to a tax levied on income by a municipal corporation in accordance with this chapter. "Taxpayer" does not include a grantor trust or, except as provided in division (L)(2)(a) of this section, a disregarded entity.
(a) A single member limited liability company that is a disregarded entity for federal tax purposes may be a separate taxpayer from its single member in all Ohio municipal corporations in which it either filed as a separate taxpayer or did not file for its taxable year ending in 2003, if all of the following conditions are met:
(i) The limited liability company's single member is also a limited liability company.
(ii) The limited liability company and its single member were formed and doing business in one or more Ohio municipal corporations for at least five years before January 1, 2004.
(iii) Not later than December 31, 2004, the limited liability company and its single member each made an election to be treated as a separate taxpayer under division (L) of this section as this section existed on December 31, 2004.
(iv) The limited liability company was not formed for the purpose of evading or reducing Ohio municipal corporation income tax liability of the limited liability company or its single member.
(v) The Ohio municipal corporation that was the primary place of business of the sole member of the limited liability company consented to the election.
(b) For purposes of division (L)(2)(a)(v) of this section, a municipal corporation was the primary place of business of a limited liability company if, for the limited liability company's taxable year ending in 2003, its income tax liability was greater in that municipal corporation than in any other municipal corporation in Ohio, and that tax liability to that municipal corporation for its taxable year ending in 2003 was at least four hundred thousand dollars.
(M) "Person" includes individuals, firms, companies, joint stock companies, business trusts, estates, trusts, partnerships, limited liability partnerships, limited liability companies, associations, C corporations, S corporations, governmental entities, and any other entity.
(N) "Pass-through entity" means a partnership not treated as an association taxable as a C corporation for federal income tax purposes, a limited liability company not treated as an association taxable as a C corporation for federal income tax purposes, an S corporation, or any other class of entity from which the income or profits of the entity are given pass-through treatment for federal income tax purposes. "Pass-through entity" does not include a trust, estate, grantor of a grantor trust, or disregarded entity.
(O) "S corporation" means a person that has made an election under subchapter S of Chapter 1 of Subtitle A of the Internal Revenue Code for its taxable year.
(P) "Single member limited liability company" means a limited liability company that has one direct member.
(Q) "Limited liability company" means a limited liability company formed under Chapter 1705. of the Revised Code or under the laws of another state.
(R) "Qualifying wages" means wages, as defined in section 3121(a) of the Internal Revenue Code, without regard to any wage limitations, adjusted as follows:
(1) Deduct the following amounts:
(a) Any amount included in wages if the amount constitutes compensation attributable to a plan or program described in section 125 of the Internal Revenue Code.
(b) Any amount included in wages if the amount constitutes payment on account of a disability related to sickness or an accident paid by a party unrelated to the employer, agent of an employer, or other payer.
(c) Any amount attributable to a nonqualified deferred compensation plan or program described in section 3121(v)(2)(C) of the Internal Revenue Code if the compensation is included in wages and the municipal corporation has, by resolution or ordinance adopted before January 1, 2017, exempted the amount from withholding and tax.
(d) Any amount included in wages if the amount arises from the sale, exchange, or other disposition of a stock option, the exercise of a stock option, or the sale, exchange, or other disposition of stock purchased under a stock option and the municipal corporation has, by resolution or ordinance adopted before January 1, 2017, exempted the amount from withholding and tax.
(e) Any amount included in wages that is exempt income.
(2) Add the following amounts:
(a) Any amount not included in wages solely because the employee was employed by the employer before April 1, 1986.
(b) Any amount not included in wages because the amount arises from the sale, exchange, or other disposition of a stock option, the exercise of a stock option, or the sale, exchange, or other disposition of stock purchased under a stock option and the municipal corporation has not, by resolution or ordinance, exempted the amount from withholding and tax adopted before January 1, 2017. Division (R)(2)(b) of this section applies only to those amounts constituting ordinary income.
(c) Any amount not included in wages if the amount is an amount described in section 401(k), 403(b), or 457 of the Internal Revenue Code. Division (R)(2)(c) of this section applies only to employee contributions and employee deferrals.
(d) Any amount that is supplemental unemployment compensation benefits described in section 3402(o)(2) of the Internal Revenue Code and not included in wages.
(e) Any amount received that is treated as self-employment income for federal tax purposes in accordance with section 1402(a)(8) of the Internal Revenue Code.
(f) Any amount not included in wages if all of the following apply:
(i) For the taxable year the amount is employee compensation that is earned outside of the United States and that either is included in the taxpayer's gross income for federal income tax purposes or would have been included in the taxpayer's gross income for such purposes if the taxpayer did not elect to exclude the income under section 911 of the Internal Revenue Code;
(ii) For no preceding taxable year did the amount constitute wages as defined in section 3121(a) of the Internal Revenue Code;
(iii) For no succeeding taxable year will the amount constitute wages; y
(iv) For any taxable year the amount has not otherwise been added to wages pursuant to either division (R)(2) of this section or section 718.03 of the Revised Code, as that section existed before the effective date of H. B. 5 of the 130th general assembly, March 23, 2017.
(S) "Intangible income" means income of any of the following types: income yield, interest, capital gains, dividends, or other income arising from the ownership, sale, exchange, or other disposition of intangible property including, but not limited to, investments, deposits, money, or credits as those terms are defined in Chapter 5701. of the Revised Code, and patents, copyrights, trademarks, tradenames, investments in real estate investment trusts, investments in regulated investment companies, and appreciation on deferred compensation. "Intangible income" does not include prizes, awards, or other income associated with any lottery winnings, gambling winnings, or other similar games of chance.
(T) "Taxable year" means the corresponding tax reporting period as prescribed for the taxpayer under the Internal Revenue Code.
(U) "Tax administrator" means the individual charged with direct responsibility for administration of an income tax levied by a municipal corporation in accordance with this chapter, and also includes the following:
(1) A municipal corporation acting as the agent of another municipal corporation;
(2) A person retained by a municipal corporation to administer a tax levied by the municipal corporation, but only if the municipal corporation does not compensate the person in whole or in part on a contingency basis;
(3) The central collection agency or the regional income tax agency or their successors in interest, or another entity organized to perform functions similar to those performed by the central collection agency and the regional income tax agency.
(V) "Employer" means a person that is an employer for federal income tax purposes.
(W) "Employee" means an individual who is an employee for federal income tax purposes.
(X) "Other payer" means any person, other than an individual's employer or the employer's agent, that pays an individual any amount included in the federal gross income of the individual. "Other payer" includes casino operators and video lottery terminal sales agents.
(Y) "Calendar quarter" means the three-month period ending on the last day of March, June, September, or December.
(Z) "Form 2106" means internal revenue service form 2106 filed by a taxpayer pursuant to the Internal Revenue Code.
(AA) "Municipal corporation" includes a joint economic development district or joint economic development zone that levies an income tax under section 715.691. 715.70. 715.71. or 715.74 of the Revised Code.
(BB) "Disregarded entity" means a single member limited liability company, a qualifying subchapter S subsidiary, or another entity if the company, subsidiary, or entity is a disregarded entity for federal income tax purposes.
(CC) "Generic form" means an electronic or paper form that is not prescribed by a particular municipal corporation and that is designed for reporting taxes withheld by an employer, agent of an employer, or other payer, estimated municipal income taxes, or annual municipal income tax liability or for filing a refund claim.
(DD) "Tax return preparer" means any individual described in section 7701(a)(36) of the Internal Revenue Code and 26 C. F.R. 301.7701-15.
(EE) "Ohio business gateway" means the online computer network system, created under section 125.30 of the Revised Code, that allows persons to electronically file business reply forms with state agencies and includes any successor electronic filing and payment system.
(FF) "Local board of tax review" and "board of tax review" mean the entity created under section 718.11 of the Revised Code.
(GG) "Net operating loss" means a loss incurred by a person in the operation of a trade or business. "Net operating loss" does not include unutilized losses resulting from basis limitations, at-risk limitations, or passive activity loss limitations.
(HH) "Casino operator" and "casino facility" have the same meanings as in section 3772.01 of the Revised Code.
(II) "Video lottery terminal" has the same meaning as in section 3770.21 of the Revised Code.
(JJ) "Video lottery terminal sales agent" means a lottery sales agent licensed under Chapter 3770. of the Revised Code to conduct video lottery terminals on behalf of the state pursuant to section 3770.21 of the Revised Code.
(KK) "Postal service" means the United States postal service.
(LL) "Certified mail," "express mail," "United States mail," "postal service," and similar terms include any delivery service authorized pursuant to section 5703.056 of the Revised Code.
(MM) "Postmark date," "date of postmark," and similar terms include the date recorded and marked in the manner described in division (B)(3) of section 5703.056 of the Revised Code.
(NN) "Related member" means a person that, with respect to the taxpayer during all or any portion of the taxable year, is either a related entity, a component member as defined in section 1563(b) of the Internal Revenue Code, or a person to or from whom there is attribution of stock ownership in accordance with section 1563(e) of the Internal Revenue Code except, for purposes of determining whether a person is a related member under this division, "twenty per cent" shall be substituted for "5 percent" wherever "5 percent" appears in section 1563(e) of the Internal Revenue Code.
(OO) "Related entity" means any of the following:
(1) An individual stockholder, or a member of the stockholder's family enumerated in section 318 of the Internal Revenue Code, if the stockholder and the members of the stockholder's family own directly, indirectly, beneficially, or constructively, in the aggregate, at least fifty per cent of the value of the taxpayer's outstanding stock;
(2) A stockholder, or a stockholder's partnership, estate, trust, or corporation, if the stockholder and the stockholder's partnerships, estates, trusts, or corporations own directly, indirectly, beneficially, or constructively, in the aggregate, at least fifty per cent of the value of the taxpayer's outstanding stock;
(3) A corporation, or a party related to the corporation in a manner that would require an attribution of stock from the corporation to the party or from the party to the corporation under division (OO)(4) of this section, provided the taxpayer owns directly, indirectly, beneficially, or constructively, at least fifty per cent of the value of the corporation's outstanding stock;
(4) The attribution rules described in section 318 of the Internal Revenue Code apply for the purpose of determining whether the ownership requirements in divisions (OO)(1) to (3) of this section have been met.
(1) "Assessment" means a written finding by the tax administrator that a person has underpaid municipal income tax, or owes penalty and interest, or any combination of tax, penalty, or interest, to the municipal corporation that commences the person's time limitation for making an appeal to the local board of tax review pursuant to section 718.11 of the Revised Code, and has "ASSESSMENT" written in all capital letters at the top of such finding.
(2) "Assessment" does not include an informal notice denying a request for refund issued under division (B)(3) of section 718.19 of the Revised Code, a billing statement notifying a taxpayer of current or past-due balances owed to the municipal corporation, a tax administrator's request for additional information, a notification to the taxpayer of mathematical errors, or a tax administrator's other written correspondence to a person or taxpayer that does meet the criteria prescribed by division (PP)(1) of this section.
(QQ) "Taxpayers' rights and responsibilities" means the rights provided to taxpayers in sections 718.11. 718.12. 718.19. 718.23. 718.36. 718.37. 718.38. 5717.011. and 5717.03 of the Revised Code and the responsibilities of taxpayers to file, report, withhold, remit, and pay municipal income tax and otherwise comply with Chapter 718. of the Revised Code and resolutions, ordinances, and rules adopted by a municipal corporation for the imposition and administration of a municipal income tax.
(RR) "Qualified municipal corporation" means a municipal corporation that, by resolution or ordinance adopted on or before December 31, 2011, adopted Ohio adjusted gross income, as defined by section 5747.01 of the Revised Code, as the income subject to tax for the purposes of imposing a municipal income tax.
(1) "Pre-2017 net operating loss carryforward" means any net operating loss incurred in a taxable year beginning before January 1, 2017, to the extent such loss was permitted, by a resolution or ordinance of the municipal corporation that was adopted by the municipal corporation before January 1, 2017, to be carried forward and utilized to offset income or net profit generated in such municipal corporation in future taxable years.
(2) For the purpose of calculating municipal taxable income, any pre-2017 net operating loss carryforward may be carried forward to any taxable year, including taxable years beginning in 2017 or thereafter, for the number of taxable years provided in the resolution or ordinance or until fully utilized, whichever is earlier.
(TT) "Small employer" means any employer that had total revenue of less than five hundred thousand dollars during the preceding taxable year. For purposes of this division, "total revenue" means receipts of any type or kind, including, but not limited to, sales receipts; payments; rents; profits; gains, dividends, and other investment income; compensation; commissions; premiums; money; property; grants; contributions; donations; gifts; program service revenue; patient service revenue; premiums; fees, including premium fees and service fees; tuition payments; unrelated business revenue; reimbursements; any type of payment from a governmental unit, including grants and other allocations; and any other similar receipts reported for federal income tax purposes or under generally accepted accounting principles. "Small employer" does not include the federal government; any state government, including any state agency or instrumentality; any political subdivision; or any entity treated as a government for financial accounting and reporting purposes.
(UU) "Audit" means the examination of a person or the inspection of the books, records, memoranda, or accounts of a person for the purpose of determining liability for a municipal income tax.
(VV) "Publicly traded partnership" means any partnership, an interest in which is regularly traded on an established securities market. A "publicly traded partnership" may have any number of partners.
Amended by 131st General Assembly File No. TBD, HB 64, §101.01, eff. 9/29/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
(A) As used in this section:
(1) "Employer" includes a person that is a related member to or of an employer.
(2) "Professional athlete" means an athlete who performs services in a professional athletic event for wages or other remuneration.
(3) "Professional entertainer" means a person who performs services in the professional performing arts for wages or other remuneration on a per-event basis.
(4) "Public figure" means a person of prominence who performs services at discrete events, such as speeches, public appearances, or similar events, for wages or other remuneration on a per-event basis.
(5) "Fixed location" means a permanent place of doing business in this state, such as an office, warehouse, storefront, or similar location owned or controlled by an employer.
(6) "Worksite location" means a construction site or other temporary worksite in this state at which the employer provides services for more than twenty days during the calendar year. "Worksite location" does not include the home of an employee.
(7) "Principal place of work" means the fixed location to which an employee is required to report for employment duties on a regular and ordinary basis. If the employee is not required to report for employment duties on a regular and ordinary basis to a fixed location, "principal place of work" means the worksite location in this state to which the employee is required to report for employment duties on a regular and ordinary basis. If the employee is not required to report for employment duties on a regular and ordinary basis to a fixed location or worksite location, "principal place of work" means the location in this state at which the employee spends the greatest number of days in a calendar year performing services for or on behalf of the employee's employer.
If there is not a single municipal corporation in which the employee spent the "greatest number of days in a calendar year" performing services for or on behalf of the employer, but instead there are two or more municipal corporations in which the employee spent an identical number of days that is greater than the number of days the employee spent in any other municipal corporation, the employer shall allocate any of the employee's qualifying wages subject to division (B)(1)(a) of this section among those two or more municipal corporations. The allocation shall be made using any fair and reasonable method, including, but not limited to, an equal allocation among such municipal corporations or an allocation based upon the time spent or sales made by the employee in each such municipal corporation. A municipal corporation to which qualifying wages are allocated under this division shall be the employee's "principal place of work" with respect to those qualifying wages for the purposes of this section.
For the purposes of this division, the location at which an employee spends a particular day shall be determined in accordance with division (B)(2) of this section, except that "location" shall be substituted for "municipal corporation" wherever "municipal corporation" appears in that division.
(1) Subject to divisions (C), (E), (F), and (G) of this section, an employer is not required to withhold municipal income tax on qualifying wages paid to an employee for the performance of personal services in a municipal corporation that imposes such a tax if the employee performed such services in the municipal corporation on twenty or fewer days in a calendar year, unless one of the following conditions applies:
(a) The employee's principal place of work is located in the municipal corporation.
(b) The employee performed services at one or more presumed worksite locations in the municipal corporation. For the purposes of this division, "presumed worksite location" means a construction site or other temporary worksite in this state at which the employer provides services that can reasonably be expected by the employer to last more than twenty days in a calendar year. Services can "reasonably be expected by the employer to last more than twenty days" if either of the following applies at the time the services commence:
(i) The nature of the services are such that it will require more than twenty days of actual services to complete the services;
(ii) The agreement between the employer and its customer to perform services at a location requires the employer to perform actual services at the location for more than twenty days.
(c) The employee is a resident of the municipal corporation and has requested that the employer withhold tax from the employee's qualifying wages as provided in section 718.03 of the Revised Code.
(d) The employee is a professional athlete, professional entertainer, or public figure, and the qualifying wages are paid for the performance of services in the employee's capacity as a professional athlete, professional entertainer, or public figure.
(2) For the purposes of division (B)(1) of this section, an employee shall be considered to have spent a day performing services in a municipal corporation only if the employee spent more time performing services for or on behalf of the employer in that municipal corporation than in any other municipal corporation on that day. For the purposes of determining the amount of time an employee spent in a particular location, the time spent performing one or more of the following activities shall be considered to have been spent at the employee's principal place of work:
(a) Traveling to the location at which the employee will first perform services for the employer for the day;
(b) Traveling from a location at which the employee was performing services for the employer to any other location;
(c) Traveling from any location to another location in order to pick up or load, for the purpose of transportation or delivery, property that has been purchased, sold, assembled, fabricated, repaired, refurbished, processed, remanufactured, or improved by the employee's employer;
(d) Transporting or delivering property described in division (B)(2)(c) of this section, provided that, upon delivery of the property, the employee does not temporarily or permanently affix the property to real estate owned, used, or controlled by a person other than the employee's employer;
(e) Traveling from the location at which the employee makes the employee's final delivery or pick-up for the day to either the employee's principal place of work or a location at which the employee will not perform services for the employer.
(C) If the principal place of work of an employee is located in a municipal corporation that imposes an income tax in accordance with this chapter, the exception from withholding requirements described in division (B)(1) of this section shall apply only if, with respect to the employee's qualifying wages described in that division, the employer withholds and remits tax on such qualifying wages to the municipal corporation in which the employee's principal place of work is located.
(1) Except as provided in division (D)(2) of this section, if, during a calendar year, the number of days an employee spends performing personal services in a municipal corporation exceeds the twenty-day threshold described in division (B)(1) of this section, the employer shall withhold and remit tax to that municipal corporation for any subsequent days in that calendar year on which the employer pays qualifying wages to the employee for personal services performed in that municipal corporation.
(2) An employer required to begin withholding tax for a municipal corporation under division (D)(1) of this section may elect to withhold tax for that municipal corporation for the first twenty days on which the employer paid qualifying wages to the employee for personal services performed in that municipal corporation.
(3) If an employer makes the election described in division (D)(2) of this section, the taxes withheld and paid by such an employer during those first twenty days to the municipal corporation in which the employee's principal place of work is located are refundable to the employee.
(E) Without regard to the number of days in a calendar year on which an employee performs personal services in any municipal corporation, an employer shall withhold municipal income tax on all of the employee's qualifying wages for a taxable year and remit that tax only to the municipal corporation in which the employer's fixed location is located if the employer qualifies as a small employer as defined in section 718.01 of the Revised Code.
To determine whether an employer qualifies as a small employer for a taxable year, a tax administrator may require the employer to provide the tax administrator with the employer's federal income tax return for the preceding taxable year.
(F) Divisions (B)(1) and (D) of this section shall not apply to the extent that a tax administrator and an employer enter into an agreement regarding the manner in which the employer shall comply with the requirements of section 718.03 of the Revised Code.
(G) In the case of a person performing personal services at a petroleum refinery located in a municipal corporation that imposes a tax on income, an employer is not required to withhold municipal income tax on the qualifying wages of such a person if the person performs those services on twelve or fewer days in a calendar year, unless the principal place of work of the employer is located in another municipal corporation in this state that imposes a tax applying to compensation paid to the person for services performed on those days and the person is not liable to that other municipal corporation for tax on the compensation paid for such services. For the purposes of this division, a petroleum refinery is a facility with a standard industrial classification code facility classification of 2911, petroleum refining.
Notwithstanding division (D) of this section, if, during a calendar year, the number of days an individual performs personal services at a petroleum refinery exceeds twelve, the employer shall withhold tax for the municipal corporation for the first twelve days for which the employer paid qualifying wages to the individual and for all subsequent days in the calendar year on which the individual performed services at the refinery.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
(1) An individual is presumed to be domiciled in a municipal corporation for all or part of a taxable year if the individual was domiciled in the municipal corporation on the last day of the immediately preceding taxable year or if the tax administrator reasonably concludes that the individual is domiciled in the municipal corporation for all or part of the taxable year.
(2) An individual may rebut the presumption of domicile described in division (A)(1) of this section if the individual establishes by a preponderance of the evidence that the individual was not domiciled in the municipal corporation for all or part of the taxable year.
(B) For the purpose of determining whether an individual is domiciled in a municipal corporation for all or part of a taxable year, only the following factors shall be considered:
(1) The location of financial institutions in which the individual or the individual's spouse have any accounts, including, but not limited to, checking, savings, certificates of deposit, or individual retirement accounts;
(2) The location of issuers of credit cards to the individual or the individual's spouse or of any other persons making installment loans to the individual or the individual's spouse;
(3) The location of institutional lenders which have made loans to, or which are guaranteed by, the individual or the individual's spouse;
(4) The location of investment facilities, brokerage firms, realtors, financial advisors, or consultants used by the individual or the individual's spouse;
(5) The location of either the insurance company that issued or the insurance agent that sold any policy of insurance to the individual or the individual's spouse, including, but not limited to, life, health, disability, automobile, or homeowner's insurance;
(6) The location of law firms, accounting firms, and similar professionals utilized by the individual or the individual's spouse for legal, tax, accounting, financial, or retirement services;
(7) The location of physicians, dentists, osteopaths, optometrists, or other health care providers, or veterinarians utilized by the individual or the individual's spouse;
(8) The location of organizations described in section 501(c) of the Internal Revenue Code to which the individual or the individual's spouse make contributions or other payments or in which they participate as a congregant, member, board member, committee member, adviser, or consultant;
(9) The location of burial plots owned by the individual or the individual's spouse;
(10) The location of business ventures or business entities in which the individual or the individual's spouse has a more than twenty-five per cent ownership interest or in which the individual exercises, either individually or jointly, significant control over the affairs of the venture or entity;
(11) The recitation of residency or domicile in a will, trust, or other estate planning document;
(12) The location of the individual's friends, dependents as defined in section 152 of the Internal Revenue Code, and family members other than the individual's spouse, if the individual is not legally separated from the individual's spouse under a decree of divorce or separate maintenance as provided in section 7703(a)(2) of the Internal Revenue Code;
(13) The location of educational institutions attended by the individual's dependents as defined in section 152 of the Internal Revenue Code, to the extent that tuition paid to such educational institution is based on the residency of the individual or the individual's spouse in the municipal corporation where the educational institution is located;
(14) The location of trustees, executors, guardians, or other fiduciaries named in estate planning documents of the individual or the individual's spouse;
(15) The location of all businesses at which the individual or the individual's spouse makes purchases of tangible personal property;
(16) The location where the individual married;
(17) The location or identity of recipients of political contributions made by the individual or the individual's spouse;
(18) The number of contact periods the individual has with the municipal corporation. For the purposes of this division, an individual has one "contact period" with a municipal corporation if the individual is away overnight from the individual's abode located outside of the municipal corporation and while away overnight from that abode spends at least some portion, however minimal, of each of two consecutive days in the municipal corporation.
(19) The individual's domicile in other taxable years;
(20) The location at which the individual is registered to vote;
(21) The address on the individual's driver's license;
(22) The location of real estate for which the individual claimed a property tax exemption or reduction allowed on the basis of the individual's residence or domicile;
(23) The location and value of abodes owned or leased by the individual;
(24) Declarations, written or oral, made by the individual regarding the individual's residency;
(25) The primary location at which the individual is employed.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
This section applies to any taxpayer engaged in a business or profession in a municipal corporation that imposes an income tax in accordance with this chapter, unless the taxpayer is an individual who resides in the municipal corporation or the taxpayer is an electric company, combined company, or telephone company that is subject to and required to file reports under Chapter 5745. of the Revised Code.
(A) Except as otherwise provided in division (B) of this section, net profit from a business or profession conducted both within and without the boundaries of a municipal corporation shall be considered as having a taxable situs in the municipal corporation for purposes of municipal income taxation in the same proportion as the average ratio of the following:
(1) The average original cost of the real property and tangible personal property owned or used by the taxpayer in the business or profession in the municipal corporation during the taxable period to the average original cost of all of the real and tangible personal property owned or used by the taxpayer in the business or profession during the same period, wherever situated.
As used in the preceding paragraph, tangible personal or real property shall include property rented or leased by the taxpayer and the value of such property shall be determined by multiplying the annual rental thereon by eight;
(2) Wages, salaries, and other compensation paid during the taxable period to individuals employed in the business or profession for services performed in the municipal corporation to wages, salaries, and other compensation paid during the same period to individuals employed in the business or profession, wherever the individual's services are performed, excluding compensation from which taxes are not required to be withheld under section 718.011 of the Revised Code;
(3) Total gross receipts of the business or profession from sales and rentals made and services performed during the taxable period in the municipal corporation to total gross receipts of the business or profession during the same period from sales, rentals, and services, wherever made or performed.
(1) If the apportionment factors described in division (A) of this section do not fairly represent the extent of a taxpayer's business activity in a municipal corporation, the taxpayer may request, or the tax administrator of the municipal corporation may require, that the taxpayer use, with respect to all or any portion of the income of the taxpayer, an alternative apportionment method involving one or more of the following:
(b) The exclusion of one or more of the factors;
(c) The inclusion of one or more additional factors that would provide for a more fair apportionment of the income of the taxpayer to the municipal corporation;
(d) A modification of one or more of the factors.
(2) A taxpayer request to use an alternative apportionment method shall be in writing and shall accompany a tax return, timely filed appeal of an assessment, or timely filed amended tax return. The taxpayer may use the requested alternative method unless the tax administrator denies the request in an assessment issued within the period prescribed by division (A) of section 718.12 of the Revised Code.
(3) A tax administrator may require a taxpayer to use an alternative apportionment method as described in division (B)(1) of this section only by issuing an assessment to the taxpayer within the period prescribed by division (A) of section 718.12 of the Revised Code.
(4) Nothing in division (B) of this section nullifies or otherwise affects any alternative apportionment arrangement approved by a tax administrator or otherwise agreed upon by both the tax administrator and taxpayer before January 1, 2017.
(C) As used in division (A)(2) of this section, "wages, salaries, and other compensation" includes only wages, salaries, or other compensation paid to an employee for services performed at any of the following locations:
(1) A location that is owned, controlled, or used by, rented to, or under the possession of one of the following:
(b) A vendor, customer, client, or patient of the employer, or a related member of such a vendor, customer, client, or patient;
(c) A vendor, customer, client, or patient of a person described in division (C)(1)(b) of this section, or a related member of such a vendor, customer, client, or patient.
(2) Any location at which a trial, appeal, hearing, investigation, inquiry, review, court-martial, or similar administrative, judicial, or legislative matter or proceeding is being conducted, provided that the compensation is paid for services performed for, or on behalf of, the employer or that the employee's presence at the location directly or indirectly benefits the employer;
(3) Any other location, if the tax administrator determines that the employer directed the employee to perform the services at the other location in lieu of a location described in division (C)(1) or (2) of this section solely in order to avoid or reduce the employer's municipal income tax liability. If a tax administrator makes such a determination, the employer may dispute the determination by establishing, by a preponderance of the evidence, that the tax administrator's determination was unreasonable.
(D) For the purposes of division (A)(3) of this section, receipts from sales and rentals made and services performed shall be sitused to a municipal corporation as follows:
(1) Gross receipts from the sale of tangible personal property shall be sitused to the municipal corporation in which the sale originated. For the purposes of this division, a sale of property originates in a municipal corporation if, regardless of where title passes, the property meets any of the following criteria:
(a) The property is shipped to or delivered within the municipal corporation from a stock of goods located within the municipal corporation.
(b) The property is delivered within the municipal corporation from a location outside the municipal corporation, provided the taxpayer is regularly engaged through its own employees in the solicitation or promotion of sales within such municipal corporation and the sales result from such solicitation or promotion.
(c) The property is shipped from a place within the municipal corporation to purchasers outside the municipal corporation, provided that the taxpayer is not, through its own employees, regularly engaged in the solicitation or promotion of sales at the place where delivery is made.
(2) Gross receipts from the sale of services shall be sitused to the municipal corporation to the extent that such services are performed in the municipal corporation.
(3) To the extent included in income, gross receipts from the sale of real property located in the municipal corporation shall be sitused to the municipal corporation.
(4) To the extent included in income, gross receipts from rents and royalties from real property located in the municipal corporation shall be sitused to the municipal corporation.
(5) Gross receipts from rents and royalties from tangible personal property shall be sitused to the municipal corporation based upon the extent to which the tangible personal property is used in the municipal corporation.
(E) The net profit received by an individual taxpayer from the rental of real estate owned directly by the individual or by a disregarded entity owned by the individual shall be subject to tax only by the municipal corporation in which the property generating the net profit is located and the municipal corporation in which the individual taxpayer that receives the net profit resides.
A municipal corporation shall allow such taxpayers to elect to use separate accounting for the purpose of calculating net profit sitused under this division to the municipal corporation in which the property is located.
(1) Except as provided in division (F)(2) of this section, commissions received by a real estate agent or broker relating to the sale, purchase, or lease of real estate shall be sitused to the municipal corporation in which the real estate is located. Net profit reported by the real estate agent or broker shall be allocated to a municipal corporation based upon the ratio of the commissions the agent or broker received from the sale, purchase, or lease of real estate located in the municipal corporation to the commissions received from the sale, purchase, or lease of real estate everywhere in the taxable year.
(2) An individual who is a resident of a municipal corporation that imposes a municipal income tax shall report the individual's net profit from all real estate activity on the individual's annual tax return for that municipal corporation. The individual may claim a credit for taxes the individual paid on such net profit to another municipal corporation to the extent that such a credit is allowed under the municipal income tax ordinance, or rules of the municipal corporation of residence.
(G) If, in computing a taxpayer's adjusted federal taxable income, the taxpayer deducted any amount with respect to a stock option granted to an employee, and if the employee is not required to include in the employee's income any such amount or a portion thereof because it is exempted from taxation under divisions (C)(12) and (R)(1)(d) of section 718.01 of the Revised Code by a municipal corporation to which the taxpayer has apportioned a portion of its net profit, the taxpayer shall add the amount that is exempt from taxation to the taxpayer's net profit that was apportioned to that municipal corporation. In no case shall a taxpayer be required to add to its net profit that was apportioned to that municipal corporation any amount other than the amount upon which the employee would be required to pay tax were the amount related to the stock option not exempted from taxation.
This division applies solely for the purpose of making an adjustment to the amount of a taxpayer's net profit that was apportioned to a municipal corporation under this section.
(H) When calculating the ratios described in division (A) of this section for the purposes of that division or division (B) of this section, the owner of a disregarded entity shall include in the owner's ratios the property, payroll, and gross receipts of such disregarded entity.
Amended by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Effective Date: 09-26-2003; 12-30-2004; 2007 HB24 12-21-2007
(A) As used in this section:
(1) "Nonqualified deferred compensation plan" means a compensation plan described in section 3121(v)(2)(C) of the Internal Revenue Code.
(a) Except as provided in division (A)(2)(b) of this section, "qualifying loss" means the excess, if any, of the total amount of compensation the payment of which is deferred pursuant to a nonqualified deferred compensation plan over the total amount of income the taxpayer has recognized for federal income tax purposes for all taxable years on a cumulative basis as compensation with respect to the taxpayer's receipt of money and property attributable to distributions in connection with the nonqualified deferred compensation plan.
(b) If, for one or more taxable years, the taxpayer has not paid to one or more municipal corporations income tax imposed on the entire amount of compensation the payment of which is deferred pursuant to a nonqualified deferred compensation plan, then the "qualifying loss" is the product of the amount resulting from the calculation described in division (A)(2)(a) of this section computed without regard to division (A)(2)(b) of this section and a fraction the numerator of which is the portion of such compensation on which the taxpayer has paid income tax to one or more municipal corporations and the denominator of which is the total amount of compensation the payment of which is deferred pursuant to a nonqualified deferred compensation plan.
(c) With respect to a nonqualified deferred compensation plan, the taxpayer sustains a qualifying loss only in the taxable year in which the taxpayer receives the final distribution of money and property pursuant to that nonqualified deferred compensation plan.
(3) "Qualifying tax rate" means the applicable tax rate for the taxable year for the which the taxpayer paid income tax to a municipal corporation with respect to any portion of the total amount of compensation the payment of which is deferred pursuant to a nonqualified deferred compensation plan. If different tax rates applied for different taxable years, then the "qualifying tax rate" is a weighted average of those different tax rates. The weighted average shall be based upon the tax paid to the municipal corporation each year with respect to the nonqualified deferred compensation plan.
(1) Except as provided in division (D) of this section, a refundable credit shall be allowed against the income tax imposed by a municipal corporation for each qualifying loss sustained by a taxpayer during the taxable year. The amount of the credit shall be equal to the product of the qualifying loss and the qualifying tax rate.
(2) A taxpayer shall claim the credit allowed under this section from each municipal corporation to which the taxpayer paid municipal income tax with respect to the nonqualified deferred compensation plan in one or more taxable years.
(3) If a taxpayer has paid tax to more than one municipal corporation with respect to the nonqualified deferred compensation plan, the amount of the credit that a taxpayer may claim from each municipal corporation shall be calculated on the basis of each municipal corporation's proportionate share of the total municipal corporation income tax paid by the taxpayer to all municipal corporations with respect to the nonqualified deferred compensation plan.
(4) In no case shall the amount of the credit allowed under this section exceed the cumulative income tax that a taxpayer has paid to a municipal corporation for all taxable years with respect to the nonqualified deferred compensation plan.
(1) For purposes of this section, municipal corporation income tax that has been withheld with respect to a nonqualified deferred compensation plan shall be considered to have been paid by the taxpayer with respect to the nonqualified deferred compensation plan.
(2) Any municipal income tax that has been refunded or otherwise credited for the benefit of the taxpayer with respect to a nonqualified deferred compensation plan shall not be considered to have been paid to the municipal corporation by the taxpayer.
(D) The credit allowed under this section is allowed only to the extent the taxpayer's qualifying loss is attributable to:
(1) The insolvency or bankruptcy of the employer who had established the nonqualified deferred compensation plan; o
(2) The employee's failure or inability to satisfy all of the employer's terms and conditions necessary to receive the nonqualified deferred compensation.
Effective Date: 09-26-2003
(1) Each employer, agent of an employer, or other payer located or doing business in a municipal corporation that imposes a tax on income in accordance with this chapter shall withhold from each employee an amount equal to the qualifying wages of the employee earned by the employee in the municipal corporation multiplied by the applicable rate of the municipal corporation's income tax, except for qualifying wages for which withholding is not required under section 718.011 of the Revised Code or division (D) or (F) of this section. An employer, agent of an employer, or other payer shall deduct and withhold the tax from qualifying wages on the date that the employer, agent, or other payer directly, indirectly, or constructively pays the qualifying wages to, or credits the qualifying wages to the benefit of, the employee.
(2) In addition to withholding the amounts required under division (A)(1) of this section, an employer, agent of an employer, or other payer may also deduct and withhold, on the request of an employee, taxes for the municipal corporation in which the employee is a resident.
(1) Except as provided in division (B)(2) of this section, an employer, agent of an employer, or other payer shall remit to the tax administrator of a municipal corporation the greater of the income taxes deducted and withheld or the income taxes required to be deducted and withheld by the employer, agent, or other payer according to the following schedule:
(a) Taxes required to be deducted and withheld shall be remitted monthly to the tax administrator if the total taxes deducted and withheld or required to be deducted and withheld by the employer, agent, or other payer on behalf of the municipal corporation in the preceding calendar year exceeded two thousand three hundred ninety-nine dollars, or if the total amount of taxes deducted and withheld or required to be deducted and withheld on behalf of the municipal corporation in any month of the preceding calendar quarter exceeded two hundred dollars.
Payment under division (B)(1)(a) of this section shall be made so that the payment is received by the tax administrator not later than fifteen days after the last day of each month.
(b) Any employer, agent of an employer, or other payer not required to make payments under division (B)(1)(a) of this section of taxes required to be deducted and withheld shall make quarterly payments to the tax administrator not later than the fifteenth day of the month following the end of each calendar quarter.
(2) Notwithstanding division (B)(1) of this section, a municipal corporation may require, by resolution, ordinance, or rule, an employer, agent of an employer, or other payer to do any of the following:
(a) Remit taxes deducted and withheld semimonthly to the tax administrator if the total taxes deducted and withheld or required to be deducted and withheld on behalf of the municipal corporation in the preceding calendar year exceeded eleven thousand nine hundred ninety-nine dollars, or if the total amount of taxes deducted and withheld or required to be deducted and withheld on behalf of the municipal corporation in any month of the preceding calendar year exceeded one thousand dollars. The payment under division (B)(2)(a) of this section shall be made so that the payment is received by the tax administrator not later than one of the following:
(i) If the taxes were deducted and withheld or required to be deducted and withheld during the first fifteen days of a month, the third banking day after the fifteenth day of that month;
(ii) If the taxes were deducted and withheld or required to be deducted and withheld after the fifteenth day of a month and before the first day of the immediately following month, the third banking day after the last day of that month.
(b) Make payment by electronic funds transfer to the tax administrator of all taxes deducted and withheld on behalf of the municipal corporation if the employer, agent of an employer, or other payer is required to make payments electronically for the purpose of paying federal taxes withheld on payments to employees under section 6302 of the Internal Revenue Code, 26 C. F.R. 31.6302-1, or any other federal statute or regulation. The payment of tax by electronic funds transfer under this division does not affect an employer's, agent's, or other payer's obligation to file any return as required under this section.
(C) An employer, agent of an employer, or other payer shall make and file a return showing the amount of tax withheld by the employer, agent, or other payer from the qualifying wages of each employee and remitted to the tax administrator. Unless the tax administrator requires all individual taxpayers to file a tax return under section 718.05 of the Revised Code, a return filed by an employer, agent, or other payer under this division shall be accepted by a tax administrator and municipal corporation as the return required of an employee whose sole income subject to the tax under this chapter is the qualifying wages reported by the employee's employer, agent of an employer, or other payer.
(D) An employer, agent of an employer, or other payer is not required to withhold municipal income tax with respect to an individual's disqualifying disposition of an incentive stock option if, at the time of the disqualifying disposition, the individual is not an employee of either the corporation with respect to whose stock the option has been issued or of such corporation's successor entity.
(1) An employee is not relieved from liability for a tax by the failure of the employer, agent of an employer, or other payer to withhold the tax as required under this chapter or by the employer's, agent's, or other payer's exemption from the requirement to withhold the tax.
(2) The failure of an employer, agent of an employer, or other payer to remit to the municipal corporation the tax withheld relieves the employee from liability for that tax unless the employee colluded with the employer, agent, or other payer in connection with the failure to remit the tax withheld.
(F) Compensation deferred before June 26, 2003, is not subject to any municipal corporation income tax or municipal income tax withholding requirement to the extent the deferred compensation does not constitute qualifying wages at the time the deferred compensation is paid or distributed.
(G) Each employer, agent of an employer, or other payer required to withhold taxes is liable for the payment of that amount required to be withheld, whether or not such taxes have been withheld, and such amount shall be deemed to be held in trust for the municipal corporation until such time as the withheld amount is remitted to the tax administrator.
(H) On or before the last day of February of each year, an employer shall file a withholding reconciliation return with the tax administrator listing the names, addresses, and social security numbers of all employees from whose qualifying wages tax was withheld or should have been withheld for the municipal corporation during the preceding calendar year, the amount of tax withheld, if any, from each such employee, the total amount of qualifying wages paid to such employee during the preceding calendar year, the name of every other municipal corporation for which tax was withheld or should have been withheld from such employee during the preceding calendar year, any other information required for federal income tax reporting purposes on Internal Revenue Service form W-2 or its equivalent form with respect to such employee, and other information as may be required by the tax administrator.
(I) The officer or the employee of the employer, agent of an employer, or other payer with control or direct supervision of or charged with the responsibility for withholding the tax or filing the reports and making payments as required by this section, shall be personally liable for a failure to file a report or pay the tax due as required by this section. The dissolution of an employer, agent of an employer, or other payer does not discharge the officer's or employee's liability for a failure of the employer, agent of an employer, or other payer to file returns or pay any tax due.
(J) An employer is required to deduct and withhold municipal income tax on tips and gratuities received by the employer's employees and constituting qualifying wages only to the extent that the tips and gratuities are under the employer's control. For the purposes of this division, a tip or gratuity is under the employer's control if the tip or gratuity is paid by the customer to the employer for subsequent remittance to the employee, or if the customer pays the tip or gratuity by credit card, debit card, or other electronic means.
(K) A tax administrator shall consider any tax withheld by an employer at the request of an employee when such tax is not otherwise required to be withheld by this chapter to be tax required to be withheld and remitted for the purposes of this section.
Amended by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Amended by 129th General AssemblyFile No.126, HB 386, §1, eff. 6/11/2012.
Effective Date: 09-26-2003; 2007 HB119 07-01-2007
(A) A municipal corporation shall require a casino facility or a casino operator, as defined in Section 6(C)(9) of Article XV, Ohio Constitution, and section 3772.01 of the Revised Code, respectively, or a lottery sales agent conducting video lottery terminals on behalf of the state to withhold and remit municipal income tax with respect to amounts other than qualifying wages as provided in this section.
(B) If a person's winnings at a casino facility are an amount for which reporting to the internal revenue service of the amount is required by section 6041 of the Internal Revenue Code, as amended, the casino operator shall deduct and withhold municipal income tax from the person's winnings at the rate of the tax imposed by the municipal corporation in which the casino facility is located.
(C) Amounts deducted and withheld by a casino operator are held in trust for the benefit of the municipal corporation to which the tax is owed.
(1) On or before the tenth day of each month, the casino operator shall file a return electronically with the tax administrator of the municipal corporation, providing the name, address, and social security number of the person from whose winnings amounts were deducted and withheld, the amount of each such deduction and withholding during the preceding calendar month, the amount of the winnings from which each such amount was withheld, the type of casino gaming that resulted in such winnings, and any other information required by the tax administrator. With this return, the casino operator shall remit electronically to the municipal corporation all amounts deducted and withheld during the preceding month.
(2) Annually, on or before the thirty-first day of January, a casino operator shall file an annual return electronically with the tax administrator of the municipal corporation in which the casino facility is located, indicating the total amount deducted and withheld during the preceding calendar year. The casino operator shall remit electronically with the annual return any amount that was deducted and withheld and that was not previously remitted. If the name, address, or social security number of a person or the amount deducted and withheld with respect to that person was omitted on a monthly return for that reporting period, that information shall be indicated on the annual return.
(3) Annually, on or before the thirty-first day of January, a casino operator shall issue an information return to each person with respect to whom an amount has been deducted and withheld during the preceding calendar year. The information return shall show the total amount of municipal income tax deducted from the person's winnings during the preceding year. The casino operator shall provide to the tax administrator a copy of each information return issued under this division. The administrator may require that such copies be transmitted electronically.
(4) A casino operator that fails to file a return and remit the amounts deducted and withheld shall be personally liable for the amount withheld and not remitted. Such personal liability extends to any penalty and interest imposed for the late filing of a return or the late payment of tax deducted and withheld.
(5) If a casino operator sells the casino facility or otherwise quits the casino business, the amounts deducted and withheld along with any penalties and interest thereon are immediately due and payable. The successor shall withhold an amount of the purchase money that is sufficient to cover the amounts deducted and withheld along with any penalties and interest thereon until the predecessor casino operator produces either of the following:
(a) A receipt from the tax administrator showing that the amounts deducted and withheld and penalties and interest thereon have been paid;
(b) A certificate from the tax administrator indicating that no amounts are due.
If the successor fails to withhold purchase money, the successor is personally liable for the payment of the amounts deducted and withheld and penalties and interest thereon.
(6) The failure of a casino operator to deduct and withhold the required amount from a person's winnings does not relieve that person from liability for the municipal income tax with respect to those winnings.
(D) If a person's prize award from a video lottery terminal is an amount for which reporting to the internal revenue service is required by section 6041 of the Internal Revenue Code, as amended, the video lottery sales agent shall deduct and withhold municipal income tax from the person's prize award at the rate of the tax imposed by the municipal corporation in which the video lottery terminal facility is located.
(E) Amounts deducted and withheld by a video lottery sales agent are held in trust for the benefit of the municipal corporation to which the tax is owed.
(1) The video lottery sales agent shall issue to a person from whose prize award an amount has been deducted and withheld a receipt for the amount deducted and withheld, and shall obtain from the person receiving a prize award the person's name, address, and social security number in order to facilitate the preparation of returns required by this section.
(2) On or before the tenth day of each month, the video lottery sales agent shall file a return electronically with the tax administrator of the municipal corporation providing the names, addresses, and social security numbers of the persons from whose prize awards amounts were deducted and withheld, the amount of each such deduction and withholding during the preceding calendar month, the amount of the prize award from which each such amount was withheld, and any other information required by the tax administrator. With the return, the video lottery sales agent shall remit electronically to the tax administrator all amounts deducted and withheld during the preceding month.
(3) A video lottery sales agent shall maintain a record of all receipts issued under division (E) of this section and shall make those records available to the tax administrator upon request. Such records shall be maintained in accordance with section 5747.17 of the Revised Code and any rules adopted pursuant thereto.
(4) Annually, on or before the thirty-first day of January, each video lottery terminal sales agent shall file an annual return electronically with the tax administrator of the municipal corporation in which the facility is located indicating the total amount deducted and withheld during the preceding calendar year. The video lottery sales agent shall remit electronically with the annual return any amount that was deducted and withheld and that was not previously remitted. If the name, address, or social security number of a person or the amount deducted and withheld with respect to that person was omitted on a monthly return for that reporting period, that information shall be indicated on the annual return.
(5) Annually, on or before the thirty-first day of January, a video lottery sales agent shall issue an information return to each person with respect to whom an amount has been deducted and withheld during the preceding calendar year. The information return shall show the total amount of municipal income tax deducted and withheld from the person's prize award by the video lottery sales agent during the preceding year. A video lottery sales agent shall provide to the tax administrator of the municipal corporation a copy of each information return issued under this division. The tax administrator may require that such copies be transmitted electronically.
(6) A video lottery sales agent who fails to file a return and remit the amounts deducted and withheld is personally liable for the amount deducted and withheld and not remitted. Such personal liability extends to any penalty and interest imposed for the late filing of a return or the late payment of tax deducted and withheld.
(F) If a video lottery sales agent ceases to operate video lottery terminals, the amounts deducted and withheld along with any penalties and interest thereon are immediately due and payable. The successor of the video lottery sales agent that purchases the video lottery terminals from the agent shall withhold an amount from the purchase money that is sufficient to cover the amounts deducted and withheld and any penalties and interest thereon until the predecessor video lottery sales agent operator produces either of the following:
(1) A receipt from the tax administrator showing that the amounts deducted and withheld and penalties and interest thereon have been paid;
(2) A certificate from the tax administrator indicating that no amounts are due.
If the successor fails to withhold purchase money, the successor is personally liable for the payment of the amounts deducted and withheld and penalties and interest thereon.
(G) The failure of a video lottery sales agent to deduct and withhold the required amount from a person's prize award does not relieve that person from liability for the municipal income tax with respect to that prize award.
(H) If a casino operator or lottery sales agent files a return late, fails to file a return, remits amounts deducted and withheld late, or fails to remit amounts deducted and withheld as required under this section, the tax administrator of a municipal corporation may impose the following applicable penalty:
(1) For the late remittance of, or failure to remit, tax deducted and withheld under this section, a penalty equal to fifty per cent of the tax deducted and withheld;
(2) For the failure to file, or the late filing of, a monthly or annual return, a penalty of five hundred dollars for each return not filed or filed late. Interest shall accrue on past due amounts deducted and withheld at the rate prescribed in section 5703.47 of the Revised Code.
(I) Amounts deducted and withheld on behalf of a municipal corporation shall be allowed as a credit against payment of the tax imposed by the municipal corporation and shall be treated as taxes paid for purposes of section 718.08 of the Revised Code. This division applies only to the person for whom the amount is deducted and withheld.
(J) The tax administrator shall prescribe the forms of the receipts and returns required under this section.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
(A) Notwithstanding division (A) of section 715.013 of the Revised Code, a municipal corporation may levy a tax on income and a withholding tax if such taxes are levied in accordance with the provisions and limitations specified in this chapter. On or after January 1, 2017, the ordinance or resolution levying such taxes, as adopted or amended by the legislative authority of the municipal corporation, shall include all of the following:
(1) A statement that the tax is an annual tax levied on the income of every person residing in or earning or receiving income in the municipal corporation and that the tax shall be measured by municipal taxable income;
(2) A statement that the municipal corporation is levying the tax in accordance with the limitations specified in this chapter and that the resolution or ordinance thereby incorporates the provisions of this chapter;
(3) The rate of the tax;
(4) Whether, and the extent to which, a credit, as described in division (D) of this section, will be allowed against the tax;
(5) The purpose or purposes of the tax;
(6) Any other provision necessary for the administration of the tax, provided that the provision does not conflict with any provision of this chapter.
(B) Any municipal corporation that, on or before March 23, 2017, levies an income tax at a rate in excess of one per cent may continue to levy the tax at the rate specified in the original ordinance or resolution, provided that such rate continues in effect as specified in the original ordinance or resolution.
(1) No municipal corporation shall tax income at other than a uniform rate.
(2) Except as provided in division (B) of this section, no municipal corporation shall levy a tax on income at a rate in excess of one per cent without having obtained the approval of the excess by a majority of the electors of the municipality voting on the question at a general, primary, or special election. The legislative authority of the municipal corporation shall file with the board of elections at least ninety days before the day of the election a copy of the ordinance together with a resolution specifying the date the election is to be held and directing the board of elections to conduct the election. The ballot shall be in the following form: "Shall the Ordinance providing for a. per cent levy on income for (Brief description of the purpose of the proposed levy) be passed?
FOR THE INCOME TAX
AGAINST THE INCOME TAX"
In the event of an affirmative vote, the proceeds of the levy may be used only for the specified purpose.
(D) A municipal corporation may, by ordinance or resolution, grant a credit to residents of the municipal corporation for all or a portion of the taxes paid to any municipal corporation, in this state or elsewhere, by the resident or by a pass-through entity owned, directly or indirectly, by a resident, on the resident's distributive or proportionate share of the income of the pass-through entity. A municipal corporation is not required to refund taxes not paid to the municipal corporation.
(E) Except as otherwise provided in this chapter, a municipal corporation that levies an income tax in effect for taxable years beginning before January 1, 2017, may continue to administer and enforce the provisions of such tax for all taxable years beginning before January 1, 2017, provided that the provisions of such tax are consistent with this chapter as it existed prior to March 23, 2017.
(F) Nothing in this chapter authorizes a municipal corporation to levy a tax on income, or to administer or collect such a tax or penalties or interest related to such a tax, contrary to the provisions and limitations specified in this chapter. No municipal corporation shall enforce an ordinance or resolution that conflicts with the provisions of this chapter.
(1) Division (G) of this section applies to a municipal corporation that, at the time of entering into a written agreement under division (G)(2) of this section, shares the same territory as a city, local, or exempted village school district, to the extent that not more than thirty per cent of the territory of the municipal corporation is located outside the school district and a portion of the territory of the school district that is not located within the municipal corporation is located within another municipal corporation having a population of four hundred thousand or more according to the federal decennial census most recently completed before the agreement is entered into under division (G)(2) of this section.
(2) The legislative authority of a municipal corporation to which division (G) of this section applies may propose to the electors an income tax, one of the purposes of which shall be to provide financial assistance to the school district described in division (G)(1) of this section. Prior to proposing the tax, the legislative authority shall negotiate and enter into a written agreement with the board of education of that school district specifying the tax rate; the percentage or amount of tax revenue to be paid to the school district or the method of establishing or determining that percentage or amount, which may be subject to change periodically; the purpose for which the school district will use the money; the first year the tax will be levied; the date of the election on the question of the tax; and the method and schedule by which, and the conditions under which, the municipal corporation will make payments to the school district. The tax shall otherwise comply with the provisions and limitations specified in this chapter.
Amended by 131st General Assembly File No. TBD, HB 64, §101.01, eff. 9/29/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Repealed by 130th General Assembly File No. TBD, HB 5, §2, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Effective Date: 07-26-2000
(A) An annual return with respect to the income tax levied by a municipal corporation shall be completed and filed by every taxpayer for any taxable year for which the taxpayer is liable for the tax. If the total credit allowed against the tax as described in division (D) of section 718.04 of the Revised Code for the year is equal to or exceeds the tax imposed by the municipal corporation, no return shall be required unless the municipal ordinance or resolution levying the tax requires the filing of a return in such circumstances.
(B) If an individual is deceased, any return or notice required of that individual shall be completed and filed by that decedent's executor, administrator, or other person charged with the property of that decedent.
(C) If an individual is unable to complete and file a return or notice required by a municipal corporation in accordance with this chapter, the return or notice required of that individual shall be completed and filed by the individual's duly authorized agent, guardian, conservator, fiduciary, or other person charged with the care of the person or property of that individual.
(D) Returns or notices required of an estate or a trust shall be completed and filed by the fiduciary of the estate or trust.
(E) No municipal corporation shall deny spouses the ability to file a joint return.
(1) Each return required to be filed under this section shall contain the signature of the taxpayer or the taxpayer's duly authorized agent and of the person who prepared the return for the taxpayer, and shall include the taxpayer's social security number or taxpayer identification number. Each return shall be verified by a declaration under penalty of perjury.
(2) A tax administrator may require a taxpayer who is an individual to include, with each annual return, amended return, or request for refund required under this section, copies of only the following documents: all of the taxpayer's Internal Revenue Service form W-2, "Wage and Tax Statements," including all information reported on the taxpayer's federal W-2, as well as taxable wages reported or withheld for any municipal corporation; the taxpayer's Internal Revenue Service form 1040 or, in the case of a return or request required by a qualified municipal corporation, Ohio form IT-1040; and, with respect to an amended tax return or refund request, any other documentation necessary to support the refund request or the adjustments made in the amended return. An individual taxpayer who files the annual return required by this section electronically is not required to provide paper copies of any of the foregoing to the tax administrator unless the tax administrator requests such copies after the return has been filed.
(3) A tax administrator may require a taxpayer that is not an individual to include, with each annual net profit return, amended net profit return, or request for refund required under this section, copies of only the following documents: the taxpayer's Internal Revenue Service form 1041, form 1065, form 1120, form 1120-REIT, form 1120F, or form 1120S, and, with respect to an amended tax return or refund request, any other documentation necessary to support the refund request or the adjustments made in the amended return.
A taxpayer that is not an individual and that files an annual net profit return electronically through the Ohio business gateway or in some other manner shall either mail the documents required under this division to the tax administrator at the time of filing or, if electronic submission is available, submit the documents electronically through the Ohio business gateway. The department of taxation shall publish a method of electronically submitting the documents required under this division through the Ohio business gateway on or before January 1, 2017. The department shall transmit all documents submitted electronically under this division to the appropriate tax administrator.
(4) After a taxpayer files a tax return, the tax administrator may request, and the taxpayer shall provide, any information, statements, or documents required by the municipal corporation to determine and verify the taxpayer's municipal income tax liability. The requirements imposed under division (F) of this section apply regardless of whether the taxpayer files on a generic form or on a form prescribed by the tax administrator.
(a) Except as otherwise provided in this chapter, each individual income tax return required to be filed under this section shall be completed and filed as required by the tax administrator on or before the date prescribed for the filing of state individual income tax returns under division (G) of section 5747.08 of the Revised Code. The taxpayer shall complete and file the return or notice on forms prescribed by the tax administrator or on generic forms, together with remittance made payable to the municipal corporation or tax administrator. No remittance is required if the amount shown to be due is ten dollars or less.
(b) Except as otherwise provided in this chapter, each annual net profit return required to be filed under this section by a taxpayer that is not an individual shall be completed and filed as required by the tax administrator on or before the fifteenth day of the fourth month following the end of the taxpayer's taxable year. The taxpayer shall complete and file the return or notice on forms prescribed by the tax administrator or on generic forms, together with remittance made payable to the municipal corporation or tax administrator. No remittance is required if the amount shown to be due is ten dollars or less.
(a) Any taxpayer that has duly requested an automatic six-month extension for filing the taxpayer's federal income tax return shall automatically receive an extension for the filing of a municipal income tax return. The extended due date of the municipal income tax return shall be the fifteenth day of the tenth month after the last day of the taxable year to which the return relates.
(b) A taxpayer that has not requested or received a six-month extension for filing the taxpayer's federal income tax return may request that the tax administrator grant the taxpayer a six-month extension of the date for filing the taxpayer's municipal income tax return. If the request is received by the tax administrator on or before the date the municipal income tax return is due, the tax administrator shall grant the taxpayer's requested extension.
(c) An extension of time to file under division (G)(2) of this section is not an extension of the time to pay any tax due unless the tax administrator grants an extension of that date.
(3) If the tax commissioner extends for all taxpayers the date for filing state income tax returns under division (G) of section 5747.08 of the Revised Code, a taxpayer shall automatically receive an extension for the filing of a municipal income tax return. The extended due date of the municipal income tax return shall be the same as the extended due date of the state income tax return.
(4) If the tax administrator considers it necessary in order to ensure the payment of the tax imposed by the municipal corporation in accordance with this chapter, the tax administrator may require taxpayers to file returns and make payments otherwise than as provided in this section, including taxpayers not otherwise required to file annual returns.
(5) To the extent that any provision in this division conflicts with any provision in section 718.052 of the Revised Code, the provision in that section prevails.
(1) For taxable years beginning after 2017, a municipal corporation shall not require a taxpayer to remit tax with respect to net profits if the amount due is less than ten dollars.
(2) Any taxpayer not required to remit tax to a municipal corporation for a taxable year pursuant to division (H)(1) of this section shall file with the municipal corporation an annual net profit return under division (F)(3) of this section.
(I) This division shall not apply to payments required to be made under division (B)(1)(a) or (2)(a) of section 718.03 of the Revised Code.
(1) If any report, claim, statement, or other document required to be filed, or any payment required to be made, within a prescribed period or on or before a prescribed date under this chapter is delivered after that period or that date by United States mail to the tax administrator or other municipal official with which the report, claim, statement, or other document is required to be filed, or to which the payment is required to be made, the date of the postmark stamped on the cover in which the report, claim, statement, or other document, or payment is mailed shall be deemed to be the date of delivery or the date of payment. "The date of postmark" means, in the event there is more than one date on the cover, the earliest date imprinted on the cover by the postal service.
(2) If a payment is required to be made by electronic funds transfer, the payment is considered to be made when the payment is credited to an account designated by the tax administrator for the receipt of tax payments, except that, when a payment made by electronic funds transfer is delayed due to circumstances not under the control of the taxpayer, the payment is considered to be made when the taxpayer submitted the payment.
(J) The amounts withheld by an employer, the agent of an employer, or an other payer as described in section 718.03 of the Revised Code shall be allowed to the recipient of the compensation as credits against payment of the tax imposed on the recipient by the municipal corporation, unless the amounts withheld were not remitted to the municipal corporation and the recipient colluded with the employer, agent, or other payer in connection with the failure to remit the amounts withheld.
(K) Each return required by a municipal corporation to be filed in accordance with this section shall include a box that the taxpayer may check to authorize another person, including a tax return preparer who prepared the return, to communicate with the tax administrator about matters pertaining to the return. The return or instructions accompanying the return shall indicate that by checking the box the taxpayer authorizes the tax administrator to contact the preparer or other person concerning questions that arise during the examination or other review of the return and authorizes the preparer or other person only to provide the tax administrator with information that is missing from the return, to contact the tax administrator for information about the examination or other review of the return or the status of the taxpayer's refund or payments, and to respond to notices about mathematical errors, offsets, or return preparation that the taxpayer has received from the tax administrator and has shown to the preparer or other person.
(L) The tax administrator of a municipal corporation shall accept for filing a generic form of any income tax return, report, or document required by the municipal corporation in accordance with this chapter, provided that the generic form, once completed and filed, contains all of the information required by ordinance, resolution, or rules adopted by the municipal corporation or tax administrator, and provided that the taxpayer or tax return preparer filing the generic form otherwise complies with the provisions of this chapter and of the municipal corporation ordinance or resolution governing the filing of returns, reports, or documents.
(M) When income tax returns, reports, or other documents require the signature of a tax return preparer, the tax administrator shall accept a facsimile of such a signature in lieu of a manual signature.
(1) As used in this division, "worksite location" has the same meaning as in section 718.011 of the Revised Code.
(2) A person may notify a tax administrator that the person does not expect to be a taxpayer with respect to the municipal corporation for a taxable year if both of the following conditions apply:
(a) The person was required to file a tax return with the municipal corporation for the immediately preceding taxable year because the person performed services at a worksite location within that municipal corporation.
(b) The person no longer provides services in the municipal corporation and does not expect to be subject to the municipal corporation's income tax for the taxable year.
The person shall provide the notice in a signed affidavit that briefly explains the person's circumstances, including the location of the previous worksite location and the last date on which the person performed services or made any sales within the municipal corporation. The affidavit also shall include the following statement: "The affiant has no plans to perform any services within the municipal corporation, make any sales in the municipal corporation, or otherwise become subject to the tax levied by the municipal corporation during the taxable year. If the affiant does become subject to the tax levied by the municipal corporation for the taxable year, the affiant agrees to be considered a taxpayer and to properly register as a taxpayer with the municipal corporation if such a registration is required by the municipal corporation's resolutions, ordinances, or rules." The person shall sign the affidavit under penalty of perjury.
(c) If a person submits an affidavit described in division (N)(2) of this section, the tax administrator shall not require the person to file any tax return for the taxable year unless the tax administrator possesses information that conflicts with the affidavit or if the circumstances described in the affidavit change. Nothing in division (N) of this section prohibits the tax administrator from performing an audit of the person.
Amended by 131st General Assembly File No. TBD, HB 64, §101.01, eff. 9/29/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
(A) Any taxpayer subject to municipal income taxation with respect to the taxpayer's net profit from a business or profession may file any municipal income tax return. estimated municipal income tax return, or extension for filing a municipal income tax return, and may make payment of amounts shown to be due on such returns, by using the Ohio business gateway.
(B) Any employer, agent of an employer, or other payer may report the amount of municipal income tax withheld from qualifying wages. and may make remittance of such amounts, by using the Ohio business gateway.
(C) Nothing in this section affects the due dates for filing employer withholding tax returns.
(D) No municipal corporation shall be required to pay any fee or charge for the operation or maintenance of the Ohio business gateway.
(E) The use of the Ohio business gateway by municipal corporations, taxpayers, or other persons pursuant to this section does not affect the legal rights of municipalities or taxpayers as otherwise permitted by law. This state shall not be a party to the administration of municipal income taxes or to an appeal of a municipal income tax matter, except as otherwise specifically provided by law.
(1) The tax commissioner shall adopt rules establishing:
(a) The format of documents to be used by taxpayers to file returns and make payments through the Ohio business gateway; y
(b) The information taxpayers must submit when filing municipal income tax returns through the Ohio business gateway.
The commissioner shall not adopt rules under this division that conflict with the requirements of section 718.05 of the Revised Code.
(2) The commissioner shall consult with the Ohio business gateway steering committee before adopting the rules described in division (F)(1) of this section.
(G) Nothing in this section shall be construed as limiting or removing the authority of any municipal corporation to administer, audit, and enforce the provisions of its municipal income tax.
Amended by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Effective Date: 09-26-2003
(A) Each member of the national guard of any state and each member of a reserve component of the armed forces of the United States called to active duty pursuant to an executive order issued by the president of the United States or an act of the congress of the United States, and each civilian serving as support personnel in a combat zone or contingency operation in support of the armed forces, may apply to the tax administrator of a municipal corporation for both an extension of time for filing of the return and an extension of time for payment of taxes required by the municipal corporation in accordance with this chapter during the period of the member's or civilian's duty service and for one hundred eighty days thereafter. The application shall be filed on or before the one hundred eightieth day after the member's or civilian's duty terminates. An applicant shall provide such evidence as the tax administrator considers necessary to demonstrate eligibility for the extension.
(1) If the tax administrator ascertains that an applicant is qualified for an extension under this section, the tax administrator shall enter into a contract with the applicant for the payment of the tax in installments that begin on the one hundred eighty-first day after the applicant's active duty or service terminates. Except as provided in division (B)(3) of this section, the tax administrator may prescribe such contract terms as the tax administrator considers appropriate.
(2) If the tax administrator ascertains that an applicant is qualified for an extension under this section, the applicant shall neither be required to file any return, report, or other tax document nor be required to pay any tax otherwise due to the municipal corporation before the one hundred eighty-first day after the applicant's active duty or service terminates.
(3) Taxes paid pursuant to a contract entered into under division (B)(1) of this section are not delinquent. The tax administrator shall not require any payments of penalties or interest in connection with those taxes for the extension period.
(1) Nothing in this division denies to any person described in this division the application of divisions (A) and (B) of this section.
(a) A qualifying taxpayer who is eligible for an extension under the Internal Revenue Code shall receive both an extension of time in which to file any return, report, or other tax document and an extension of time in which to make any payment of taxes required by a municipal corporation in accordance with this chapter. The length of any extension granted under division (C)(2)(a) of this section shall be equal to the length of the corresponding extension that the taxpayer receives under the Internal Revenue Code. As used in this section, "qualifying taxpayer" means a member of the national guard or a member of a reserve component of the armed forces of the United States called to active duty pursuant to either an executive order issued by the president of the United States or an act of the congress of the United States, or a civilian serving as support personnel in a combat zone or contingency operation in support of the armed forces.
(b) Taxes whose payment is extended in accordance with division (C)(2)(a) of this section are not delinquent during the extension period. Such taxes become delinquent on the first day after the expiration of the extension period if the taxes are not paid prior to that date. The tax administrator shall not require any payment of penalties or interest in connection with those taxes for the extension period. The tax administrator shall not include any period of extension granted under division (C)(2)(a) of this section in calculating the penalty or interest due on any unpaid tax.
(D) For each taxable year to which division (A), (B), or (C) of this section applies to a taxpayer, the provisions of divisions (B)(2) and (3) or (C) of this section, as applicable, apply to the spouse of that taxpayer if the filing status of the spouse and the taxpayer is married filing jointly for that year.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
(A) As used in this section:
(1) "Affiliated group of corporations" means an affiliated group as defined in section 1504 of the Internal Revenue Code, except that, if such a group includes at least one incumbent local exchange carrier that is primarily engaged in the business of providing local exchange telephone service in this state, the affiliated group shall not include any incumbent local exchange carrier that would otherwise be included in the group.
(2) "Consolidated federal income tax return" means a consolidated return filed for federal income tax purposes pursuant to section 1501 of the Internal Revenue Code.
(3) "Consolidated federal taxable income" means the consolidated taxable income of an affiliated group of corporations, as computed for the purposes of filing a consolidated federal income tax return, before consideration of net operating losses or special deductions. "Consolidated federal taxable income" does not include income or loss of an incumbent local exchange carrier that is excluded from the affiliated group under division (A)(1) of this section.
(4) "Incumbent local exchange carrier" has the same meaning as in section 4927.01 of the Revised Code.
(5) "Local exchange telephone service" has the same meaning as in section 5727.01 of the Revised Code.
(1) For taxable years beginning on or after January 1, 2017, a taxpayer that is a member of an affiliated group of corporations may elect to file a consolidated municipal income tax return for a taxable year if at least one member of the affiliated group of corporations is subject to the municipal income tax in that taxable year and if the affiliated group of corporations filed a consolidated federal income tax return with respect to that taxable year. The election is binding for a five-year period beginning with the first taxable year of the initial election unless a change in the reporting method is required under federal law. The election continues to be binding for each subsequent five-year period unless the taxpayer elects to discontinue filing consolidated municipal income tax returns under division (B)(2) of this section or a taxpayer receives permission from the tax administrator. The tax administrator shall approve such a request for good cause shown.
(2) An election to discontinue filing consolidated municipal income tax returns under this section must be made in the first year following the last year of a five-year consolidated municipal income tax return election period in effect under division (B)(1) of this section. The election to discontinue filing a consolidated municipal income tax return is binding for a five-year period beginning with the first taxable year of the election.
(3) An election made under division (B)(1) or (2) of this section is binding on all members of the affiliated group of corporations subject to a municipal income tax.
(C) A taxpayer that is a member of an affiliated group of corporations that filed a consolidated federal income tax return for a taxable year shall file a consolidated municipal income tax return for that taxable year if the tax administrator determines, by a preponderance of the evidence, that intercompany transactions have not been conducted at arm's length and that there has been a distortive shifting of income or expenses with regard to allocation of net profits to the municipal corporation. A taxpayer that is required to file a consolidated municipal income tax return for a taxable year shall file a consolidated municipal income tax return for all subsequent taxable years unless the taxpayer requests and receives written permission from the tax administrator to file a separate return or a taxpayer has experienced a change in circumstances.
(D) A taxpayer shall prepare a consolidated municipal income tax return in the same manner as is required under the United States department of treasury regulations that prescribe procedures for the preparation of the consolidated federal income tax return required to be filed by the common parent of the affiliated group of which the taxpayer is a member.
(1) Except as otherwise provided in divisions (E)(2), (3), and (4) of this section, corporations that file a consolidated municipal income tax return shall compute adjusted federal taxable income, as defined in section 718.01 of the Revised Code, by substituting "consolidated federal taxable income" for "federal taxable income" wherever "federal taxable income" appears in that division and by substituting "an affiliated group of corporation's" for "a C corporation's" wherever "a C corporation's" appears in that division.
(2) No corporation filing a consolidated municipal income tax return shall make any adjustment otherwise required under division (E) of section 718.01 of the Revised Code to the extent that the item of income or deduction otherwise subject to the adjustment has been eliminated or consolidated in the computation of consolidated federal taxable income.
(3) If the net profit or loss of a pass-through entity having at least eighty per cent of the value of its ownership interest owned or controlled, directly or indirectly, by an affiliated group of corporations is included in that affiliated group's consolidated federal taxable income for a taxable year, the corporation filing a consolidated municipal income tax return shall do one of the following with respect to that pass-through entity's net profit or loss for that taxable year:
(a) Exclude the pass-through entity's net profit or loss from the consolidated federal taxable income of the affiliated group and, for the purpose of making the computations required in section 718.02 of the Revised Code, exclude the property, payroll, and gross receipts of the pass-through entity in the computation of the affiliated group's net profit sitused to a municipal corporation. If the entity's net profit or loss is so excluded, the entity shall be subject to taxation as a separate taxpayer on the basis of the entity's net profits that would otherwise be included in the consolidated federal taxable income of the affiliated group.
(b) Include the pass-through entity's net profit or loss in the consolidated federal taxable income of the affiliated group and, for the purpose of making the computations required in section 718.02 of the Revised Code, include the property, payroll, and gross receipts of the pass-through entity in the computation of the affiliated group's net profit sitused to a municipal corporation. If the entity's net profit or loss is so included, the entity shall not be subject to taxation as a separate taxpayer on the basis of the entity's net profits that are included in the consolidated federal taxable income of the affiliated group.
(4) If the net profit or loss of a pass-through entity having less than eighty per cent of the value of its ownership interest owned or controlled, directly or indirectly, by an affiliated group of corporations is included in that affiliated group's consolidated federal taxable income for a taxable year, all of the following shall apply:
(a) The corporation filing the consolidated municipal income tax return shall exclude the pass-through entity's net profit or loss from the consolidated federal taxable income of the affiliated group and, for the purposes of making the computations required in section 718.02 of the Revised Code, exclude the property, payroll, and gross receipts of the pass-through entity in the computation of the affiliated group's net profit sitused to a municipal corporation;
(b) The pass-through entity shall be subject to municipal income taxation as a separate taxpayer in accordance with this chapter on the basis of the entity's net profits that would otherwise be included in the consolidated federal taxable income of the affiliated group.
(F) Corporations filing a consolidated municipal income tax return shall make the computations required under section 718.02 of the Revised Code by substituting "consolidated federal taxable income attributable to" for "net profit from" wherever "net profit from" appears in that section and by substituting "affiliated group of corporations" for "taxpayer" wherever "taxpayer" appears in that section.
(G) Each corporation filing a consolidated municipal income tax return is jointly and severally liable for any tax, interest, penalties, fines, charges, or other amounts imposed by a municipal corporation in accordance with this chapter on the corporation, an affiliated group of which the corporation is a member for any portion of the taxable year, or any one or more members of such an affiliated group.
(H) Corporations and their affiliates that made an election or entered into an agreement with a municipal corporation before January 1, 2017, to file a consolidated or combined tax return with such municipal corporation may continue to file consolidated or combined tax returns in accordance with such election or agreement for taxable years beginning on and after January 1, 2017.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
The tax administrator of a municipal corporation that imposes a tax on income in accordance with this chapter shall make electronic versions of any rules or ordinances governing the tax available to the public through the internet, including, but not limited to, ordinances or rules governing the rate of tax; payment and withholding of taxes; filing any prescribed returns, reports, or other documents; dates for filing or paying taxes, including estimated taxes; penalties, interest, assessment, and other collection remedies; rights of taxpayers to appeal; procedures for filing appeals; and a summary of taxpayers' rights and responsibilities. The tax administrator shall make blanks of any prescribed returns, reports, or documents, and any instructions pertaining thereto, available to the public electronically through the internet. Electronic versions of rules, ordinances, blanks, and instructions shall be made available by posting them on the electronic site established by the tax commissioner under section 5703.49 of the Revised Code and, if the municipal corporation or tax administrator maintains an electronic site for the posting of such documents that is accessible through the internet, by posting them on that electronic site. If a municipal corporation or tax administrator establishes such an electronic site, the municipal corporation shall incorporate an electronic link between that site and the site established pursuant to section 5703.49 of the Revised Code, and shall provide to the tax commissioner the uniform resource locator of the site established pursuant to this division.
Amended by 131st General Assembly File No. TBD, HB 64, §101.01, eff. 9/29/2017.
Effective Date: 07-26-2000; 11-05-2004
(A) As used in this section:
(1) "Estimated taxes" means the amount that the taxpayer reasonably estimates to be the taxpayer's tax liability for a municipal corporation's income tax for the current taxable year.
(2) "Tax liability" means the total taxes due to a municipal corporation for the taxable year, after allowing any credit to which the taxpayer is entitled, and after applying any estimated tax payment, withholding payment, or credit from another taxable year.
(1) Except as provided in division (F) of this section, every taxpayer shall make a declaration of estimated taxes for the current taxable year, on the form prescribed by the tax administrator, if the amount payable as estimated taxes is at least two hundred dollars. For the purposes of this section:
(a) Taxes withheld from qualifying wages shall be considered as paid to the municipal corporation for which the taxes were withheld in equal amounts on each payment date unless the taxpayer establishes the dates on which all amounts were actually withheld, in which case the amounts withheld shall be considered as paid on the dates on which the amounts were actually withheld.
(b) An overpayment of tax applied as a credit to a subsequent taxable year is deemed to be paid on the date of the postmark stamped on the cover in which the payment is mailed or, if the payment is made by electronic funds transfer, the date the payment is submitted. As used in this division, "date of the postmark" means, in the event there is more than one date on the cover, the earliest date imprinted on the cover by the postal service.
(c) Taxes withheld by a casino operator or by a lottery sales agent under section 718.031 of the Revised Code are deemed to be paid to the municipal corporation for which the taxes were withheld on the date the taxes are withheld from the taxpayer's winnings.
(2) Except as provided in division (F) of this section, taxpayers filing joint returns shall file joint declarations of estimated taxes. A taxpayer may amend a declaration under rules prescribed by the tax administrator. Except as provided in division (F) of this section, a taxpayer having a taxable year of less than twelve months shall make a declaration under rules prescribed by the tax administrator.
(3) The declaration of estimated taxes shall be filed on or before the date prescribed for the filing of municipal income tax returns under division (G) of section 718.05 of the Revised Code or on or before the fifteenth day of the fourth month after the taxpayer becomes subject to tax for the first time.
(4) Taxpayers reporting on a fiscal year basis shall file a declaration on or before the fifteenth day of the fourth month after the beginning of each fiscal year or period.
(5) The original declaration or any subsequent amendment may be increased or decreased on or before any subsequent quarterly payment day as provided in this section.
(1) The required portion of the tax liability for the taxable year that shall be paid through estimated taxes made payable to the municipal corporation or tax administrator, including the application of tax refunds to estimated taxes and withholding on or before the applicable payment date, shall be as follows:
(a) On or before the fifteenth day of the fourth month after the beginning of the taxable year, twenty-two and one-half per cent of the tax liability for the taxable year;
(b) On or before the fifteenth day of the sixth month after the beginning of the taxable year, forty-five per cent of the tax liability for the taxable year;
(c) On or before the fifteenth day of the ninth month after the beginning of the taxable year, sixty-seven and one-half per cent of the tax liability for the taxable year;
(d) On or before the fifteenth day of the twelfth month of the taxable year, ninety per cent of the tax liability for the taxable year.
(2) When an amended declaration has been filed, the unpaid balance shown due on the amended declaration shall be paid in equal installments on or before the remaining payment dates.
(3) On or before the fifteenth day of the fourth month of the year following that for which the declaration or amended declaration was filed, an annual return shall be filed and any balance which may be due shall be paid with the return in accordance with section 718.05 of the Revised Code.
(1) In the case of any underpayment of any portion of a tax liability, penalty and interest may be imposed pursuant to section 718.27 of the Revised Code upon the amount of underpayment for the period of underpayment, unless the underpayment is due to reasonable cause as described in division (E) of this section. The amount of the underpayment shall be determined as follows:
(a) For the first payment of estimated taxes each year, twenty-two and one-half per cent of the tax liability, less the amount of taxes paid by the date prescribed for that payment;
(b) For the second payment of estimated taxes each year, forty-five per cent of the tax liability, less the amount of taxes paid by the date prescribed for that payment;
(c) For the third payment of estimated taxes each year, sixty-seven and one-half per cent of the tax liability, less the amount of taxes paid by the date prescribed for that payment;
(d) For the fourth payment of estimated taxes each year, ninety per cent of the tax liability, less the amount of taxes paid by the date prescribed for that payment.
(2) The period of the underpayment shall run from the day the estimated payment was required to be made to the date on which the payment is made. For purposes of this section, a payment of estimated taxes on or before any payment date shall be considered a payment of any previous underpayment only to the extent the payment of estimated taxes exceeds the amount of the payment presently required to be paid to avoid any penalty.
(E) An underpayment of any portion of tax liability determined under division (D) of this section shall be due to reasonable cause and the penalty imposed by this section shall not be added to the taxes for the taxable year if any of the following apply:
(1) The amount of estimated taxes that were paid equals at least ninety per cent of the tax liability for the current taxable year, determined by annualizing the income received during the year up to the end of the month immediately preceding the month in which the payment is due.
(2) The amount of estimated taxes that were paid equals at least one hundred per cent of the tax liability shown on the return of the taxpayer for the preceding taxable year, provided that the immediately preceding taxable year reflected a period of twelve months and the taxpayer filed a return with the municipal corporation under section 718.05 of the Revised Code for that year.
(3) The taxpayer is an individual who resides in the municipal corporation but was not domiciled there on the first day of January of the calendar year that includes the first day of the taxable year.
(1) A tax administrator may waive the requirement for filing a declaration of estimated taxes for any class of taxpayers after finding that the waiver is reasonable and proper in view of administrative costs and other factors.
(2) A municipal corporation may, by ordinance or rule, waive the requirement for filing a declaration of estimated taxes for all taxpayers.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
(A) This section applies to either of the following:
(1) A municipal corporation that shares the same territory as a city, local, or exempted village school district, to the extent that not more than five per cent of the territory of the municipal corporation is located outside the school district and not more than five per cent of the territory of the school district is located outside the municipal corporation;
(2) A municipal corporation that shares the same territory as a city, local, or exempted village school district, to the extent that not more than five per cent of the territory of the municipal corporation is located outside the school district, more than five per cent but not more than ten per cent of the territory of the school district is located outside the municipal corporation, and that portion of the territory of the school district that is located outside the municipal corporation is located entirely within another municipal corporation having a population of four hundred thousand or more according to the federal decennial census most recently completed before the agreement is entered into under division (B) of this section.
(B) The legislative authority of a municipal corporation to which this section applies may propose to the electors an income tax, one of the purposes of which shall be to provide financial assistance to the school district through payment to the district of not less than twenty-five per cent of the revenue generated by the tax, except that the legislative authority may not propose to levy the income tax on the incomes of nonresident individuals. Prior to proposing the tax, the legislative authority shall negotiate and enter into a written agreement with the board of education of the school district specifying the tax rate, the percentage of tax revenue to be paid to the school district, the purpose for which the school district will use the money, the first year the tax will be levied, which shall be the first year after the year in which the levy is approved or any later year, the date of the special election on the question of the tax, and the method and schedule by which the municipal corporation will make payments to the school district. The special election shall be held on a day specified in division (D) of section 3501.01 of the Revised Code, except that the special election may not be held on the day for holding a primary election as authorized by the municipal corporation's charter unless the municipal corporation is to have a primary election on that day.
After the legislative authority and board of education have entered into the agreement, the legislative authority shall provide for levying the tax by ordinance. The ordinance shall include the provisions described in division (A) of section 718.04 of the Revised Code and shall state the tax rate, the percentage of tax revenue to be paid to the school district, the purpose for which the municipal corporation will use its share of the tax revenue, the first year the tax will be levied, and that the question of the income tax will be submitted to the electors of the municipal corporation. The legislative authority also shall adopt a resolution specifying the regular or special election date the election will be held and directing the board of elections to conduct the election. At least ninety days before the date of the election, the legislative authority shall file certified copies of the ordinance and resolution with the board of elections.
(C) The board of elections shall make the necessary arrangements for the submission of the question to the electors of the municipal corporation, and shall conduct the election in the same manner as any other municipal income tax election. Notice of the election shall be published in a newspaper of general circulation in the municipal corporation once a week for four consecutive weeks, or as provided in section 7.16 of the Revised Code, prior to the election, and shall include statements of the rate and municipal corporation and school district purposes of the income tax, the percentage of tax revenue that will be paid to the school district, and the first year the tax will be levied. The ballot shall be in the following form:
"Shall the ordinance providing for a. per cent levy on income for (brief description of the municipal corporation and school district purposes of the levy, including a statement of the percentage of tax revenue that will be paid to the school district) be passed? The income tax, if approved, will not be levied on the incomes of individuals who do not reside in (the name of the municipal corporation).
For the income tax
(D) If the question is approved by a majority of the electors, the municipal corporation shall impose the income tax beginning on the first day of January of the year specified in the ordinance. The proceeds of the levy may be used only for the specified purposes, including payment of the specified percentage to the school district.
Amended by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Amended by 129th General AssemblyFile No.28, HB 153, §101.01, eff. 9/29/2011.
Amended by 128th General AssemblyFile No.29, HB 48, §1, eff. 7/2/2010.
Effective Date: 12-21-2000; 12-20-2005
(A) This section applies to a group of two or more municipal corporations that, taken together, share the same territory as a single city, local, or exempted village school district, to the extent that not more than five per cent of the territory of the municipal corporations as a group is located outside the school district and not more than five per cent of the territory of the school district is located outside the municipal corporations as a group.
(B) The legislative authorities of the municipal corporations in a group of municipal corporations to which this section applies each may propose to the electors an income tax, to be levied in concert with income taxes in the other municipal corporations of the group, except that a legislative authority may not propose to levy the income tax on the incomes of individuals who do not reside in the municipal corporation. One of the purposes of such a tax shall be to provide financial assistance to the school district through payment to the district of not less than twenty-five per cent of the revenue generated by the tax. Prior to proposing the taxes, the legislative authorities shall negotiate and enter into a written agreement with each other and with the board of education of the school district specifying the tax rate, the percentage of the tax revenue to be paid to the school district, the first year the tax will be levied, which shall be the first year after the year in which the levy is approved or any later year, and the date of the election on the question of the tax, all of which shall be the same for each municipal corporation. The agreement also shall state the purpose for which the school district will use the money, and specify the method and schedule by which each municipal corporation will make payments to the school district. The special election shall be held on a day specified in division (D) of section 3501.01 of the Revised Code, including a day on which all of the municipal corporations are to have a primary election.
After the legislative authorities and board of education have entered into the agreement, each legislative authority shall provide for levying its tax by ordinance. Each ordinance shall include the provisions described in division (A) of section 718.04 of the Revised Code and shall state the rate of the tax, the percentage of tax revenue to be paid to the school district, the purpose for which the municipal corporation will use its share of the tax revenue, and the first year the tax will be levied. Each ordinance also shall state that the question of the income tax will be submitted to the electors of the municipal corporation on the same date as the submission of questions of an identical tax to the electors of each of the other municipal corporations in the group, and that unless the electors of all of the municipal corporations in the group approve the tax in their respective municipal corporations, none of the municipal corporations in the group shall levy the tax. Each legislative authority also shall adopt a resolution specifying the regular or special election date the election will be held and directing the board of elections to conduct the election. At least ninety days before the date of the election, each legislative authority shall file certified copies of the ordinance and resolution with the board of elections.
(C) For each of the municipal corporations, the board of elections shall make the necessary arrangements for the submission of the question to the electors, and shall conduct the election in the same manner as any other municipal income tax election. For each of the municipal corporations, notice of the election shall be published in a newspaper of general circulation in the municipal corporation once a week for four consecutive weeks, or as provided in section 7.16 of the Revised Code, prior to the election. The notice shall include a statement of the rate and municipal corporation and school district purposes of the income tax, the percentage of tax revenue that will be paid to the school district, and the first year the tax will be levied, and an explanation that the tax will not be levied unless an identical tax is approved by the electors of each of the other municipal corporations in the group. The ballot shall be in the following form:
"Shall the ordinance providing for a. per cent levy on income for (brief description of the municipal corporation and school district purposes of the levy, including a statement of the percentage of income tax revenue that will be paid to the school district) be passed? The income tax, if approved, will not be levied on the incomes of individuals who do not reside in (the name of the municipal corporation). In order for the income tax to be levied, the voters of (the other municipal corporations in the group), which are also in the (name of the school district) school district, must approve an identical income tax and agree to pay the same percentage of the tax revenue to the school district.
For the income tax
Against the income tax
For the income tax
Against the income tax
(D) If the question is approved by a majority of the electors and identical taxes are approved by a majority of the electors in each of the other municipal corporations in the group, the municipal corporation shall impose the tax beginning on the first day of January of the year specified in the ordinance. The proceeds of the levy may be used only for the specified purposes, including payment of the specified percentage to the school district.
Amended by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Amended by 129th General AssemblyFile No.28, HB 153, §101.01, eff. 9/29/2011.
Amended by 128th General AssemblyFile No.29, HB 48, §1, eff. 7/2/2010.
Effective Date: 12-21-2000; 12-20-2005
(1) The legislative authority of each municipal corporation that imposes a tax on income in accordance with this chapter shall maintain a local board of tax review to hear appeals as provided in this section. The legislative authority of any municipal corporation that does not impose a tax on income on June 26, 2003, but that imposes such a tax after that date, shall establish such a board by ordinance not later than one hundred eighty days after the tax takes effect.
(2) The local board of tax review shall consist of three members. Two members shall be appointed by the legislative authority of the municipal corporation, but such appointees may not be employees, elected officials, or contractors with the municipal corporation at any time during their term or in the five years immediately preceding the date of appointment. One member shall be appointed by the top administrative official of the municipal corporation. This member may be an employee of the municipal corporation, but may not be the director of finance or equivalent officer, or the tax administrator or other similar official or an employee directly involved in municipal tax matters, or any direct subordinate thereof.
(3) The term for members of the local board of tax review appointed by the legislative authority of the municipal corporation shall be two years. There is no limit on the number of terms that a member may serve if the member is reappointed by the legislative authority. The board member appointed by the top administrative official of the municipal corporation shall serve at the discretion of the administrative official.
(4) Members of the board of tax review appointed by the legislative authority may be removed by the legislative authority by majority vote for malfeasance, misfeasance, or nonfeasance in office. To remove such a member, the legislative authority must give the member a copy of the charges against the member and afford the member an opportunity to be publicly heard in person or by counsel in the member's own defense upon not less than ten days' notice. The decision by the legislative authority on the charges is final and not appealable.
(5) A member of the board who, for any reason, ceases to meet the qualifications for the position prescribed by this section shall resign immediately by operation of law.
(6) A vacancy in an unexpired term shall be filled in the same manner as the original appointment within sixty days of when the vacancy was created. Any member appointed to fill a vacancy occurring prior to the expiration of the term for which the member's predecessor was appointed shall hold office for the remainder of such term. No vacancy on the board shall impair the power and authority of the remaining members to exercise all the powers of the board.
(7) If a member is temporarily unable to serve on the board due to a conflict of interest, illness, absence, or similar reason, the legislative authority or top administrative official that appointed the member shall appoint another individual to temporarily serve on the board in the member's place. The appointment of such an individual shall be subject to the same requirements and limitations as are applicable to the appointment of the member temporarily unable to serve.
(B) Whenever a tax administrator issues an assessment regarding an underpayment of municipal income tax or denies a refund claim, the tax administrator shall notify the taxpayer in writing at the same time of the taxpayer's right to appeal the assessment or denial, the manner in which the taxpayer may appeal the assessment or denial, and the address to which the appeal should be directed.
(C) Any person who has been issued an assessment may appeal the assessment to the board created pursuant to this section by filing a request with the board. The request shall be in writing, shall specify the reason or reasons why the assessment should be deemed incorrect or unlawful, and shall be filed within sixty days after the taxpayer receives the assessment.
(D) The local board of tax review shall schedule a hearing to be held within sixty days after receiving an appeal of an assessment under division (C) of this section, unless the taxpayer requests additional time to prepare or waives a hearing. If the taxpayer does not waive the hearing, the taxpayer may appear before the board and may be represented by an attorney at law, certified public accountant, or other representative. The board may allow a hearing to be continued as jointly agreed to by the parties. In such a case, the hearing must be completed within one hundred twenty days after the first day of the hearing unless the parties agree otherwise.
(E) The board may affirm, reverse, or modify the tax administrator's assessment or any part of that assessment. The board shall issue a final determination on the appeal within ninety days after the board's final hearing on the appeal, and send a copy of its final determination by ordinary mail to all of the parties to the appeal within fifteen days after issuing the final determination. The taxpayer or the tax administrator may appeal the board's final determination as provided in section 5717.011 of the Revised Code.
(F) The local board of tax review created pursuant to this section shall adopt rules governing its procedures and shall keep a record of its transactions. Such records are not public records available for inspection under section 149.43 of the Revised Code. Hearings requested by a taxpayer before a local board of tax review created pursuant to this section are not meetings of a public body subject to section 121.22 of the Revised Code.
Amended by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Effective Date: 09-26-2003
(a) Civil actions to recover municipal income taxes and penalties and interest on municipal income taxes shall be brought within the later of:
(i) Three years after the tax was due or the return was filed, whichever is later; o
(ii) One year after the conclusion of the qualifying deferral period, if any.
(b) The time limit described in division (A)(1)(a) of this section may be extended at any time if both the tax administrator and the employer, agent of the employer, other payer, or taxpayer consent in writing to the extension. Any extension shall also extend for the same period of time the time limit described in division (C) of this section.
(2) As used in this section, "qualifying deferral period" means a period of time beginning and ending as follows:
(a) Beginning on the date a person who is aggrieved by an assessment files with a local board of tax review the request described in section 718.11 of the Revised Code. That date shall not be affected by any subsequent decision, finding, or holding by any administrative body or court that the local board of tax review with which the aggrieved person filed the request did not have jurisdiction to affirm, reverse, or modify the assessment or any part of that assessment.
(b) Ending the later of the sixtieth day after the date on which the final determination of the local board of tax review becomes final or, if any party appeals from the determination of the local board of tax review, the sixtieth day after the date on which the final determination of the local board of tax review is either ultimately affirmed in whole or in part or ultimately reversed and no further appeal of either that affirmation, in whole or in part, or that reversal is available or taken.
(B) Prosecutions for an offense made punishable under a resolution or ordinance imposing an income tax shall be commenced within three years after the commission of the offense, provided that in the case of fraud, failure to file a return, or the omission of twenty-five per cent or more of income required to be reported, prosecutions may be commenced within six years after the commission of the offense.
(C) A claim for a refund of municipal income taxes shall be brought within the time limitation provided in section 718.19 of the Revised Code.
(D) Interest shall be allowed and paid on any overpayment by a taxpayer of any municipal income tax obligation from the date of the overpayment until the date of the refund of the overpayment, except that if any overpayment is refunded within ninety days after the final filing date of the annual return or ninety days after the completed return is filed, whichever is later, no interest shall be allowed on the refund. For the purpose of computing the payment of interest on amounts overpaid, no amount of tax for any taxable year shall be considered to have been paid before the date on which the return on which the tax is reported is due, without regard to any extension of time for filing that return. Interest shall be paid at the interest rate described in division (A)(5) of section 718.27 of the Revised Code.
(E) Within sixty days after the final determination of any federal or state tax liability affecting the taxpayer's municipal tax liability, that taxpayer shall make and file an amended municipal return showing income subject to the municipal income tax based upon such final determination of federal or state tax liability, and pay any additional municipal income tax shown due thereon or make a claim for refund of any overpayment, unless the tax or overpayment is less than ten dollars.
(1) Notwithstanding the fact that an appeal is pending, the petitioner may pay all or a portion of the assessment that is the subject of the appeal. The acceptance of a payment by the municipal corporation does not prejudice any claim for refund upon final determination of the appeal.
(2) If upon final determination of the appeal an error in the assessment is corrected by the tax administrator, upon an appeal so filed or pursuant to a final determination of the local board of tax review created under section 718.11 of the Revised Code, of the Ohio board of tax appeals, or any court to which the decision of the Ohio board of tax appeals has been appealed, so that the amount due from the party assessed under the corrected assessment is less than the amount paid, there shall be issued to the appellant or to the appellant's assigns or legal representative a refund in the amount of the overpayment as provided by section 718.19 of the Revised Code, with interest on that amount as provided by division (D) of this section.
(G) No civil action to recover municipal income tax or related penalties or interest shall be brought during either of the following time periods:
(1) The period during which a taxpayer has a right to appeal the imposition of that tax or interest or those penalties;
(2) The period during which an appeal related to the imposition of that tax or interest or those penalties is pending.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
(A) Except as provided in division (B) of this section, if tax or withholding is paid to a municipal corporation on income or wages, and if a second municipal corporation imposes or assesses a tax on that income or wages after the time period allowed for a refund of the tax or withholding paid to the first municipal corporation, the second municipal corporation shall allow a nonrefundable credit, against the tax or withholding the second municipality claims is due with respect to such income or wages, equal to the tax or withholding paid to the first municipal corporation with respect to such income or wages.
(B) If the tax rate in the second municipal corporation is less than the tax rate in the first municipal corporation, then the credit described in division (A) of this section shall be calculated using the tax rate in effect in the second municipal corporation.
(C) If the tax rate in the second municipal corporation is greater than the tax rate in the first municipal corporation, the tax due in excess of the credit afforded is to be paid to the second municipal corporation, along with any penalty and interest accruing thereto during the period of nonpayment.
(D) Nothing in this section permits any credit carryforward.
Amended by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Effective Date: 09-26-2004
(A) Any information gained as a result of returns, investigations, hearings, or verifications required or authorized by this chapter or by a charter or ordinance of a municipal corporation levying an income tax pursuant to this chapter is confidential, and no person shall access or disclose such information except in accordance with a proper judicial order or in connection with the performance of that person's official duties or the official business of the municipal corporation as authorized by this chapter or the charter or ordinance authorizing the levy. The tax administrator of the municipal corporation or a designee thereof may furnish copies of returns filed or otherwise received under this chapter and other related tax information to the internal revenue service. the tax commissioner, and tax administrators of other municipal corporations.
(B) This section does not prohibit a municipal corporation from publishing or disclosing statistics in a form that does not disclose information with respect to particular taxpayers.
Amended by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Effective Date: 07-26-2000; 2007 HB119 09-29-2007
Repealed by 130th General Assembly File No. TBD, HB 5, §2, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Effective Date: 09-26-2003
A municipal corporation, by ordinance, may grant a refundable or nonrefundable credit against its tax on income to a taxpayer to foster job creation in the municipal corporation. If a credit is granted under this section, it shall be measured as a percentage of the new income tax revenue the municipal corporation derives from new employees of the taxpayer and shall be for a term not exceeding fifteen years. Before the municipal corporation passes an ordinance granting a credit, the municipal corporation and the taxpayer shall enter into an agreement specifying all the conditions of the credit.
Amended by 130th General Assembly File No. TBD, HB 492, §1, eff. 9/17/2017.
Effective Date: 09-26-2003
A municipal corporation, by ordinance, may grant a refundable or nonrefundable credit against its tax on income to a taxpayer for the purpose of fostering job retention in the municipal corporation. If a credit is granted under this section, it shall be measured as a percentage of the income tax revenue the municipal corporation derives from the retained employees of the taxpayer, and shall be for a term not exceeding fifteen years. Before a municipal corporation passes an ordinance allowing such a credit, the municipal corporation and the taxpayer shall enter into an agreement specifying all the conditions of the credit.
Amended by 130th General Assembly File No. TBD, HB 492, §1, eff. 9/17/2017.
Amended by 2011 File No. 3, HB 58,§1, eff. 3/7/2011.
Effective Date: 09-26-2003
A municipal corporation shall grant a credit against its tax on income to a resident of the municipal corporation who works in a joint economic development zone created under section 715.691 or a joint economic development district created under section 715.70. 715.71. or 715.72 of the Revised Code to the same extent that it grants a credit against its tax on income to its residents who are employed in another municipal corporation.
Effective Date: 07-26-2000
(1) Subject to division (B) of this section, a copy of each assessment shall be served upon the person affected thereby either by personal service, by certified mail, or by a delivery service authorized under section 5703.056 of the Revised Code.
(2) With the permission of the person affected by an assessment, the tax administrator may deliver the assessment through alternative means as provided in this section, including, but not limited to, delivery by secure electronic mail. Delivery by such means satisfies the requirements for delivery under this section.
(a) If certified mail is returned because of an undeliverable address, a tax administrator shall utilize reasonable means to ascertain a new last known address, including the use of a change of address service offered by the postal service or an authorized delivery service under section 5703.056 of the Revised Code. If, after using reasonable means, the tax administrator is unable to ascertain a new last known address, the assessment shall be sent by ordinary mail and considered served. If the ordinary mail is subsequently returned because of an undeliverable address, the assessment remains appealable within sixty days after the assessment's postmark.
(b) Once the tax administrator or other municipal official, or the designee of either, serves an assessment on the person to whom the assessment is directed, the person may protest the ruling of that assessment by filing an appeal with the local board of tax review within sixty days after the receipt of service. The delivery of an assessment of the tax administrator under division (B)(1)(a) of this section is prima facie evidence that delivery is complete and that the assessment is served.
(2) If mailing of an assessment by a tax administrator by certified mail is returned for some cause other than an undeliverable address, the tax administrator shall resend the assessment by ordinary mail. The assessment shall show the date the tax administrator sends the assessment and include the following statement:
"This assessment is deemed to be served on the addressee under applicable law ten days from the date this assessment was mailed by the tax administrator as shown on the assessment, and all periods within which an appeal may be filed apply from and after that date."
Unless the mailing is returned because of an undeliverable address, the mailing of that information is prima facie evidence that delivery of the assessment was completed ten days after the tax administrator sent the assessment by ordinary mail and that the assessment was served.
If the ordinary mail is subsequently returned because of an undeliverable address, the tax administrator shall proceed under division (B)(1)(a) of this section. A person may challenge the presumption of delivery and service under this division in accordance with division (C) of this section.
(1) A person disputing the presumption of delivery and service under division (B) of this section bears the burden of proving by a preponderance of the evidence that the address to which the assessment was sent was not an address with which the person was associated at the time the tax administrator originally mailed the assessment by certified mail. For the purposes of this section, a person is associated with an address at the time the tax administrator originally mailed the assessment if, at that time, the person was residing, receiving legal documents, or conducting business at the address; or if, before that time, the person had conducted business at the address and, when the assessment was mailed, the person's agent or the person's affiliate was conducting business at the address. For the purposes of this section, a person's affiliate is any other person that, at the time the assessment was mailed, owned or controlled at least twenty per cent, as determined by voting rights, of the addressee's business.
(2) If a person elects to appeal an assessment on the basis described in division (C)(1) of this section, and if that assessment is subject to collection and is not otherwise appealable, the person must do so within sixty days after the initial contact by the tax administrator or other municipal official, or the designee of either, with the person. Nothing in this division prevents the tax administrator or other official from entering into a compromise with the person if the person does not actually file such an appeal with the local board of tax review.
(D) Nothing in this section prohibits the tax administrator or the tax administrator's designee from delivering an assessment by a tax administrator by personal service.
(E) Collection actions taken upon any assessment being appealed under division (B)(1)(b) of this section shall be stayed upon the pendency of an appeal under this section. If an appeal is filed pursuant to this section on a claim that has been delivered for collection, the collection activities with respect to the assessment shall be stayed.
(F) As used in this section:
(1) "Last known address" means the address the tax administrator has at the time a document is originally sent by certified mail, or any address the tax administrator can ascertain using reasonable means such as the use of a change of address service offered by the postal service or an authorized delivery service under section 5703.056 of the Revised Code.
(2) "Undeliverable address" means an address to which the postal service or an authorized delivery service under section 5703.056 of the Revised Code is not able to deliver an assessment of the tax administrator, except when the reason for nondelivery is because the addressee fails to acknowledge or accept the assessment.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
(A) Upon receipt of a request for a refund, the tax administrator of a municipal corporation, in accordance with this section, shall refund to employers, agents of employers, other payers, or taxpayers, with respect to any income or withholding tax levied by the municipal corporation:
(1) Overpayments of more than ten dollars;
(2) Amounts paid erroneously if the refund requested exceeds ten dollars.
(1) Except as otherwise provided in this chapter, requests for refund shall be filed with the tax administrator, on the form prescribed by the tax administrator within three years after the tax was due or paid, whichever is later. The tax administrator may require the requestor to file with the request any documentation that substantiates the requestor's claim for a refund.
(2) On filing of the refund request, the tax administrator shall determine the amount of refund due and certify such amount to the appropriate municipal corporation official for payment. Except as provided in division (B)(3) of this section, the administrator shall issue an assessment to any taxpayer whose request for refund is fully or partially denied. The assessment shall state the amount of the refund that was denied, the reasons for the denial, and instructions for appealing the assessment.
(3) If a tax administrator denies in whole or in part a refund request included within the taxpayer's originally filed annual income tax return, the tax administrator shall notify the taxpayer, in writing, of the amount of the refund that was denied, the reasons for the denial, and instructions for requesting an assessment that may be appealed under section 718.11 of the Revised Code.
(C) A request for a refund that is received after the last day for filing specified in division (B) of this section shall be considered to have been filed in a timely manner if any of the following situations exist:
(1) The request is delivered by the postal service, and the earliest postal service postmark on the cover in which the request is enclosed is not later than the last day for filing the request.
(2) The request is delivered by the postal service, the only postmark on the cover in which the request is enclosed was affixed by a private postal meter, the date of that postmark is not later than the last day for filing the request, and the request is received within seven days of such last day.
(3) The request is delivered by the postal service, no postmark date was affixed to the cover in which the request is enclosed or the date of the postmark so affixed is not legible, and the request is received within seven days of the last day for making the request.
(D) As used in this section, "withholding tax" has the same meaning as in section 718.27 of the Revised Code.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
(A) A tax administrator, or any authorized agent or employee thereof may examine the books, papers, records, and federal and state income tax returns of any employer, taxpayer, or other person that is subject to, or that the tax administrator believes is subject to, the provisions of this chapter for the purpose of verifying the accuracy of any return made or, if no return was filed, to ascertain the tax due under this chapter. Upon written request by the tax administrator or a duly authorized agent or employee thereof, every employer, taxpayer, or other person subject to this section is required to furnish the opportunity for the tax administrator, authorized agent, or employee to investigate and examine such books, papers, records, and federal and state income tax returns at a reasonable time and place designated in the request.
(B) The records and other documents of any taxpayer, employer, or other person that is subject to, or that a tax administrator believes is subject to, the provisions of this chapter shall be open to the tax administrator's inspection during business hours and shall be preserved for a period of six years following the end of the taxable year to which the records or documents relate, unless the tax administrator, in writing, consents to their destruction within that period, or by order requires that they be kept longer. The tax administrator of a municipal corporation may require any person, by notice served on that person, to keep such records as the tax administrator determines necessary to show whether or not that person is liable, and the extent of such liability, for the income tax levied by the municipal corporation or for the withholding of such tax.
(C) The tax administrator may examine under oath any person that the tax administrator reasonably believes has knowledge concerning any income that was or would have been returned for taxation or any transaction tending to affect such income. The tax administrator may, for this purpose, compel any such person to attend a hearing or examination and to produce any books, papers, records, and federal income tax returns in such person's possession or control. The person may be assisted or represented by an attorney, accountant, bookkeeper, or other tax practitioner at any such hearing or examination. This division does not authorize the practice of law by a person who is not an attorney.
(D) No person issued written notice by the tax administrator compelling attendance at a hearing or examination or the production of books, papers, records, or federal income tax returns under this section shall fail to comply.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Nothing in this chapter shall limit the authority of a tax administrator to perform any of the following duties or functions, unless the performance of such duties or functions is expressly limited by a provision of the Revised Code or the charter or ordinances of the municipal corporation:
(A) Exercise all powers whatsoever of an inquisitorial nature as provided by law, including, the right to inspect books, accounts, records, memorandums, and federal and state income tax returns, to examine persons under oath, to issue orders or subpoenas for the production of books, accounts, papers, records, documents, and testimony, to take depositions, to apply to a court for attachment proceedings as for contempt, to approve vouchers for the fees of officers and witnesses, and to administer oaths; provided that the powers referred to in this division of this section shall be exercised by the tax administrator only in connection with the performance of the duties respectively assigned to the tax administrator under a municipal corporation income tax ordinance or resolution adopted in accordance with this chapter;
(B) Appoint agents and prescribe their powers and duties;
(C) Confer and meet with officers of other municipal corporations and states and officers of the United States on any matters pertaining to their respective official duties as provided by law;
(D) Exercise the authority provided by law, including orders from bankruptcy courts, relative to remitting or refunding taxes, including penalties and interest thereon, illegally or erroneously imposed or collected, or for any other reason overpaid, and, in addition, the tax administrator may investigate any claim of overpayment and make a written statement of the tax administrator's findings, and, if the tax administrator finds that there has been an overpayment, approve and issue a refund payable to the taxpayer, the taxpayer's assigns, or legal representative as provided in this chapter;
(E) Exercise the authority provided by law relative to consenting to the compromise and settlement of tax claims;
(F) Exercise the authority provided by law relative to the use of alternative apportionment methods by taxpayers in accordance with section 718.02 of the Revised Code;
(G) Make all tax findings, determinations, computations, and orders the tax administrator is by law authorized and required to make and, pursuant to time limitations provided by law, on the tax administrator's own motion, review, redetermine, or correct any tax findings, determinations, computations, or orders the tax administrator has made, but the tax administrator shall not review, redetermine, or correct any tax finding, determination, computation, or order which the tax administrator has made as to which an appeal has been filed with the local board of tax review or other appropriate tribunal, unless such appeal or application is withdrawn by the appellant or applicant, is dismissed, or is otherwise final;
(H) Destroy any or all returns or other tax documents in the manner authorized by law;
(I) Enter into an agreement with a taxpayer to simplify the withholding obligations described in section 718.03 of the Revised Code.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
A person may round to the nearest whole dollar all amounts the person is required to enter on any return, report, voucher, or other document required under this chapter. Any fractional part of a dollar that equals or exceeds fifty cents shall be rounded to the next whole dollar, and any fractional part of a dollar that is less than fifty cents shall be dropped. If a person chooses to round amounts entered on a document, the person shall round all amounts entered on the document.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
(A) Nothing in this chapter prohibits a tax administrator from requiring any person filing a tax document with the tax administrator to provide identifying information, which may include the person's social security number, federal employer identification number, or other identification number requested by the tax administrator. A person required by the tax administrator to provide identifying information that has experienced any change with respect to that information shall notify the tax administrator of the change before, or upon, filing the next tax document requiring the identifying information.
(B) When transmitting or otherwise making use of a tax document that contains a person's social security number, the tax administrator shall take all reasonable measures necessary to ensure that the number is not capable of being viewed by the general public, including, when necessary, masking the number so that it is not readily discernible by the general public. The tax administrator shall not put a person's social security number on the outside of any material mailed to the person.
(1) If the tax administrator makes a request for identifying information and the tax administrator does not receive valid identifying information within thirty days of making the request, nothing in this chapter prohibits the tax administrator from imposing a penalty upon the person to whom the request was directed pursuant to section 718.27 of the Revised Code, in addition to any applicable penalty described in section 718.99 of the Revised Code.
(2) If a person required by the tax administrator to provide identifying information does not notify the tax administrator of a change with respect to that information as required under division (A) of this section within thirty days after filing the next tax document requiring such identifying information, nothing in this chapter prohibits the tax administrator from imposing a penalty pursuant to section 718.27 of the Revised Code.
(3) The penalties provided for under divisions (C)(1) and (2) of this section may be billed and imposed in the same manner as the tax or fee with respect to which the identifying information is sought and are in addition to any applicable criminal penalties described in section 718.99 of the Revised Code for a violation of section 718.35 of the Revised Code and any other penalties that may be imposed by the tax administrator by law.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
(A) As used in this section:
(1) "Applicable law" means this chapter, the resolutions, ordinances, codes, directives, instructions, and rules adopted by a municipal corporation provided such resolutions, ordinances, codes, directives, instructions, and rules impose or directly or indirectly address the levy, payment, remittance, or filing requirements of a municipal income tax.
(2) "Income tax," "estimated income tax," and "withholding tax" means any income tax, estimated income tax, and withholding tax imposed by a municipal corporation pursuant to applicable law, including at any time before January 1, 2017.
(3) A "return" includes any tax return, report, reconciliation, schedule, and other document required to be filed with a tax administrator or municipal corporation by a taxpayer, employer, any agent of the employer, or any other payer pursuant to applicable law, including at any time before January 1, 2017.
(4) "Federal short-term rate" means the rate of the average market yield on outstanding marketable obligations of the United States with remaining periods to maturity of three years or less, as determined under section 1274 of the Internal Revenue Code, for July of the current year.
(5) "Interest rate as described in division (A) of this section" means the federal short-term rate, rounded to the nearest whole number per cent, plus five per cent. The rate shall apply for the calendar year next following the July of the year in which the federal short-term rate is determined in accordance with division (A)(4) of this section.
(6) "Unpaid estimated income tax" means estimated income tax due but not paid by the date the tax is required to be paid under applicable law.
(7) "Unpaid income tax" means income tax due but not paid by the date the income tax is required to be paid under applicable law.
(8) "Unpaid withholding tax" means withholding tax due but not paid by the date the withholding tax is required to be paid under applicable law.
(9) "Withholding tax" includes amounts an employer, any agent of an employer, or any other payer did not withhold in whole or in part from an employee's qualifying wages, but that, under applicable law, the employer, agent, or other payer is required to withhold from an employee's qualifying wages.
(1) This section applies to the following:
(a) Any return required to be filed under applicable law for taxable years beginning on or after January 1, 2017;
(b) Income tax, estimated income tax, and withholding tax required to be paid or remitted to the municipal corporation on or after January 1, 2017.
(2) This section does not apply to returns required to be filed or payments required to be made before January 1, 2017, regardless of the filing or payment date. Returns required to be filed or payments required to be made before January 1, 2017, but filed or paid after that date shall be subject to the ordinances or rules, as adopted before January 1, 2017, of the municipal corporation to which the return is to be filed or the payment is to be made.
(C) Each municipal corporation levying a tax on income may impose on a taxpayer, employer, any agent of the employer, and any other payer, and must attempt to collect, the interest amounts and penalties prescribed under division (C) of this section when the taxpayer, employer, any agent of the employer, or any other payer for any reason fails, in whole or in part, to make to the municipal corporation timely and full payment or remittance of income tax, estimated income tax, or withholding tax or to file timely with the municipal corporation any return required to be filed.
(1) Interest shall be imposed at the rate described in division (A) of this section, per annum, on all unpaid income tax, unpaid estimated income tax, and unpaid withholding tax.
(a) With respect to unpaid income tax and unpaid estimated income tax, a municipal corporation may impose a penalty equal to fifteen per cent of the amount not timely paid.
(b) With respect to any unpaid withholding tax, a municipal corporation may impose a penalty equal to fifty per cent of the amount not timely paid.
(3) With respect to returns other than estimated income tax returns, a municipal corporation may impose a penalty of twenty-five dollars for each failure to timely file each return, regardless of the liability shown thereon for each month, or any fraction thereof, during which the return remains unfiled regardless of the liability shown thereon. The penalty shall not exceed one hundred fifty dollars for each failure.
(1) With respect to the income taxes, estimated income taxes, withholding taxes, and returns, no municipal corporation shall impose, seek to collect, or collect any penalty, amount of interest, charges, or additional fees not described in this section.
(2) With respect to the income taxes, estimated income taxes, withholding taxes, and returns not described in division (A) of this section, nothing in this section requires a municipal corporation to refund or credit any penalty, amount of interest, charges, or additional fees that the municipal corporation has properly imposed or collected before January 1, 2017.
(E) Nothing in this section limits the authority of a municipal corporation to abate or partially abate penalties or interest imposed under this section when the tax administrator determines, in the tax administrator's sole discretion, that such abatement is appropriate.
(F) By the thirty-first day of October of each year the municipal corporation shall publish the rate described in division (A) of this section applicable to the next succeeding calendar year.
(G) The municipal corporation may impose on the taxpayer, employer, any agent of the employer, or any other payer the municipal corporation's post-judgment collection costs and fees, including attorney's fees.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
(A) As used in this section, "claim" means a claim for an amount payable to a municipal corporation that arises pursuant to the municipal income tax imposed in accordance with this chapter.
(B) Nothing in this chapter prohibits a tax administrator from doing either of the following if such action is in the best interests of the municipal corporation:
(1) Compromise a claim;
(2) Extend for a reasonable period the time for payment of a claim by agreeing to accept monthly or other periodic payments.
(C) The tax administrator may consider the following standards when ascertaining with respect to a claim whether a compromise or payment-over-time agreement is in the best interests of the municipal corporation:
(1) There exists a doubt as to whether the claim can be collected.
(2) There exists a substantial probability that, upon payment of the claim and submission of a timely request for refund with respect to that payment, the tax administrator would refund an amount that was illegally or erroneously paid.
(3) There exists an economic hardship such that a compromise or agreement would facilitate effective tax administration.
(4) There exists a joint liability among spouses, one of whom is an innocent spouse, provided that any relief under this standard shall only affect the claim as to the innocent spouse. A spouse granted relief under section 6015 of the Internal Revenue Code with regard to any income item is rebuttably presumed to be an innocent spouse with regard to that income item to the extent that income item is included in or otherwise affects the computation of a municipal income tax or any penalty or interest on that tax.
(5) Any other reasonable standard that the tax administrator establishes.
(D) The tax administrator's rejection of a compromise or payment-over-time agreement proposed by a person with respect to a claim shall not be appealable.
(E) A compromise or payment-over-time agreement with respect to a claim shall be binding upon and shall inure to the benefit of only the parties to the compromise or agreement, and shall not extinguish or otherwise affect the liability of any other person.
(F) A compromise or payment-over-time agreement with respect to a claim shall be void if the taxpayer defaults under the compromise or agreement or if the compromise or agreement was obtained by fraud or by misrepresentation of a material fact. Any amount that was due before the compromise or agreement and that is unpaid shall remain due, and any penalties or interest that would have accrued in the absence of the compromise or agreement shall continue to accrue and be due.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Nothing in this chapter prohibits the legislative authority of a municipal corporation, or a tax administrator pursuant to authority granted to the administrator by resolution or ordinance, to adopt rules to administer an income tax imposed by the municipal corporation in accordance with this chapter. Such rules shall not conflict with or be inconsistent with any provision of this chapter. All rules adopted under this section shall be published and posted on the internet as described in section 718.07 of the Revised Code.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
No person hired or retained by a tax administrator to examine or inspect a taxpayer's books shall be paid on a contingency basis.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
No person shall knowingly make, present, aid, or assist in the preparation or presentation of a false or fraudulent report, return, schedule, statement, claim, or document authorized or required by municipal corporation ordinance or state law to be filed with a tax administrator, or knowingly procure, counsel, or advise the preparation or presentation of such report, return, schedule, statement, claim, or document, or knowingly change, alter, or amend, or knowingly procure, counsel or advise such change, alteration, or amendment of the records upon which such report, return, schedule, statement, claim, or document is based with intent to defraud the municipal corporation or a tax administrator.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
(A) At or before the commencement of an audit, the tax administrator shall provide to the taxpayer a written description of the roles of the tax administrator and of the taxpayer during an audit and a statement of the taxpayer's rights, including any right to obtain a refund of an overpayment of a tax. At or before the commencement of an audit, the tax administrator shall inform the taxpayer when the audit is considered to have commenced.
(B) Except in cases involving suspected criminal activity, the tax administrator shall conduct an audit of a taxpayer during regular business hours and after providing reasonable notice to the taxpayer. A taxpayer who is unable to comply with a proposed time for an audit on the grounds that the proposed time would cause inconvenience or hardship must offer reasonable alternative dates for the audit.
(C) At all stages of an audit by the tax administrator, a taxpayer is entitled to be assisted or represented by an attorney, accountant, bookkeeper, or other tax practitioner. The tax administrator shall prescribe a form by which a taxpayer may designate such a person to assist or represent the taxpayer in the conduct of any proceedings resulting from actions by the tax administrator. If a taxpayer has not submitted such a form, the tax administrator may accept other evidence, as the tax administrator considers appropriate, that a person is the authorized representative of a taxpayer.
A taxpayer may refuse to answer any questions asked by the person conducting an audit until the taxpayer has an opportunity to consult with the taxpayer's attorney, accountant, bookkeeper, or other tax practitioner. This division does not authorize the practice of law by a person who is not an attorney.
(D) A taxpayer may record, electronically or otherwise, the audit examination.
(E) The failure of the tax administrator to comply with a provision of this section shall neither excuse a taxpayer from payment of any taxes owed by the taxpayer nor cure any procedural defect in a taxpayer's case.
(F) If the tax administrator fails to substantially comply with the provisions of this section, the tax administrator, upon application by the taxpayer, shall excuse the taxpayer from penalties and interest arising from the audit.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
(A) A taxpayer aggrieved by an action or omission of a tax administrator, a tax administrator's employee, or an employee of the municipal corporation may bring an action against the municipal corporation for damages in the court of common pleas of the county in which the municipal corporation is located, if all of the following apply:
(1) In the action or omission the tax administrator, the tax administrator's employee, or the employee of the municipal corporation frivolously disregards a provision of this chapter or a rule or instruction of the tax administrator;
(2) The action or omission occurred with respect to an audit or an assessment and the review and collection proceedings connected with the audit or assessment;
(3) The tax administrator, the tax administrator's employee, or the employee of the municipal corporation did not act manifestly outside the scope of employment and did not act with malicious purpose, in bad faith, or in a wanton or reckless manner.
(B) In any action brought under division (A) of this section, upon a finding of liability on the part of the municipal corporation, the municipal corporation shall be liable to the taxpayer in an amount equal to the sum of the following:
(1) Compensatory damages sustained by the taxpayer as a result of the action or omission by the tax administrator, the tax administrator's employee, or the employee of the municipal corporation;
(2) Reasonable costs of litigation and attorneys' fees sustained by the taxpayer.
(C) In the awarding of damages under division (B) of this section, the court shall take into account the negligent actions or omissions, if any, on the part of the taxpayer that contributed to the damages, but shall not be bound by the provisions of sections 2315.32 to 2315.36 of the Revised Code.
(D) Whenever it appears to the court that a taxpayer's conduct in the proceedings brought under division (A) of this section is frivolous, the court may impose a penalty against the taxpayer in an amount not to exceed ten thousand dollars which shall be paid to the general fund of the municipal corporation.
(E) Division (A) of this section does not apply to opinions of the tax administrator or other information functions of the tax administrator.
(F) As used in this section, "frivolous" means that the conduct of the tax administrator, an employee of the municipal corporation or the tax administrator, the taxpayer, or the taxpayer's counsel of record satisfies either of the following:
(1) It obviously serves merely to harass or maliciously injure the tax administrator, the municipal corporation, or employees thereof if referring to the conduct of a taxpayer or the taxpayer's counsel of record, or to harass or maliciously injure the taxpayer if referring to the conduct of the tax administrator, the municipal corporation, or employees thereof;
(2) It is not warranted under existing law and cannot be supported by a good faith argument for an extension, modification, or reversal of existing law.
Amended by 131st General Assembly File No. TBD, HB 64, §101.01, eff. 9/29/2017.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
(A) An "opinion of the tax administrator" means an opinion issued under this section with respect to prospective municipal income tax liability. It does not include ordinary correspondence of the tax administrator.
(B) A taxpayer may submit a written request for an opinion of the tax administrator as to whether or how certain income, source of income, or a certain activity or transaction will be taxed. The written response of the tax administrator shall be an "opinion of the tax administrator" and shall bind the tax administrator, in accordance with divisions (C), (G), and (H) of this section, provided all of the following conditions are satisfied:
(1) The taxpayer's request fully and accurately describes the specific facts or circumstances relevant to a determination of the taxability of the income, source of income, activity, or transaction, and, if an activity or transaction, all parties involved in the activity or transaction are clearly identified by name, location, or other pertinent facts.
(2) The request relates to a tax imposed by the municipal corporation in accordance with this chapter.
(3) The tax administrator's response is signed by the tax administrator and designated as an "opinion of the tax administrator."
(C) An opinion of the tax administrator shall remain in effect and shall protect the taxpayer for whom the opinion was prepared and who reasonably relies on it from liability for any taxes, penalty, or interest otherwise chargeable on the activity or transaction specifically held by the tax administrator's opinion to be taxable in a particular manner or not to be subject to taxation for any taxable years that may be specified in the opinion, or until the earliest of the following dates:
(1) The effective date of a written revocation by the tax administrator sent to the taxpayer by certified mail, return receipt requested. The effective date of the revocation shall be the taxpayer's date of receipt or one year after the issuance of the opinion, whichever is later;
(2) The effective date of any amendment or enactment of a relevant section of the Revised Code, uncodified state law, or the municipal corporation's income tax ordinance that would substantially change the analysis and conclusion of the opinion of the tax administrator;
(3) The date on which a court issues an opinion establishing or changing relevant case law with respect to the Revised Code, uncodified state law, or the municipal corporation's income tax ordinance;
(4) If the opinion of the tax administrator was based on the interpretation of federal law, the effective date of any change in the relevant federal statutes or regulations, or the date on which a court issues an opinion establishing or changing relevant case law with respect to federal statutes or regulations;
(5) The effective date of any change in the taxpayer's material facts or circumstances;
(6) The effective date of the expiration of the opinion, if specified in the opinion.
(D) A taxpayer is not relieved of tax liability for any activity or transaction related to a request for an opinion that contained any misrepresentation or omission of one or more material facts.
(E) If a tax administrator provides written advice under this section, the opinion shall include a statement that:
(1) The tax consequences stated in the opinion may be subject to change for any of the reasons stated in division (C) of this section;
(2) It is the duty of the taxpayer to be aware of such changes.
(F) A tax administrator may refuse to offer an opinion on any request received under this section.
(G) This section binds a tax administrator only with respect to opinions of the tax administrator issued on or after January 1, 2017.
(H) An opinion of a tax administrator binds that tax administrator only with respect to the taxpayer for whom the opinion was prepared and does not bind the tax administrator of any other municipal corporation.
(I) A tax administrator shall make available the text of all opinions issued under this section, except those opinions prepared for a taxpayer who has requested that the text of the opinion remain confidential. In no event shall the text of an opinion be made available until the tax administrator has removed all information that identifies the taxpayer and any other parties involved in the activity or transaction.
(J) An opinion of the tax administrator issued under this section may not be appealed.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
If the municipal corporation imposing a tax in accordance with this chapter has a population greater than thirty thousand according to the most recent decennial census or if the tax administrator charged with the administration of the tax is described in either division (U)(2) or (3) of section 718.01 of the Revised Code, all of the tax administrator's written correspondence to a taxpayer or other person shall include the name and contact information of an individual designated to receive inquiries regarding the correspondence. The individual may be the tax administrator or an employee of the tax administrator.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
(A) A taxpayer shall file an amended return with the tax administrator in such form as the tax administrator requires if any of the facts, figures, computations, or attachments required in the taxpayer's annual return to determine the tax due levied by the municipal corporation in accordance with this chapter must be altered as the result of an adjustment to the taxpayer's federal income tax return, whether initiated by the taxpayer or the internal revenue service, and such alteration affects the taxpayer's tax liability under this chapter. If a taxpayer intends to file an amended consolidated municipal income tax return, or to amend its type of return from a separate return to a consolidated return, based on the taxpayer's consolidated federal income tax return, the taxpayer shall notify the tax administrator before filing the amended return.
(1) In the case of an underpayment, the amended return shall be accompanied by payment of any combined additional tax due together with any penalty and interest thereon. If the combined tax shown to be due is ten dollars or less, such amount need not accompany the amended return. Except as provided under division (B)(2) of this section, the amended return shall not reopen those facts, figures, computations, or attachments from a previously filed return that are not affected, either directly or indirectly, by the adjustment to the taxpayer's federal or state income tax return unless the applicable statute of limitations for civil actions or prosecutions under section 718.12 of the Revised Code has not expired for a previously filed return.
(2) The additional tax to be paid shall not exceed the amount of tax that would be due if all facts, figures, computations, and attachments were reopened.
(1) In the case of an overpayment, a request for refund may be filed under this division within the period prescribed by division (E) of section 718.12 of the Revised Code for filing the amended return even if it is filed beyond the period prescribed in that division if it otherwise conforms to the requirements of that division. If the amount of the refund is ten dollars or less, no refund need be paid by the municipal corporation to the taxpayer. Except as set forth in division (C)(2) of this section, a request filed under this division shall claim refund of overpayments resulting from alterations to only those facts, figures, computations, or attachments required in the taxpayer's annual return that are affected, either directly or indirectly, by the adjustment to the taxpayer's federal or state income tax return unless it is also filed within the time prescribed in section 718.19 of the Revised Code. Except as set forth in division (C)(2) of this section, the request shall not reopen those facts, figures, computations, or attachments that are not affected, either directly or indirectly, by the adjustment to the taxpayer's federal or state income tax return.
(2) The amount to be refunded shall not exceed the amount of refund that would be due if all facts, figures, computations, and attachments were reopened.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
(A) No municipal corporation other than the municipal corporation of residence shall levy a tax on the income of any member or employee of the Ohio general assembly including the lieutenant governor which income is received as a result of services rendered as such member or employee and is paid from appropriated funds of this state.
(B) No municipal corporation other than the municipal corporation of residence and the city of Columbus shall levy a tax on the income of the chief justice or a justice of the supreme court received as a result of services rendered as the chief justice or justice. No municipal corporation other than the municipal corporation of residence shall levy a tax on the income of a judge sitting by assignment of the chief justice or on the income of a district court of appeals judge sitting in multiple locations within the district, received as a result of services rendered as a judge.
Renumbered from § 718.04 and amended by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Amended by 128th General AssemblyFile No.9, HB 1, §101.01, eff. 10/16/2009.
Effective Date: 02-21-1967
(A) Except as provided in division (B) of this section, whoever violates section 718.35 of the Revised Code, division (A) of section 718.13 of the Revised Code, or section 718.03 of the Revised Code by failing to remit municipal income taxes deducted and withheld from an employee, shall be guilty of a misdemeanor of the first degree and shall be subject to a fine of not more than one thousand dollars or imprisonment for a term of up to six months, or both, unless the violation is punishable by a municipal ordinance or resolution imposing a greater penalty or requiring dismissal from office or discharge from employment, or both, in which case the municipal ordinance or resolution shall govern.
(B) Any person who discloses information received from the Internal Revenue Service in violation of division (A) of section 718.13 of the Revised Code shall be guilty of a felony of the fifth degree and shall be subject to a fine of not more than five thousand dollars plus the costs of prosecution, or imprisonment for a term not exceeding five years, or both, unless the violation is punishable by a municipal ordinance imposing a greater penalty or requiring dismissal from office or discharge from employment, or both, in which case the municipal ordinance shall govern.
(C) Each instance of access or disclosure in violation of division (A) of section 718.13 of the Revised Code constitutes a separate offense.
(D) Nothing in this chapter prohibits a municipal corporation from prosecuting offenses which are made punishable under a municipal ordinance or resolution levying an income tax and for which no other penalty is provided under this section.
Added by 130th General Assembly File No. TBD, HB 5, §1, eff. 3/23/2017, applicable to municipal taxable years beginning on or after 1/1/2017.
Dividends Received Deduction (DRD)
* Assumes a 35% tax rate for the corporation receiving the dividend.
The DRD is designed to soften the blow of triple taxation on corporate dividends. Triple taxation occurs because the company paying the dividend does so with after-tax money. The C corporation receiving the dividend is then taxed on the dividend. Finally, if the receiving C corporation pays out the dividend to its shareholders, the shareholders are taxed yet again.
There are a few limitations to the DRD:
The DRD is only available to C corporations; not LLCs, S corporations, or individuals.
There is a 45-day minimum holding period for common stock.
The DRD does not apply to preferred stock.
If a corporation is entitled to a 70% DRD, it can deduct dividends only up to 70% of its taxable income.
If a corporation is entitled to a 80% DRD, it can deduct dividends only up to 80% of its taxable income.
If a corporation is entitled to a 100% DRD, there is no taxable income limitation. Also, if the DRD creates or increases a net operating loss, the taxable income limitations do not apply.
Example A
Corporation X owns 40% of Corporations Y's outstanding stock. Corporation X has taxable income of $900, which includes dividends of $1,000. What is Corporation X's taxable income after the DRD?
At first glance, Corporation X could deduct $800 (=80%×$1,000) of dividends based on stock ownership alone. However, the taxable income limitation limits the deduction to 80% of Corporation X's taxable income, or $720 (=80%×$900).
Taxable Income Before DRD
Taxation of Stock Warrants
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A stock warrant is similar to a stock option in that both give you the right to purchase shares of the stock at a guaranteed strike price and you are able to exercise this right for a limited time. However, warrants are issued by a company for its own stock and are usually good for several years. Options are contracts sold by parties unrelated to the company and typically have expiration dates of a few months. The taxation of stock warrants is much like that of stock options, but there are some differences.
Cost Basis
Companies issue stock warrants as an extra to encourage investors to buy the firm’s stock or bonds. In some cases, the stock or bond and the warrant are sold as a package deal, and part of the price is allocated to the warrant by the terms of the sale. This allocated amount is an investment and is a nontaxable cost basis. Alternatively, you might buy a stock warrant on the market. In this case, the premium you pay for the warrant is your cost basis.
Tax at Exercise
When you exercise warrants to buy the underlying stock, you pay the stated strike price to the issuing company. The difference between the strike price and the price of a share, minus the cost basis, is taxable income. Suppose you exercise warrants with a strike price of $30 per share to buy 100 shares of XY Company and you originally paid $500 for the warrants. Your total investment is thus $3,500. If the market price on the day of exercise is $50, the stock is worth $5,000 and the difference is $1,500. This $1,500 is taxable as ordinary income in the year of exercise. It is not a capital gain because you did not own the shares prior to exercising the warrants.
Capital Gains and Losses
You can sell the shares you acquire by exercising stock warrants immediately. If instead you decide to hold on to the stock, the exercise price becomes your cost basis. Any further gains or losses are capital gains or losses. If you sell the shares one year or less from the date of exercise, you have a short-term capital gain (or loss) that is taxable as ordinary income at the same rate as your other income such as wages or salary. If you hold the shares for more than a year after exercise, it’s a long-term gain or loss. Long-term gains are taxed at a maximum rate of 15 percent as of 2017.
Opciones de acciones para empleados
Employee stock options are actually stock warrants, despite the name. Most ESOs are nonqualified stock options issued to employees as an incentive or reward. When an employee exercises a nonqualified stock option, the difference between the strike price and the market price on the day of exercise is called the bargain element. This bargain element is considered compensation by the Internal Revenue Service and must be reported on the employee’s W-2 statement. The bargain element is taxed as ordinary income and is subject to payroll tax withholding, including income taxes as well as Social Security and Medicare taxes. A second type of ESO, incentive stock options, operates under a special set of rules that allow the bargain element to be treated as a long-term capital gain, rather than as compensation. If you are given ISOs, you have to wait at least a year to exercise them and then hold the stock for one more year before the bargain element is eligible for this tax break.
Sobre el Autor
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.
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Tax Consequences of Using Listed Equity Derivatives in Managing a Stock Portfolio By Robert Gordon and Mark Fichtenbaum Twenty-First Securities Corporation Originally published in Derivatives . July/August 1996. Reprinted with permission from Derivatives Report . Copyright © 1996, Warren, Gorham & Lamont, Division of RIA, 395 Hudson Street, New York, NY 10014. 1-800-431-9025.
Using derivatives to hedge stock portfolios can affect the tax treatment on the disposition of positions, and the short-against-the-box proposal may require rethinking of some standard techniques.
Many portfolio managers keep well-balanced portfolios of stocks. There are many reasons why these managers use derivatives in managing a large equity portfolio, such as to hedge the portfolio, to skew the portfolio to certain sectors (technology), to distinguish between growth and cyclical stocks, and to avoid selling a portion of an existing portfolio. Using derivatives as a substitute for reconstituting a portfolio gives rise to many tax consequences, however.
Update: Under the American Jobs Creation Act of 2004, writing in-the-money calls suspends the holding period required to capture dividends or the DRD. See Tougher Rules For Hedging Dividends .
Derivatives may affect the dividends - received deduction. Under IRC Section 243(a), a corporation can deduct 70% of the amount of dividend income it receives if certain criteria are met. Section 246(c) provides that the stock of the corporation paying the dividend must be held for at least 46 days. Congress was concerned that taxpayers could eliminate substantially all of the risk from holding the equity, in effect turning the positions into essentially debt or quasi-debt, and therefore should not be entitled to include the days in which the hedge is in place in determining whether the 46-day holding period is satisfied. Hedging a portfolio of stock with a position in an option, futures contract, forward contract, or swap based on an index of stock may cause a suspension of the holding period in the underlying portfolio. 1
In determining whether the risk of loss in holding the portfolio has been so substantially reduced as to require a suspension of the holding period, Treasury determined to use a test based on the overlap between the stocks held and the stocks comprising the index. 2 The general rule of Reg.1.246-5(c) (1)(iii)(B) is that the holding period of the portfolio is suspended only if there is at least a 70% overlap between the value of the stocks in the portfolio and the index. The calculation to determine whether the overlap exists is contained in Reg. 1.246-5(c)(1)(iii). The investor compares its portfolio with the portfolio which would make up the underlying contract on the index. A sub-portfolio is created which is made up of the lesser of (1) the amount of shares held by the investor, or (2) the amount of shares that stock represents in the index. If the value of the sub-portfolio is 70% or greater of the value of the stocks making up the index, then the holding period of the investor's stocks included in the sub-portfolio is tolled for purposes of the 46-day holding requirement. In performing the test, a percentage of the value of the index may be used in constructing the sub-portfolio.
Ejemplo. An investor owns 69% of the value of each stock comprising one futures contract on an index and hedges the portfolio with a position in the futures contract. By using 69% of the underlying value of the futures contract, a sub-portfolio is created with a 100% overlap. The holding period of the entire portfolio is disallowed for purposes of the dividends-received deduction.
Since the test measuring the overlap is purely mathematical and not subjective, an investor can plan to avoid the 70% overlap and maintain the holding period in the portfolio. If an investor can hedge the risk in its portfolio with either an OEX option (S&P 100) or an option on the S&P 500, a different tax result can occur depending on the contract used. Since the OEX is made up of 100 stocks and the S&P 500 is made up of 500 stocks, the investor may flunk the 70% test on the OEX but pass it on the S&P 500.
If, economically, the two contracts can be used to hedge the portfolio, use of the S&P 500 would have a better after-tax result than the OEX. If both contracts would cause the taxpayer to have the holding period disallowed, it might be easier to adjust the portfolio to avoid flunking the test on the S&P 100 than on the S&P 500, since a position in a fewer number of securities would have to be adjusted in order to pass the test.
Anti-abuse provision overrides overlap test. An anti-abuse provision in Reg. 1.246-5(c)(1)(vi) overrides the 70% overlap test. This provision applies if both:
1. The portfolio of stocks and the hedge virtually track each other.
2. A principal purpose for entering into the hedge was to acquire tax benefits greatly in excess of the pre-tax economic profit earned from the transaction.
Since rules already exist under Section 246A that essentially prohibit leveraging of dividend-paying stock, it is not possible in the normal course of business for the tax benefits to be greatly in excess of the pre-tax economic profit earned from the transaction. However, exceptions can be crafted.
A straddle is, under Section 1092(c), the holding of two or more positions in personal property in which the holding of one substantially diminishes the risk of loss in holding the other. Unfortunately, there is no definition of "substantially diminishes the risk of loss" in either the Code or the Regulations. Based on Regulations proposed in 1995, a position in a portfolio of stocks or a single stock, along with a position in an index future, option, or other derivative, can be part of a straddle. 3 Any position that causes a suspension of holding period for purposes of the dividends-received deduction makes up a straddle. There may, however, be situations in which there is a sufficient reduction in the risk of holding a stock or portfolio to invoke application of the straddle rules without requiring suspension of the holding period for purposes of the dividends-received deduction. This would be true of a portfolio of stocks hedged by a position in an index in which there is less than a 70% overlap between the index and the portfolio, but where the correlation between the two is virtually 100%.
There are many implications to an investor if a straddle has been established. First, any losses realized on the closing of a position in a straddle, or recognized due to a mandated marking to market at year-end, will be deferred to the extent of any unrealized gains in the other leg of the straddle. 4 An investor may create straddles when hedging the risk in its portfolio by use of derivatives. If the portfolio increases in price, so that a loss is incurred on the derivative, the loss is deferred to the extent of unrealized gain in the portfolio, until the gain is recognized. It is unclear when this gain is recognized and, thus, when the loss may be taken. The major unanswered question is whether the index and the portfolio are to be treated as large homogeneous positions or whether they should be disaggregated for these purposes.
Ejemplo. A portfolio being hedged has a total unrealized gain from both the time prior to the hedge being entered into, and until the hedge is closed, of $ 100,000. The loss on the hedge is $20,000. One of the stocks in the portfolio made up 5% of the portfolio and also has $5,000 of unrealized gain. When that stock is sold, the remaining portfolio has an unrealized gain of $95,000. If the portfolio and the hedge are treated as large homogeneous assets, then none of the $20,000 deferred loss maybe recognized when the single stock is disposed of. If, however, the two are disaggregated for these purposes, then 5% or $1,000 of the deferred loss may be recognized when that stock was disposed.
Another complexity in such an example arises when the portfolio's $100,000 net unrealized gain is composed of both unrealized gains and unrealized losses. Since losses are deferred only to the extent of unrealized gains, if the positions are disaggregated, a portion of the loss realized on closing the hedge would be recognized immediately for tax purposes. To the extent that an investor consistently uses derivatives as an alternative to the actual disposition of the underlying securities, because this is either more efficient or less expensive, then the losses on the closing of the hedge may effectively be deferred permanently. All gains upon the closing of the hedges are, however, taxed at the time of recognition.
Mixed straddle election. The investor can make certain elections as to how to treat the straddle. If the positions qualify, the investor can use the mixed straddle account elections. 5 Under this election, all of the positions in the account are marked to market daily. The tollgate charge for making this election is that all unrealized gains or losses must be recognized when the account is established. Since all the positions are marked to market throughout the year, there will be no unrealized gains. Thus, the loss deferral rules, along with the issues they raise, disappear.
Avoiding Section 1256. Another election available to the investor is to elect to have Section 1256 contracts not subject to that section. This allows the investor not to have to mark the derivative to market at year-end. Avoidance of the year-end mark allows the investor to avoid the problem of having to include the income currently while having to defer any losses. The 60/40 capital gain/loss treatment is also lost.
Identifying specific straddles. Investors may also identify specific straddles. 6 In identified straddles, all realized gains must be recognized while realized losses are deferred to the extent of unrealized gains in the other legs of the straddle. Holding period does not accrue on the positions in the straddle for long-term capital gains purposes. Furthermore, all holding period on an asset, prior to the time it is made part of a straddle is eliminated unless the asset was held for enough time so that its disposition would result in either long-term capital gain or loss.
CHANGES IN MARKETS
Events in the marketplace have created anomalies of which investors should be aware. In the last few months, for instance, the options exchanges have begun to use strike prices that are in 2Ѕ - point intervals as opposed to 5-point intervals. This may have severe tax effects for investors who do covered call writing.
In determining whether the holding period of stock must be suspended for purposes of the dividends-received deduction and whether a straddle exists, the strike price of the call is crucial. Generally, if the call is more than one strike price "in the money" then the holding period must be suspended and a straddle exists during the time that the call is outstanding. 7 Therefore, prior to the change in strike price availability, an investor owning a stock with a market value of $49 per share was allowed to write a call with a strike price of $45 without a negative tax result. However, because a call option with a strike price of 47Ѕ is now available, writing the $45 call will have negative tax implications. This is a strange result in that the investor has the same amount of risk reduction appropriate to avoid the negative tax results as when Congress initially enacted the rules but, due to the actions of the options exchanges, now suffers detrimental tax results. Treasury has authority under Section 1092(c) (4) (H) to change the rules due to the action of the exchange and should do so to afford investors the same level of risk reduction they had when the statute was originally drafted.
Futures Contracts on Indexes
The determination of whether an option based on the value of an index of stocks qualifies as a Section 1256 contract depends on whether a futures contract could exist on such an index. The CFTC has authority to designate a futures contract on an index of stocks only if it is found that the stocks making up the index are of a general nature and are not narrowly based. When an exchange decides to list a new option, it must seek approval from the SEC. In this procedure the SEC designates the index as one that is either based on a general basket of stocks or one that is narrowly based. Depending on the classification, the tax classification follows. 8
Options on technology stocks. Both the Pacific and American options exchanges have option contracts based on a group of technology stocks. The Pacific exchange options were, however, classified as being derived from a general basket of stocks, while the American exchange options were classified as being based on a narrow basket of stocks. This difference in classification was due solely to the manner in which the exchanges drafted their request and not because the makeup of one index differs much from the other.
For tax purposes, however, the Pacific options are treated as Section 1256 contracts, which means that they must be marked to the market at year-end. 9 Also, all gains and losses on such contracts are 60% long-term and 40% short-term under Section 1256(a)(3) regardless of holding period and whether such gains and losses are from long or short positions.
The American exchange options, in contrast, are not Section 1256 contracts and are not marked to market. All of the gains or losses are either short-term or long-term, based upon the holding period of the option. Regardless of holding period, any gain or loss from short positions will be treated as short-term unless overridden by a specific rule (i. e. being part of a straddle).
To the extent options hedge the risk of technology stocks in an existing portfolio and a straddle exists, then the use of the Pacific options would give the investor the choice of electing to use a mixed straddle account election. A similar transaction in the American exchange option would not qualify for such an election.
Hedging with individual stock options. Another anomalous result occurs when an investor chooses to hedge a portfolio with a series of individual stock options as opposed to an index option. One investor owns all 20 stocks comprising the Major Market Index and hedges the portfolio by writing individual call options on each of the 20 stocks. Another investor achieves a similar hedge of the portfolio simply by writing a call option on the entire index. While both strategies use the listed options exchange to accomplish similar economic results, the tax results vary.
The use of individual calls allows an investor to use strike prices that will not create a straddle or cause a diminishing of the holding period for purposes of the dividends-received deduction. No specific rules allow an investor to use index options with a specific strike price to avoid these rules. While a strong argument exists not to reduce the holding period of the stocks when an "at the money” or "out of the money" call option is used, it is much more difficult to argue that the straddle rules should not apply. The reason for this is that while the calls may not substantially diminish the risk of loss from holding the stock, holding the stock certainly diminishes the risk from holding the short call position. 10 Therefore, it is easier to plan for tax results by using individual calls as opposed to an index option.
The second difference between hedging with individual call options as opposed to hedging with the entire index is that if "deep in the money" calls are used, then a straddle would exist in either case. The use of the index option creates a mixed straddle while the use of the individual options does not.
Synthetically creating a portfolio. A third difference between hedging with individual call options and hedging with an index arises if an investor synthetically creates a port - folio through use of options. The investor can purchase calls and write puts with identical strike prices and maturity dates on each of the individual stocks in the index. On the other hand, the investor can purchase calls and write puts on the index with identical strike prices and maturity dates.
In both cases, the investor synthetically creates the same basket of stocks. In the first case, the gains and losses with respect to the calls will be either long-term or short-term capital gains or losses depending on the length of the holding period. The gains on the puts will be short-term regardless of holding period. Where the investor purchases calls and writes puts on the index with identical strike prices and maturity dates, any gains and losses will be 60% long-term and 40% short-term capital gain or loss. Obviously the straddle rules do not apply in these transactions because the holding of a call and the writing of a put with identical strike prices and expiration dates do not offset the risk of each other.
Effect of leverage. To the extent an investor with a large portfolio uses leverage, additional complexities arise. If the investor is a corporation, to the extent that a dividend paying stock is leveraged a portion of the dividends-received deduction is disallowed. Instead of using a 70% dividends-received deduction, the percentage used is (a) 70% multiplied by (b) the ratio of the cost of the stock not leveraged over the total cost of the stock. The amount of the reduction in the dividends-received deduction cannot, under Section 246A(e), be greater than the interest expense incurred on the debt to carry the stock.
If the stock is also part of a straddle, then another rule comes into play. Interest expense incurred to carry a position in a straddle must be capitalized under Section 263(g). A corporate investor who hedges a leveraged dividend-paying stock with a derivative is subject to both rules. Therefore, a portion of the dividends-received deduction is disallowed and the interest expense must be capitalized. Since a non-corporate investor is not entitled to the dividends-received deduction, it capitalizes the interest expense incurred to carry the stock position.
Section 1259 became law effective June 9, 1997.
It appears that, due to the publicity received to the initial public offering of Estee Lauder Companies, Inc. legislation was proposed to eliminate the tax benefits associated with a short-against-the-box or equity-swap strategy. 11 This proposed legislation (to create Section 1259) would not just affect short-against - the-box and equity-swap transactions. Where an investor removes substantially all of the risk of loss and substantially all of the potential for profit from a portion or all of its portfolio of stocks by use of a derivative, the proposal would probably apply. Under the proposal, entering into a derivative would cause a constructive sale of the underlying portfolio. This could have a disastrous effect on mutual funds that use derivatives to temporarily hedge a portion of their portfolios. In order to qualify as a regulated investment company, for tax purposes, certain requirements must be satisfied.
The Government repealed Section 851(b)(3) (also known as the “short three rule”) for tax years beginning after August 5, 1997.
One requirement under Section 851(b)(3) is that no more than 30% of the company’s income be derived from gains of securities that are held for less than three months. Therefore a company could inadvertently lose qualification as a RIC by, hedging its portfolio in such a manner as to cause a constructive sale of the stock. The proposed legislation is silent as to whether the constructive sale rules apply for all purposes of the Code or just for gain recognition, but the above result is possible.
Another area in which the constructive sale rules could cause unanticipated results is one in which a dividend-paying stock has been held for more than 46 days. Under current law, once the 46-day holding period has been met, the stock may be hedged and all subsequent dividends will still qualify for the dividends-received deduction. Under the constructive-sale rules, the stock may be deemed to have been sold and repurchased on the date the hedge was entered into. In this case, the investor will have to satisfy a new 46-day holding period before future dividends received on the stock will qualify for the dividends-received deduction. Since the establishment of the hedge caused the constructive sale to occur, no holding period will accrue on the stock for purposes of the dividends-received deduction until the hedge is disposed of. Thus, the constructive-sale proposed legislation may affect any situation where the length of holding period is relevant.
Section 246(c)(1)(A) is now law effective for dividends received or accrued after September 4, 1997.
New holding period for each dividend. Another proposal that would affect the use of derivatives and the dividends-received deduction is one in which an investor must satisfy a new 46-day holding period for each dividend. As noted, under current law, once a stock has met the 46-day holding period requirement, it may be hedged in any manner the investor wishes, and the holding period requirement for the dividends-received deduction will continue to be met. Under the proposal, there would have to be a constant monitoring of stock and its hedges to determine if the holding period requirement is satisfied. It would be possible to have some dividends qualify, and later dividends not qualify.
Many investors hold large portfolios and use derivatives to either completely or partially hedge them. Under current law, those investors must determine whether they have created a tax straddle or jeopardized the receipt of their dividends-received deduction or the accrual of holding period. They must also be aware that different strategies to accomplish identical or similar economic results can receive disparate tax treatment. Under current proposals, certain hedging transactions could result in dispositions for tax purposes with potentially catastrophic results.
2 Reg. 1.246-5(c ). A more quantitative approach could have looked at the correlation between the portfolio held and the stock index.
3 Prop. Reg. 1.1092(d)-2.
4 Section 1092(a)(1).
5 Section 1092(b)(2)(A)(i)(II). The major condition is that at least one of the positions in the straddle be a Section 1256 contract while another position is not.
6 Section 1092(b)(2)(A)(i)(I).
7 Sections 246(c )(4) and 1092(c )(4).
8 Rev. Rul 94-63, 1994-2 CB 188.
9 Section 1256(a)(1).
10 Under Section 1092(c), a straddle exists when the holding of one position (stock) substantially diminishes the risk of loss in another position (short index call).
11 A short-against-the-box strategy is one in which an investor sells short an equivalent amount of stock that the investor currently owns. See Scarborough, “Proposal Would Tax Short-Against-the-Box Sales, But May Encourage Alternatives That Use Derivatives,” 1 DERIVATIVES 217 (May/June 1996).
This article and other articles are provided f or information purposes only. They are not intended to be an offer to engage in any securities transactions or to provide specific financial, legal or tax advice. Articles may have been rendered partly inaccurate by events that have occurred since publication. Investors should consult their advisers before acting on any topics discussed herein.
Options involve risk and are not suitable for all investors . Before engaging in an options transaction, investors must review the booklet "Characteristics and Risks of Standardized Options ".
IRS Tax Write-offs for Worthless Stock
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TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
I nternal Revenue Code (I. R.C.) Section (§) 165, along with associated regulations, procedures, and rulings, provides taxpayers with tax relief for investment theft losses. An investment theft loss occurs when someone steals a taxpayer’s property held in connection with a transaction entered into for profit. [1] The taking of property must be illegal under State law and committed with criminal intent. A theft includes the taking of money or property by blackmail, burglary, robbery, embezzlement, etc. Theft losses can also include losses resulting from Ponzi schemes. A Ponzi scheme is an investment fraud that involves the payment of fictitious investment returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high rates of return with little or no risk.
The IRS issued guidance to help provide taxpayers with some clarity on the tax implications resulting from Ponzi scheme investment theft losses.
With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out. In some instances, these schemes last for long periods of time and do not collapse until substantial sums of money have been contributed by investors. For example, in March 2009, Bernard Madoff pleaded guilty to 11 Federal felonies and admitted to turning his wealth management business into a massive Ponzi scheme that defrauded thousands of investors of billions of dollars. The amount missing from client accounts, including fabricated gains, was almost $ 65 billion. The court-appointed trustee estimated actual losses to investors of $18 billion.
The Internal Revenue Service (IRS) recognized and addressed the tax implications of Ponzi scheme losses
The number of investment theft loss victims as a result of a Ponzi scheme increased significantly in Tax Years 2008 and 2009. With the potentially large number of victims filing tax returns claiming these losses, IRS officials wanted to minimize both the IRS’s administrative burden and the burden on the victims of Ponzi scheme losses. As such, the IRS issued a revenue procedure which provides victims with a uniform method for computing the theft losses from Ponzi-type investment schemes and helps to simplify related tax reporting for these taxpayers.
The IRS also issued a revenue ruling describing the proper income tax treatment under I. R.C. § 165 for losses resulting from Ponzi-type investment schemes.
· Revenue Ruling 2009-9 : Provides taxpayers with guidance on determining the amount and timing of losses under I. R.C. § 165 resulting from Ponzi schemes. The ruling holds that a loss from a Ponzi scheme is a theft loss in a transaction entered into for profit; therefore, the theft loss rules under I. R.C. § 165 apply. Under the I. R.C. § 165 rules, a taxpayer must prove that the loss was from theft and the amount of the loss. The loss is deductible in the year the theft was discovered. However, a taxpayer is not allowed a deduction if there is a claim for reimbursement of any portion of the loss for which there is a reasonable prospect of recovery. Investment theft losses are not subject to either personal loss limitations, namely the $100 and 10 percent of Adjusted Gross Income or the 2 percent of Adjusted Gross Income limitation. [2]
Revenue Procedure 2009-20 . Simplifies compliance for taxpayers by providing an optional safe harbor [3] means of determining the year in which the loss from a specified fraudulent arrangement [4] is deemed to occur and a simplified means of computing the amount of the loss. The safe harbor option allows qualified investors [5] to deduct either 75 or 95 percent of their qualified investment, [6] less the amount of any potential or actual recovery from insurance or similar contractual arrangements, in the year the l ead figure is criminally charged. The remaining 5 or 25 percent of the loss may be deducted in the tax year in which there are no longer any reimbursement claims for which there is a reasonable prospect of recovery under the normal I. R.C. § 165 rules discussed above.
The safe harbor requires taxpayers to waive their rights to file amended tax returns for prior years to eliminate the income that the scheme falsely reported to the taxpayer in each of those years. Instead, the taxpayer must claim the investment theft loss (which may include amounts reported in prior years) as a deduction only in the year the criminal charges are filed against the lead figure.
In comparison, if these victims choose not to apply the safe harbor treatment, their investment theft loss would be subject to the I. R.C. § 165 provisions described above. Figure 1 provides a comparison of key elements relating to the safe harbor provision and I. R.C. § 165 provisions.
Figure 1: Comparison/Contrast Key Requirements Safe Harbor Method to Non-Safe Harbor Method for I. R.C. § 165 Investment Theft Loss Deductions
Source: IRS guidelines and procedures.
This review was performed at the Small Business/Self-Employed (SB/SE) Division Headquarters and the Large Business and International Division Headquarters in Washington, D. C.; the Submission Processing Site in Fresno, California; and the SB/SE Division Examination Policy Office in San Diego, California, during the period of October 2010 through June 2011. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
As a result, the IRS is unable to quantify the number of taxpayers claiming these losses. IRS procedures require taxpayers to report investment theft losses on Form 4684, Section B, and to include the investment theft loss amount on Itemized Deductions (Schedule A ), line 28 (Other Miscellaneous Deductions). However, *************2(f)*******************************************2(f)***************************************************************************2(f)*********************************************2(f)**************.
Schedule A, line 28, is used to report multiple losses and other tax items, including investment theft and casualty losses. Therefore, even though the IRS does transcribe this line, it cannot determine whether taxpayers are carrying an investment theft loss to this line for paper-filed tax returns. Schedule A, line 28, is used to report the following eight miscellaneous deductions :
· Casualty and theft losses of income-producing properties.
· Federal estate taxes on income in respect of decedents.
· Amortizable bond premiums on bonds acquired before October 23, 1986.
· Deductions for repayment of amounts under claims of right if over $3,000.
· Certain unrecovered investments in annuities.
· Impairment-related work expenses of disabled persons.
· Losses on other activities from large partnerships.
Our review of Tax Year 2008 electronically filed (e-filed) tax returns identified 1,967 taxpayers claiming investment theft losses of nearly $781 million. [8] The information from Form 4684, Section B, is captured for e-filed tax returns. *******************2(f)*************** ***************************************2(f)************************************ *************************************2(f)*****************************. The IRS estimates that more than 19,200 taxpayers have filed Tax Year 2008 tax returns claiming a combined total of more than $8 billion in property income casualty and theft deductions.
The f igure below provides the available statistics for the volume of tax returns and dollars of investment theft losses reported during Tax Year 2008 for paper and e-file returns.
Figure 2: Form 1040 – Schedule A, Other Miscellaneous Deductions
Tax Returns Filed in Tax Year 2008
*************************************2(f )* ************************************************************************* 2(f)**********************. For capital losses, taxpayers are required to provide a property description (100 shares of XYZ Company), dates acquired and sold, sale prices as well as cost or other basis, and related gains or losses on Capital Gains and Losses (Schedule D). Figure 4 identifies the information needed on Schedule D to claim a capital loss.
Figure 4: Information Needed to Claim a Capital Loss
Figure 4 was removed due to its size. To see Figure 4 please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Management’s Response: *********************2(f )* *************** ************************************2(f)******************************************************2(f)*******************. The IRS will assess the costs and availability of resources for additional transcription if the results of the recommended Compliance Initiative Project (see Recommendation 3) confirm a high risk of noncompliance.
Based on our review of a statistically valid sample of 140 e-filed Tax Year 2008 tax returns on which taxpayers reported an investment theft deduction, we estimate that 1,788 (82.14 percent) of 2,177 tax returns may have erroneously claimed deductions totaling more than $697 million, resulting in revenue losses totaling approximately $41 million. Our sample was from Tax Year 2008 tax returns, and the audit statute of limitations may not allow the IRS sufficient time to complete the audits of these tax returns to recover the tax. However, these same issues will continue to exist in subsequent years.
The IRS is not meeting its strategic goal of enforcing the law to ensure everyone meets their obligation to pay taxes. To achieve this goal, the IRS states that it will use the information it already receives and support proposals to increase information reporting while mitigating burden to the public. ***********************************2(f )* ******************** *************************2(f)**********************.
Our review of the 140 e-filed tax returns identified 81 (58 percent) taxpayers who claimed investment theft losses totaling more than $7.2 million that did not appear to meet the qualifications for this type of deduction. These claims were personal or capital losses and, as such, did not qualify as an investment theft loss. These potentially nonqualifying claims could result in a revenue loss totaling more than $1.2 million.
62 (44 percent) tax returns – the taxpayers claimed investment theft losses totaling more than $6.6 million. Our review of information retained by the IRS both from the taxpayer and third parties could not substantiate that these taxpayers had such investments or related thefts. These potentially nonqualifying deductions result in a potential revenue loss of more than $1 million. For example: [11]
Taxpayer A claims an investment theft loss of $100,000 from the XYZ Company. Although the taxpayer does not have to provide support showing an investment in XYZ Company, IRS third-party records such as a Schedule K-1 or Proceeds From Broker and Barter Exchange Transactions (Form 1099-B) did not identify any documents issued by the XYZ Company to this taxpayer. Moreover, the taxpayers’ prior year tax returns did not show income or loss associated with the investment. Given the lack of evidence of the investment, more information is needed by the IRS to substantiate whether the taxpayer was ever a victim of an investment theft.
· 15 (11 percent) tax returns – the taxpayers claimed over $396,000 in investment theft losses without establishing that they were a victim of a theft. These potentially nonqualifying deductions should have been taken as personal or capital losses (a maximum yearly deduction of $3,000). These nonqualifying deductions result in a potential tax revenue loss of $120,000. Por ejemplo:
Taxpayer A has an investment in ABC Corporation for $35,000. At the time of sale, the taxpayer’s investment has dropped in value to $20,000, resulting in a $15,000 loss on the sale of the investment. No one is pursuing civil or criminal actions against ABC Corporation for theft of investments. However, the taxpayer claims the $15,000 as an investment theft loss deduction instead of a capital loss limited to $3,000.
· 4 (3 percent) tax returns – the taxpayers claimed more than $215,000 in investment theft losses resulting from the Madoff Ponzi scheme. Madoff issued Forms 1099-B in an effort to maintain the perception of a valid investment. Our review of information retained by the IRS both from the taxpayer and third parties could not substantiate that these taxpayers had investments with Bernard Madoff. These nonqualifying deductions result in a potential revenue loss of more than $26,000. Por ejemplo:
Taxpayer A takes a Ponzi theft loss deduction of $300,000 and claims the loss is due to an investment in the Madoff Ponzi scheme. Independent research of third-party documentation could not find any Forms 1099-B for Tax Years 2007 and 2008 in the primary taxpayer’s name or his or her spouse’s name. Additionally, neither taxpayer was on the list of Madoff victims. Therefore, this deduction does not appear to be valid.
In addition, neither the Treasury Inspector General for Tax Administration nor the IRS could make a determination on whether 34 (24 percent) of the 140 e-filed tax returns we reviewed met the qualifications to take investment theft loss deductions. These taxpayers claimed investment theft losses totaling more than $20 million. These cases involved taxpayers for whom we were unable to substantiate either through information provided on the tax return or third-party documentation whether they were victims of investment theft, or taking investment theft loss deductions in an incorrect tax year, or electing the safe harbor provision without providing the required documentation. Por ejemplo:
· 2 5 (18 percent) tax returns – the taxpayers claimed about $7.7 million in investment theft losses and indicated on their Forms 4684 that the losses were associated with involvement in partnerships. However, our research of associated partnership tax returns showed that the partnerships did not include with their tax returns a Form 4684 reporting investment theft losses. [12] As such, it appears that these taxpayers did not incur an investment theft loss from those partnerships. Por ejemplo:
Taxpayer A claims an investment the ft loss deduction in Tax Year 2008 of $175,000. The taxpayer notes on their Form 4684 that the losses were reported on a Schedule K-1 from Partnership A, which had an investment theft loss due to the illegal scheme. However, the tax return filed by Partnership A has no Form 4684 reporting an investment theft loss. Therefore, the taxpayer’s claim does not appear to be valid.
· 7 (5 percent) tax returns – the taxpayers claimed more than $10.6 million in investment theft losses that may have been deducted in the incorrect tax year. Only those taxpayers using the safe harbor option can claim their investment theft loss in the tax year the individual perpetrating the Ponzi scheme is criminally charged. However, to use the safe harbor, IRS guidelines require taxpayers to mark the top of their Form 4684 with “Revenue Procedure 2009-20” and to provide an Appendix A. These taxpayers took investment theft losses but did not notate selection of the safe harbor. If the taxpayer is not using safe harbor, these losses are treated as an I. R.C. § 165 investment theft loss with recoverable losses not allowed until there is no further possibility of recovery of such loss. Por ejemplo:
Taxpayer A claims an investment theft loss deduction in Tax Year 2008 in the amount of $250,000 for losses resulting from a Ponzi scheme. The court case (criminal and civil) relating to this Ponzi scheme is still ongoing at the time the tax return is filed. There is no indication on the tax return and/or Form 4684 that the taxpayer is electing the safe harbor provision. Without this election, the investment theft loss is treated as an I. R.C. § 165 and, as such, the taxpayer cannot claim any recoverable theft loss until all court cases (criminal and civil) are finalized.
Taxpayer A claims a $750,000 loss on his e-filed tax return due to an investment in a Ponzi scheme and indicates on the Form 4684 the election of the safe harbor procedures in Revenue Procedure 2009-20 but does not provide the IRS with the required Appendix A. The taxpayer has not complied with the reporting instructions outlined in the Revenue Procedure.
It should be noted that IRS audit results from Tax Preparer Projects also showed that taxpayers are erroneously claiming investment theft loss deductions. As of December 24, 2010, the IRS determined that 96 percent of the 1,761 investment theft loss claims associated with tax returns under examination were erroneous, resulting in additional tax assessments totaling $19.5 million. The IRS indicated that most of the erroneous investment theft losses include:
· Taxpayers converting capital losses to theft losses. Investment losses caused by stock market performance rather than outright theft are not deductible except as a capital loss (which is limited to a $3,000 maximum per year).
· Taxpayers choosing to use the safe harbor option when they were not the victim of a Ponzi scheme or any other investment theft loss.
A Compliance Initiative Project was not initiated despite the high rate of erroneous investment theft loss deductions
The IRS uses Compliance Initiative Projects to identify potential areas of noncompliance for the purpose of correcting the problem. The Compliance Initiative Projects are any activity involving contact with specific taxpayers and the collection of taxpayer data to identify areas of noncompliance.
The IRS initiated Tax Preparer Projects that focused on special investigations to identify individuals promoting abusive theft loss claims by taking capital losses as investment theft losses. The examination results found that 96 percent of the tax returns did not qualify for investment theft deductions.
The Commissioner, Small Business/Self-Employed Division, should:
Recommendation 3 . E stablish a Compliance Initiative Project to measure noncompliance with the claims of investment theft losses and, ****************2(f )* ******************* **************2(f)*********************
Management’s Response: IRS management will consult with the SB/SE Division Research function to analyze their processes and review historical data to determine whether the IRS needs to make changes to its processes and forms. As part of this analysis, the IRS will look at the feasibility of establishing a Compliance Initiative Project. The IRS will recommend applicable process improvements and compliance strategies based on the assessment of the level of noncompliance.
Our overall objective was to assess the IRS’s efforts to ensure the validity of investment theft loss deductions. Data validation showed that source data for evaluation were reliable. To accomplish our objective, we:
I. Identified processes established by the IRS to identify taxpayers claiming a Ponzi scheme loss deduction.
A. Participated in a walkthrough at a Submission Processing site and determined efforts taken by IRS tax examiners to identify tax returns that claimed Ponzi scheme loss deductions.
B. Discussed with the Code and Edit, Error Resolution, and Examination functions the steps taken to verify the accuracy of tax returns claiming Ponzi scheme loss deductions.
II. Assessed the effectiveness of IRS processes to ensure taxpayers who claimed Ponzi scheme loss deductions met documentation requirements and to identify questionable claims to be referred for additional action.
A. Participated in a walkthrough at a Submission Processing site and determined efforts taken to verify the completeness of Ponzi scheme loss deductions on tax returns at the time returns are processed.
B. Interviewed IRS personnel and reviewed procedures to identify the process used by the IRS to ensure taxpayers who claimed a Ponzi scheme loss deduction using safe harbor and non-safe harbor options met documentation requirements (required forms and information attached to returns).
C. Interviewed IRS personnel and reviewed available documentation to determine actions taken to validate specific items pertaining to Ponzi scheme loss deductions and identify questionable tax returns prior to referring the returns to other functions for additional actions (including referrals to examination). As part of this effort, we:
1. Discussed with the special project coordinator the results of initiatives to stop fraudulent claims promoted by tax preparers.
2. Discussed with SB/SE Division managers the monitoring of Ponzi scheme losses for fraudulent activity or noncompliance with requirements.
D. Reviewed available management information reports outlining post-processing efforts and results.
III. Determined whether 908 taxpayers claiming approximately $516 million on e-filed tax returns complied with filing and documentation requirements.
A. Identified 793 tax returns with a possible Ponzi scheme loss deduction that did not submit U. S. Individual Income Tax Transmittal for an IRS e-file Return (Form 8453); however, since Appendix A documentation is only required for safe harbor claims, the test was inconclusive as tax returns using safe harbor provisions are not captured.
B. Identified the 115 tax returns with Forms 8453 where the taxpayers self-identified themselves as claiming a Ponzi scheme loss deduction.
1. Selected a judgmental sample of 50 e-filed tax returns and found 2 taxpayers submitted Appendix A when taking the safe harbor option.
2. Matched our sampled tax returns claiming a Madoff connection to a list of Madoff victims to identify individuals not listed on the Madoff file for evaluating their claims for Ponzi theft loss deductions to ascertain whether the claims were eligible for the deduction.
IV. Determined whether individuals erroneously claimed a Ponzi scheme loss deduction.
A. S elected a statistically valid, random sample of 140 e-filed Tax Year 2008 tax returns from an Individual Returns Transaction File [13] extract of 2,177 tax returns ($803 million) claiming “Other Miscellaneous” deductions. We used attribute sampling to calculate the minimum sample size (134), [14] which we rounded to 140:
Z = Confidence Level: 90 percent (expressed as 1.645 standard deviation)
p = Expected Rate of Occurrence: 5 percent
A = Precision Rate: ±3 percent
N = Population: 2,177
1. Reviewed the prints of e-filed tax returns and determined if the claimed deduction is a Ponzi scheme loss deduction electing the safe harbor option.
2. Determined if taxpayers complied with filing and documentation requirements.
3. Matched our sampled tax returns claiming a Madoff connection to a list of Madoff victims and identified taxpayers not listed on the Madoff file to ascertain whether the claims appear eligible for the deduction.
4. For claims we determined to be potentially ineligible that were not selected for examination, we calculated the lost revenue to project the total potential revenue loss for our population (2,177 tax returns).
B. Determined whether the tax returns were selected for examination.
1. Matched accounts to the Audit Inventory Management System [15] open and closed files to determine the status of cases and issues under examination consideration.
2. Interviewed IRS managers and determined how cases with Ponzi scheme loss deductions are selected for examination.
3. Reviewed management information reports and determined whether Ponzi scheme loss deductions are being tracked.
Internal controls methodology
Internal controls relate to management’s plans, methods, and procedures used to meet their mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. We determined the following internal controls were relevant to our audit objective: the Internal Revenue Manual; Standards for Internal Control in the Federal Government ; and the IRS’s policies, procedures, and practices for processing investment theft losses. We evaluated these controls by interviewing management, examining applicable information, and reviewing samples of tax returns with investment theft losses.
Michael E. McKenney, Assistant Inspector General for Audit (Returns Processing and Account Services)
Russell P. Martin, Director
Edward Gorman, Audit Manager
Linda Bryant, Senior Auditor
Lawrence Smith, Senior Auditor
Mark Willoughby, Auditor
Martha Stewart, Information Technology Specialist
Office of the Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Services and Enforcement SE
Deputy Commissioner (Operations), Large Business and International Division SE:LB
Deputy Commissioner of Operations, Wage and Investment Division SE:W
Deputy Commissioner, Small Business/Self-Employed Division SE:S
Director, Compliance, Wage and Investment Division SE:W:CP
Director, Customer Account Service, Wage and Investment Division SE:W:CAS
Director, Electronic Tax Administration and Refundable Credits, Wage and Investment Division SE:W:ETARC
Director, Examination, Small Business/Self-Employed Division SE:S:E
Director, Strategy and Finance, Wage and Investment Division SE:W:S
Director, Submission Processing, Wage and Investment Division SE:W:CAS:SP
Director, Accounts Management, Wage and Investment Division SE:W:CAS:AM
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
Office of Internal Control OS:CFO:CPIC:IC
Audit Liaison: Chief, Program Evaluation and Improvement, Wage and Investment Division SE:W:S:PEI
The Form was removed due to its size. To seethe Form, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
The Form was removed due to its size. To seethe Form, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
MEMORANDUM FOR MICHAEL R. PHILLIPS
DEPUTY INSPECTOR GENERAL FOR AUDIT
FROM: Faris R. Fink /s/ Faris R. Fink
Commissioner, Small Business/Self-Employed Division
SUBJECT: Many Investment Theft Loss Deductions Appear to Be Erroneous (Audit # 201040042)
Thank you for the opportunity to review your draft report titled: "Many Investment Theft Loss Deductions Appear to Be Erroneous." We appreciate your recognition of our efforts to address the tax implications of the Ponzi scheme losses by: (1) issuing a Revenue Procedure to provide victims with a uniform method for computing the theft losses from these schemes and to simplify related tax reporting for these taxpayers; and (2) issuing a Revenue Ruling describing the proper income tax treatment under Internal Revenue Code Section 165.
We have investigated promoters of abusive investment theft loss schemes and the taxpayers who have participated in such schemes. To maximize these compliance efforts, we have worked collectively with other impacted IRS business units and our internal counsel. We have also developed internal websites to provide our examiners with additional technical information, conducted case reviews, and conducted training workshops. In addition, we have provided information on our public website, www. irs. gov, including telephone and e-mail contacts for additional information for external stakeholders to assist with taxpayer compliance.
Your report observes that the Service initiated investigations to identify promoters of abusive theft loss claims and that examination of clients of these promoters determined that 96 percent of tax returns did not qualify for investment theft losses. It is important to note that we targeted those promoters because we had information indicating that they were promoting abusive schemes to attempt to avail their clients of improper investment theft loss deductions. For this reason, it is not surprising that the examinations of these clients resulted in a very high disallowance rate. However, it cannot be assumed that the noncompliance rate is the same for the entire population of taxpayers claiming investment theft loss deductions.
Attached is a detailed response outlining our corrective actions. If you have any questions, please contact me, or a member of your staff may contact Shenita Hicks, SB/SE Director, Examination at (859) 669-5526.
***********************************2(f )* *******************************************************************************************************************2(f)************************. We will assess the costs and availability of resources for additional transcription if the results of the recommended Compliance Initiative Project (CIP) (see Recommendation 3) confirm a high risk of noncompliance.
Director, Submission Processing (W&I)
CORRECTIVE ACTION MONITORING PLAN .
We will monitor this action as part of our internal management control process.
We will monitor this action as part of our internal management control process.
[1 ] Investment property is any property held for investment, such as stocks, notes, bonds, gold, silver, vacant lots, and works of art.
[2] Adjusted Gross Income (U. S. Individual Income Tax Return (Form 1040), line 37) is the taxpayer’s total income (line 22) minus the allowable adjustments (lines 23-35).
[3] Rev. Proc. 2009-20 provides an optional procedure, i. e. “safe harbor,” under which qualified investors may treat a Ponzi loss as a theft loss deduction. The safe harbor also provides investors with a uniform manner for determining their theft losses. In addition, the safe harbor avoids potentially difficult problems of proof in determining how much income reported in prior years was fictitious or a return of capital and alleviates compliance and administrative burdens on both taxpayers and the IRS.
[4] A specified fraudulent arrangement is an arrangement by which a party receives cash or other property from investors, alleges to earn income for the investors, reports income to the investors that is partially or wholly fictitious, makes payments of purported income or principal to some investors from amounts that other investors invested in the arrangement, and appropriates some of the investors’ cash or property.
[5] Qualified investors who invested directly with the specified fraudulent arrangement qualify to deduct theft losses if they did not invest in a tax shelter and had no actual knowledge of the fraudulent nature of the arrangement before it became publicly known. Indirect investors who invested in the specified fraudulent arrangement through a pass-through entity are not qualified investors under the revenue procedure but may deduct their proportionate share of the loss passed through to them as reported on a Schedule K-1.
[6] Taxpayers deduct 75 percent if they intend to pursue any potential for third-party recovery and 95 percent if they do not intend to pursue any potential third-party recovery.
[7] Appendix A can be found in Internal Revenue Bulletin No. 2009-14 (April 6, 2009). See Appendix V of this report for an example. Appendix A must be filed by the “qualified investor,” which could be a partnership filing on behalf of partners.
[8] This number does not agree with the total number of e-filed investment theft losses in our case review because 210 of the 2,177 individuals in our total used “casualty” in reporting partnership losses.
[9] The IRS database that contains data transcribed from initial input of the original individual tax returns during return processing.
[10] The 2009 Financial Crimes Report states that investment fraud investigations have increased by 33 percent over the last 5 years. For Fiscal Year 2009, the Federal Bureau of Investigation was investigating 1,510 cases of investment fraud and had 177 Special Agents assigned to address this problem .
[11] All examples included in this report are hypothetical.
[12] Partnerships are required to complete and attach Forms 4684 to their tax returns if they are claiming investment theft losses. The investment theft losses are then passed on to each partner on Schedule K-1 from a partnership. Partnerships can be multitiered, which means the loss can be passed through several partnerships. In these instances, the IRS often cannot determine whether the claim is valid and where the loss originated without performing an examination.
[13] The IRS database that contains data transcribed from initial input of the original individual tax returns during return processing.
[14] The formula n = (Z2p(1-p))/(A2+(Z2p(1-p)/N)) is from Sawyer’s Internal Auditing – The Practice of Modern Internal Auditing . 4th Edition, pp. 462-464.
[15] The Audit Inventory Management System is a computer system used by the IRS functions to control tax returns, trace examination results, and provide management reports.
____ 4. Vicki owns and operates a news agency (as a sole proprietorship). During 2000, she incurred expenses of $24,000 to increase circulation of newspapers and magazines that her agency distributes. For regular income tax purposes, she elected to expense the $24,000 in 2000. In addition, Vicki incurred $15,000 in circulation expenditures in 2001 and again elected expense treatment. What AMT adjustments will be required in 2000 and 2001 as a result of the circulation expenditures?
$16,000 positive in 2000, $2,000 positive in 2001.
$16,000 negative in 2000, $2,000 positive in 2001.
$16,000 negative in 2000, $10,000 positive in 2001.
$16,000 positive in 2000, $10,000 positive in 2001.
None of the above.
____ 5. Which of the following statements is correct?
If the tentative AMT is $10,000 and the regular income tax liability is $12,000, the AMT is $2,000.
If the tentative AMT is $12,000 and the regular income tax liability is $10,000, the AMT is $12,000.
If the tentative AMT is $10,000 and the regular income tax liability is $12,000, the AMT is a negative $2,000.
If the tentative AMT is $12,000 and the regular income tax liability is $10,000, the AMT is $2,000.
None of the above.
____ 6. Which of the following statements is incorrect .
If the tentative minimum tax exceeds the regular income tax liability, the AMT is $0.
The exemption amount increases as AMTI increases.
The AMT tax rate for an individual taxpayer can be as high as 26%.
Only a. and c. are incorrect.
a. segundo. and c. are incorrect.
____ 7. Which of the following statements is correct?
AMT adjustments can either increase or decrease AMTI.
The AMT rate for individuals is 28%.
The AMT exemption amount cannot be less than zero (i. e. cannot increase AMTI).
Only a. and c. are correct.
a. segundo. and c. are correct.
____ 8. Prior to the effect of the tax credits, Justin's regular income tax liability is $100,000 and his tentative AMT is $90,000. Justin has the following credits:
Child tax credit
HOPE and lifetime learning credits
Calculate Justin's tax liability after credits.
None of the above.
____ 9. Prior to the effect of tax credits, Eunice's regular income tax liability is $100,000 and her tentative AMT is $90,000. Eunice has general business credits available of $12,500. Calculate Eunice's tax liability after tax credits.
None of the above.
____ 10. Which of the following statements is correct regarding circulation expenditures?
For regular income tax purposes, circulation expenses must be capitalized and are amortized as § 197 intangibles over a 15-year period.
For AMT purposes, circulation expenses must be capitalized and are amortized as § 197 intangibles over a 15-year period.
For AMT purposes, the taxpayer can elect to expense circulation expenses.
For regular income tax purposes and for AMT purposes, circulation expenses must be capitalized and amortized over a three-year period.
None of the above is correct.
____ 11. Tom owns and operates Tom's Emporium, a sole proprietorship. On January 3, 1998, Tom's Emporium acquired a warehouse for $100,000. For regular income tax purposes in 2000, MACRS depreciation was deducted using a rate of 2.564 percent. The Alternative Depreciation System (ADS) rate for 2000 is 2.500 percent. Compute the AMT adjustment for depreciation with respect to the warehouse, and indicate whether the adjustment is positive or negative.
$64 negative adjustment.
$64 positive adjustment.
No adjustment is required because Tom's Emporium used the Alternative Depreciation System to compute depreciation on the property for AMT purposes.
No adjustment is required because Tom's Emporium used MACRS to compute depreciation on the property for regular income tax purposes.
None of the above.
____ 12. Omar acquires 7-year personal property for $100,000 to use in his business in February 2000. Omar does not elect § 179 expensing, but does take the maximum cost recovery deduction. As a result, Omar will have a positive AMT adjustment in 2000 of what amount?
____ 13. In 1998, Dan exercised an incentive stock option, acquiring 150 shares of stock at an option price of $75 per share. The fair market value of the stock at the date of exercise was $130 per share. In 2000, the rights in the stock become freely transferable and are not subject to a substantial risk of forfeiture. Which of the following statements is incorrect .
Dan has no AMT adjustment from the ISO in 1998.
Dan has no taxable income from the ISO in 1998.
Dan has an AMT basis of $19,500 in the stock.
Dan has a regular income tax basis of $11,250 in the stock.
All of the above are correct.
____ 14. Marvin, the vice president of Lavender, Inc. exercises stock options for 100 shares of stock in March 2000. The stock options are incentive stock options (ISOs). Their exercise price is $20 and the fair market value on the date of exercise is $28. The options were granted in March 1997 and all restrictions on free transferability had lapsed by the exercise date.
If Marvin sells the stock in December 2000 for $3,000, his AMT adjustment in 2000 is a positive adjustment of $800.
If Marvin sells the stock in December 2001 for $3,000, his AMT adjustment in 2001 is $0.
If Marvin sells the stock in December 2000 for $3,000, his AMT adjustment in 2000 is a negative adjustment of $800.
If Marvin sells the stock in December 2001 for $3,000, his AMT adjustment in 2001 is a negative adjustment of $1,000.
None of the above.
____ 15. Factors that can cause the adjusted basis for AMT purposes to be different from the adjusted basis for regular income tax purposes include the following:
A different amount of depreciation (cost recovery) has been deducted for AMT purposes and regular income tax purposes.
The spread on an incentive stock option (ISO) is recognized for AMT purposes, but is not recognized for regular income tax purposes.
Realized gain is deferred on §1031 like-kind exchanges for regular income tax purposes, but is recognized for AMT purposes.
Chapter 16 Corporate Operations
1. In general, a corporation can elect to use either the accrual or cash method of accounting no matter how large the corporation.
2. Corporations calculate adjusted gross income (AGI) in the same way as individuals.
3. Corporations have a larger standard deduction than individual taxpayers because they generally have higher revenues.
4. Large corporations are allowed to use the cash method of accounting for at least the first two years of their existence.
5. Although a corporation may report a temporary book-tax difference for an item of income or deduction for a given year, over the long term the total amount of income or deduction it reports with respect to that item will be the same for both book and tax purposes.
6. An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income.
7. Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book-tax difference.
8. Federal income tax expense reported on a corporation's books generates a temporary book-tax difference for Schedule M-3 purposes.
9. For a corporation, goodwill created in an asset acquisition generally leads to temporary book-tax differences.
10. In a given year, Adams Corporation has goodwill impairment in excess of the allowable amortization for tax purposes. It has a favorable temporary book-tax difference for that year.
11. For incentive stock options granted when ASC 718 (a codification of FAS 123R) applies, the value of the options that vest in a given year always creates a permanent, unfavorable book-tax difference.
12. For tax purposes, companies using nonqualified stock options deduct expenses in the year the options are exercised.
13. A nonqualified stock option will create a permanent book-tax difference in a given year if it vests during the year but is exercised in a later year.
14. In contrast to an individual, a corporation may deduct the entire amount of a net capital loss.
15. A corporation may carry a net capital loss forward five years to offset capital gains in future years but it may not carry a net capital loss back to offset capital gains in previous years.
16. A corporation may carry a net capital loss back two years and forward 20 years.
17. A corporation may carry a net capital loss back three years and forward five years.
18. Corporations can carry net operating loss sustained in 2017 back two years and forward 20 years.
19. Bingo Corporation incurred a net operating loss in 2017. If it carries the loss back, it must first carry the loss back to offset its 2017 taxable income and then it carries any remaining loss back to offset its 2012 taxable income.
20. Net operating losses generally create permanent book-tax differences.
21. Net capital loss carryovers but not carrybacks are deductible against capital gains in determining a corporation's net operating loss for the year.
22. Accrual-method corporations cannot deduct charitable contributions until they actually make payment to the charity.
23. GenerUs Inc.'s board of directors approved a charitable cash contribution to FoodBank, a qualified non-profit organization, in November of 2017. GenerUs made payment to FoodBank on February 2, 2017. GenerUs Inc. (a calendar-year corporation) may claim a deduction for the contribution on its 2017 tax return.
24. NOL and capital loss carryovers are deductible in calculating the charitable contribution limit modified taxable income, while NOL and capital loss carrybacks are not.
25. Corporations may carry excess charitable contributions forward five years, but they may not carry them back.
26. A corporation generally will report a favorable, temporary book-tax difference when it deducts a charitable contribution carryover.
27. Corporations are not allowed to deduct charitable contributions in excess of 10% of the corporation's taxable income (before the charitable contribution and certain other deductions).
28. The dividends received deduction is designed to mitigate the extent to which corporate earnings are subject to more than two levels of taxation.
29. Corporations compute their dividends received deduction by multiplying the dividend amount by 10%, 50%, or 100% depending on their ownership in the distributing corporation's stock.
30. The dividends received deduction cannot cause a net operating loss. The deduction can reduce income to zero but not below zero.
31. The dividends received deduction is subject to a limitation based on modified taxable income.
32. Taxable income of the most profitable corporations is subject to a flat 35% tax rate.
33. Controlled group provisions in the tax law prevent taxpayers from splitting a corporation into several smaller corporations to take advantage of low marginal corporate tax rates at low levels of income.
34. Three brothers each own 20% of the stock in three corporations. Because no single brother owns more than 50% of a corporation, the tax law would not treat the corporations as a controlled group.
35. A C corporation reports its taxable income or loss on Form 1065.
36. Schedule M-1 reconciles from book income to bottom line taxable income (the taxable income that is applied to the tax rates to determine the corporation's gross tax liability).
37. Both Schedules M-1 and M-3 require taxpayers to identify book-tax differences as either temporary or permanent.
38. An affiliated group must file a consolidated tax return.
39. The rules for consolidated reporting for financial statement purposes are the same as the rules for consolidated reporting for tax purposes.
40. Calendar-year corporations that request an extension for filing their tax returns will have a tax return due date of September 15.
41. Volos Company (a calendar-year corporation) began operations in March of 2012 and was not profitable through December of 2017. Volos has been profitable for the first quarter of 2017 and is trying to determine its first quarter estimated tax payment. It will have no estimated tax payment requirement in 2017 because it had no tax liability for the 2017 tax year and has been in business for at least 12 months.
42. Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments.
43. Large corporations (corporations with over $1,000,000 in taxable income in any of the three years prior to the current year) can use their prior tax year liability to determine all required estimated quarterly payments for the current year.
44. For estimated tax purposes, a "large" corporation is any corporation with average annual gross receipts of $5,000,000 in the three years prior to the current year.
45. Small corporations (in terms of average annual gross receipts) are exempt from the alternative minimum tax.
46. Urban Corporation receives tax-exempt income from Denver municipal bonds. All the proceeds from the bonds were used to fund public projects. In computing its AMT base, Urban must add back the interest income from its municipal bonds to taxable income.
47. Depreciation adjustments can increase or decrease the AMT base relative to taxable income.
48. The tax rate for the corporate alternative minimum tax is a flat 26%.
49. The adjusted current earnings (ACE) adjustment is 75% of the difference between a corporation's alternative minimum taxable income before the ACE adjustment and its ACE.
50. Corporations are allowed to deduct at least some AMT exemption regardless of profitability.
51. A corporation with an AMTI of $400,000 will have all of its AMT exemption phased-out.
52. Minimum tax credits generated by the corporate AMT can be carried forward indefinitely.
53. A corporation with a minimum tax credit carryover may reduce regular tax down to the amount of its tentative minimum tax when its regular tax exceeds its tentative minimum tax.
54. The amount of a corporation's AMT is the amount of its tentative minimum tax in excess of its regular tax.
Multiple Choice Questions
55. Which of the following is not calculated in the corporate income tax formula?
B. Adjusted gross income
C. Taxable income
D. Regular tax liability
56. WFO Corporation has gross receipts according to the following schedule:
If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method?
E. None of these.
57. Which of the following does NOT create a permanent book-tax difference?
A. Organizational and start-up expenses
B. Key employee death benefit income
C. Fines and penalties expenses
D. Municipal bond interest income
58. Which of the following does NOT create a temporary book-tax difference?
A. Deferred compensation
B. Bad-debt expense
C. Depreciation expense
D. Domestic production activities deduction
59. Which of the following statements regarding book-tax differences is true?
A. Corporations are not required to report book-tax differences on their income tax returns.
B. Corporations will eventually recognize the same amount of income for book and tax purposes for income-related temporary book-tax differences.
C. Income excludable for tax purposes usually creates a temporary book-tax difference.
D. None of these is true.
60. It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons?
A. Temporary book-tax differences will reverse in future years whereas permanent differences will not.
B. Certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.
C. Temporary book-tax differences will reverse in future years whereas permanent differences will not, and certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.
D. Neither temporary nor permanent book-tax differences will reverse in future years nor are certain corporations required to disclose book-tax differences as permanent or temporary on their tax returns.
61. TrendSetter Inc. paid $50,000 in premiums for life insurance coverage for its key employees. What is the nature of the book-tax difference created by this expense?
A. Permanent; favorable
B. Permanent; unfavorable
C. Temporary; favorable
D. Temporary; unfavorable
62. iScope Inc. paid $3,000 in interest on a loan it used to purchase municipal bonds. What is the nature of the book-tax difference relating to this expense?
A. Permanent; favorable
B. Permanent; unfavorable
C. Temporary; favorable
D. Temporary; unfavorable
63. AmStore Inc. sold some of its heavy machinery at a gain. AmStore used the straight-line method for financial accounting depreciation and MACRS for tax cost-recovery. If accumulated depreciation for financial accounting purposes is less than accumulated depreciation for tax reporting purposes, what is the nature of the book-tax difference associated with the gain on the sale?
A. Permanent; favorable
B. Permanent; unfavorable
C. Temporary; favorable
D. Temporary; unfavorable
64. Corporation A receives a dividend from Corporation B. Corporation A includes the dividend in its gross income for tax and financial accounting purposes (no book-tax difference). If A has accounted for the dividend correctly (following the general rule), how much of B stock does A own?
A. A owns less than 20 percent of the stock of B
B. A owns at least 20 but not more than 50 percent of the stock of B
C. A owns more than 50 percent of the stock of B
D. Cannot be determined
65. Corporation A receives a dividend from Corporation B. It includes the dividend in gross income for tax purposes but includes a pro-rata portion of B's earnings in its financial accounting income. If A has accounted for the dividend correctly (using the general rule), how much of B's stock does A own?
A. A owns less than 20 percent of the stock of B
B. A owns at least 20 but not more than 50 percent of the stock of B
C. A owns more than 50 percent of the stock of B
D. Cannot be determined
66. Coop Inc. owns 40% of Chicken Inc. both Coop and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in 2017. Chicken also reports financial accounting earnings of $20,000 for that year. Assume that Coop follows the general rule of accounting for investment in Chicken. What is the amount and nature of the book-tax difference to Coop associated with the dividend distribution (ignoring the dividends received deduction)?
A. $2,000 unfavorable
B. $2,000 favorable
C. $10,000 unfavorable
D. $10,000 favorable
E. None of these
67. Over what time period do corporations amortize purchased goodwill for tax purposes?
D. None of these
68. Which of the following statements regarding book-tax differences associated with purchased goodwill is false?
A. It is possible to have no book-tax difference in a year when there is no goodwill amortization for tax purposes.
B. In a year when goodwill is impaired and yet fully amortized for tax purposes (so no tax amortization of the goodwill for that year), the book-tax difference will be unfavorable.
C. Temporary book-tax differences associated with goodwill are always favorable.
D. If goodwill has been fully amortized for tax purposes in a previous year, the book-tax difference is equal to the amount of impairment recognized.
69. Which of the following describes the correct treatment of incentive stock options (ISOs) granted when ASC 718 (a codification of FAS 123R) applies?
A. Financial accounting—no expense; tax—no deduction
B. Financial accounting—no expense; tax—deduct bargain element at exercise
C. Financial—expense value over vesting period; tax—no deduction
D. Financial—expense value over vesting period; tax—deduct bargain element at exercise
70. Which of the following describes the correct treatment of incentive stock options (ISOs) granted when ASC 718 (a codification of FAS 123R) does not apply?
A. Financial accounting—no expense; tax—no deduction
B. Financial accounting—no expense; tax—deduct bargain element at exercise
C. Financial accounting—expense value over vesting period; tax—no deduction
D. Financial accounting—expense value over vesting period; tax—deduct bargain element at exercise
71. Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs) that were granted when ASC 718 (a codification of FAS 123R) applies?
A. Financial—no expense; tax—no deduction
B. Financial—no expense; tax—deduct bargain element at exercise
C. Financial—expense value over vesting period; tax—no deduction
D. Financial—expense value over vesting period; tax—deduct bargain element at exercise
72. Which of the following describes the correct treatment of nonqualified stock options (NQOs) granted when ASC 718 (a codification of FAS 123R) did not apply?
A. Financial—no expense; tax—no deduction
B. Financial—no expense; tax—deduct bargain element at exercise
C. Financial—expense value over vesting period; tax—no deduction
D. Financial—expense value over vesting period; tax—deduct bargain element at exercise
73. Which of the following statements regarding nonqualified stock options (NQOs) is false?
A. If ASC 718 (a codification of FAS 123R) applies, book-tax differences associated with NQOs may be either permanent or temporary.
B. In a given year when ASC 718 applies, if the value of the options that vest is greater than the bargain element of options exercised, the book-tax difference for that year is unfavorable.
C. Before ASC 718 applied, no expense recognition was required for NQOs for financial accounting purposes.
D. If ASC 718 does not apply, all stock option-related book-tax differences are temporary.
74. Which of the following statements regarding incentive stock options (ISOs) is false?
A. If ASC 718 (a codification of FAS 123R) does not apply, ISOs do not create book-tax differences.
B. For ISOs granted when ASC 718 applies, book-tax differences are always unfavorable.
C. If ASC 718 applies, the value expensed for book purposes in a given year is the value of the options that vest.
D. If ASC 718 applies, book-tax differences associated with ISOs may be either permanent or temporary.
75. Orange Inc. issued 20,000 nonqualified stock options valued at $40,000 (in total). The options vest over two years - half in 2017 (the year of issue) and half in 2017. One thousand options are exercised in 2017 with a bargain element on each option of $6. What is the 2017 book-tax difference associated with the stock options?
A. $14,000 unfavorable
B. $14,000 favorable
C. $20,000 unfavorable
D. $20,000 favorable
E. None of these
76. In January 2017, Khors Company issues nonqualified stock options to its CEO, Jenny Svaro. Because the company does not expect Ms. Svaro to leave the company, the options vest at the time they are granted with a total value of $50,000. In December of 2017, the company experiences a surge in its stock price, and Ms. Svaro exercises the options. The total bargain element at the time of exercise is $60,000. For 2017, what is the book-tax difference due to the options exercised?
A. 10,000 unfavorable
B. 10,000 favorable
C. 50,000 unfavorable
D. 60,000 favorable
77. In January 2017, Khors Company issues nonqualified stock options to its CEO, Jenny Svaro. Because the company does not expect Ms. Svaro to leave the company, the options vest at the time they are granted with a total value of $50,000. In December of 2017, the company experiences a surge in its stock price, and Ms. Svaro exercises the options. The total bargain element at the time of exercise is $40,000. For 2017, what is the nature of the book-tax difference due to the options exercised?
A. Favorable and temporary
B. Favorable and permanent
C. Unfavorable and temporary
D. Unfavorable and permanent
E. Not enough information to determine.
78. Which of the following statements regarding capital gains and losses is false?
A. In terms of tax treatment, corporations generally prefer capital gains to ordinary income.
B. Like individuals, corporations can deduct $3,000 of net capital losses against ordinary income in a given year.
C. C corporations can carry back net capital losses three years and they can carry them forward for five years.
D. Corporations must apply capital loss carrybacks and carryovers in a particular order.
79. For corporations, which of the following regarding net capital losses is true?
A. A corporation that experiences a net capital loss has a favorable book-tax difference in the year of the loss.
B. A corporation that experiences a net capital loss in year 4 first carries the loss back to year 3, then year 2, and then year 1 before carrying it forward.
C. Net capital loss carrybacks are deductible in determining a corporation's net operating loss.
D. Net capital loss carrybacks and carryovers create temporary book-tax differences if they are used before they expire.
80. Studios reported a net capital loss of $30,000 in year 5. It reported net capital gains of $14,000 in year 4 and $27,000 in year 6. What is the amount and nature of the book-tax difference in year 6 related to the net capital carryover?
A. $11,000 unfavorable
B. $11,000 favorable
C. $16,000 unfavorable
D. $16,000 favorable
81. Tatoo Inc. reported a net capital loss of $13,000 in 2017. It had a net capital gain of $4,300 in 2012 and $3,000 in 2011. In 2017, although the company suffered a net operating loss, it had net capital gains of $1,000. What is the amount of the Tatoo's capital loss carryover remaining after it applies the carryback?
82. BTW Corporation has taxable income in the current year that can be offset with an NOL from a previous year. What is the nature of the book-tax difference created by the net operating loss carryover deduction in the current year?
A. Permanent; favorable
B. Permanent; unfavorable
C. Temporary; favorable
D. Temporary; unfavorable
83. Which of the following is allowable as a deduction in calculating a corporation's net operating loss?
A. Charitable contribution deduction
B. Domestic production activities deduction
C. Net capital loss carryback
D. Net operating losses from other years
84. Which of the following statements regarding net operating losses generated in 2017 is true?
A. Corporations can carry net operating losses back two years and forward up to 15 years.
B. A corporation may elect to forgo carrying a net operating loss back and instead carry it over to future years.
C. When a corporation applies a net operating loss carryover, it reports a favorable, permanent book-tax difference in the amount of the applied carryover.
D. Marginal tax rates are irrelevant in determining the tax benefit of applying a net operating loss carryback or carryover.
E. None of these is a true statement.
85. Which of the following statements regarding charitable contributions is false?
A. Only contributions made to qualified charitable organizations are deductible.
B. Charitable contribution deductions are subject to a limitation based on the corporation's taxable income (before certain deductions).
C. Corporations can qualify to deduct a contribution before actually paying the contribution to the charity.
D. The amount deductible for non-cash contributions is always the adjusted basis of the property donated.
86. Which of the following is unnecessary to allow an accrual-method corporation to deduct charitable contributions before actually paying the contribution to charity?
A. Approval of the payment from the board of directors.
B. Approval from the IRS prior to making the contribution.
C. Payment made within two and one-half months of the tax year end.
D. All of these are necessary.
87. Canny Foods Co. is considering three ways it could contribute to a local, qualified charity. First, it could give $5,000 in cash. Second, it could give stock it initially purchased two years ago for $4,000 but is now worth $6,000. Third, it could give items of inventory with a fair market value of $7,000 but with an adjusted basis of $3,000. Which of the following correctly describes the relation among possible charitable contributions in terms of amount deductible for tax purposes?
A. Cash > Stock > Inventario
B. Stock > Cash > Inventario
C. Inventory > Stock > Cash
D. Inventory > Cash > Valores
88. Which of the following is deductible in calculating the charitable contribution limit modified taxable income?
A. Net capital loss carrybacks
B. NOL carrybacks
C. NOL carryovers
D. Charitable contributions
89. Remsco has taxable income of $60,000 and a charitable contribution limit modified taxable income of $72,000. Its charitable contributions for the year were $7,500. What is Remsco's current-year charitable contribution deduction and contribution carryover?
A. $6,000 current-year deduction; $1,500 carryover
B. $7,500 current-year deduction; $0 carryover
C. $1,200 current-year deduction; $6,300 carryover
D. $7,200 current-year deduction; $300 carryover
90. If a corporation's cash charitable contributions exceed the charitable contribution deduction limit, what kind of book-tax difference is created?
A. Permanent; favorable
B. Permanent; unfavorable
C. Temporary; favorable
D. Temporary; unfavorable
91. Which of the following statements regarding excess charitable contributions (contributions in excess of the modified taxable income limitation) by corporations is true?
A. Corporations may not carry over or carry back excess charitable contributions.
B. Corporations can carry excess charitable contributions over to a future year or back to a prior year.
C. Corporations can carry excess charitable contributions over to a future year but not back to a prior year.
D. Corporations can carry excess charitable contributions back to a prior year but not over to a future year.
92. Which of the following statements regarding the dividends and/or the dividends received deduction (DRD) is true?
A. Dividends are taxed at preferential rates for corporations as well as for individuals.
B. The DRD can increase the net operating loss of a corporation.
C. Corporations are allowed to deduct from a dividend received the product of the dividend and the percentage of the receiving corporation's ownership in the distributing corporation's stock.
D. The DRD allows corporations to deduct the amount of dividends that they distribute.
93. Which of the following is deductible in calculating DRD modified taxable income?
A. Charitable contribution deduction
B. NOL carrybacks
C. NOL carryovers
D. Dividends received deduction
94. Jazz Corporation owns 50% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income before the dividend was $100,000. What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.
95. Jazz Corporation owns 10% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income (loss) before the dividend was ($2,000). What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.
E. None of these.
96. Jazz Corporation owns 10% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable income (loss) before the dividend was ($6,000). What is the amount of Jazz's dividends received deduction on the dividend it received from Williams Corp.
E. None of these.
97. Which of the following is not a type of controlled group as defined in the Internal Revenue Code?
D. All of these are types of controlled groups.
98. TireShop, Inc. owns 85% of Rubber Supply Co.'s voting stock throughout the tax year. TireShop and Rubber Supply would be considered as what kind of controlled group?
D. None of these
99. Together, Kurt and Esmeralda own 60% of three corporations: RAZ, DVA, and TRE. The three corporations would be considered as what kind of controlled group for tax purposes?
D. The three corporations would not be considered to be a controlled group for tax purposes.
100. Which of the following statements regarding controlled groups is false?
A. The purpose of the controlled group rules is to essentially treat the group as though it were one entity for purposes of determining certain tax benefits.
B. Having several entities treated as a controlled group is advantageous for tax purposes because each corporation in the group is allowed to use the 15% tax bracket in the corporate tax rate schedule in computing its regular income tax liability.
C. Lauren owns 100% of Corporation A stock and 100% of Corporation B stock. Corporation A and Corporation B form a controlled group.
D. Corporation A owns 100% of Corporation B. Corporation A and Corporation B form a controlled group.
101. Which of the following regarding Schedule M-1 and Schedule M-3 of Form 1120 is false?
A. In general, smaller corporations are required to complete Schedule M-1 while larger corporations are required to complete Schedule M-3.
B. Schedule M-3 lists more book-tax differences than Schedule M-1.
C. Both Schedules M-1 and M-3 reconcile to a corporation's bottom line taxable income.
D. Schedule M-1 does not distinguish between temporary and permanent book-tax differences whereas Schedule M-3 does.
102. Which of the following statements is false regarding consolidated tax returns?
A. An affiliated group can file a consolidated tax return only if it elects to do so.
B. To file a consolidated tax return, one corporation must own at least 50% of the stock of another corporation.
C. For a group of corporations filing a consolidated tax return, an advantage is that losses of one group member may offset gains of another group member.
D. For a group of corporations filing a consolidated tax return, losses from certain intercompany transactions are deferred until realized through a transaction outside of the group.
103. What is the unextended due date of the tax return of a calendar-year corporation?
104. Which of the following is not an acceptable method of determining the required annual payment of federal income tax for corporations?
A. 100 percent of the prior year's tax liability (with a few exceptions)
B. 100 percent of the current year's tax liability
C. 100 percent of the estimated current year tax liability using the annualized income method
D. All of these are acceptable methods of determining the required annual payment of federal income tax for corporations
105. Which of the following statements is false regarding corporate estimated tax payments?
A. The due dates for estimated tax payments are the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year.
B. Corporations must pay estimated taxes only if they have a federal income tax liability greater than $10,000 (including the alternative minimum tax).
C. Even though a corporation extends its tax return it still must pay its tax liability for the year by two and one half months after year end.
D. Corporations using the annualized income method for determining estimated tax payments project their tax liability for the year based on income from the first, second, and third quarters.
106. Omnidata uses the annualized income method to determine its quarterly federal income tax payments. It had $100,000, $50,000, and $90,000 of taxable income for the first, second, and third quarters, respectively ($240,000 in total through the first three quarters). What is Omnidata's annual estimated taxable income as of the end of the third quarter?
107. Rapidpro Inc. had more than $1,000,000 of taxable income two years prior to the current year. It would like to use its prior year tax liability (which was very low but above zero) to determine its quarterly estimated payments this year. Which of the following statements is true?
A. Rapidpro may use the prior year tax liability to determine its first and second quarter estimated tax payments only since it is a large corporation.
B. To avoid penalty, the second quarter estimated payment must be large enough to cover 50 percent of its estimated annual tax liability annualized from its first quarter estimated taxable income (assume it does not rely on its current year actual tax liability to determine its estimated tax payment).
C. To avoid penalty, the third quarter estimated payment must be large enough to cover 50 percent of its estimated annual tax liability annualized from its third quarter estimated taxable income (assume it does not rely on its current year actual tax liability to determine its estimated tax payment).
D. None of these is true.
108. Which of the following statements regarding the alternative minimum tax is false?
A. Corporations compute the AMT by multiplying their AMT base by 35% and subtracting their regular tax liability.
B. Small corporations are exempt from the AMT.
C. All first-year corporations are exempt from the AMT.
D. None of these is false (choose if you believe All of these are true).
109. Which of the following is not an AMT adjustment?
A. Adjustment for depreciation
B. Adjustment of gain or loss on sale of depreciable assets
C. Adjustment for adjusted current earnings (ACE)
D. Adjustment for domestic production activities deduction
110. In the current year, FurnitureKing Corporation recognized $32,000 of income from an installment sale it made in a previous tax year. If installment sales are the only difference between ACE and alternative minimum taxable income (before the ACE adjustment), what is the amount and nature of the ACE adjustment for the current tax year?
A. $24,000 favorable
B. $24,000 unfavorable
C. $32,000 favorable
D. $32,000 unfavorable
111. XPO Corporation has a minimum tax credit of $51,000 from 2017. If its 2017 tentative minimum tax is $211,000 and its regular tax liability is $250,000, what is its minimum tax credit carryover to 2017?
112. Flywest Airlines, Inc. has regular taxable income of $190 million. It also has $10 million of AMT preference items, a $5 million unfavorable depreciation adjustment, and a $2 million favorable ACE adjustment. What is Flywest's alternative minimum tax income (AMTI)?
113. Z Corporation has AMTI of $250,000, which exceeds the AMT exemption phase-out threshold by $100,000. What is Z's tentative minimum tax?
114. Which of the following statements regarding AMT is true?
A. Only very profitable companies (AMTI greater than $1 million) have their AMT exemption phased out.
B. The AMT exemption is phased out dollar for dollar as AMTI increases.
C. Minimum tax credits are generated whenever regular tax liability exceeds tentative minimum tax.
D. Minimum tax credits can be carried forward indefinitely.
115. Assume a corporation is not required to pay AMT in the current year but will pay AMT next year. Also assume the corporation's regular marginal tax rate is 35%. Which tax planning strategy would minimize its after-tax cost of a charitable contribution it is considering paying to a qualified charity?
A. Pay the contribution this year.
B. Wait until next year to pay the contribution.
C. The after-tax cost of the contribution will be the same no matter which year it makes the contribution.
D. None of these.
116. In 2017, AutoUSA Inc. received $4,600,000 of book income, including $20,000 of interest income from tax-exempt municipal bonds. AutoUSA reported $3,600,000 of regular business expenses. If it made $350,000 of estimated tax payments (prepayments) throughout the tax year, what is its tax due or tax refund when it files its return? Assume AutoUSA pays taxes at a flat 34 percent rate and disregard the alternative minimum tax.
117. For book purposes, RadioAircast Inc. reported $15,000 of income from municipal bonds in 2017. It also expensed $12,000 of radio station filing fines paid to the FCC the same year. What is the total book-tax difference associated with these items? Is it favorable or unfavorable? What amount of the total adjustment is permanent and what amount is temporary?
118. In 2017, US Sys Corporation received $250,000 in death benefits after its CEO (a key employee) died (it included this amount in book income). For book purposes, US Sys also expensed life insurance premiums for other key employees in the amount of $20,000. In addition, for book purposes, it expensed $10,000 of meals and entertainment expenditures. What is the total book-tax difference associated with these items? Is it favorable or unfavorable? What amount of the book-tax difference is temporary and what amount is permanent?
119. In 2017, Carbonfab Manufacturers Inc. expensed $125,000 of depreciation for book purposes, but for tax purposes, it deducted $179,000. Carbonfab also sold equipment for $500,000. The book adjusted basis of the equipment sold was $350,000, while the adjusted basis for tax purposes was $210,000. What is the total book-tax difference associated with depreciation and the gain on sale? Is it favorable or unfavorable? What amount of the book-tax difference is permanent and what amount is temporary?
120. Atom Ventures Inc. (AV) owns stock in the Primo and Faraday corporations. The following summarizes information relating to AV's investment in Primo and Faraday as follows:
Assuming that AV follows the general rules for reporting its income from these investments, what is the amount of AV's book-tax difference associated with the investment in these corporations (disregarding the dividends received deduction)? Is it favorable or unfavorable? Is it permanent or temporary?
121. On January 1, 2012, Credit Inc. recorded goodwill valued at $270,000 when it acquired the assets of another company. At the end of 2017, the auditors of Credit Inc. determined that the goodwill had been impaired by $50,000 and Credit Inc. wrote down the book value of the goodwill by $50,000. During 2017, the goodwill was not further impaired. In 2017, additional goodwill was impaired and was written down another $18,000 for financial reporting purposes. What is the temporary book-tax difference associated with the purchased goodwill 2017, 2017, and 2017? Are the differences favorable or unfavorable? Are the differences permanent or temporary?
122. On January 1, 2017, GrowCo issued 50,000 nonqualified stock options (NQOs) valued at $1 per option. Each option entitles the owner to purchase one share of stock for $4. These options vest at 20 percent per year for five years beginning in 2017. By the end of 2017, 20,000 of the options had vested. At the end of 2017, these options were exercised when the stock price is $6.25. What is the total value of the book-tax difference associated with the stock options for 2017? Is it favorable or unfavorable? How much of the adjustment is permanent and how much is temporary? (Note that ASC 718 applies to these transactions.)
123. On January 1, 2005 [before the adoption of ASC 718 (a codification of FAS 123R)], Net Optimizers Inc. granted 1,000 nonqualified stock options (NQOs) valued at $.05 per option. Each option entitles the owner to purchase one share of stock for $1. These options vest at 10 percent per year for ten years. On December 31, 2017, 300 options are exercised when the stock price is $5. In 2017, what is the book-tax difference associated with the stock options? Is it favorable or unfavorable? Is it permanent or temporary?
124. Imperial Construction Inc. (IC) issued 100,000 incentive stock options (ISOs) to its employees on January 1, 2017 with an estimated value of $5.50 per option. The options vest at 25 percent per year for four years (beginning in 2017). Each option allows the holder to purchase one share of stock at $8. On January 1, 2017, employees exercised 12,500 options as IC's stock price reached $14.72. What is the amount of the book-tax difference in 2017 associated with the incentive stock options? Is it favorable or unfavorable? Is it temporary or permanent?
125. Pure Action Cycles Inc. a bicycle manufacturer, has a net capital loss in 2017 of $64,000. It had net capital gains of $21,500 in 2017, $45,000 in 2012, $10,000 in 2011 (but suffered a net operating loss in 2011), and $8,000 of net capital gain in 2010. What is the net capital gain in 2017 after the carryback is applied?
126. In 2011, Smith Traders Inc. reported taxable income of $100,000. In 2012, it reported taxable income of $15,000. In 2017, it reported taxable income of $95,000. In 2017, Smith Traders experienced a net operating loss of $25,000. What amount of refund can Smith Traders receive if it does not elect to forgo the carry back (see the corporate income tax schedule)?
127. During 2017, Hughes Corporation sold a portfolio of stock it had held for five years at a loss of $200,000. It also sold some investment land and recognized a capital gain of $180,000. In 2012, Hughes reported a net capital gain of $12,000 and in 2017 it recognized a net capital gain of $6,000. What is the amount of its net capital loss carryover to 2017?
128. In 2017, Webtel Corporation donated $50,000 to a qualifying charity. For the year, it reported taxable income of $310,000, which included the following: the $50,000 charitable contribution (before limitation), a $100,000 dividends received deduction, and a $20,000 net operating loss carryover. What is Webtel Corp's charitable contribution deduction?
129. In 2017, Datasoft Inc. received $350,000 in dividends from CSLabs Inc. Datasoft's taxable income before the dividends received deduction and $20,000 charitable contribution deduction is $300,000. What is Datasoft's DRD assuming it owns 15% of the CSLabs Inc. stock?
130. AB Inc. received a dividend from CD Corporation and is able to claim a dividends received deduction without limitation. AB owns 10 percent of CD. What is AB's marginal tax rate (to the nearest tenth of a percent) on the dividends received (after taking the DRD into account) assuming its ordinary marginal tax rate is 34%?
131. In 2017, LuxAir Inc. (LA) has book income of $160,000. Included in this figure is income generated from ownership in Jet Repair Corporation (JRC), of which LA owns 30%. JRC has $270,000 in earnings for the year and pays $32,000 in dividends to LA. Assuming accounting for the investment in JRC (income from JRC and the DRD) are its only book-tax differences, what is LA's tax liability for 2017 (see corporate tax schedule)?
132. Netgate Corporation's gross regular tax liability for 2017 was $95,375. What was its taxable income?
133. For 2017, SRH's taxable income is $35,000 and JHH's taxable income is $45,000. Together, Scott and Jackson Howard own 100 percent of both corporations. What is the combined tax liability of the two corporations?
134. AR Systems Inc. (AR) had $120,000 of tax liability last year. It anticipates a current-year tax liability of $500,000. Assuming AR is considered a large corporation for purposes of estimating tax liability, what are the minimum estimated tax payments it should make to avoid underpayment penalties? Ignore the annualized income method.
135. In the current year, Auto Rent Corporation reported the following taxable income at the end of its first, second, and third quarters:
What amount of estimated tax payments would Auto Rent pay each quarter in order to avoid estimated tax penalties under the annualized income method of computing estimated tax payments?
136. IndusTree Inc. received $1,800,000 from the sale of a property in 2017. The property's adjusted basis for regular tax purposes was $200,000 at the time of the sale. The property's adjusted basis for AMT purposes was $290,000. What is the amount of the AMT adjustment due to the sale of the asset? Does it increase or decrease AMTI?
137. ValuCo gives you the following information:
What is its ACE adjustment for the year? Is it favorable or unfavorable?
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Preview: estimated xxx payment xx will have xx estimated tax xxxxxxx requirement xx xxxx because xx had no xxx liability for xxx 2017 xxx xxxx and xxx been in xxxxxxxx for at xxxxx 12 xxxxxx xxxxxxxxxxxxxxxxxx taxes xxx due if xxx corporation expects xx incur x xxx liability xx $500 or xxxx for the xxxx A xxxxxxxxxxx xxx base xxx estimated payments xx the prior xxxxxx tax xxxxxxxxx xxxx if xx is positive, xxxxx is not xxx case xxxx xxxxxxxx Reflective xxxxxxxxxxxxxx BB Critical xxxxxxxxxxxxxxxxxxxxxx Keyboard NavigationBlooms: xxxxxxxxxxxxxxx Objective: xxxxx xxxxxxxx a xxxxxxxxxxxxx tax return xxxxxxxxx and estimated xxx payment xxxxxxxxxxx xxxxx of xxxxxxxxxxx 2 MediumTopic: xxxxxxxxxxxxxx Most corporations xxx the xxxxxxxxxx xxxxxx method xx determine their xxxxxxxx annual payment xxx purposes xx xxxxxx quarterly xxxxxxxxx payments В В TRUEВ AACSB: xxxxxxxxxx ThinkingAICPA: BB xxxxxxxx ThinkingAccessibility: xxxxxxxx xxxxxxxxxxxxxxxxx RememberLearning xxxxxxxxxx 16-03 Describe x corporation's tax xxxxxx reporting xxx xxxxxxxxx tax xxxxxxx obligations Level xx Difficulty: 1 xxxxxxxxxx ComplianceВ 43 xxxxx xxxxxxxxxxxx (corporations xxxx over $1,000,000 xx taxable income xx any xx xxx three xxxxx prior to xxx current year) xxx use xxxxx xxxxx tax xxxx liability to xxxxxxxxx all required xxxxxxxxx quarterly xxxxxxxx xxx the xxxxxxx year В В FALSELarge xxxxxxxxxxxx can use xxx prior xxxx xxxxxxxxx to xxxxxxxxx the first xxxxxxx estimated tax xxxxxxx only xxxxxxxx xxxxxxxxxx ThinkingAICPA: xx Critical ThinkingAccessibility: xxxxxxxx NavigationBlooms: AnalyzeLearning xxxxxxxxxx 16-03 xxxxxxxx x corporation's xxx return reporting xxx estimated tax xxxxxxx obligations xxxxx xx Difficulty: x MediumTopic: ComplianceВ 44 xxx estimated tax xxxxxxxxx a xxxxxxx xxxxxxxxxxx is xxx corporation with xxxxxxx annual gross xxxxxxxx of xxxxxxxxxx xx the xxxxx years prior xx the current xxxx В В FALSEFor xxxxxxxxx xxx purposes, x "large" corporation xx a corporation xxxx more xxxx xxxxxxxxxx of xxxxxxx income in xxx of the xxxxx years xxxxx xx the xxxxxxx year В AACSB: xxxxxxxxxx ThinkingAICPA: BB xxxxxxxx ThinkingAccessibility: xxxxxxxx xxxxxxxxxxxxxxxxx AnalyzeLearning xxxxxxxxxx 16-03 Describe x corporation's tax xxxxxx reporting xxx xxxxxxxxx tax xxxxxxx obligations Level xx Difficulty: 2 xxxxxxxxxxxx ComplianceВ 45 xxxxx xxxxxxxxxxxx (in xxxxx of average xxxxxx gross receipts) xxx exempt xxxx xxx alternative xxxxxxx tax В В TRUEВ AACSB: xxxxxxxxxx ThinkingAICPA: BB xxxxxxxx ThinkingAccessibility: xxxxxxxx xxxxxxxxxxxxxxxxx RememberLearning xxxxxxxxxx 16-04 Explain xxx to calculate x corporation's xxxxxxxxxxx xxxxxxx tax xxxxxxxxx Level of xxxxxxxxxxx 1 EasyTopic: xxxxxxxxx alternative xxxxxxx xxxxxxx Urban xxxxxxxxxxx receives tax-exempt xxxxxx from Denver xxxxxxxxx bonds xxx xxx proceeds xxxx the bonds xxxx used to xxxx public xxxxxxxx xx computing xxx AMT base, xxxxx must add xxxx the xxxxxxxx xxxxxx from xxx municipal bonds xx taxable income xxxxxxxxxxxxx tax-exempt xxxxxxxx xxxx a xxxxxxx activity bond xx a preference xxxx for xxxxxxxxx xxx purposes xxxxxxxx Reflective ThinkingAICPA: xx Critical ThinkingAccessibility: xxxxxxxx NavigationBlooms: xxxxxxxxxxxxxxx xxxxxxxxxx 16-04 xxxxxxx how to xxxxxxxxx a corporation's xxxxxxxxxxx minimum xxx xxxxxxxxx Level xx Difficulty: 2 xxxxxxxxxxxx Corporate alternative xxxxxxx taxВ 47 xxxxxxxxxxxx xxxxxxxxxxx can xxxxxxxx or decrease xxx AMT base xxxxxxxx to xxxxxxx xxxxxx В В TRUEВ AACSB: xxxxxxxxxx ThinkingAICPA: BB xxxxxxxx ThinkingAccessibility: Keyboard xxxxxxxxxxxxxxxxx RememberLearning xxxxxxxxxx xxxxx Explain xxx to calculate x corporation's alternative xxxxxxx tax xxxxxxxxx xxxxx of xxxxxxxxxxx 1 EasyTopic: xxxxxxxxx alternative minimum xxxxxxx The xxx xxxx for xxx corporate alternative xxxxxxx tax is x flat xxx xxxxxxxxxxxx corporate xxx rate is x flat 20% xxxxxxxx Reflective xxxxxxxxxxxxxx xx Critical xxxxxxxxxxxxxxxxxxxxxx Keyboard NavigationBlooms: xxxxxxxxxxxxxxx Objective: 16-04 xxxxxxx how xx xxxxxxxxx a xxxxxxxxxxxxx alternative minimum xxx liability Level xx Difficulty: x xxxxxxxxxxxx Corporate xxxxxxxxxxx minimum taxВ 49 xxx adjusted current xxxxxxxx (ACE) xxxxxxxxxx xx 75% xx the difference xxxxxxx a corporation's xxxxxxxxxxx minimum xxxxxxx xxxxxx before xxx ACE adjustment xxx its ACE xxxxxxxxxxxxxxxx Reflective xxxxxxxxxxxxxx xx Critical xxxxxxxxxxxxxxxxxxxxxx Keyboard NavigationBlooms: xxxxxxxxxxxxxxx Objective: 16-04 xxxxxxx how xx xxxxxxxxx a xxxxxxxxxxxxx alternative minimum xxx liability Level xx Difficulty: x xxxxxxxxxxxx Corporate xxxxxxxxxxx minimum taxВ 50 xxxxxxxxxxxx are allowed xx deduct xx xxxxx some xxx exemption regardless xx profitability В В FALSEThe xxx exemption xx xxxxxxxxxx completely xxx corporations with xxxx of least xxxxxxxx В AACSB: xxxxxxxxxx xxxxxxxxxxxxxx BB xxxxxxxx ThinkingAccessibility: Keyboard xxxxxxxxxxxxxxxxx RememberLearning Objective: xxxxx Explain xxx xx calculate x corporation's alternative xxxxxxx tax liability xxxxx of xxxxxxxxxxx x EasyTopic: xxxxxxxxx alternative minimum xxxxxxx A corporation xxxx an xxxx xx $400,000 xxxx have all xx its AMT xxxxxxxxx phased-out xxxxxxxxxxxxxxxx xxxxxxxxxx ThinkingAICPA: xx Critical ThinkingAccessibility: xxxxxxxx NavigationBlooms: AnalyzeLearning xxxxxxxxxx 16-04 xxxxxxx xxx to xxxxxxxxx a corporation's xxxxxxxxxxx minimum tax xxxxxxxxx Level xx xxxxxxxxxxx 2 xxxxxxxxxxxx Corporate alternative xxxxxxx taxВ 52 Minimum xxx credits xxxxxxxxx xx the xxxxxxxxx AMT can xx carried forward xxxxxxxxxxxx В В TRUEВ AACSB: xxxxxxxxxx xxxxxxxxxxxxxx BB xxxxxxxx ThinkingAccessibility: Keyboard xxxxxxxxxxxxxxxxx RememberLearning Objective: xxxxx Explain xxx xx calculate x corporation's alternative xxxxxxx tax liability xxxxx of xxxxxxxxxxx x EasyTopic: xxxxxxxxx alternative minimum xxxxxxx A corporation xxxx a xxxxxxx xxx credit xxxxxxxxx may reduce xxxxxxx tax down xx the xxxxxx xx its xxxxxxxxx minimum tax xxxx its regular xxx exceeds xxx xxxxxxxxx minimum xxx В В TRUEВ AACSB: Reflective xxxxxxxxxxxxxx BB Critical xxxxxxxxxxxxxxxxxxxxxx Keyboard xxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxx Objective: xxxxx Explain how xx calculate a xxxxxxxxxxxxx alternative xxxxxxx xxx liability xxxxx of Difficulty: x EasyTopic: Corporate xxxxxxxxxxx minimum xxxxxxx xxx amount xx a corporation's xxx is the xxxxxx of xxx xxxxxxxxx minimum xxx in excess xx its regular xxx В В TRUEВ AACSB: xxxxxxxxxx xxxxxxxxxxxxxx BB xxxxxxxx ThinkingAccessibility: Keyboard xxxxxxxxxxxxxxxxx RememberLearning Objective: xxxxx Explain xxx xx calculate x corporation's alternative xxxxxxx tax liability xxxxx of xxxxxxxxxxx x EasyTopic: xxxxxxxxx alternative minimum xxxxxxxxxxxxxxx Choice QuestionsВ 55 xxxxx of xxx xxxxxxxxx is xxx calculated in xxx corporate income xxx formula? В В A xxxxxxx xxxxxxx В Adjusted xxxxx incomeC В Taxable xxxxxxx В Regular tax xxxxxxxxxxxxxxxxx gross xxxxxx xx calculated xxx individual returns, xxx not for xxxxxxxxx returns xxxxxxxx xxxxxxxxxx ThinkingAICPA: xx Critical ThinkingAccessibility: xxxxxxxx NavigationBlooms: RememberLearning xxxxxxxxxx 16-01 xxxxxxxx xxx corporate xxxxxx tax formula; xxxxxxx and contrast xxx corporate xx xxx individual xxx formula; and xxxxxxx tax considerations xxxxxxxx to xxxxxxxxxxxxx xxxxxxxxxx periods xxx accounting methods xxxxx of Difficulty: x EasyTopic: xxxxxxxxx xxxxx income xxxxxxxxxxx WFO Corporation xxx gross receipts xxxxxxxxx to xxx xxxxxxxxx schedule:В В If xxx began business xx a cash-method xxxxxxxxxxx in xxxx xx in xxxxx year would xx have first xxxx required xx xxx the xxxxxxx method? В В A В Year xx В Year 4C xxxxxx 5D xxxxxx xx В None xx these Corporations xxxx less than xx million xx xxxxxxx annual xxxxx receipts can xxx the cash xxxxxx of xxxxxxxxxx xxx tax xxxxxxxx Corporations that xxxx not been xx existence xxx xx least xxxxx years can xxxxxxx average annual xxxxx receipts xxxx xxx years xxxx have been xx existence The xxxxx years xxxxxxxxx xxxx 6 xxxx average annual xxxxx receipts of xx 17 xxxxxxx xxxxxxxx Reflective xxxxxxxxxxxxxx BB Critical xxxxxxxxxxxxxxx ApplyLearning Objective: xxxxx Describe xxx xxxxxxxxx income xxx formula; compare xxx contrast the xxxxxxxxx to xxx xxxxxxxxxx tax xxxxxxxx and discuss xxx considerations relating xx corporations' xxxxxxxxxx xxxxxxx and xxxxxxxxxx methods Level xx Difficulty: 3 xxxxxxxxxx Corporate xxxxx xxxxxx formulaВ 57 xxxxx of the xxxxxxxxx does NOT xxxxxx a xxxxxxxxx xxxxxxxx difference? В В A xxxxxxxxxxxxxxxx and start-up xxxxxxxxx В Key employee xxxxx benefit xxxxxxx xxxxxxx and xxxxxxxxx expensesD В Municipal xxxx interest incomeOrganizational xxx start-up xxxxxxxx xxx capitalized xxx amortized for xxx purposes, so xxxxx create x xxxxxxxxx book-tax xxxxxxxxxx В AACSB: Reflective xxxxxxxxxxxxxx BB Critical xxxxxxxxxxxxxxxxxxxxxx Keyboard xxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxx Objective: xxxxx Identify common xxxxxxxx differences; distinguish xxxxxxx permanent xxx xxxxxxxxx differences; xxx compute a xxxxxxxxxxxxx taxable income xxx regular xxx xxxxxxxxx Level xx Difficulty: 1 xxxxxxxxxx Computing corporate xxxxxxx taxable xxxxxxxxxx xxxxx of xxx following does xxx create a xxxxxxxxx book-tax xxxxxxxxxxxxxxxx xxxxxxxxxx compensationB xxxxxxxxxx expenseC В Depreciation xxxxxxxx В Domestic production xxxxxxxxxx deductionThe xxxxxxxx xxxxxxxxxx activities xxxxxxxxx is a xxxxxxxxx for tax xxxxxxxx only xx xxxxxxx a xxxxxxxxx permanent book-tax xxxxxxxxxx В AACSB: Reflective xxxxxxxxxxxxxx BB xxxxxxxx xxxxxxxxxxxxxxxxxxxxxx Keyboard xxxxxxxxxxxxxxxxx RememberLearning Objective: xxxxx Identify common xxxxxxxx differences; xxxxxxxxxxx xxxxxxx permanent xxx temporary differences; xxx compute a xxxxxxxxxxxxx taxable xxxxxx xxx regular xxx liability Level xx Difficulty: 1 xxxxxxxxxx Computing xxxxxxxxx xxxxxxx taxable xxxxxxxxxx Which of xxx following statements xxxxxxxxx book-tax xxxxxxxxxxx xx true? В В A xxxxxxxxxxxxxx are not xxxxxxxx to report xxxxxxxx differences xx xxxxx income xxx returns B xxxxxxxxxxxxxx will eventually xxxxxxxxx the xxxx xxxxxx of xxxxxx for book xxx tax purposes xxx income-related xxxxxxxxx xxxxxxxx differences x В Income excludable xxx tax purposes xxxxxxx creates x xxxxxxxxx book-tax xxxxxxxxxx D В None xx these is xxxx Temporary xxxxxxxx xxxxxxxxxxx will xxxxxxxxxx reverse; if x difference is xxxxxxxxx one xxxxx xx will xx unfavorable in xxxxxxx В AACSB: Reflective xxxxxxxxxxxxxx BB xxxxxxxx xxxxxxxxxxxxxxxxxxxxxx Keyboard xxxxxxxxxxxxxxxxx AnalyzeLearning Objective: xxxxx Identify common xxxxxxxx differences; xxxxxxxxxxx xxxxxxx permanent xxx temporary differences; xxx compute a xxxxxxxxxxxxx taxable xxxxxx xxx regular xxx liability Level xx Difficulty: 2 xxxxxxxxxxxx Computing xxxxxxxxx xxxxxxx taxable xxxxxxxxxx It is xxxxxxxxx to distinguish xxxxxxx temporary xxx xxxxxxxxx book-tax xxxxxxxxxxx for which xx the following xxxxxxxxxxxxx В Temporary xxxxxxxx xxxxxxxxxxx will xxxxxxx in future xxxxx whereas permanent xxxxxxxxxxx will xxx x В Certain xxxxxxxxxxxx are required xx disclose book-tax xxxxxxxxxxx as xxxxxxxxx xx temporary xx their tax xxxxxxx C В Temporary xxxxxxxx differences xxxx xxxxxxx in xxxxxx years whereas xxxxxxxxx differences will xxxx and xxxxxxx xxxxxxxxxxxx are xxxxxxxx to disclose xxxxxxxx differences as xxxxxxxxx or xxxxxxxxx xx their xxx returns D xxxxxxxxx temporary nor xxxxxxxxx book-tax xxxxxxxxxxx xxxx reverse xx future years xxx are certain xxxxxxxxxxxx required xx xxxxxxxx book-tax xxxxxxxxxxx as permanent xx temporary on xxxxx tax xxxxxxx xxxxxxxxx book-tax xxxxxxxxxxx that reverse xx future years xxxxxxx permanent xxxxxxxxxxx xxxx not, xxx certain corporations xxxxxxxx to disclose xxxxxxxx differences xx xxxxxxxxx or xxxxxxxxx on their xxx returns are xxxxx reasons xxx x corporation xxxxxx distinguish between xxxxxxxxx and permanent xxxxxxxx differences xxxxxxxx xxxxxxxxxx ThinkingAICPA: xx Critical ThinkingAccessibility: xxxxxxxx NavigationBlooms: RememberLearning xxxxxxxxxx 16-02 xxxxxxxx xxxxxx book-tax xxxxxxxxxxxx distinguish between xxxxxxxxx and temporary xxxxxxxxxxxx and xxxxxxx x corporation's xxxxxxx income and xxxxxxx tax liability xxxxx of xxxxxxxxxxx x EasyTopic: xxxxxxxxx corporate regular xxxxxxx incomeВ 61 TrendSetter xxx paid xxxxxxx xx premiums xxx life insurance xxxxxxxx for its xxx employees xxxx xx the xxxxxx of the xxxxxxxx difference created xx this xxxxxxxxxxxxx xxxxxxxxxxxx favorableB xxxxxxxxxxxx unfavorableC В Temporary; xxxxxxxxxx В Temporary; unfavorableLife xxxxxxxxx premiums xxx xxx employees xxx not deductible xxx tax purposes xxxxxxxx Reflective xxxxxxxxxxxxxx xx Critical xxxxxxxxxxxxxxxxxxxxxx Keyboard NavigationBlooms: xxxxxxxxxxxxxxxx Objective: 16-02 xxxxxxxx common xxxxxxxx xxxxxxxxxxxx distinguish xxxxxxx permanent and xxxxxxxxx differences; and xxxxxxx a xxxxxxxxxxxxx xxxxxxx income xxx regular tax xxxxxxxxx Level of xxxxxxxxxxx 1 xxxxxxxxxx xxxxxxxxx corporate xxxxxxx taxable incomeВ 62 xxxxxx Inc paid xxxxxx in xxxxxxxx xx a xxxx it used xx purchase municipal xxxxx What xx xxx nature xx the book-tax xxxxxxxxxx relating to xxxx expense? В В A xxxxxxxxxxxx xxxxxxxxxx В Permanent; xxxxxxxxxxxx В Temporary; favorableD xxxxxxxxxxxx unfavorableInterest expense xx loans xx xxxxxxx investments xxxx produce tax-exempt xxxxxx is not xxxxxxxxxx under xxxxxxx xxx В AACSB: xxxxxxxxxx ThinkingAICPA: BB xxxxxxxx ThinkingAccessibility: Keyboard xxxxxxxxxxxxxxxxx RememberLearning xxxxxxxxxx xxxxx Identify xxxxxx book-tax differences; xxxxxxxxxxx between permanent xxx temporary xxxxxxxxxxxx xxx compute x corporation's taxable xxxxxx and regular xxx liability xxxxx xx Difficulty: x EasyTopic: Computing xxxxxxxxx regular taxable xxxxxxxxxx AmStore xxx xxxx some xx its heavy xxxxxxxxx at a xxxx AmStore xxxx xxx straight-line xxxxxx for financial xxxxxxxxxx depreciation and xxxxx for xxx xxxxxxxxxxxxx If xxxxxxxxxxx depreciation for xxxxxxxxx accounting purposes xx less xxxx xxxxxxxxxxx depreciation xxx tax reporting xxxxxxxxx what is xxx nature xx xxx book-tax xxxxxxxxxx associated with xxx gain on xxx sale? В В A xxxxxxxxxxxx xxxxxxxxxx В Permanent; xxxxxxxxxxxx В Temporary; favorableD xxxxxxxxxxxx unfavorableThe gain xxxxxxxxxx by xxxxxxx xx higher xxx tax purposes xxxx it is xxx book xxxxxxxx xxxxxxx the xxx accumulated depreciation xx higher than xxx book xxxxxxxxxxx xxxxxxxxxxxx (the xxxxx is higher xxx book purposes xxxx for xxx xxxxxxxxx This xxxxxxxxxx is the xxxxxxxx of the xxxxxxxxx book-tax xxxxxxxxxx xxx depreciation xx the asset xxxxxxxx Reflective ThinkingAICPA: xx Critical xxxxxxxxxxxxxxxxxxxxxx xxxxxxxx NavigationBlooms: xxxxxxxxxxxxxxx Objective: 16-02 xxxxxxxx common book-tax xxxxxxxxxxxx distinguish xxxxxxx xxxxxxxxx and xxxxxxxxx differences; and xxxxxxx a corporation's xxxxxxx income xxx xxxxxxx tax xxxxxxxxx Level of xxxxxxxxxxx 2 MediumTopic: xxxxxxxxx corporate xxxxxxx xxxxxxx incomeВ 64 xxxxxxxxxxx A receives x dividend from xxxxxxxxxxx B xxxxxxxxxxx x includes xxx dividend in xxx gross income xxx tax xxx xxxxxxxxx accounting xxxxxxxx (no book-tax xxxxxxxxxxx If A xxx accounted xxx xxx dividend xxxxxxxxx (following the xxxxxxx rule), how xxxx of x xxxxx does x own? В В A В A xxxx less than xx percent xx xxx stock xx BB В A xxxx at least xx but xxx xxxx than xx percent of xxx stock of xx В A xxxx xxxx than xx percent of xxx stock of xx В Cannot xx xxxxxxxxxxxxxxxxxxxxxx generally xxxxxxx dividends from xxxxxxxxxxxx in which xxxx own xxxx xxxx 20% xx both taxable xxx financial income xxxxxxxxxx are xxx xxxxxx for xxxx purposes if xxxxxxxxxxx A accounts xxx its xxxxx xxxxxxxxx under xxx equity method, xxxxx generally begins xxxx a xxx xxxxxxxxx interest) xxxxxxxx Reflective ThinkingAICPA: xx Critical ThinkingAccessibility: xxxxxxxx NavigationBlooms: xxxxxxxxxxxxxxxx xxxxxxxxxx 16-02 xxxxxxxx common book-tax xxxxxxxxxxxx distinguish between xxxxxxxxx and xxxxxxxxx xxxxxxxxxxxx and xxxxxxx a corporation's xxxxxxx income and xxxxxxx tax xxxxxxxxx xxxxx of xxxxxxxxxxx 2 MediumTopic: xxxxxxxxx corporate regular xxxxxxx incomeВ 65 xxxxxxxxxxx x receives x dividend from xxxxxxxxxxx B It xxxxxxxx the xxxxxxxx xx gross xxxxxx for tax xxxxxxxx but includes x pro-rata xxxxxxx xx B's xxxxxxxx in its xxxxxxxxx accounting income xx A xxx xxxxxxxxx for xxx dividend correctly xxxxxx the general xxxxxx how xxxx xx B's xxxxx does A xxxxxxxxx В A owns xxxx than xx xxxxxxx of xxx stock of xx В A owns xx least xx xxx not xxxx than 50 xxxxxxx of the xxxxx of xx xxx owns xxxx than 50 xxxxxxx of the xxxxx of xx xxxxxxxx be xxxxxxxxxxxx a corporation xxxxxxxxx dividends owns xx least xxx xxx not xxxx than 50% xx the stock xx a xxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxx it xxxxxxx a pro-rata xxxxxxx of the xxxxxxxxxxxx corporation's xxxxxxxx xx its xxxxxxxxx accounting income xxxxx the equity xxxxxx and xx xxxxxxxx the xxxxxx amount of xxx dividend in xxx taxable xxxxxx xxxxxxxx Reflective xxxxxxxxxxxxxx BB Critical xxxxxxxxxxxxxxxxxxxxxx Keyboard NavigationBlooms: xxxxxxxxxxxxx Objective: xxxxx xxxxxxxx common xxxxxxxx differences; distinguish xxxxxxx permanent and xxxxxxxxx differences; xxx xxxxxxx a xxxxxxxxxxxxx taxable income xxx regular tax xxxxxxxxx Level xx xxxxxxxxxxx 2 xxxxxxxxxxxx Computing corporate xxxxxxx taxable incomeВ 66 xxxx Inc xxxx xxx of xxxxxxx Inc. xxxx Coop and xxxxxxx are xxxxxxxxxxxx xxxxxxx pays xxxx a dividend xx $10,000 in xxxx Chicken xxxx xxxxxxx financial xxxxxxxxxx earnings of xxxxxxx for that xxxx Assume xxxx xxxx follows xxx general rule xx accounting for xxxxxxxxxx in xxxxxxx xxxx is xxx amount and xxxxxx of the xxxxxxxx difference xx xxxx associated xxxx the dividend xxxxxxxxxxxx (ignoring the xxxxxxxxx received xxxxxxxxxxxxxxxx xxxxxxxx unfavorableB xxxxxxxx favorableC В $10,000 xxxxxxxxxxxx В $10,000 favorableE xxxxxx of xxxxxxxxx xxxxxxxxxx $10,000 xx dividend income xxx tax purposes xxx only xxxxxx xx book xxxxxx (40 percent xx the $20,000 xxxxxxxx of xxxxxxxx xxxxxxx taxable xxxxxx is greater xxxx book income, xxx difference xx xxxxxxxxxxx В AACSB: xxxxxxxxxxxxxx Reflective ThinkingAICPA: xx Critical ThinkingAccessibility: xxxxxxxx NavigationBlooms: xxxxxxxxxxxxx xxxxxxxxxx 16-02 xxxxxxxx common book-tax xxxxxxxxxxxx distinguish between xxxxxxxxx and xxxxxxxxx xxxxxxxxxxxx and xxxxxxx a corporation's xxxxxxx income and xxxxxxx tax xxxxxxxxx xxxxx of xxxxxxxxxxx 2 MediumTopic: xxxxxxxxx corporate regular xxxxxxx incomeВ 67 xxxx xxxx time xxxxxx do corporations xxxxxxxx purchased goodwill xxx tax xxxxxxxxxxxxxx xxxxx monthsB xxxxx monthsC В 60 xxxxxxx В None of xxxxxxxxxxxxx is xxxxxxxxx xxxx 15 xxxxx (180 months) xxxxxxxx Reflective ThinkingAICPA: xx Critical xxxxxxxxxxxxxxxxxxxxxx xxxxxxxx NavigationBlooms: xxxxxxxxxxxxxxxx Objective: 16-02 xxxxxxxx common book-tax xxxxxxxxxxxx distinguish xxxxxxx xxxxxxxxx and xxxxxxxxx differences; and xxxxxxx a corporation's xxxxxxx income xxx xxxxxxx tax xxxxxxxxx Level of xxxxxxxxxxx 1 EasyTopic: xxxxxxxxx corporate xxxxxxx xxxxxxx incomeВ 68 xxxxx of the xxxxxxxxx statements regarding xxxxxxxx differences xxxxxxxxxx xxxx purchased xxxxxxxx is false? В В A xxxx is possible xx have xx xxxxxxxx difference xx a year xxxx there is xx goodwill xxxxxxxxxxxx xxx tax xxxxxxxx B В In x year when xxxxxxxx is xxxxxxxx xxx yet xxxxx amortized for xxx purposes (so xx tax xxxxxxxxxxxx xx the xxxxxxxx for that xxxxxx the book-tax xxxxxxxxxx will xx xxxxxxxxxxx C xxxxxxxxxxx book-tax differences xxxxxxxxxx with goodwill xxx always xxxxxxxxx x В If xxxxxxxx has been xxxxx amortized for xxx purposes xx x previous xxxxx the book-tax xxxxxxxxxx is equal xx the xxxxxx xx impairment xxxxxxxxxx It is xxxxxxxx to have xx unfavorable xxxxxxxxxx xx a xxxx when goodwill xxxxxxxxxx exceeds the xxxxxxxxx amortization xxxxxxxxx xxxxxxxx Reflective xxxxxxxxxxxxxx BB Critical xxxxxxxxxxxxxxxxxxxxxx Keyboard NavigationBlooms: xxxxxxxxxxxxxxx Objective: xxxxx xxxxxxxx common xxxxxxxx differences; distinguish xxxxxxx permanent and xxxxxxxxx differences; xxx xxxxxxx a xxxxxxxxxxxxx taxable income xxx regular tax xxxxxxxxx Level xx xxxxxxxxxxx 2 xxxxxxxxxxxx Computing corporate xxxxxxx taxable incomeВ 69 xxxxx of xxx xxxxxxxxx describes xxx correct treatment xx incentive stock xxxxxxx (ISOs) xxxxxxx xxxx ASC xxx (a codification xx FAS 123R) xxxxxxxxxxxxx В Financial xxxxxxxxxxxxxxx xxxxxxxx tax—no xxxxxxxxxx В Financial accounting—no xxxxxxxx tax—deduct bargain xxxxxxx at xxxxxxxxx xxxxxxxxxxxxxxxxxxxxx value xxxx vesting period; xxxxxxxx deductionD В Financial—expense xxxxx over xxxxxxx xxxxxxx tax—deduct xxxxxxx element at xxxxxxxxxxxxx ASC 718, xxxxxx values xxx xxxxxxxx over xxx vesting period xxxxxxxx an unfavorable xxxxxxxxx book-tax xxxxxxxxxx xxxxxxxx Reflective xxxxxxxxxxxxxx BB Critical xxxxxxxxxxxxxxxxxxxxxx Keyboard NavigationBlooms: xxxxxxxxxxxxxxx Objective: xxxxx xxxxxxxx common xxxxxxxx differences; distinguish xxxxxxx permanent and xxxxxxxxx differences; xxx xxxxxxx a xxxxxxxxxxxxx taxable income xxx regular tax xxxxxxxxx Level xx xxxxxxxxxxx 2 xxxxxxxxxxxx Computing corporate xxxxxxx taxable incomeВ 70 xxxxx of xxx xxxxxxxxx describes xxx correct treatment xx incentive stock xxxxxxx (ISOs) xxxxxxx xxxx ASC xxx (a codification xx FAS 123R) xxxx not xxxxxxxxxxx xxxxxxxxxxx accounting—no xxxxxxxx tax—no deductionB xxxxxxxxxxx accounting—no expense; xxxxxxxxxxxx bargain xxxxxxx xx exerciseC xxxxxxxxxxx accounting—expense value xxxx vesting period; xxxxxxxx deductionD xxxxxxxxxxx xxxxxxxxxxxxxxxxxxxx value xxxx vesting period; xxxxxxxxxxxx bargain element xx exerciseBefore xxx xxxx option xxxxxx were not xxxxxxxx to be xxxxxxxx В AACSB: xxxxxxxxxx xxxxxxxxxxxxxx BB xxxxxxxx ThinkingAccessibility: Keyboard xxxxxxxxxxxxxxxxx AnalyzeLearning Objective: xxxxx Identify xxxxxx xxxxxxxx differences; xxxxxxxxxxx between permanent xxx temporary differences; xxx compute x xxxxxxxxxxxxx taxable xxxxxx and regular xxx liability Level xx Difficulty: x xxxxxxxxxxxx Computing xxxxxxxxx regular taxable xxxxxxxxxx Which of xxx following xxxxxxxxx xxx correct xxxxxxxxx of the xxxxxxxx of nonqualified xxxxx options xxxxxx xxxx were xxxxxxx when ASC xxx (a codification xx FAS xxxxx xxxxxxxxxxxxx В Financial—no xxxxxxxx tax—no deductionB xxxxxxxxxxxxxxxx expense; tax—deduct xxxxxxx element xx xxxxxxxxx В Financial—expense xxxxx over vesting xxxxxxx tax—no deductionD xxxxxxxxxxxxxxxxxxxxx value xxxx xxxxxxx period; xxxxxxxxxxxx bargain element xx exerciseUnder ASC xxxx the xxxxx xx options xx expensed over xxx vesting period xxx books xxx xxx bargain xxxxxxx is deducted xx the year xx exercise xxx xxx purposes xxxxxxxx a temporary xxxxxxxx difference В AACSB: xxxxxxxxxx ThinkingAICPA: xx xxxxxxxx ThinkingAccessibility: xxxxxxxx NavigationBlooms: AnalyzeLearning xxxxxxxxxx 16-02 Identify xxxxxx book-tax xxxxxxxxxxxx xxxxxxxxxxx between xxxxxxxxx and temporary xxxxxxxxxxxx and compute x corporation's xxxxxxx xxxxxx and xxxxxxx tax liability xxxxx of Difficulty: x MediumTopic: xxxxxxxxx xxxxxxxxx regular xxxxxxx incomeВ 72 Which xx the following xxxxxxxxx the xxxxxxx xxxxxxxxx of xxxxxxxxxxxx stock options xxxxxx granted when xxx 718 xx xxxxxxxxxxxx of xxx 123R) did xxx apply? В В A В Financial—no xxxxxxxx tax—no xxxxxxxxxx xxxxxxxxxxxxxxxx expense; xxxxxxxxxxxx bargain element xx exerciseC В Financial—expense xxxxx over xxxxxxx xxxxxxx tax—no xxxxxxxxxx В Financial—expense value xxxx vesting period; xxxxxxxxxxxx bargain xxxxxxx xx exerciseBefore xxx 718, option xxxxxx were not xxxxxxxx to xx xxxxxxxx for xxxx purposes В AACSB: xxxxxxxxxx ThinkingAICPA: BB xxxxxxxx ThinkingAccessibility: xxxxxxxx xxxxxxxxxxxxxxxxx AnalyzeLearning xxxxxxxxxx 16-02 Identify xxxxxx book-tax differences; xxxxxxxxxxx between xxxxxxxxx xxx temporary xxxxxxxxxxxx and compute x corporation's taxable xxxxxx and xxxxxxx xxx liability xxxxx of Difficulty: x MediumTopic: Computing xxxxxxxxx regular xxxxxxx xxxxxxxxxx Which xx the following xxxxxxxxxx regarding nonqualified xxxxx options xxxxxx xx false? В В A xxxx ASC 718 xx codification of xxx 123R) xxxxxxxx xxxxxxxx differences xxxxxxxxxx with NQOs xxx be either xxxxxxxxx or xxxxxxxxx x В In x given year xxxx ASC 718 xxxxxxxx if xxx xxxxx of xxx options that xxxx is greater xxxx the xxxxxxx xxxxxxx of xxxxxxx exercised, the xxxxxxxx difference for xxxx year xx xxxxxxxxxxx C xxxxxxxx ASC 718 xxxxxxxx no expense xxxxxxxxxxx was xxxxxxxx xxx NQOs xxx financial accounting xxxxxxxx D В If xxx 718 xxxx xxx apply, xxx stock option-related xxxxxxxx differences are xxxxxxxxx If xxx xxx applies, xxx stock option-related xxxxxxxx differences are xxxxxxxxx В AACSB: xxxxxxxxxx xxxxxxxxxxxxxx BB xxxxxxxx ThinkingAccessibility: Keyboard xxxxxxxxxxxxxxxxx AnalyzeLearning Objective: xxxxx Identify xxxxxx xxxxxxxx differences; xxxxxxxxxxx between permanent xxx temporary differences; xxx compute x xxxxxxxxxxxxx taxable xxxxxx and regular xxx liability Level xx Difficulty: x xxxxxxxxxxxx Computing xxxxxxxxx regular taxable xxxxxxxxxx Which of xxx following xxxxxxxxxx xxxxxxxxx incentive xxxxx options (ISOs) xx false? В В A В If xxx 718 xx xxxxxxxxxxxx of xxx 123R) does xxx apply, ISOs xx not xxxxxx xxxxxxxx differences x В For ISOs xxxxxxx when ASC xxx applies, xxxxxxxx xxxxxxxxxxx are xxxxxx unfavorable C xxxx ASC 718 xxxxxxxx the xxxxx xxxxxxxx for xxxx purposes in x given year xx the xxxxx xx the xxxxxxx that vest x В If ASC xxx applies, xxxxxxxx xxxxxxxxxxx associated xxxx ISOs may xx either permanent xx temporary xxxxxxxx xxxxxxxxxxx associated xxxx ISOs are xxxxxxxxx because no xxxxxxxxxx can xx xxxxx for xxx purposes В AACSB: xxxxxxxxxx ThinkingAICPA: BB xxxxxxxx ThinkingAccessibility: xxxxxxxx xxxxxxxxxxxxxxxxx AnalyzeLearning xxxxxxxxxx 16-02 Identify xxxxxx book-tax differences; xxxxxxxxxxx between xxxxxxxxx xxx temporary xxxxxxxxxxxx and compute x corporation's taxable xxxxxx and xxxxxxx xxx liability xxxxx of Difficulty: x MediumTopic: Computing xxxxxxxxx regular xxxxxxx xxxxxxxxxx Orange xxx issued 20,000 xxxxxxxxxxxx stock options xxxxxx at xxxxxxx xxx total) xxx options vest xxxx two years x half xx xxxx (the xxxx of issue) xxx half in xxxx One xxxxxxxx xxxxxxx are xxxxxxxxx in 2017 xxxx a bargain xxxxxxx on xxxx xxxxxx of xx What is xxx 2017 book-tax xxxxxxxxxx associated xxxx xxx stock xxxxxxxxxxxxx В $14,000 unfavorableB xxxxxxxxx favorableC В $20,000 xxxxxxxxxxxx В $20,000 xxxxxxxxxx xxxxxx of xxxxxxxx book-tax difference xx 2017 is xxx difference xxxxxxx xxxxxxx expensed xxx book purposes xxxx Г — $40,000) xxx $6,000 xxxxxx xxxxxxx exercised xx $6 bargain xxxxxxxx It is xxxxxxxxxxx because xxxx xxxxxxxx exceed xxx deductions В AACSB: xxxxxxxxxxxxxx Reflective ThinkingAICPA: xx Critical xxxxxxxxxxxxxxxxxxxxxx xxxxxxxx NavigationBlooms: xxxxxxxxxxxxx Objective: 16-02 xxxxxxxx common book-tax xxxxxxxxxxxx distinguish xxxxxxx xxxxxxxxx and xxxxxxxxx differences; and xxxxxxx a corporation's xxxxxxx income xxx xxxxxxx tax xxxxxxxxx Level of xxxxxxxxxxx 1 EasyTopic: xxxxxxxxx corporate xxxxxxx xxxxxxx incomeВ 76 xx January 2017, xxxxx Company issues xxxxxxxxxxxx stock xxxxxxx xx its xxxx Jenny Svaro xxxxxxx the company xxxx not xxxxxx xx Svaro xx leave the xxxxxxxx the options xxxx at xxx xxxx they xxx granted with x total value xx $50,000 xx xxxxxxxx of xxxxx the company xxxxxxxxxxx a surge xx its xxxxx xxxxxx and xx Svaro exercises xxx options The xxxxx bargain xxxxxxx xx the xxxx of exercise xx $60,000 For xxxxx what xx xxx book-tax xxxxxxxxxx due to xxx options exercised? В В A xxxxxxxx unfavorableB xxxxxxxx xxxxxxxxxx В 50,000 xxxxxxxxxxxx В 60,000 favorableFor xxxxxxxxx purposes, the xxxxxxx deducts xxx xxxxxx $50,000 xxxxx of the xxxxx options in xxxxx when xxx xxxxx option xx granted For xxx purposes, the xxxxxxx deducts xxx xxxxxxx bargain xxxxxxx in 2017, xxxx the stock xxxxxx is xxxxxxxxx xxx 2017, xxx book-tax difference xx favorable in xxx amount xx xxxxxxx В AACSB: xxxxxxxxxx ThinkingAICPA: BB xxxxxxxx ThinkingAccessibility: Keyboard xxxxxxxxxxxxxxxxx ApplyLearning xxxxxxxxxx xxxxx Describe xxx corporate income xxx formula; compare xxx contrast xxx xxxxxxxxx to xxx individual tax xxxxxxxx and discuss xxx considerations xxxxxxxx xx corporations' xxxxxxxxxx periods and xxxxxxxxxx methods Level xx Difficulty: x xxxxxxxxxx Corporate xxxxx income formulaВ 77 xx January 2017, xxxxx Company xxxxxx xxxxxxxxxxxx stock xxxxxxx to its xxxx Jenny Svaro xxxxxxx the xxxxxxx xxxx not xxxxxx Ms Svaro xx leave the xxxxxxxx the xxxxxxx xxxx at xxx time they xxx granted with x total xxxxx xx $50,000 xx December of xxxxx the company xxxxxxxxxxx a xxxxx xx its xxxxx price, and xx Svaro exercises xxx options xxx xxxxx bargain xxxxxxx at the xxxx of exercise xx $40,000 xxx xxxxx what xx the nature xx the book-tax xxxxxxxxxx due xx xxx options xxxxxxxxxxxxxxx В Favorable and xxxxxxxxxx В Favorable and xxxxxxxxxx В Unfavorable xxx xxxxxxxxxx В Unfavorable xxx permanentE В Not xxxxxx information to xxxxxxxxx The xxxxxxxxxx xx unfavorable xxxxxxx the book xxxxxxxxx exceeds the xxx deduction xxx xxxxxxxxxx is xxxxxxxxx because it xxxx not ever xxxxxxx В AACSB: xxxxxxxxxx xxxxxxxxxxxxxx BB xxxxxxxx ThinkingAccessibility: Keyboard xxxxxxxxxxxxxxxxx ApplyLearning Objective: xxxxx Describe xxx xxxxxxxxx income xxx formula; compare xxx contrast the xxxxxxxxx to xxx xxxxxxxxxx tax xxxxxxxx and discuss xxx considerations relating xx corporations' xxxxxxxxxx xxxxxxx and xxxxxxxxxx methods Level xx Difficulty: 3 xxxxxxxxxx Corporate xxxxx xxxxxx formulaВ 78 xxxxx of the xxxxxxxxx statements regarding xxxxxxx gains xxx xxxxxx is xxxxxxxxxxx В In terms xx tax treatment, xxxxxxxxxxxx generally xxxxxx xxxxxxx gains xx ordinary income x В Like individuals, xxxxxxxxxxxx can xxxxxx xxxxxx of xxx capital losses xxxxxxx ordinary income xx a xxxxx xxxx C xxx corporations can xxxxx back net xxxxxxx losses xxxxx xxxxx and xxxx can carry xxxx forward for xxxx years x xxxxxxxxxxxxxx must xxxxx capital loss xxxxxxxxxx and carryovers xx a xxxxxxxxxx xxxxx Corporations xxxxxx deduct capital xxxxxx against ordinary xxxxxx В AACSB: xxxxxxxxxx xxxxxxxxxxxxxx BB xxxxxxxx ThinkingAccessibility: Keyboard xxxxxxxxxxxxxxxxx AnalyzeLearning Objective: xxxxx Identify xxxxxx xxxxxxxx differences; xxxxxxxxxxx between permanent xxx temporary differences; xxx compute x xxxxxxxxxxxxx taxable xxxxxx and regular xxx liability Level xx Difficulty: x xxxxxxxxxxxx Computing xxxxxxxxx regular taxable xxxxxxxxxx For corporations, xxxxx of xxx xxxxxxxxx regarding xxx capital losses xx true? В В A В A xxxxxxxxxxx that xxxxxxxxxxx x net xxxxxxx loss has x favorable book-tax xxxxxxxxxx in xxx xxxx of xxx loss B xxx corporation that xxxxxxxxxxx a xxx xxxxxxx loss xx year 4 xxxxx carries the xxxx back xx xxxx 3, xxxx year 2, xxx then year x before xxxxxxxx xx forward x В Net capital xxxx carrybacks are xxxxxxxxxx in xxxxxxxxxxx x corporation's xxx operating loss x В Net capital xxxx carrybacks xxx xxxxxxxxxx create xxxxxxxxx book-tax differences xx they are xxxx before xxxx xxxxxx Net xxxxxxx losses create xx unfavorable book-tax xxxxxxxxxx in xxx xxxx they xxxxx and a xxxxxxxxx book-tax difference xx the xxxx xxxx are xxxxxxx These book-tax xxxxxxxxxxx are temporary xxxxxxxx Reflective xxxxxxxxxxxxxx xx Critical xxxxxxxxxxxxxxxxxxxxxx Keyboard NavigationBlooms: xxxxxxxxxxxxx Objective: 16-02 xxxxxxxx common xxxxxxxx xxxxxxxxxxxx distinguish xxxxxxx permanent and xxxxxxxxx differences; and xxxxxxx a xxxxxxxxxxxxx xxxxxxx income xxx regular tax xxxxxxxxx Level of xxxxxxxxxxx 3 xxxxxxxxxx xxxxxxxxx corporate xxxxxxx taxable incomeВ 80 xxxxxxx reported a xxx capital xxxx xx $30,000 xx
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Corporate Tax Notes
Segundo. 11--Establishes that corporations are separate taxpaying entities, sets corporate tax rates, and provides that the maximum tax rate applies to personal service corporation income. Also exempts foreign corporation from regular taxation, but specifies that foreign corporations are taxed under Sec. 882.
Segundo. 301--Provides that dividends are taxable to shareholders to the extent that they are paid from earnings and profits, and further provides that distributions in excess of earnings and profits constitute a return of capital to the extent of the stock's basis.
Secs. 61, 1001, 1011, and 1201--Provide that gains from sales of stock are taxable, that losses are deductible (subject to several limitations), and further provide that the gains and losses are ordinarily capital gains and losses.
Segundo. 882--Specifies that foreign corporations are taxed on income from a U. S. trade or business and from income effectively connected to the U. S. trade or business.
Segundo. 881--States that foreign corporations are taxed on other U. S. source income at a flat rate of 30%, but provides exceptions.
Secs. 1361-1379--Provides that an S corporation is generally exempt from the corporate income tax, and explains that the income passes through to shareholders.
Constraints on Tax Planning
Substance over form The the essential characteristics of a transaction determines how it will be treated not the labels that are placed on the transaction by the parties. For example, an investment in a corporation is treated as a loan or stock depending on the characteristics of the investment and not the labels used. In tax cases the idea is sometimes referred to as the economic substance (or economic reality) of the transaction. For tax issues, often it is the economic impact of a transaction that indicates it substance.
Business purpose Spin off of liquid assets into new corporation followed by liquidation taxed as a dividend even though transaction met the requirements of reorganization-liquidation. Supreme Court established business purpose as a requirement for some but not all transactions. Evelyn F. Gregory v Helvering . 14 AFTR 1191, 35-1 USTC ¶ 9043 (USSC, 1935) .
Step transaction Combine many steps to determine appropriate treatment of events. Rule from common law. Could be applied to Gregory situation.
Clear reflection of income Accounting methods used by taxpayer must clearly reflect income. IRS can accelerate the reporting income or defer deductions or make other changes in order to clearly reflect income. Segundo. 446(b).
Constructive receipt Taxed on income if it is available to taxpayer even if taxpayer has not yet received it.
Reasonable amount Sec. 162 limits the deduction for compensation to a "reasonable amount." This limitation probably can be extended to rent, interest, royalties, etc. In other words, arm's length dealing and fair market value are ways to determine the substance of a transaction. Thus, excessive "rent" paid to a shareholder may be reclassified as a nondeductible dividend.
Assignment of income Lucas v. Guy C. Earl, 8 AFTR 10287, 2 USTC ¶ 496 (USSC, 1930) -- husband's income taxed to him in spite of agreement to share income with wife.
Helvering v. Paul R. Horst . 24 AFTR 1058, 40-2 USTC ¶ 9787 (USSC, 1940) -- coupon interest taxed to father who owned bonds rather than son who was given the coupons and cashed them.
George B. Clifford, Jr. v. Helvering, 23 AFTR 1077, 40-1 USTC ¶ 9265 (USSC, 1940) -- income from a grantor trust is taxed to the grantor.
Reallocation of income Sec. 482 grants the IRS the authority to reallocate income, deductions, gains, losses, and credits among related taxpayers. An extension of assignment of income that is particularly useful relative to families, related corporations, and international operations. Thus, "salary" paid to a child may actually be a dividend to father and a gift to the child. Income of foreign subsidiary may actually be parent corporation's income.
How many people were taxed, who was taxed, and what was taxed tell more about a society than anything else. --Charles Adams, U. S. Ambassador to Great Britain, historian, and writer
Definition of "Corporation"
Segundo. 7701--Although Sec.11 imposes the corporate income tax on "every corporation," it does not define the term corporation. The regulations identify six characteristics that are considered when classifying organizations. These are: (1) association, (2) business purpose, (3) continuity, (4) centralized management, (5) limited liability, and (6) transferability. Now, however, the IRS allows most entities, other than those specifically identified as corporations under state law, to choose to be treated as partnerships. In general, entities that are not identified as corporation under state may elect to be so treated.
Personal Service Corporations: Three Definitions
Segundo. 448(d)(2)--Perform personal services (health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting) and substantially all stock is owned by employees who perform such services.
May use cash basis (Sec.448(b)(2))
35% tax rate applies to all income (Sec. 11(b)(2))
Segundo. 269A(b)(1)-- Personal services are substantially performed by greater than 10% owners:
IRS can make allocations between corporation and owners under Sec.269A
Sec.441(i)(2)--At least 10% of the stock must be held by owner-employees who provide personal services:
Limit on fiscal years (same as shareholder or make required distributions) (Secs. 441(I)(1) and 444(f))
Deductions/income "matched" for corporation and shareholders (Sec. 267)
Subject to passive loss limitation (Secs. 469(j)(2) and 58(a)(3))
Organization and Similar Costs
Investigation and start up costs if actually start business
Investigation costs include market, labor, and transportation studies. Start-up expenses include pre-opening advertising, salary for training, rent, professional fees, and utilities.
May elect to expense first $5,000 of such costs. Amortize over 15 years next $45,000 of such costs. If costs exceed $50,000, current deduction for first $5,000 reduced by the excess. May elect to deduct at liquidation. (Sec.195)
Investigation and start up costs if do not actually start business
No deduction unless are already in business. If consider expanding existing business, but decided not to can deduct costs.
Legal fees, accounting fees, state filing fees, costs of organization meeting.
May elect to expense first $5,000 of such costs. Amortize over 15 years next $45,000 of such costs. If costs exceed $50,000, current deduction for first $5,000 reduced by the excess. May elect to deduct at liquidation (Sec. 248)
Stock issuance costs
Commissions, professional fees, certificate printing costs, listing on exchange.
Reduces proceeds. No tax benefit ever.
Legal fees, accounting, state filing fees.
Un settled. Vea abajo.
Reorganization Sec. 248--Describes treatment of organization costs, but does not mention reorganization costs.
Segundo. 197(e)(8)--Says that professional fees and other costs incurred in a tax free corporate transaction may not be amortized over 15 years. In INDOPCO, Inc. v. CIR . 69 AFTR2d 92-694, 92-1 USTC ¶ 50,113 (USSC, 1992) the Supreme Court denied a deduction for advisory fees paid in connection with a friendly take-over. Court concluded that corporation received a future benefit and, as a result, the costs must be capitalized. Deductions have been permitted for court ordered transactions ( U. S. v. General Bancshares Corp. . 21 AFTR2d 352, 68-1 USTC ¶ 9664 (8th Cir. 1968)).
It is likely that capitalized reorganization costs and unamortized organization are deductible upon the liquidation of a corporation. Similarly, capitalized costs associated with a stock redemption or an earlier partial liquidation are deductible upon complete liquidation. It is not clear what happens to such costs when a corporation terminates, as part of a reorganization.
May deduct costs incurred while considering possible reorganization ( Wells Fargo & Co. v. CIR . 86 AFTR2d 5815, 2000-2 USTC ¶ 50,697 (CA-8, 2000)) including cost incurred if abandon plans ( El Paso Co. v. U. S., 51 AFTR2d 83-465, 82-2 USTC ¶ 9711 (CA-FC, 1982)).
In at least two cases, individual shareholders have been permitted to deduct the cost of tax advice. (Basil Kaufmann v. U. S. . 13 AFTR2d 887, 64-1 USTC ¶ 9235 (WD Mo. 1963) and Philip Sharples v. U. S. . 37 AFTR2d 76-1223, 76-1 USTC ¶ 9256 (Ct. Cl. 1976).
Expansion Although Sec. 195 seems to state that costs associated with the expansion of an existing business are "deductible," there is still the question of whether such costs may have to be capitalized because of FMR Corp. and Subsidiaries, 110 TC 402 (1998). The court held that costs associated with the creation of new mutual funds in the Fidelity family were not currently deductible even though they related to the expansion of FMR's existing business of serving mutual funds. The court concluded that the costs provide significant future benefits. The obvious question is what constitutes a new business versus what constitutes an expansion.
The United states is the only country where it takes more brains to figure your tax than to earn the money to pay it. --Edward J. Gurney
Organization of a Corporation: Section 351 and Related Provisions
Segundo. 1001--Provides that gain on the sale or other disposition of property is taxable unless a nonrecognition rule applies.
Segundo. 165--Permits losses.
Segundo. 1032--Provides that no gain or loss is recognized by a corporation on the receipt of money or other property in exchange for its stock. Applies to options. (note this does not mention other securities, nor does it mention gains on property issued in connection with the redemption of stock, nor does it mention the shareholder, nor does it mention stock of an affiliate).
Segundo. 351--Provides that no gain or loss is recognized on transfers of property to a controlled corporation if the transfer is solely in exchange for stock of that corporation (only stock mentioned, only if solely, etc.). Recognize gain up to amount of boot received.
Segundo. 357--Gain must be recognized in cases of debt relief (if debt relief exceeds of basis or tax avoidance motives).
Segundo. 358--Specifies that basis of stock received equals basis of property transferred to corporation increased by gain recognized and decreased by value of other property received and debt relief. See Sec. 362 for an alternative.
Segundo. 362--Corporation's basis for property received is equal to the shareholder's basis increased by gain recognized by the shareholder, but is limited to the fair market value of the transferred property. Any basis reduction as a result of the fair market value limitation is allocated among the transferred properties in proportion to their respective built-in losses. Shareholders may elect to reduce their basis for the company's stock in lieu of reducing the corporation's basis for the assets it receives.
Segundo. 118--Contributions to capital by both shareholders and others are not taxable. Segundo. 362 states that the basis of property contributed by others is zero.
Segundo. 453--Permits use of installment method which may be available to an investor who receives debt rather than stock. Preferable to Sec. 351 in some instances because corporation receives higher basis in assets. Gain may not have to be recognized until investor receives payment.
Segundo. 267--Denies deduction of losses on transfers between related person. Applies to corporations and controlling shareholders as well as controlled groups of corporations.
Sec.1202--Small Business Stock. Only one-half of gain from Small Business Stock is taxed, but it is taxed at the tax rate associated with collectibles resulting in an effective tax rate of 14% (0.50 X 28%) except for taxpayers who are in the 10% or 15% tax brackets in which case the effective rate is 5% (0.50 X 10%) or 7.5% (0.50 X 15%). Because the current maximum tax rate for long-term capital gains is 15% the tax rate advantage is small for many taxpayers. However, reinvestment (discussed below) may still be desirable. To receive this favorable treatment, stock must have been issued after August 10, 1993 and held for more than 5 years. The amount of gain that so qualifies is limited to the greater of: $10 million reduced by amounts previously excluded for gains on the company's stock, or the aggregate adjusted basis of stock sold during the year times 10. Must be a C corporation with assets having an adjusted basis of no more than $50 million. At least 80% of the value of its assets must be used in the active conduct of one or more qualified businesses (businesses other than those providing professional services, financial services, hospitality, extraction, and farming).
Segundo. 1045--Specifies that taxpayers other than corporations may elect to not recognize gain from the sale for Small Business Stock (Sec. 1202 Stock) if they purchase other small business stock within 60 days. The stock that was sold must have been held more than six months. Under the election, gain is recognized only to the extent the amount realized on the sale exceeds the cost of the newly acquired stock. The basis of the new stock is reduced by the amount of unrecognized gain.
Section 351 Examples
One might expect that the recognized gain is limited to $10,000 as that is the total realized gain. The recognized gain is $15,000 because one-half of the boot is allocated to the patent. That is, because the value of the patent is equal to 50% of the total value transferred to the corporation ($100,000/$200,000 = 50%), one-half of the boot (or $15,000) is associated with the patent resulting in $15,000 of gain recognition.
Basis of stock and cash:
Assuming no election to reduce basis, the computation is as follows:
Basis of the stock
Basis of assets transferred
Total basis of stock and cash
Basis of assets to corporation:
The basis of the assets transferred to the corporation normally is equal to their bases in the hands of the shareholder increased by the gain recognized or $205,000 ($190,000 + $15,000). The total basis, however, cannot exceed the value of the assets received. As a result, the basis of the land and patent cannot be determined without knowing the basis and value of other assets being transferred. Even, if we assume the only other asset being transferred is cash, the individual bases of the patent and land asset is unclear. The $15,000 increase in basis because of the gain recognition, would lead to a total asset basis of $205,000 when the value is $200,000. How the $200,000 is allocated is unclear.
American workers spend more of their day working to pay taxes than they do to feed, clothe and house their families. --The Tax Foundation
Corporation's Capital Structure: Debt vs. Equity
Segundo. 385--Briefly describes some characteristics which may be used to distinguish debt from stock. Characteristics of debt include maturity date, certain return, lack of vote, participate in neither gains or losses, and a remedy in case of default. Courts also consider whether participants act like lender and borrower. Is interest paid on time? Is debt held in same proportion as stock? Is debt to equity ratio reasonable? Are terms similar to those available from others?
Segundo. 1244--May treat loss on small business corporation stock as ordinary if within limits. Available to first holder if an individual or partnership and stock is issued for property other than stock or securities. Ordinary loss limited to $50,000 per year ($100,000 on joint return). Corporation may issue up to $1,000,000 of Sec. 1244 stock (measured by the adjusted basis of property received reduced by debt payable to non-shareholders). May designate which shares are covered by Sec. 1244 in year pass $1,000,000 threshold. Greater than 50% corporation's receipts must be from an active business in 5years prior to loss. Does not apply to built-in losses, contributed capital, or AAA basis of S corporation (but may be able to avoid by selling corporate assets).
Secs. 1272 and 1273--Original investor must amortize original issue discount if it exceeds 1/4 of 1 percent multiplied times number of years to maturity.
Secs. 1276, 1277, and 1278--Investor need not amortize market discount, but must report it as ordinary income on retirement if it is not amortized.
Segundo. 531--Imposes a tax equal to 35% (temporarily 15%) of "accumulated taxable income."
Segundo. 532--Says the tax is imposed on corporations formed or availed of for the purpose of avoiding the income tax on shareholders. Exempts from the tax personal holding companies, foreign personal holding companies, exempt corporations, and passive foreign investment companies. (S corporations are effectively exempt because shareholders are automatically taxed on corporation's income.)
Segundo. 533--Exempts income accumulated to meet "reasonable needs of the business", but states that a mere holding or investment company shall be prima facie evidence of the purpose of tax avoidance.
Segundo. 534--Imposes burden of proof on corporation unless it provides required written explanations.
Segundo. 535--Explains computation of "accumulated taxable income". Exempts capital gains, but otherwise moves toward accounting income. Provides for an exemption of $250,000 ($150,000 for service corporations).
Segundo. 537--Defines "reasonable needs of the business" to include reasonably anticipated needs, Sec. 303 redemptions (estate tax), and excess business holdings redemption (private foundations).
Secs. 561 to 565--Explains deductions for dividends paid.
Personal holding company tax
Segundo. 541--Imposes a tax equal to 35% (temporarily 15%) of "undistributed personal holding company income."
Segundo. 542--Defines "personal holding company" as corporations with at least 60% of adjusted ordinary gross income consisting of personal holding company income and over 50% of stock owned, directly or indirectly, by 5 or fewer individuals or tax exempt organizations. Exempts banks, life insurance companies, lending company, foreign corporations, exempt corporations, etc.
Segundo. 543--Defines personal holding company income to include dividends, interest, rents, royalties, and income from personal service contracts. Creates special exceptions for companies engaged in the real estate rental business, oil and gas producers, etc.
Segundo. 544--Explains constructive ownership rules used to decide whether control exists.
Segundo. 545--Defines "undistributed personal holding company income" as being computed by starting with taxable income and making adjustments for distributions, income taxes, unallowable contributions, dividend received deduction, NOL, etc.
Segundo. 547--Permits a deficiency dividend which eliminates the tax if shareholders agree to include in their incomes the corporation's income that would otherwise be subject to the tax.
Secs. 551 to 557--Establishes rules for foreign personal holding company. Basically U. S. shareholders must include the foreign personal holding company's income in their own income.
Secs. 561 to 565--Explains deductions for dividends paid.
Nuclear physics is much easier than tax law. It's rational and always works the same way. --Jerold Rochwald
Dividend and Other Nonliquidating Distributions
Segundo. 61--States that dividends are taxable.
Segundo. 316--Defines dividend as distributions of current or accumulated earnings and profits (but does not define E & P).
Segundo. 312--Does not define E & P, but does discuss the impact of distributions, reorganizations, divisions, depreciation, and certain other events on E & PAG.
Segundo. 301--Says distribution of property is taxable if have E & P; that the dividend equals the value of the property reduced by any liability; that the basis of the property is equal to its value; and the basis of stock is reduced if distribution exceeds E & PAG.
Segundo. 311--Says that corporation recognizes gain (but not loss) if it distributes appreciated property in a dividend and in most other transactions.
Segundo. 305--Says that stock dividends and distributions of stock rights are not taxable, but creates several exceptions. The exception make stock dividends taxable if a shareholder has the option to receive cash or other property instead of stock, if the dividend is disproportionate, if some some shareholders receive common and others receive preferred, if the distribution is on preferred stock, if the distribution is of convertible preferred stock, or if the transaction changes conversion or redemption rights.
Segundo. 307--Says that part of basis of old stock is allocated when receive stock dividend or stock rights, but does not require allocation if stock rights are worth less than 15% of the value of old stock.
Segundo. 306--Defines "Sec. 306 stock" to include preferred stock, nonvoting common, options, rights, and convertible stock received as a dividend, gift, in a reorganization or division. The redemption of "Sec. 306 stock" results in dividend income to extent of E&P at time of redemption. Sale results in dividend income to extent of E&P at time of issue. In neither case is E&P reduced by amount of dividend.
Segundo. 243--Provides that corporations may claim a dividend received deduction equal to 100% of dividends received from 80% or greater subsidiaries, 80% of dividends received from 20% (but less than 80%) subsidiaries, and 70% of dividends received from other corporations. Does not apply to dividends received from foreign subsidiaries.
Segundo. 1059--Requires corporations to reduce the basis of stock held if they receive "extraordinary dividends" within 2 years of acquisition of the stock. Applies if dividends exceed 10% of basis (5% of basis if preferred stock) paid within an 85 day day period (or 20% of basis paid within a one year period). Basis is reduced by amount of dividend received deduction.
Example 1: A corporation distributes land with a basis of $40,000 and a value of $60,000 to its sole shareholder, an individual whose stock basis is $500,000. Corporation's current and accumulated E&P total $200,000. Corporation reports a gain on the land of $20,000. E & P is increased by $20,000 (assuming E & P basis is the same as income tax basis), reduced by the income tax on the distribution ($7,000 assuming a 35% tax rate), and reduced by the amount of the distribution $60,000. Shareholder reports $60,000 of dividend income. Stock basis is unchanged. Land basis is $60,000.
Assume same facts, except that current E&P is $20,000 (current E& P is determined at the end of the year and would include the gain on the distribution net of tax) and accumulated E&P is $30,000. Distribution is assumed to first come from current E&P followed by accumulated E&P. The remaining distribution of $10,000 is a return of capital reducing the shareholder's basis by $10,000 to $490,000. Land's basis is $60,000.
Assume shareholder is another corporation that purchased stock years ago. Shareholder reports $60,000 of dividend in the first situation and takes a $60,000 dividend received deduction. In second situation, shareholder reports a $50,000 dividend, claims a $50,000 dividend received deduction, and reduces stock basis by $10,000. Land's basis is $60,000 in both situations.
Assume same facts except the shareholder is a corporation that recently purchased the stock. In first instance dividend is extraordinary because $60,000 > 10% X $500,000. Dividend received deduction of $60,000 is available. Stock basis is reduced by full amount of dividend received deduction. Possibly the distribution in the second instance (where E & P is only $50,000) basis is reduced by only $10,000 because the dividend is $50,000 and that is not greater than 10% of basis. That, however, is not certain.
Example 2: Preferred Stock Bailout (Sec. 306 stock) . Shareholder owns 100 shares of common stock with a total basis of $1,000. Corporation pays to shareholder 10 shares of preferred stock. Value of common after the distribution is $1,500 and value of preferred is $500.
Although a dividend on preferred stock is taxable, a dividend of preferred stock is not (unless of course it is paid on preferred stock). Nevertheless, complex rules take away advantages and create recordkeeping challenges. Basis is allocated between old common and new preferred share using value even is value is less than 15%.
Basis of $1,000 allocated between preferred and common.
Preferred stock: $500/$2000 X $1,000 = $250
Common stock: $1,500/$2,000 X $1,000 = $750
Although basis is allocated to the preferred shares, the transaction is subject to the "preferred stock bailout" rules of Sec. 306. As a result, the sale of the preferred stock is taxable as a dividend assuming the corporation had E & P at time of issue (without any corresponding reduction in E&P). If preferred stock is sold for $400, shareholder reports $400 of dividend income assuming the corporation had at least $400 of E&P at the time of issue.
A redemption also is taxable as a dividend, but the E&P is measured at the time of the redemption. The shareholder is permitted to return the "unrecovered" basis of the preferred stock back to the common stock. If there is no E&P, the shareholder can recover the basis of the preferred stock tax free, and any amount in excess of the basis is a gain.
Order of distribution by C Corporation:
Rule: Dividends are taxable if paid out of either current or accumulated earnings and profits. Distributions are assumed to occur in the following order:
1. Current earnings and profits (for entire year, if positive).
2. Post 2/28/13 accumulated earnings and profits (if there is a current loss, then AE&P as of date of distribution, if a current profit as of beginning of the current year).
3. Return of capital (figured in aggregate).
Part a 1. Is the redemption substantially disproportionate? Show computation. (200/1400)/(300/1500) = 14.29%/20% = 71.43%. Sí. 2. Assuming the redemption is treated as a sale, how much gain does Long recognize. $5,000-$4,000 = $1,000 3. Assuming the redemption is treated as a sale, what is Long's basis for her 200 remaining shares? $40/share or $8,000 4. Assuming the redemption is treated as a sale, what is L & L's earnings and profits after the redemption? $50,000 - 100/1,500 X $50,000 = $46,667
Part b For part b, assume that L & L also redeems 400 shares from Lopez for $20,000. 5. Is the redemption substantially disproportionate? (200/1,000)/(300/1,500)= 20%/20% = 100%. No 6. Assuming the redemption is treated as a dividend, how much dividend income does Long recognize? $5,000 7. Assuming the redemption is treated as a dividend, what is Long's basis for her remaining shares? $12,000/200 = $60 8. Assuming the redemption is treated as a dividend, what is L & L's earnings and profits after the redemption of 500 shares. $50,000 - $25,000 = $25,000
Part c For this part assume that L & L redeems 100 shares from Long and 400 shares from Lopez as in part b. Also assume earnings and profits before the redemption is only $2,000. 9. How much dividend income must Long report? $5,000/$25,000 X $2,000 = $400 10. What is the balance in E & P after the redemption of the shares from Long and Lopez? -0- 11. What is the basis of Long's remaining shares? $12,000 - ($5,000 - $400) = $7,400
In a reversal of "No taxation without representation," women were required to pay federal income tax seven years before they won the right to vote. --Loch Adamson, Writer
Complete Liquidations and Other Taxable Dispositions
of Corporate Stock and Assets in Bulk
Segundo. 331--States that a liquidation of a corporation shall be treated as a sale of the shareholder's stock.
Segundo. 1001--Provides that the gain or loss on the sale of stock is equal to the difference between the adjusted basis of the stock and the net distribution. Provides creditors (including parent corporations) recognize gain if amount received exceeds the basis of debt instrument.
Segundo. 334--Provides that the basis of property received in a liquidation is equal to its value (assuming gain or loss is recognized).
Segundo. 336--Provides that the corporation recognizes both gains and losses on property that it distributes in a complete liquidation. Losses may not be deducted, however, if the property is distributed to a related person (as defined by Sec. 267) on a non pro rata basis, was transferred to the corporation by a related person in a nontaxable transaction within the last five years, or if the property was contributed to the corporation within the last two year for purposes of permitting the corporation to deduct loss.
Segundo. 332--Provides that the liquidation of an 80% subsidiary is not taxable to either the parent or the subsidiary and that the basis of assets, earnings and profits, and most other attributes transfer to the surviving parent. Minority shareholders are still covered by Sec. 331. Generally unavailable in the case of the liquidation of an insolvent subsidiary because the parent receives nothing for the stock. Everything goes to creditors. The parent probably can deduct a loss equal to basis of the subsidiary's stock.
Segundo. 338--Establishes an exception that allows parent to elect to step up or down the basis of the subsidiary assets if the subsidiary was acquired in a transaction taxable to prior shareholders during the preceding 12 months and the write up or down is reported as taxable income. It is not necessary to liquidate the subsidiary to make this election. Subsidiary's tax attributes disappear. This election is sometimes made by S corporations. The gain recognized on the corporate assets passes through to the S corporations former shareholders increasing their stock basis and reducing the gain on the stock. The result is a higher basis for the assets acquired from the S corporation.
Segundo. 1244--Allows eligible shareholders to treat limited amounts of loss on stock as ordinary. Can apply to liquidation.
1. What subjective conditions must be meet for this reorganization to be treated as a tax exempt reorganization? For the remaining questions, assume these conditions are met. Continuity of interest, step transaction, plan, business purpose, continuity of business, etc. 2. What code section covers this transaction? Segundo. 368(a)(1)(A). 3. a. What is B company's stock worth? $100 per share or $100,000 total (1,000 X $100). Z is receiving $100 per share ($20,000 cash / 200 shares). X and Y are each receiving $40,000 (800 share times $50 per share) of A company stock for their 400 shares of B stock which also is $100 per share ($40,000/ 400 shares). segundo. How much is B's goodwill worth? Value of corporation is $135,000 (Stock value $100,000 + debt $35,000). Value of listed assets is $107,000. Goodwill is $28,000 ($135,000 - $107,000). do. Will it be booked for tax purposes? No. 4. Will B report any income from the reorganization? No. 5. Would it make any difference if Z were given the land instead of the cash? Yes, corporation will recognize $10,000 gain. 6. What happens to B's E & P? Transfers to A, but may be adjusted properly. 7. If B had an NOL, what would happen to it? Transfers to A, but use limited. 8. a. What happens to the basis of B's assets? Unchanged. segundo. How is depreciation computed on the building after the merger? Continue as before. 9. Does A recognize any gain? No. 10. a. Does Z recognize capital gain, ordinary gain, or dividend income? Probably capital gain. segundo. How much? $15,800 = $20,000 - $21 X 200 c. Would it make any difference whether A or B's cash is used? No. 11. a. Do X and Y recognize any income? No. b. What is their basis in the A stock they receive? $10.50 per share or $8,400 for each investor. do. Would it make any difference if X and Y received preferred stock instead of common? Probably not, but could raise continuity of interest and preferred stock bailout issues. re. Would it make any difference if X and Y later sold the stock they received? Yes, may not meet continuity of interest requirements. mi. Would it make any difference if X, Y, or Z were corporations instead of individuals? No. f. How would X, Y, and Z be taxed if the $20,000 cash were paid out proportionately and each received the balance in the form of A stock. Each would report dividend income (X $8,000, Y $8,000, and Z $4,000). Some might claim transaction produces a capital gain. 12. Record the transfer of B assets to A on A's books. Assume the original transaction is carried out. Inventory 15,000 Building 40,000 Land 10,000 Mortgage 35,000 E&P 24,000 Common stock 6,000 13. If A wanted to achieve a step up in the basis of B's assets how could they achieve it? There are at least two things they could do differently to accomplish this result. Purchase assets or purchase stock and make Sec. 338 election.
It took an IRS accountant to catch Al Capone. --IRS recruiting poster
Segundo. 482--Allows the IRS to reallocate income deductions, gains, losses and credits between related persons.
Segundo. 1501--Provides that an affiliated group may elect to file consolidated tax returns.
Segundo. 1504--Defines an affiliated group to include a parent and 80% controlled subsidiaries (by both vote and value). Excludes exempt, foreign, insurance, possessions, regulated investment companies, real estate investment trusts, and DISCs. (Other provisions exclude foreign sales corporations).
Segundo. 1502 Regulations--Separate return limitation year (SRLY) rule prevents the use of an NOL carryover to offset income of other members of a consolidated group if the corporation generating the loss was not a member of the group when the loss occurred. Rule also extends to "built-in deductions" such as "depreciated assets." Rule does not apply to parent’s own losses as long as the parent’s shareholders maintain control (50% or greater).
Regulations also provide that subsidiary's losses that occur during period of consolidation can offset the income of other members of the group, and that the offset is not limited to the parent’s basis in the subsidiary's stock. Losses reduce parent’s basis in the subsidiary's stock. If losses exceed the basis, the excess is accumulated in an "excess loss account" (ELA). Sale of subsidiary stock can result in a gain greater than the sales price of the stock. A liquidation purges the balance without any gain recognition.
Segundo. 1561--Establishes a one-group/one allowance barrier that limits tax benefits for members of a controlled group. The rule applies to tax brackets, accumulated earnings credit, AMT exemption, the limit for credits, the Sec. 179 write-off for equipment, and various pension rules.
Segundo. 1563--Defines a controlled group to include:
Parent-subsidiary--80% ownership and Brother-sister--5 or fewer individuals, estates, or trusts own at least 80% of all corporations in group and 50% when considering the smallest interest in any corporation in a group. Combinations of the above.
Stock held by partnerships, corporations, estates, and trusts are attributed to those who have a 5% or greater interest in proportion to the interest. In general, stock held by an individual's spouse and minor (under age 21) children are attributed to an individual. Stock held by grandchildren and adult children are attributed to an individual who owns more than 50%.
Segundo. 269--An acquisition of a 50% interest for tax avoidance reason can result in the disallowance of any deduction, credit or other allowance.
Affiliated Corporations Case
For years, the Lee family has owned three businesses, X partnership, Y corporation, and Z corporation.
X partnership owns several pieces of real estate including properties rented to their other businesses, apartments rented to tenants, and undeveloped real estate held for expansion and appreciation. The partnership assets are valuable. Several of the assets have a value that is significantly higher than their bases either because of appreciation or because of accumulated depreciation.
Y corporation, which made an S election in 1986, provides real estate services including appraisals, surveys, inspections, management, repairs, mortgage banking and other services. Several family members have licenses which enables Y corporation to offer these services. Given the nature of Y, it does not have many assets of any real value other than possibly goodwill. There, of course, are cash basis receivables.
Finally, Z corporation is involved in real estate construction. Z corporation has some equipment and contracts in progress. Each of eight members of the family owns an interest in each business, and the plan is to maintain overlapping ownership.
The percentages of ownership, however, are not identical. The children are in their middle to late twenties while the grandchildren are preschoolers. As more grandchildren are born, they will be given an interest in the family businesses. Current interests are as follows:
Sec.269--Disallows any deduction, credit or other allowance if acquire stock or property for tax avoidance motive.
Sec.382(c)--Prohibits a carryover from being used to offset income with a loss from a different business (Libson Shops v. Koehler, 51 AFTR 43, 57 USTC ¶ 9691 (USSC, 1957).
Sec.382(g)--Limits use of NOL if there is a change in ownership (tax exempt rate times value of stock).
Sec.383--Limits foreign tax credit and capital loss.
Sec.384--Limits use of pre-acquisition NOLs and built in losses to offset built-in gains (appreciation and burnt-out tax shelters).
Sec.381--Enumerates 21 tax attributes and states that they are preserved in certain corporate acquisitions (NOL carryback isn't one of the attributes except in an F reorganization. Does not mention tax year, S election
Segundo. 381 applies to:
Sec.332 liquidation of subsidiary, Sec.368(a)(1)(A) merger or consolidation, Sec.368(a)(1)(C) acquisition of property, Sec.368(a)(1)(D) but only if non divisive, Sec.368(a)(1)(F) mere name change, etc. and Sec.368(a)(1)(G) insolvency reorganization where transferor terminates.
Just because Sec.381 says the attributes ordinarily survives does not mean they are automatically available. Secs. 269, 382(c), etc. may cause the taxpayer to lose the attribute. Further, Sec.382(g) and the SRLY rule can limit the use of an NOL.
Also, the fact that Sec. 381 does not mention the transaction does not necessarily mean that the attributes expire. Or at least so says the committee report, but in Denver & Rio Grande Western Railroad . 38 TC 557 (1962) the court held the opposite. This may not necessarily mean that the court rejected the committee report, but rather the court felt that in the specific situation at hand the attribute should not survive.
Sec.338 liquidation of subsidiary--attributes probably terminate.
Sec.368(a)(1)(E) recapitalization--attributes probably survive.
Sec.368(a)(1)(D) divisive followed by a split off--parent's probably survive.
Sec.368(a)(1)(D) divisive followed by a split up--probably terminate.
Sec.304(b)(2) partial liquidation--probably terminate
Sec.368(a)(1)(G) transferor survives--not clear
Sec.368(a)(1)(B) stock for stock--not clear.
Corporate Attributes Case
The Hill family has owned Hill Nursery and Hill Landscaping, two C corporations, for years. Mrs. Hill has managed the nursery business while Mr. Hill has been in charge of landscaping. Both Mr. and Mrs. Hill have drawn large salaries and rent from the corporations so that they have paid little corporate income tax. Because of their age, they are looking to the future when they will retire. In fact, Mr. Hill has limited his involvement in the landscaping operations for over two years because of back problems. As they have lived off of the income from the business, they need an alternative source of income for retirement. In fact, the landscaping business has shown losses since Mr. Hill injured his back and the corporation has an NOL carryover as a result. After some review, you have decided that there is support for the salary deduction because Mr. Hill has an employment contract with the corporation that guarantees his salary.
Their adult son and daughter do not plan to work in the business as they both have their own careers, but they have both expressed a desire to acquire the corporation's stock so they can receive future dividend income. Obviously, the company would have to begin paying dividends for this to happen.
On the other hand, National Nurseries has expressed an interest in acquiring the nursery operation because of its reputation and location. The land is actually owned by Mr. and Mrs. Hill who rent it to the corporation.
National, however, does not do landscaping. Tom Green, a long time employee of the landscaping operation, has indicated that he is interested in acquiring that business, but he has very limited resources.
After some discussion the family is leaning toward selling the land to National for cash. Hill Nursery will merge into National and they will receive National stock in exchange.
Finally, they plan to recapitalize the Hill Landscaping by issuing equal amounts of common and preferred stock for their existing common stock. Tom Green will have the option of purchasing the common stock over a six year period. As Green will be running the corporation they plan to increase his salary, and they hope that he will then be able to purchase the common stock using part of his salary. Over time, the Hills plan to give the preferred stock to their children.
Mr. and Mrs. Hill will no longer draw their salaries.
An preliminary examination suggests the following.
Land Nursery stock Landscaping stock
$ 25,000 100,000 20,000
$500,000 500,000 300,000
1. Which of the events described above are currently taxable? Land sale. Could transfer land to corporation then receive more stock from National. Also, an installment sale could delay gain recognition. 2. Which of these event will likely produce a future tax? Low basis of National stock suggests a future tax. Planned sale of Landscaping stock will be taxable. Gift of preferred stock could produce gift tax. 3. Assume the recapitalization of the landscaping business takes place as planned. Will the tax attributes of the corporation survive? Specifically, does the exchange of common for preferred and common impact the future use of the NOL? Sí. No, but sale could limit use of NOL. The change of ownership test is based on value, not vote. The question is whether the Hills maintain 50% or greater ownership. 4. a. What impact will the gifting of stock have on tax attributes? Gifts are exempt. segundo. Would it make a difference if they were given common instead of preferred stock? Segundo. 382 may not apply to preferred stock. do. Would it make a difference if the children purchased the stock instead of receiving it as a gift? Interfamily transfers are exempt. 5. a. Assume Mr. Green borrows funds from a local bank and purchases all of the common stock in the landscaping corporation after two years. What impact does this have on the Hills? On their children? Taxable transaction. Limits use of losses if value is greater than 50%. No impact on children at this time. segundo. Assume a small portion of the NOL has been used up. Is the balance still available after the transfer? Depends on value. If greater than 50% change than limit applies. do. Assume that Mr. Green decides to discontinue the landscaping business and open a nursery. What implications does this have? Is this a change of business? If so, lose NOL.
These days it is hard to believe that America was founded to avoid high taxation. --Unknown
Donate Long-Term Appreciated Securities
Expiration of IRA charitable rollover provision
The provision which allowed a qualified charitable distribution (QCD) from an IRA expired on December 31, 2017. Although Congress has reinstated QCDs a few times since their inception in 2006, there is no certainty that they will be reinstated for 2017 and beyond.
Donating Complex Assets to Charity
By Karla D'Alleva Valas, Managing Director, Complex Asset Group, Fidelity Charitable
An Effective and Tax-Efficient Way to Make More of a Difference
Americans have always been known for their generosity and devotion to giving. But most Americans donate cash when there are more tax-advantageous assets to give — assets that will enable individuals to make a larger charitable impact. That's why it may be helpful to think outside the box when it comes to putting together a personal giving plan.
Typically, cash and appreciated publicly traded securities — such as stocks, bonds, and mutual funds — are the two types of assets used in individual charitable giving, but that isn't always the case. Increasingly, donors are leveraging a broader spectrum of their assets, such as restricted stock and privately held securities, for charitable purposes. In addition, continued strength in the mergers and acquisitions market also is a sign of more strategic charitable planning on the part of donors and their advisors. This is exciting, as these types of assets have powerful tax advantages.
For many, charitable contributions of illiquid assets — private C - and S-Corp stock, restricted stock, limited partnership interests, and other privately held assets — may be an effective and tax-efficient method of giving. These types of assets, also referred to as complex assets, often have a relatively low cost basis (i. e. original cost) for the donor — and in the cases of entrepreneurs who have founded companies, the cost basis may effectively be zero — and a significant current market value that would result in large capital gains taxes if sold. When such an asset is donated to a public charity in the correct and optimal manner, the donor not only minimizes any potential capital gains exposure, but is also generally entitled to claim a tax deduction of the full current market value 1 (and not just the original cost basis). This tax treatment offers significant benefits at the federal level, and frequently at the state and local levels as well.
Contributing complex assets to charity, however, can be complicated and is fraught with technical requirements and potential pitfalls. Fortunately, there are organizations that can help guide donors and their advisors through this process, as well as offer valuable planning and technical assistance. One of the largest of these organizations — and one offering several unique advantages — is Fidelity Charitable, an independent public charity with a donor-advised fund program ("DAF"). Donating complex assets to a DAF, like Fidelity Charitable offers, makes the process easy and typically more financially advantageous for the receiving charities.
Options for Donating Complex Assets
Once the privately held assets to be donated have been identified (see the call-out box below for a list of assets in this category), donors and their advisors typically devise a detailed plan outlining immediate and long-term charitable goals, and then consider what would be the best method for donating the assets to realize these goals.
They often quickly find that their options are limited. Many nonprofit organizations, being primarily mission - and program-focused, are not well equipped to handle this type of contribution, and therefore might require that a donor first sell the assets and contribute the proceeds. A donor in this situation would have taxable income and thus would not, in most cases, choose to donate the entire amount of the proceeds, but rather would deduct his/her "cost" to liquidate (including both selling costs and the tax incurred) and then donate the net proceeds — thereby reducing the total amount of the charitable contribution. In this situation, the donor would also only be able to claim a deduction for the amount of the resulting cash contribution, rather than the fair market value of the contributed asset prior to liquidation. Furthermore, while some charitable organizations might have some limited experience in handling contributions of complex assets, the cost to the charity to outsource the compliance and liquidation work can be considerable. Although the donor would still be eligible to claim a fair market value deduction, the net result to the charity would once again be significantly reduced.
Some donors also consider creating a private foundation, but find even greater complexity, even more obstacles, and higher costs — similarly reducing the amount of money that eventually reaches the donor's chosen charities. Moreover, contributions of most illiquid assets to a private foundation are generally limited to the original cost basis for deduction purposes, rather than the current market value. Donating these types of assets to private foundations is further complicated by IRS rules and regulations related to "self-dealing," "jeopardizing investments," and "excess business holdings."
In many cases, an optimal method for donating complex assets to charity — measured by cost, flexibility, simplicity, and tax benefits to the donor, as well as by maximizing the net proceeds ultimately made available to charitable organizations — is to make the contribution to a charity that offers donoradvised funds. Most of the larger donor-advised fund programs in the United States, including the one offered by Fidelity Charitable, have the requisite expertise and dedicated professional resources to work with donors and their advisors directly to maximize the giving power of these assets. Most acceptance decisions can be made within a few days once the necessary information is received.
How a DAF Works
For those who may not be familiar with the concept, some public charities have DAF programs. In a DAF program, donors make irrevocable contributions to the charity, and the charity then establishes an account from which the donor is able to recommend grants to other eligible charities — generally speaking, IRS-qualified 501(c)(3) public charities — from the balance in their DAF account.
The benefits of the donor-advised fund are numerous. First, donors are able to make a charitable contribution and are eligible for a tax deduction on that contribution, in a specific year, while spacing out their grants over a period of years 2. Donors are permitted, of course, to make further contributions at any time, but having the balance in place in their DAF means that they can engage in longer-term charitable giving, allowing them to maintain a certain level of giving regardless of changing financial circumstances — a critical point for both donors and their recommended charities during challenging economic times.
Types of Complex Assets that Can Be Donated to Charity
Private Company Stock
S-Corp
C-Corp
Restricted Stock
LLC and Limited Partnership Interests
Bienes raíces
Pre-IPO Shares
Personal Property (Artwork, Collectibles 3 )
Other Miscellaneous Capital Assets
Certain Alternative Investments
Second, individuals who create a donor-advised fund are typically also able to recommend how those funds should be invested. Many DAFs offer a variety of investment pools that allow donors to recommend the investment style that fits best with their time horizon for recommending charitable grants — Growth, Fixed Income, Money Market, or Blended investments. The funds that have been contributed to the DAF have the opportunity thereafter to grow tax free 4. In addition, DAF programs provide consolidated tax reporting for the year's contributions, eliminating paperwork for the donor and simplifying and improving compliance with IRS requirements.
DAFs are simple, fl exible, and cost effective. They help donors achieve strategic, thoughtful giving for themselves and, in many cases, for their entire family. Often, in fact, donor-advised funds are established in the name of a donor's family; by planning for charitable contributions and grants over a period of time — one year, five years, ten years, or more — families can make a continuing difference.
Donating Complex Assets via a DAF
In the specific case of donating complex assets, once they are contributed, the sponsoring charity of the DAF, as the legal owner of the assets, has the responsibility for liquidating the complex assets in compliance with IRS rules and regulations — including handling all legal review of documents and IRS reporting. This enables the grant-receiving charitable organizations to focus on what they do best — fulfilling the organization's charitable mission — rather than overseeing an often-complicated financial and legal process and being responsible for "getting it right" both for the donor and for themselves. Also, and as previously mentioned, the donation of complex assets to a public charity means that donors themselves realize no capital gain, and thus pay no capital gains tax 5. This helps ensure that the highest possible percentage of the funds from the sale of the asset or assets actually goes to the chosen charitable organizations.
Perhaps best of all, by donating complex assets to establish a DAF, these donors are able to diversify their giving with one asset in that they are able to recommend multiple grants to many different charities, as opposed to donating the asset (or assets) to one nonprofit organization — or going through a transfer agent to break up the asset to facilitate multiple gifts. The experienced charitable giving professionals at the DAF program are able to do this work for the donor.
Fidelity Charitable and Its Mission
Fidelity Charitable offers the nation's largest donor-advised fund program and is one of the nation's largest public charities 6 .
The Fidelity Charitable mission is to further the American tradition of philanthropy by providing programs that make charitable giving simple and effective. Among DAF providers, Fidelity Charitable has one of the lowest annual fees (currently 0.6 percent) and one of the lowest minimum initial contribution requirements (currently $5,000, though it can be higher for complex asset donations). Fidelity Charitable does not charge a direct fee 7 for helping its donors contribute complex assets (only unrelated business income tax, if applicable, actual carrying and maintenance costs, and certain tax preparation consultancy costs are taken from the proceeds of the sale of the contributed asset). Quite apart from fees, however, Fidelity Charitable offers a level of expertise in this area matched by few organizations in the United States.
The goal of Fidelity Charitable is to make charitable giving as easy and painless as possible, both for the donor and for the donor's lawyers and/or advisors. This is especially relevant in connection with contributions of complex assets — and, according to our donors and their advisors, we are succeeding at this goal.
What Fidelity Charitable Donors and Their Advisors Say 8
One of these advisors is Joseph Crocker, CFP ®. CIMA, and Managing Director of Chess Financial Corporation, who worked with Fidelity Charitable to help accept a donation of private S-Corp stock on behalf of his entrepreneur client. According to Crocker, "This was my and Chess's first foray into this type of transaction and, working with Fidelity Charitable, it was a smooth process from beginning to end — smooth, above all, because of the follow-through at every step of the way by Fidelity Charitable. Nothing fell through the cracks. The knowledge and experience Fidelity Charitable brought to the table helped turn a transaction that I think can be a nine or a ten, in terms of difficulty, into about a three."
Steven C. Mayer, a Fidelity Charitable donor, is the chief executive officer and co-founder of CoGenesys, a biotechnology company located in Maryland. In his words, as he prepared to sell his interest in the privately held company, "I wanted to create an ongoing charitable concern, something to serve as a legacy for me and my whole family. I thought first of establishing a private foundation, but found there were two problems: one, that donating privately held stock to a private foundation is not a tax-efficient option; and two, that the administrative challenges were considerable and expensive. Establishing a DAF at Fidelity Charitable was absolutely the best option. Throughout the donation process, which went very smoothly, and afterwards as Fidelity Charitable worked with the company to liquidate its shares in the corporate transaction, Fidelity Charitable distinguished itself as a top-tier organization. I look forward to a long association."
Conclusión
When it comes to helping donors and their advisors donate complex assets to charity, Fidelity Charitable is an ideal option. Its dedicated Complex Asset Group provides the support and technical expertise to get the job done correctly, promptly, and with all appropriate follow-through, as well as the scale to be able to offer individual assistance to donors or to their advisors or legal counsel
1 As determined by a qualified appraiser in compliance with IRS rules and regulations.
2 Subject to program's grantmaking policies.
3 Related use needed to claim a fair market tax deduction.
4 Of course, investing also involves risk, including risk of loss to the charity and the individual donor-advised fund.
5 Assumes that the donor does not have an anticipatory assignment of income issue.
6 Source: The Philanthropy 400, The Chronicle of Philanthropy, October 21, 2010 (based on contributions from individuals, foundations, and corporations).
7 Fidelity Charitable charges an annual administrative fee.
8 The testimonials and the statements and opinions expressed in this article are based on interviews with Joseph Crocker, who provided permission to use his name and that of Chess Financial Corporation, and Steven C. Mayer, who provided permission to use his name and that of CoGenesys. These testimonial statements are not indicative of future services and may not be representative of the experience of all donors/advisors.
Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Fidelity Charitable does not provide legal or tax advice. Content provided relates to taxation at the federal level only. Availability of certain federal income tax deductions may depend on whether you itemize deductions. Rules and regulations regarding tax deductions for charitable giving vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of the information provided. Charitable contributions of capital gain property held for more than one year are usually deductible at fair market value. Deductions for capital gain property held for one year or less are usually limited to cost basis. Consult an attorney or tax advisor regarding your specific legal or tax situation.
To ensure compliance with Treasury Department Circular 230, you are hereby notified that: (a) any discussion of federal income tax issues in this article is not intended or written to be relied upon, and cannot be relied upon, by you for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code; (b) such discussion is being used in connection with the promotion or marketing (within the meaning of Circular 230) by Fidelity Charitable of the matter addressed herein; and (c) you should seek advice based on your particular circumstances from an independent tax advisor.
Fidelity Charitable is the brand name for the Fidelity ® Charitable Gift Fund, an independent public charity with a donor-advised fund program. Various Fidelity companies provide services to Fidelity Charitable SM. The Fidelity Charitable name and logo are service marks, and Fidelity is a registered mark, of FMR LLC, used by Fidelity Charitable SM under license.
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< THE MOTLEY FOOL CHARITY FUND > Charitable Contributions of Stock
by Roy Lewis (TMF Taxes)
If you are planning to make a relatively substantial contribution to a charity, such as a church/synagogue, college, hospital, or other qualified charitable organization, you should consider donating appreciated stock from your investment portfolio instead of cash. Your tax benefits from the donation can be increased and the organization will be just as happy to receive the stock.
This tax planning tool is derived from the general rule that the deduction for a donation of property to charity is equal to the fair market value of the donated property. Where the donated property is "gain" property, the donor does not have to recognize the gain on the donated property. These rules allow for the "doubling up," so to speak, of tax benefits: A charitable deduction, plus avoiding tax on the appreciation in value of the donated property.
Let's look at an example: Tom and Jerry are brothers, and each wants to make a charitable contribution to his favorite charity. Tom wants to donate to his college alma mater, while Jerry wants to give to his church.
Both Tom and Jerry purchased shares in XYZ Corp. back in April 1996 for $5,000 each. Tom and Jerry's investments now have a fair market value of $20,000 each.
In order to make his charitable contribution, Tom decides to sell his shares in XYZ Corp. Tom realizes a gain of $15,000 on those shares. Tom now has to deal with Uncle Sam, and will be required to fork over $3,000 in federal taxes on this $15,000 gain (20% capital gains rate). Tom then takes the remainder of these funds in the amount of $17,000 and writes a check to his alma mater for this amount. Assuming that Tom is in the 28% tax bracket, Tom will realize a tax savings of $4,760 on the charitable contribution deduction of $17,000.
Jerry, on the other hand, has made arrangements with his church to donate his shares of XYZ Corp. directly to the churchпїЅ and his church jumps at the chance to receive this donation. After the transfer, Jerry will NOT have to realize any gain or pay any tax on the $20,000 transfer of the stock to his church. In addition, Jerry will receive a charitable contribution for the full $20,000 fair market value of the stock. And, assuming that Jerry is also in the 28% tax bracket, this $20,000 charitable contribution deduction will generate tax savings of $5,600 to Jerry.
Take a closer look at the numbers: Who "made out" better in these transactions? In Jerry's case, his charity received a full $20,000 with which to carry out their charitable obligations, but Tom's charity received only $17,000. almost 18% less. Also, Jerry saved a full $5,600 in taxes on his contribution, while Tom only saved $1,760 in "net" taxes ($3,000 tax on the gain on the sale of the shares, less a $4,760 tax deduction on the charitable contribution)пїЅ a whopping difference of $3,840 in tax savings for Jerry.
So, on Tom's transaction, Uncle Sammy made out. In Jerry's transaction, both Jerry AND his charity made out. Only Uncle Sammy was the loser. Which is quite fine. Remember that tax policy is often used to drive social actionпїЅ and this is a prime example. There was nothing illegal or immoral for Jerry to arrange his affairs in order to comply with the law and keep his taxes a low as possible while providing his charity with the largest possible contribution. The Supreme Court has said as muchпїЅ many times.
And remember also that this technique may work for other similar contributions, from $100 to $1 million, depending upon your individual tax situation. So don't think that you have to be in the class of the Ted Turners or Bill Gates of the world in order to make the contribution of appreciated stock work for you from a tax standpoint.
But there ARE a few cautions: While this plan works for Jerry in the above example, it will not work if the stock has NOT been held for more than a year. If the shares were held for a year or less, the shares would be treated as "ordinary income property" for these purposes, and the charitable deduction would be limited to the stock's $5,000 cost. So remember that if you are considering the contribution of appreciated stock, you need to make sure that the shares have been held for more than one year and qualify for the "qualified appreciated stock" deduction.
And, in addition, if the property in question is OTHER ordinary income property (such as inventory), there are special limitations that apply. Not only that, if the capital gain property is NOT stock (such as artwork, jewelry, real property, etc.), there are other special limitations that may apply to the contribution. Finally, depending on the amounts involved and the rest of your tax picture for the year, taking advantage of these tax benefits may trigger alternative minimum tax concerns. So prior to making any charitable contribution, make sure that you are on solid ground. Check the contribution first with your tax professional. At the very least, read IRS Publication 526 for additional information on the contribution limitations.
But there ARE very real tax benefits to the tax savvy charitable giver. Don't overlook 'em.
Tax Deductions for Inventory
A small business has several options when looking for deductions based on inventory. These deductions can range from inventory storage at a business owner's home to the cost to purchase building materials. A meticulous business owner can maximize inventory deductions to ensure that even the unsold business inventory is still providing some financial benefit at the end of the year.
Inventory Storage Deduction
If you use a portion of your home as permanent storage for business inventory, you may take a percentage of your monthly rent or mortgage payment as a tax deduction on your federal return. The IRS bases your deduction on the total square footage of your home used for business purposes as compared to the square footage of your entire home. You may also deduct a percentage of utility charges for the inventory storage facility based on the square footage used for the space. Using a portion of your home on occasion for inventory is not sufficient to claim this deduction.
Inventory Creation Costs
The IRS permits a deduction based on the cost of producing inventory for your small business. This means you may take tax deductions for the cost of purchasing building materials, including fabric and wooden boards, for inventory you later resell for a profit. You may take this deduction only for inventory you actually sell over the course of the year. Keeping detailed records of your sales figures, including what goes into making each inventory item in stock, is necessary to maximize this deduction and ensure that your financial figures are accurate.
Credits for Charitable Contributions
Donations of inventory to charitable causes and nonprofit organizations can net your small business a tax credit at the end of the year. A tax credit is far preferable to a deduction because it directly reduces the amount of money you owe the IRS. A deduction only reduces your gross income for the year. The IRS allows a tax credit for inventory donations only up to the fair market value of the inventory at the time of donation. You must also remove the donated inventory from your company's opening inventory, meaning it can't also appear on your list of goods sold throughout the year. If your business wishes to donate food inventory, the donation must satisfy all federal, state and local nutritional laws and the donation must be for the ill, needy or for infants.
Itemizing Business Deductions
Claiming losses from your small business, including inventory creation and storage costs, requires you to file Schedule C of IRS Form 1040. You must also itemize your tax deductions to claim losses from your small business on your federal return. Providing invoices and receipts to back up your business purchases can go a long way to avoiding a costly IRS audit. For charitable contributions of inventory, you must obtain a receipt from the qualifying organization detailing the value of the donation, the date the donation was received and its intended use.
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Deductions
An employer can lawfully withhold amounts from an employee’s wages only: (1) when required or empowered to do so by state or federal law, or (2) when a deduction is expressly authorized in writing by the employee to cover insurance premiums, benefit plan contributions or other deductions not amounting to a rebate on the employee’s wages, or (3) when a deduction to cover health, welfare, or pension contributions is expressly authorized by a wage or collective bargaining agreement. Labor Code Sections 221 and 224. Although a wage garnishment is a lawful deduction from wages under Labor Code section 224, an employer cannot discharge an employee because a garnishment of wages has been threatened or if the employee’s wages have been subjected to a garnishment for the payment of one judgment. Labor Code Section 2929(a) (See How to file a discrimination complaint )
The ability of an employer to deduct amounts from an employee’s wages due to a cash shortage, breakage, or loss of equipment is specifically regulated by the Industrial Welfare Commission Orders and limited by court decisions. ( Kerr’s Catering v. Department of Industrial Relations (1962) 57 Cal.2d 319). In addition, there have been several court decisions that significantly restrict an employer’s ability to take an offset against an employee’s wages. Barnhill v. Sanders (1981) 125 Cal. App.3d 1, (Balloon payment on separation of employment to repay employee’s debt to employer is an unlawful deduction even where the employee authorized such payment in writing); CSEA v. State of California (1988) 198 Cal. App.3d 374 (Unlawful to deduct from current payroll for past salary advances that were in error); Hudgins v. Nieman Marcus (1995) 34 Cal. App.4 th 1109 (Deductions for unidentified returns from commission sales unlawful.)
Some common payroll deductions often made by employers that are unlawful include:
a. Gratuities . An employer cannot collect, take, or receive any gratuity or part thereof given or left for an employee, or deduct any amount from wages due an employee on account of a gratuity given or left for an employee. Labor Code Section 351 However, a restaurant may have a policy allowing for tip pooling/sharing among employees who provide direct table service to customers.
segundo. Photographs . If an employer requires a photograph of an applicant or employee, the employer must pay the cost of the photograph. Labor Code Section 401
do. Bond . If an employer requires a bond of an applicant or employee, the employer must pay the cost of the bond. Labor Code Section 401
re. Uniforms . If an employer requires that an employee wear a uniform, the employer must pay the cost of the uniform. Labor Code Section 2802. Industrial Welfare Commission Orders, Section 9. The term "uniform" includes wearing apparel and accessories of distinctive design and color.
mi. Business Expenses . An employee is entitled to be reimbursed by his or her employer for all expenses or losses incurred in the direct consequence of the discharge of the employee’s work duties. Labor Code Section 2802
F. Medical or Physical Examinations . An employer may not withhold or deduct from the wages of any employee or require any prospective employee or applicant for employment to pay for any pre-employment medical or physical examination taken as a condition of employment, nor may an employer withhold or deduct from the wages of any employee, or require any employee to pay for any medical or physical examination required by any federal or state law or regulation, or local ordinance. Labor Code Section 222.5
Under California law, an employer may lawfully deduct the following from an employee’s wages:
Deductions that are required of the employer by federal or state law, such as income taxes or garnishments.
Deductions expressly authorized in writing by the employee to cover insurance premiums, hospital or medical dues or other deductions not amounting to a rebate or deduction from the wage paid to the employee.
Deductions authorized by a collective bargaining or wage agreement, specifically to cover health and welfare or pension payments.
If I break or damage company property or lose company money while performing my job, can my employer deduct the cost/loss from my wages?
No, your employer cannot legally make such a deduction from your wages if, by reason of mistake or accident a cash shortage, breakage, or loss of company property/equipment occurs. The California courts have held that losses occurring without any fault on the part of the employee or that are merely the result of simple negligence are inevitable in almost any business operation and thus, the employer must bear such losses as a cost of doing business. For example, if you accidentally drop a tray of dishes, take a bad check, or have a customer walkout without paying a check, your employer cannot deduct the loss from your paycheck.
There is an exception to the foregoing contained in the Industrial Welfare Commission Wage Orders that purports to provide the employer the right to deduct from an employee’s wages for any cash shortage, breakage or loss of equipment if the employer can show that the shortage, breakage or loss is caused by a dishonest or willful act, or by the employee’s gross negligence. What this means is that a deduction may be legal if the employer proves that the loss resulted from the employee’s dishonesty, willfulness, or grossly negligent act. Under this regulation, a simple accusation does not give the employer the right to make the deduction. The DLSE has cautioned that use of this deduction contained in the IWC regulations may, in fact, not comply with the provisions of the California Labor Code and various California Court decisions. Furthermore, DLSE does not automatically assume that an employee was dishonest, acted willfully or was grossly negligent when an employer asserts such as a justification for making a deduction from an employee’s wages to cover a shortage, breakage, or loss to property or equipment.
Labor Code Section 224 clearly prohibits any deduction from an employee’s wages which is not either authorized by the employee in writing or permitted by law, and any employer who resorts to self-help does so at its own risk as an objective test is applied to determine whether the loss was due to dishonesty, willfulness, or a grossly negligent act. If your employer makes such a deduction and it is later determined that you were not guilty of a dishonest or willful act, or grossly negligent, you would be entitled to recover the amount of the wages withheld. Additionally, if you no longer work for the employer who made the deduction and it’s decided that the deduction was wrongful, you may also be able to recover the waiting time penalty pursuant to Labor Code Section 203 .
What, if anything, can my employer do if I experience shortages in my cash drawer?
Your employer may subject you to disciplinary action, up to and including termination of employment. Additionally, your employer can bring an action in court to try to recover any damages and/or losses it has suffered.
My employer loaned me $500.00, and per our written agreement was taking $50.00 from each paycheck as an installment payment on the loan. When I quit last week my employer deducted the outstanding loan balance of $250.00 from my final paycheck. Is this legal?
No. Although a California court has held that deductions for the periodic installment payments on a loan made to an employee by the employer are permissible when authorized in writing by the employee, the court also concluded that the balloon (lump sum) payment of the outstanding balance to be made at the time the employment relationship ends is not allowed notwithstanding the fact the employee has given his or her written consent to such a payment. When the employment relationship ends, your employer can only deduct the amount of one installment payment from your final paycheck.
Can my employer deduct anything from my paycheck if I come to work late?
Yes, your employer can deduct money from your paycheck for coming to work late. The deduction shall not, however, exceed the proportionate wage that would have been earned during the time actually lost, but for a loss of time less than 30 minutes, a half hour’s wage may be deducted. Labor Code Section 2928. For example, if you earn $12.00 per hour and come to work 40 minutes late, your employer can deduct $8.00 from your paycheck. And if you come to work five minutes late, your employer can deduct $6.00.
What can I do if my employer makes an illegal deduction from my paycheck?
You can either file a wage claim with the Division of Labor Standards Enforcement (the Labor Commissioner's Office), or file a lawsuit in court against your employer to recover the lost wages. Additionally, if you no longer work for this employer, you can make a claim for the waiting time penalty pursuant to Labor Code Section 203 .
What is the procedure that is followed after I file a wage claim?
After your claim is completed and filed with a local office of the Division of Labor Standards Enforcement (DLSE), it will be assigned to a Deputy Labor Commissioner who will determine, based upon the circumstances of the claim and information presented, how best to proceed. Initial action taken regarding the claim can be referral to a conference or hearing, or dismissal of the claim.
If the decision is to hold a conference, the parties will be notified by mail of the date, time and place of the conference. The purpose of the conference is to determine the validity of the claim, and to see if the claim can be resolved without a hearing. If the claim is not resolved at the conference, the next step usually is to refer the matter to a hearing or dismiss it for lack of evidence.
At the hearing the parties and witnesses testify under oath, and the proceeding is recorded. After the hearing, an Order, Decision, or Award (ODA) of the Labor Commissioner will be served on the parties.
Either party may appeal the ODA to a civil court of competent jurisdiction. The court will set the matter for trial, with each party having the opportunity to present evidence and witnesses. The evidence and testimony presented at the Labor Commissioner’s hearing will not be the basis for the court’s decision. In the case of an appeal by the employer, DLSE may represent an employee who is financially unable to afford counsel in the court proceeding.
See the Policies and Procedures of Wage Claim Processing pamphlet for more detail on the wage claim procedure.
What can I do if I prevail at the hearing and the employer doesn’t pay or appeal the Order, Decision, or Award?
When the Order, Decision, or Award (ODA) is in the employee's favor and there is no appeal, and the employer does not pay the ODA, the Division of Labor Standards Enforcement (DLSE) will have the court enter the ODA as a judgment against the employer. This judgment has the same force and effect as any other money judgment entered by the court. Consequently, you may either try to collect the judgment yourself or you can assign it to DLSE.
What can I do if my employer retaliates against me because I objected to a deduction from my wages?
If your employer discriminates or retaliates against you in any manner whatsoever, for example, he discharges you because you object to what you believe to be an illegal deduction, or because you file a claim or threaten to file a claim with the Labor Commissioner, you can file a discrimination/retaliation complaint with the Labor Commissioner’s Office. In the alternative, you can file a lawsuit in court against your employer.
File a Claim
Tax-Free Acquisitions
Tax-free M&A transactions are considered "reorganizations" and are similar to taxable deals except that in reorganizations the acquirer uses its stock as a significant portion of the consideration paid to the seller rather than cash or debt. Four conditions must be met to qualify a transaction for tax-free treatment under Internal Revenue Code (IRC) Section 368:
Continuity of ownership interest – At least 50% of the consideration is acquirer stock (although transactions with as little as 40% stock consideration have qualified for tax-free treatment).
Continuity of business enterprise – The acquirer must either continue the target's historical business or use a significant portion of the target's assets in an existing business for 2 years after the transaction.
Valid business purpose – The transaction must serve a valid business purpose beyond tax avoidance.
Step-transaction doctrine – The transaction cannot be part of a larger plan that, taken in its entirety, would constitute a taxable acquisition.
Reorganizations, while not generally taxable at the entity level, are not completely tax-free to the selling shareholders. A reorganization is immediately taxable to the target's shareholders to the extent they receive non-qualifying consideration, or "boot". Also, tax on acquirer stock received by target shareholders as consideration is deferred rather than avoided altogether.
Boot
Any consideration received by target shareholders other than acquirer stock (e. g. cash or debt).
Let's examine how each stakeholder in a non-taxable acquisition is affected from a tax perspective:
Assumes a carryover basis in the acquired net assets equal to the target's historical tax basis, even when a gain is recognized by the target shareholders on any boot received.
Assumes a carryover basis in the stock received from target shareholders equal to the target shareholders' basis, even when a gain is recognized by the target shareholders on any boot received.
No gain or loss on the exchange of the acquirer's own stock for stock of the target.
The target's tax attributes (e. g. NOLs) survive the acquisition and carry over to the acquirer, but their use is subject to limitation under Section 382.
Target does not recognize a taxable gain on the transfer of assets to the acquirer.
Target shareholders assume a tax basis in the acquirer stock received as consideration equal to their old basis in the target stock.
No gain or loss on the exchange of target stock for acquirer stock; rather, any tax on acquirer stock received as consideration is deferred until the target shareholders sell the stock.
The transaction is immediately taxable to selling shareholders to the extent boot is received.
Example 3.8 – Shareholder Taxes
Suppose Alpha acquires Tango in an tax-free reorganization for $60 in cash and $40 in stock. Tango's shareholders' aggregate basis in their stock is $20. So, Tango's shareholders' realized gain is $60 + $40 − $20 = $80. Their recognized gain is the lower of the realized gain and the amount of boot received, or $60.
Tax-Free Deal Structures
Section 368 of the Internal Revenue Code recognizes three types of corporate acquisition structures that qualify as tax-free (or tax-deferred) reorganizations:
Type "A" Reorganization (stock-for-assets acquisition)
Statutory merger or consolidation
Forward triangular merger
Reverse triangular merger
Type "B" Reorganization (stock-for-stock acquisition)
Type "C" Reorganization (stock-for-assets acquisition)
Statutory Merger ("A" Reorganization)
In a statutory merger . target shareholders exchange their shares for acquirer stock and up to 60% boot (continuity of interest requirement applies). Boot is immediately taxable to target shareholders, while payment in acquirer stock is tax-deferred. Stock consideration may be paid in voting and non-voting common or qualified preferred shares of the acquirer. The target is liquidated, and all of the target's assets and liabilities are assumed by the acquirer. Approval of the merger plan is subject to acquirer and target shareholder vote in most states. Also, dissenting shareholders may have their independently appraised and purchase for cash.
Statutory Consolidation ("A" Reorganization)
In a statutory consolidation . two or more corporations contribute all of their assets and liabilities to a new corporation formed to effect the transaction, and the preexisting corporations are dissolved. This structure is appropriate for mergers of equals. Acquirer and target shareholders have the same voting and appraisal rights as in a statutory merger.
Forward Triangular Merger ("A" Reorganization)
In a forward triangular merger, the target is merged into a subsidiary of the acquiring corporation, leaving the subsidiary as the surviving entity. Because the target is eliminated, non-transferrable assets and contracts, such as patents or licenses, may be lost. The buyer must acquire "substantially all" of the target's assets (defined as at least 70% and 90% of the FV of the target's gross assets and net assets, respectively) for the transaction to qualify for tax-free treatment. Sales of assets not wanted by the acquirer just prior to the merger may jeopardize favorable tax treatment.
As in a statutory merger, the form of consideration must meet the continuity of interest requirement and payment in acquirer stock is flexible as to the type of securities used as consideration (payment in subsidiary stock is disallowed). However, this structure has two advantages over a statutory merger: 1) the acquirer is shielded from the target's liabilities because they are isolated in a separate legal entity (the subsidiary) and 2) the acquirer's shareholders need not approve the merger, unless the acquisition is material or more acquirer shares must be authorized to complete the transaction.
Reverse Triangular Merger ("A" Reorganization)
In a reverse triangular merger, a subsidiary of the acquirer is merged into the target, leaving the target as the surviving entity and a subsidiary of the acquirer and eliminating any minority shareholders in the target. This structure allows the acquirer to shield itself from the target's liabilities, as in the forward triangular merger, but with the added benefit that non-transferrable assets and contracts are not lost. For this reason, the reverse triangular merger is a commonly used structure. However, at least 80% of the consideration must be paid in voting common or preferred stock of the acquirer, eliminating some flexibility in the type of equity consideration paid relative to the forward triangular merger. Other characteristics of this structure are similar to those found in forward triangular mergers, including the "substantially all" and shareholder approval requirements.
Stock-for-Stock Acquisition ("B" Reorganization)
In a "B" reorganization, the acquirer exchanges its voting common and/or qualified preferred stock (no boot, except for small amounts paid for fractional shares) for control of the target, defined as ownership of 80% of the "vote and value" of the target's stock. The target survives as a subsidiary of the acquirer, shielding the acquirer from the target's liabilities. The buyer need not acquire the entire 80% of target stock at once, but must own at least 80% upon completion of the acquisition. This allows the buyer to acquire the target's shares gradually in what is known as a "creeping" acquisition. Note that since this structure does not require 100% of the target's shares to be acquired, minority shareholders may retain a stake in the target. The "B" reorganization is similar to the reverse triangular merger, except that the latter allows boot, eliminates minority shareholders, and requires the buyer to acquire "substantially all" of the target's assets.
This structure may be useful when the target's shareholders are willing to accept acquirer stock as consideration because, for example, they might have built-in capital gains that would be triggered upon a stock sale for cash. The buyer may also prefer this structure if it does not want to part with a substantial amount of cash to fund the acquisition or seeks to shield itself from the target's liabilities.
Stock-for-Assets Acquisition ("C" Reorganization)
In a "C" reorganization, the acquirer exchanges its voting common and/or preferred stock for "substantially all" of the target's assets. The target liquidates and transfers the acquirer shares and any remaining assets to its shareholders. Consideration paid in cash or securities other than voting common or preferred stock (boot) cannot exceed 20% of the FV of the target's pre-transaction assets. Any liabilities assumed by the acquirer count toward the 20% boot limit when cash or other non-qualifying consideration is paid.
As in taxable asset acquisitions, the buyer can be selective in choosing which, if any, of the target's assets it will assume. Rejecting the certain liabilities altogether affords the acquirer even greater protection than does isolating those liabilities in a subsidiary. However, the acquirer is highly exposed to any assumed liabilities unless a subsidiary is used to shield that exposure as in other structures. Moreover, like taxable asset acquisitions, the "C" reorganization can be mechanically complex, costly, and time consuming. Hence, "C" reorganizations are rare.
Exhibit 3.3 – Comparison of Section 368 Tax-Free Structures
Acquirer must exchange its voting stock for target stock
Inflexible with respect to the form of consideration
"Substantially all" requisito
Mechanically complex and costly
Section 351 Mergers
IRC Section 351 provides a means to effect a tax-free business combination when the tax-free structures recognized under Section 368 are impractical. The most notable advantage of Section 351 over Section 368 is that the former does not require continuity of ownership interest, which restricts the amount of non-taxable consideration (acquirer stock) that the target's shareholders may receive. Thus, a Section 351 merger may include an unrestricted amount of tax-free consideration, benefiting selling shareholders who value tax deferment over current income.
Founding shareholders in a newly formed corporation generally transfer property (e. g. cash and other assets) to the new entity (NewCo) in return for ownership interests (e. g. common or preferred stock). Under IRC Section 351, this transfer is tax-free, provided that the transferors (in aggregate) assume tax control of NewCo immediately after the transaction, defined as at least 80% ownership of the vote and value of each class of outstanding stock. The conditions required by Section 368 for tax-free treatment do not apply. The following illustration shows one way in which a Section 351 merger might be structured:
Transferors may receive boot (e. g. cash and other property) in addition to NewCo stock in exchange for the property transferred. While the receipt by transferors of NewCo stock is not taxable, transferors who receive boot recognize a taxable gain equal to the lesser of the boot received and the gain realized on the transfer of property. Transferors who receive NewCo stock assume a basis in such stock equal to the basis in the property transferred. However, if the transferors also receive boot in the exchange, their basis in their NewCo stock is reduced by FV of the boot and any loss they recognize on the exchange. Conversely, the transferors' basis is increased by the amount of any gain recognized on the exchange. NewCo assumes a carryover basis in the property received, increased by the amount of any gain recognized by transferors (recall that when taxes are paid, a step-up is allowed by the IRS).
Section 351 mergers are flexible in that they can be tailored to meet the objectives of the target's shareholders. Consideration may consist of cash and/or multiples classes of NewCo stock such as voting and non-voting common and preferred stock.
Exhibit 3.4 – Example of a Section 351 Merger
Delta and Foxtrot are publicly traded corporations. Much of Delta's business consists of supplying raw materials to a manufacturing division of Foxtrot. Delta and Foxtrot agree to a business combination under Section 351 whereby Foxtrot transfers its manufacturing division to Delta in exchange for enough newly issued Delta shares to give Foxtrot 81% ownership of Delta post-transaction. In this case, Delta acquires a new division and Foxtrot acquires tax control of the combined company (Delta) as required by Section 351. The previously issued Delta shares remain outstanding and publicly traded, but now represent just 19% (=1−81%) of the total Delta shares outstanding.
The resulting post-transaction structure would be the same if Foxtrot had instead acquired Delta outright, transferred its manufacturing division into new subsidiary Delta, and carved out 19% of its equity ownership in Delta. Of course, this equivalent series of transactions would be far more complex, potentially tax-inefficient, and impractical.
Joint ventures are sometimes structured under Section 351.
G eneral outline and financial impact
Special transitional provision for some oyster farmers
Schedule 1 to this bill amends the IT(TP) Act 1997 and the ITAA 1997 to provide special transitional arrangements for oyster farmers capturing oyster spat by the traditional stick farming method.
Oyster farmers using the traditional stick farming method will be able to value certain stock at the start of the 2001-2002 income year based on an amount per stick used to capture the spat. The amount per stick is set out in the bill and depends on the type of stick used.
Date of effect . The proposed change applies to the valuation of certain oyster trading stock on hand at the start of the 2001-2002 income year.
Proposal announced . The measure was announced in former Assistant Treasurer’s Press Release No. 40 of 24 August 2001.
Financial impact . The amendments are expected to have an overall revenue cost of less than $5 million over a 4 year period commencing with the 2002-2003 income year.
Compliance cost impact . The measure will not increase compliance costs, or record keeping costs, for eligible oyster farmers. They are already required to comply with the trading stock rules.
Summary of regulation impact statement
Regulation impact on business
Impact . The eligible oyster farmers can comply with the trading stock rules from the 2001-2002 income year without having a large one-off increase in taxable income. This could have caused serious financial hardship for some farmers.
& # 8226; The amendments do not create any new obligations or requirements for the taxpayers impacted. Therefore, there will be no increase in compliance costs for eligible oyster farmers.
& # 8226; The valuation method for oyster trading stock covered by the measure is the easiest for the industry. Amounts per stick were chosen after sample costings were prepared by the industry representatives.
Work in progress
Schedule 2 to this bill amends the ITAA 1997 to prevent the possibility of double taxation where an amount is paid in respect of work in progress (partially completed work for which a recoverable debt has not yet arisen).
The amendments will provide a specific deduction where a payment is made for a work in progress amount. They will also confirm that receipt of a work in progress amount is assessable income.
Date of effect . The amendments will apply to amounts paid on or after 23 September 1998.
Proposal announced . The measure was announced in former Assistant Treasurer’s Press Release No. 8 of 8 March 2001.
Financial impact . The revenue impact is unquantifiable, but is expected to be minimal because the amendments prevent an unintended gain to the revenue. The amendments are beneficial to taxpayers as they prevent the potential for double taxation.
Compliance cost impact . The amendments are expected to reduce compliance costs for business.
Capital allowances
Schedule 3 to this bill makes a number of technical corrections and amendments to the ITAA 1936, the ITAA 1997, IT(TP) Act 1997 and the New Business Tax System (Capital Allowances – Transitional and Consequential) Act 2001 . The amendments all relate, directly or indirectly, to the capital allowances system.
Date of effect . These amendments have various dates of effect, but will generally apply from 1 July 2001.
Proposal announced . These amendments have not previously been announced.
Financial impact . There is no revenue impact as a result of these amendments as the amendments ensure that the capital allowance system operates as intended and as originally costed. However, there would be a significant but unquantifiable revenue cost if these amendments were not made.
Compliance cost impact . These amendments will involve no additional compliance costs.
Recovery of PAYG withholding amounts
Schedule 4 to this bill amends the ITAA 1936 to enable the Commissioner to recover all outstanding PAYG withholding amounts by making an estimate of the debt. The amendment will also allow a taxpayer to have the estimate of any PAYG withholding amount reduced or revoked by giving the Commissioner a statutory declaration.
Date of effect . The amendments in Schedule 4 will apply to PAYG withholding amounts that are due and payable in the year ended 30 June 2002 and in subsequent years.
Proposal announced . The amendments have not been announced.
Financial impact . The amendments will allow $50 million to be collected in 2002-2003 and in subsequent years.
Compliance cost impact . The amendments do not have any compliance cost impacts.
Outline of chapter
1.1 This chapter explains the amendments in Schedule 1 to this bill which provide a transitional measure for oyster farmers using the traditional stick farming method, to assist them to apply the trading stock provisions in the income tax law.
Context of amendments
1.2 Oyster farmers use the traditional stick farming method to catch Sydney rock oysters. The method consists of placing sticks (or slats) in the water in areas of natural oyster spatfall, to which immature oyster spat attach themselves. Sydney rock oysters take 4 years to grow to maturity. During this time they may remain attached to the sticks (or slats), or the farmer may knock the spat off the sticks (or slats) at various stages of growth, and allow them to grow to maturity in baskets or trays in the water. This allows more even growth and produces better shaped oysters. Once the oysters have been knocked off the stick or slat, they will not reattach to any surface.
1.3 Generally, oyster farmers using the traditional stick farming method have not been bringing to account as trading stock the oysters they hold which are growing in the water. Those oysters are trading stock, and farmers carrying on a business are required to bring them to account where they are on hand at the end of an income year.
1.4 If oyster farmers using the traditional stick farming method for the first time brought their trading stock to account in the 2001-2002 income year, there would be a large one-off excess in the value of their closing stock over their opening stock (zero). This difference would be assessable income, and could cause severe financial hardship for some farmers in the industry.
Summary of new law
1.5 The amendments will allow eligible oyster farmers to bring to account an opening value for their oyster trading stock in the 2001-2002 transitional year, equivalent to a value per stick multiplied by the number of sticks used to capture the oysters as spat.
Detailed explanation of new law
1.6 These amendments apply to particular oysters that are trading stock on hand to give them a special value as at the start of the 2000-2001 income year. The amendments insert section 70-41 into the IT(TP) Act 1997. If this section applies, the value of the particular oyster trading stock on hand at the start of the 2001-2002 income year is calculated using the method statement in this section, rather than any other trading stock valuation rules.
To whom does the transitional provision apply?
1.7 The transitional provision, section 70-41, will only apply to taxpayers carrying on a business of oyster farming. It does not apply to oyster hatcheries. Hatcheries generally breed oysters in a controlled environment for the purpose of selling the immature spat to oyster farmers. [Schedule 1, item 1, paragraph 70-40(1)(a)]
1.8 It is also a requirement that the taxpayer held certain oysters (described in paragraph 1.15) as trading stock on hand at the start of the 2001-2002 income year. These are called the relevant stock in the section.
1.9 The final requirement is that the relevant stock should have been, but were not, taken into account as trading stock at the end of the 2000-2001 income year under Division 70 of the ITAA 1997 (the trading stock rules). [Schedule 1, item 1, paragraphs 70-41(1)(b), (c) and (d)]
1.10 Without a special transitional valuation rule for these oysters, the opening value for the purposes of the trading stock rules of this oyster trading stock would be nil, in accordance with subsection 70-40(2) of the ITAA 1997.
1.11 In summary, these amendments apply to oyster farmers who have stock on hand at the start of the 2001-2002 income year, that consists of certain oysters (described in paragraph 1.15) that should have been, but were not, brought to account as trading stock on hand at the end of the 2000-2001 income year. They will be able to bring a special value for those oysters to account at the start of the 2001-2002 income year, in accordance with the method provided in subsection 70-41(6).
1.12 The transitional provision will not apply if the 2001-2002 income year is the first income year in which the taxpayer is carrying on a business of oyster farming. If 2001-2002 is the first year the taxpayer is carrying on a business they will not have had oyster trading stock that should have been brought to account at the end of the previous income year.
1.13 The transitional provision will also not apply if the taxpayer had brought any of the particular oysters to account as trading stock at the end of the 2000-2001 income year. If this is the case, the taxpayer’s opening stock value for the 2001-2002 income year will be worked out in accordance with section 70-40 of the ITAA 1997, and because the opening value will not be nil, no special transitional rule is required.
Which oysters are subject to the transitional provision?
1.14 Subsection 70-41(2) describes the oysters to which this transitional provision applies. It only includes those oysters that:
& # 8226; were farmed by the taxpayer solely for food as human consumption;
& # 8226; had not been harvested at the start of the 2001-2002 income year; y
& # 8226; had been acquired by the taxpayer using the traditional stick farming method.
[Schedule 1, item 1, subsection 70-41(2)]
1.15 Oysters that the taxpayer held as trading stock on hand at the start of the 2001-2002 income year and that satisfy these conditions, are called the relevant stock in the section.
1.16 Oysters that have been farmed for purposes other than solely for human consumption (such as pearling oysters) are already being brought to account as trading stock, and therefore do not require a special transitional provision. [Schedule 1, item 1, paragraph 70-41(2)(a)]
1.17 The practice in the oyster farming industry has been to bring harvested oysters that are on hand at the end of an income year to account as trading stock. Therefore, harvested oysters are excluded from this provision. [Schedule 1, item 1, paragraph 70-41(2)(b)]
1.18 The traditional stick farming method is the placing of plastic slats or wooden sticks in the water for the purpose of capturing oyster spat, and the oyster spat attaching themselves to those slats or sticks. [Schedule 1, item 1, paragraph 70-41(2)(c)]
1.19 The oysters must have been acquired by the taxpayer, using the traditional stick farming method. Therefore, even if someone else captured the oysters using the traditional stick farming method, and the taxpayer purchased the oysters from them, this transitional provision will not apply to those oysters. [Schedule 1, item 1, paragraph 70-41(2)(c)]
1.20 Although the oysters must have been acquired by the taxpayer using the traditional stick farming method, some of those oysters may have been knocked off the slats or sticks since acquisition and placed in trays or baskets (or some other container) in the water to continue to grow. As long as these oysters have not yet been harvested, this transitional provision will still apply to these oysters. [Schedule 1, item 1, paragraph 70-41(2)(c)]
What happens if the transitional provision applies?
1.21 If the transitional provision applies then the value of the relevant stock, as at the start of the 2001-2002 income year, is worked out under this transitional provision, rather than under Division 70 (the general trading stock rules) or Subdivision 328-E (the trading stock provisions for STS taxpayers) of the ITAA 1997. [Schedule 1, item 1, subsections 70-41(3) to (5)]
1.22 The general rule is that the value of the relevant stock as items of trading stock on hand is worked out using the method statement in new subsection 70-41(6) of the IT(TP) Act 1997. It is not to be worked out under section 70-40 of the ITAA 1997.
STS taxpayers
1.23 There is a special rule in this transitional provision for calculating the value of opening stock for taxpayers that were STS taxpayers for the 2001-2002 income year. This is because subsection 328-295(1) of the STS provisions provides a value for all of the trading stock on hand at the start of the income year. There may be a situation where an oyster farmer has trading stock other than relevant stock (e. g. oysters that have been harvested), and in this case if the transitional provision applied to the exclusion of section 328-295, only a value for the relevant stock would be able to be brought to account at the start of the 2001-2002 income year.
1.24 The special rule for STS taxpayers in subsection 70-41(5) provides that trading stock on hand at the start of the 2001-2002 income year is to be valued by using the method statement in subsection 70-41(6) of the IT(TP) Act 1997 for the value of the relevant stock, and adding this to the value of any other trading stock that was brought to account under Division 70 of the ITAA 1997 at the end of the 2000-2001 income year. The relevant stock is not to be counted twice.
1.25 If there was no other trading stock, or no other trading stock was brought to account at the end of the 2000-2001 income year, then the value of all of the trading stock on hand at the start of the 2001-2002 income year is the value of the relevant stock worked out using this transitional provision.
1.26 Subsection 70-41(5) only refers to other trading stock brought to account under Division 70 at the end of the 2000-2001 income year (rather than under Division 70 or Subdivision 328-E), because the STS provisions in Division 328 of the ITAA 1997 only apply to an income year starting after 30 June 2001. Therefore, no value for the other stock could have been brought to account under the STS provisions at the end of the 2000-2001 income year.
How does the transitional valuation method work?
1.27 The method statement in subsection 70-41(6) applies to give a value to the relevant stock on a per stick (or slat) basis.
1.28 The method statement effectively requires the number of wooden sticks or plastic slats that were used to capture the relevant stock to be calculated. This requires a calculation of not only the sticks (or slats) that were in use at the start of the 2001-2002 income year to capture spat, but also the number of sticks (or slats) that were used to capture the relevant stock that is no longer attached to sticks. The numbers of wooden sticks, 1 metre long plastic slats and 2 metre long plastic slats must be differentiated.
1.29 As well, if any sticks (or slats) were reused, they must be counted each time they were used.
1.30 The number of wooden and 2 metre long plastic slats used to capture the relevant stock are multiplied by $1, and the number of 1 metre long plastic slats used is multiplied by $0.50. The value of the relevant stock is the sum of those 2 calculations.
1.31 These values were arrived at based on an average of sample costings prepared by industry representatives.
1.32 The application of the method statement is demonstrated in Example 1.1.
Robert is an oyster farmer to whom the transitional provision applies.
At 1 July 2001 Robert had wooden sticks and 1 metre long plastic slats in the water to capture oyster spat, as well as oysters at various stages of maturity in baskets in the water.
Steps 1 and 2: Robert calculates that he had 2,000 1 metre long plastic slats in the water at 1 July 2001, and the oysters in baskets were captured using 1,000 of the plastic slats that are currently in the water being reused, and another 1,000 plastic slats that were each used twice. Therefore the result of step 1 and step 2 is 5,000 1 metre long plastic slats.
Step 3: The 5,000 plastic slats from step 2 are multiplied by 50 cents to give $2,500.
Step 4: Robert does not use any plastic slats that are 2 metres long. He also does not reuse any of his wooden sticks. He had 3,000 wooden sticks in the water at 1 July 2001, and he estimates that the oysters in baskets were captured using 6,000 wooden sticks. Therefore the total number of wooden sticks used to acquire the relevant stock is 9,000.
Step 5: As none of the wooden sticks are reused the result of step 5 is also 9,000.
Step 6: The result of step 5 is multiplied by $1 to give $9,000.
Step 7: The results of steps 3 and 6 are added together:
$2,500 + $9,000 = $11,500.
This is the value of Robert’s relevant stock.
1.33 The slats and sticks that are referred to in the method statement as being used to acquire the relevant stock are the slats and sticks that were placed in the water for the purposes of capturing the oyster spat using the traditional stick farming method (as described in paragraph 70-41(2)(c)). [Schedule 1, item 1, subsection 70-41(7)]
Certain provisions not affected
1.34 Section 70-41 does not affect the operation of any of the following provisions:
& # 8226; section 102AAY of the ITAA 1936 (modified application of trading stock provisions for certain non-resident trust estates);
& # 8226; section 397of the ITAA 1936 (modified application of trading stock provisions for eligible CFCs);
& # 8226; section 57-115 of Schedule 2D to the ITAA 1936 (modified application of trading stock provisions for tax exempt entities that become taxable); y
& # 8226; section 165-115W of the ITAA 1997 (trading stock decrease for a CGT asset).
[Schedule 1, item 2, subsection 70-41(5)]
Application and transitional provisions
1.35 The amendments will only apply to the opening stock value of eligible oyster farmers for the 2001-2002 income year. After this, the normal trading stock rules will apply.
Consequential amendments
1.36 Notes have been inserted into the ITAA 1997 at the end of section 70-40 (the general trading stock rule about the value of trading stock at the start of an income year) and at the end of subsection 328-295(1) (the STS rules about the value of trading stock at the start of an income year). These notes provide signposts to the transitional provision for oyster trading stock acquired using the traditional stick farming method. [Schedule 1, items 2 to 5]
1.37 Also, a note has been inserted into the dictionary in subsection 995-1(1) of the ITAA 1997 after the definition of value of an item of trading stock. This note also acts as a signpost to the transitional provision for oyster trading stock acquired using the traditional stick farming method. [Schedule 1, items 6 and 7]
REGULATION IMPACT STATEMENT Policy objective
1.38 The objective of these amendments is to assist oyster farmers using the traditional stick farming method (eligible oyster farmers) to apply the trading stock rules. The amendments will provide a transitional treatment to allow oyster farmers to apply an opening stock value to their trading stock in the transitional year. This will remove any transitional costs in complying with the trading stock rules.
Implementation options
1.39 Legislative amendments are necessary to implement the transitional measure to assist eligible oyster farmers to apply the trading stock rules.
1.40 Without legislative amendments eligible oyster farmers who have not been bringing trading stock to account would be required to have an opening value for trading stock of nil in the first year they began to comply with the trading stock rules.
1.41 There were 2 options considered for describing the value that could be used by eligible oyster farmers for their opening stock for the 2001-2002 income year. The first was to allow these oyster farmers to bring the costs of their trading stock to account on a per stick basis, but require each individual oyster farmer to calculate their costs, and average them over the number of sticks.
1.42 The second option was to provide a value per stick in the legislation that could be applied to the number of sticks used by an eligible oyster farmer in capturing their oyster stock.
Assessment of impacts
1.43 Under either of the 2 options, the amendments will only have an impact for the transitional income year of 2001-2002. These amendments are designed to ensure that there will be no transitional cost to stick farmers in applying the trading stock rules for the first time. Eligible oyster farmers will not be required to account for the difference between the nil value of the opening stock (which is what the law would otherwise provide) and the value of the closing stock in the year they commence compliance with the trading stock rules (2001-2002).
Impact group identification
1.44 The transitional measure applies to oyster farmers using the traditional stick farming method to capture oyster spat grown solely for human consumption (‘eligible’ oyster farmers). This method of capturing oyster spat is almost exclusively used to capture spat of the Sydney rock oyster (Saccostrea commercialis), which is grown in New South Wales and Queensland. There are approximately 500-600 oyster farmers using the traditional stick farming method.
Analysis of costs/benefits
1.45 Neither option would create any new obligations or requirements for the taxpayers impacted.
1.46 There will be no increase in administrative costs for the ATO.
1.47 The amendments will benefit eligible oyster farmers, who otherwise would have been required to bring the value of all of their trading stock to account in one income year, in the first year they began to apply the trading stock rules. This would have resulted in a large one-off increase in income that would have caused serious financial hardship to some eligible farmers. Instead, they will be allowed to apply an opening stock value for the transitional year, which means that only changes in the value of their trading stock over the year will be brought to account at the end of the income year.
1.48 The first option would require each farmer to calculate the actual costs incurred in capturing their oyster trading stock on hand at the start of the 2001-2002 income year. As Sydney rock oysters take 4 years to mature, many of these costs would have been incurred over the previous 3 to 4 years. The number of sticks (or plastic slats) used to capture the oyster trading stock would also need to be calculated and the costs incurred averaged over the number of sticks (or slats) used.
1.49 The second option would require each farmer to calculate the number of sticks (or plastic slats) that were used to capture their oyster trading stock on hand at the start of the 2001-2002 income year. They would then multiply this by the value provided for each stick in the legislation. There would be no need to calculate the actual costs incurred in capturing the stock on hand at the start of the 2001-2002 income year.
Consultation
1.50 Oyster industry representatives have been consulted extensively over several years on the trading stock obligations of oyster farmers, and on the current proposal to provide transitional measures.
1.51 Following consultation it has been accepted by the industry that oysters are trading stock, and must be brought to account each income year.
1.52 The difficulties for oyster farmers in retrospectively calculating the actual costs involved in capturing the oyster trading stock on hand at the start of the 2001-2002 income year were highlighted during consultation.
Conclusion and recommended option
1.53 The amendments will benefit eligible oyster farmers and prevent a large one-off increase in their taxable income that would otherwise occur when they started to comply with the trading stock rules.
1.54 After consultation with industry representatives the second option (as described in paragraph 1.50) was chosen, as the method that imposed the least compliance costs on the industry. Values were chosen based on sample costings prepared by the industry representatives. The values provided in the legislation are $1 for each wooden stick and 2 metre plastic slat, and $0.50 for each 1 metre plastic slat.
Outline of chapter
2.1 This chapter explains amendments in Schedule 2 to this bill which clarify the taxation treatment of payments and receipts in respect of work in progress. The amendments do not cover partly completed goods (e. g. of manufacturers) which are normally brought to account as trading stock. The amendments will ensure that amounts in respect of work in progress that are assessable to the recipient, are deductible to the payer, and therefore are not effectively taxed a second time in the hands of the payer when they complete the work and bill the clients.
Context of amendments
2.2 Work in progress is work (but not goods) that has been partially performed but not yet completed to the stage that a recoverable debt has arisen in respect of the work. Commonly, a recoverable debt will arise when the work is billed, so work in progress will be work that has not yet been performed to a billable stage.
2.3 As a result of various court decisions, the taxation treatment of amounts paid or received in respect of work in progress has given rise to the potential for the taxation of the same amount twice, albeit in the hands of different taxpayers.
Michael, Robyn and Emma carry on a practice as solicitors in partnership but Emma decides to leave the partnership. On 30 June 2002 the partnership is dissolved and Emma is paid $100,000 for her interest in the partnership, $60,000 of which is in respect of work in progress. Under the current law, the $60,000 would be assessable as ordinary income to Emma. However, it is not deductible to Michael and Robyn, even though when they complete the work and bill the clients, those amounts will be fully assessable. This effectively taxes the $60,000 twice – once in Emma’s hands on leaving the partnership, and again in Michael and Robyn’s hands when the amounts are actually billed to the clients.
2.4 In Crommelin v DC of T (1998) 39 ATR 377, 98 ATC 4790 the Federal Court followed the decisions in previous cases ( Jamieson v IRC (NZ) (1974) 4 ATR 327, 74 ATC 6008; Stapleton v FCT (1989) 20 ATR 996, 89 ATC 4818) and held that a payment received by a partner retiring from a partnership for his share of the work in progress of the partnership was assessable income according to ordinary concepts. The Federal Court also held that there was no need for an express agreement that a specific amount be paid in respect of work in progress, as long as that amount is capable of being identified as being paid for that reason.
2.5 Also, in Coughlan v FC of T 91 ATC 4505 the Federal Court held that, where there was a change in the partners of an accounting firm, an amount paid by the new partnership in respect of the work in progress of the old partnership was a non-deductible capital amount.
2.6 The Commissioner previously dealt with this anomaly in the case of an exiting partner by an administrative practice set out in Taxation Ruling IT 2551 (Sale of interest in a professional partnership: Amounts paid to retiring partners on account of work in progress). The ruling clarified that the Commissioner did not seek to tax the same amount twice. It stated that where an amount in respect of work in progress is included in the assessable income of an outgoing partner, it should be shown in the accounts of the reconstituted partnership as an advance to the outgoing partner. The ruling stated that no deduction would be allowable. However, as work in progress is completed and billed, the amounts billed would not be treated as income of the partnership to the extent that they are attributable to the advance.
2.7 The Commissioner withdrew Taxation Ruling IT 2551 on 23 September 1998 following the decision in Crommelin v FCT . as the approach taken was no longer tenable at law.
Summary of new law
2.8 The proposed amendments will provide a specific deduction where a payment is made in respect of work in progress. They will also confirm that receipt of a work in progress amount is assessable income. This will remove any potential for double taxation.
2.9 Although the issue of work in progress commonly arises in the context of professional partnerships, the amendments apply generally to situations where payments are made in respect of work in progress. They are not restricted to partnership situations.
Detailed explanation of new law
Definition of work in progress amount
2.10 A work in progress amount has been defined in subsections 25-95(3) and (4) of the ITAA 1997.
2.11 Under this definition an amount will be a work in progress amount to the extent that it satisfies the criteria in paragraphs 25-95(3)(a) and (b). The use of the expression ‘to the extent that’ means that, although a larger lump sum amount may be paid in some situations, it must be apportioned between that part of the amount that is a work in progress amount and that part that is not. To the extent that an amount is a work in progress amount, the rules about assessability and deductibility contained in these amendments will apply. [Schedule 2, item 5, subsection 25-95(3)]
2.12 The conditions in paragraphs 25-95(3)(a) and (b) are that an entity agrees to pay the amount to another entity, and that the amount can be identified as being in respect of work (but not goods) that has been partially performed by the recipient for a third entity, but not yet completed to the stage where a recoverable debt has arisen in respect of the work. [Schedule 2, item 5, paragraphs 25-95(3)(a) and (b)]
2.13 It is a requirement that the work has been partially performed by the recipient of the amount for a third entity. This eliminates the possibility that a payment made by the entity for whom the work is being performed would satisfy the definition of a work in progress amount, and therefore potentially be deductible under these provisions. It is generally envisaged that the entity who pays an amount for work in progress will attempt to complete the work and bill the entity for whom the work is being performed. It is recognised however, that the work may not be completed, or billed for, in all cases.
2.14 As defined for the purposes of the ITAA 1997, work in progress does not cover work in progress that is goods, for example, the work in progress of a manufacturer. Partially completed goods are generally brought to account as trading stock of the manufacturer of the goods. A work in progress amount also does not include an amount paid for a partially completed structure such as a building.
2.15 A payment for shares in a company or units in a unit trust will not be a work in progress amount even if the value of work in progress was taken into account in valuing the shares or units.
2.16 The work in progress amount is defined in terms of work that has been performed but which has not yet been completed to a stage where a recoverable debt has arisen. Once a legal entitlement to payment for the work arises and a debt is created, the amount can then be brought to account as a receivable of the entity to whom the payment is owed.
2.17 The amount must be able to be identified as an amount in respect of work that has been performed but not yet completed to the stage where a recoverable debt has arisen. A work in progress amount need not be specified in a contract between the parties. A work in progress amount may be able to be identified by looking to all the surrounding circumstances, including working documents or accounts demonstrating how the amount was calculated.
Future payments
2.18 In some situations payments may be made in respect of work in progress at one or more future points in time. This may occur when an amount is specified in an agreement, but paid in instalments over time. One or more of those instalments may be paid after the work has been completed. The amendments provide that an amount does not stop being a work in progress amount because it is paid after a recoverable debt has arisen in respect of the completion of the work. [Schedule 2, item 5, subsection 25-95(4)]
2.19 If the amount specified in the agreement can be identified as being in respect of work in progress, then each time a payment of part of this amount is paid, it will also be in respect of work in progress. In this case, each time part of the amount is paid, it will be deductible in the income year in which it is paid (subject to the rules about timing of a deduction for a work in progress amount in subsections 25-95(1) and (2)). This is the case even if the work has been completed before the amount is paid.
2.20 Parties may also agree to make payments in respect of work in progress at future points in time based on a formula. In this case, no amount is specified, rather, a method of calculating the quantum of each payment is provided. When each amount is quantified it will still be an amount in respect of work in progress if the original formula is intended to provide for an amount or amounts in respect of work in progress. This is so, even if the work has been completed and billed by the time the amount(s) is calculated and paid. The amount(s) is not deductible until the income year in which it is paid (and is subject to the rules about timing of a deduction for a work in progress amount in subsections 25-95(1) and (2)).
Cash and accruals taxpayers
2.21 The amendments apply to taxpayers whether they return their income on a cash basis or an accruals basis. The potential for double taxation arises even if both the payer and the payee account for their income on a cash basis.
Method of calculating the value of work in progress
2.22 The provisions do not provide a method for valuing a work in progress amount. This is a commercial decision between the parties.
Deductibility of work in progress amounts
2.23 Section 25-95 provides a deduction for a work in progress amount that a taxpayer pays. [Schedule 2, item 5, section 25-95]
2.24 The payment of a work in progress amount will be deductible in the income year in which it was paid, to the extent that, as at the end of that income year:
& # 8226; a recoverable debt has arisen in respect of the completion or partial completion of the work to which the amount related; o
& # 8226; you reasonably expect a recoverable debt to arise in respect of the completion or partial completion of that work within 12 months after the amount was paid.
[Schedule 2, item 5, subsection 25-95(1)]
2.25 At the end of the income year in which a party pays a work in progress amount, the party should evaluate when a recoverable debt for the completion or partial completion of the work in progress to which the payment relates, is likely to arise.
2.26 To the extent to which a recoverable debt for the completion or partial completion of the work in progress to which the payment relates, cannot reasonably be expected to arise within 12 months of the date of the payment, that amount will be deductible in the following income year. [Schedule 2, item 5, subsection 25-95(2)]
2.27 If none of the work in progress amount is deductible in the income year in which the payment is made, the entire amount is deductible in the following income year. This is the case even if no recoverable debt is expected to arise in the future.
2.28 This deferral of a deduction is required to make the tax treatment of the payment more accurately reflect the economic outcome of the payment. Where part of the payment relates to gaining assessable income of a future income year, part of the deduction should also be deferred to that later year. However a simplified approach has been taken to defer the deduction for only one income year, in recognition of the compliance costs that would be involved in matching the deduction to the income year in which each individual item of work was billed. This full matching approach was previously required by the Commissioner’s administrative practice, set out in Taxation Ruling IT 2551.
David runs an accounting practice as a sole trader. On 25 August 2002, David accepts an offer from Tom and Tina to buy the practice. As part of the agreement Tom and Tina will pay David $10,500 for the work in progress of the practice. This amount is set out in the agreement, along with various other amounts for the assets of the practice. Tom and Tina then carry on the accounting practice as a partnership.
On 30 June 2003, $3,000 of the work in progress as at 25 August 2002 has already been billed to clients, and of the remaining work related to the payment made to David, $5,000 of it could reasonably be expected to be completed and billed by 25 August 2003. Therefore, $8,000 of the payment will be deductible in the 2002-2003 income year. The remaining $2,500 will be deductible in the following income year (2003-2004).
2.29 The term ‘you reasonably expect’ requires the payer to have the expectation (that a recoverable debt will arise within 12 months) and that the expectation is objectively assessed. For an expectation to be reasonable it must be more than a mere possibility, and could be based on a number of factors including deadlines imposed by the client, external factors such as court hearing dates, stage of completion of the work and progress payments built into the contract for the work.
Assessability of work in progress payments
2.30 A work in progress amount that is received will be included in the assessable income of the recipient under section 15-50 of the ITAA 1997. It will be assessable income in the income year in which it is received. [Schedule 2, item 3, section 15-50]
Recoupment
2.31 If a work in progress amount is paid and that payment gives rise to a deduction under section 25-95, any later recoupment of any of that work in progress amount will be included in the taxpayer’s assessable income under the rules contained in Subdivision 20-A of the ITAA 1997. [Schedule 2, item 4, subsection 20-30(1)]
Application and transitional provisions
2.32 The proposed amendments will apply to amounts paid on or after 23 September 1998. This is the date on which Taxation Ruling IT 2551 was withdrawn. The amendments will be beneficial to taxpayers as they will prevent any potential for double taxation. [Schedule 2, item 7]
Consequential amendments
2.33 Sections 10-5 and 12-5 of the ITAA 1997 will be amended to include sections 15-10 and 25-95 in the respective summary tables. [Schedule 2, item 1, section 10-5 and item 2, section 12-5]
Outline of chapter
3.1 This chapter explains technical corrections and amendments made to:
& # 8226; various provisions of the ITAA 1997 to ensure that the capital allowances system operates as intended and that the other capital allowances, GST, STS and CGT provisions interact appropriately with the capital allowances system;
& # 8226; various provisions in the ITAA 1936 and the IT(TP) Act 1997 that relate to the capital allowances system or to depreciating assets, to ensure that they apply as intended;
& # 8226; overcome the fact that certain consequential amendments to particular provisions were not taken into account when later amendments repealed and replaced those provisions; y
& # 8226; an application clause in the New Business Tax System (Capital Allowances – Transitional and Consequential) Act 2001 to ensure that amendments made by that Act, apply as intended.
Context of amendments
3.2 The capital allowances system was enacted with effect from 1 July 2001 to allow deductions for the cost of a depreciating asset over a period that reflects the effective life of the asset. The capital allowances system is also intended to provide deductions over 5 years for 7 categories of capital expenditure that are not recognised elsewhere in the income tax law (i. e. certain ‘blackhole’ expenditure). The provision intended to achieve that objective is section 40-880 of the ITAA 1997.
3.3 The technical corrections and amendments explained in this chapter ensure that the capital allowances system operates as intended and interacts appropriately with other related provisions.
Detailed explanation of the amendments
Capital allowances – Division 40 of the ITAA 1997
Subdivision 40-B – core provisions
Prime cost method
3.4 Subsection 40-75(1) contains the formula for using the prime cost method of working out the decline in value of a depreciating asset. The formula applies for both the year in which an asset’s start time occurs, called the start year, and later income years. However, subsection 40-75(2) adjusts the formula should any of the circumstances in paragraphs 40-75(2)(a) to (f) arise in later income years.
3.5 Paragraph 40-75(2)(c) applies to adjust the prime cost formula where section 40-90 (about debt forgiveness) applies. Item 17 amends this paragraph by deleting the reference to ‘cost’ and replacing the reference to ‘adjustable value’ with ‘opening adjustable value’. The concept of cost is only relevant for calculating the decline in value in the start year and, as explained in paragraph 3.4, subsection 40-75(2) only applies in later income years. Further, replacing adjustable value with opening adjustable value will make the paragraph consistent with subsection 40-90(3) which adjusts an asset’s opening adjustable value, not its adjustable value.
3.6 Paragraph 40-75(2)(d) adjusts the prime cost formula where section 40-340 (about roll-over relief) applies. Item 18 repeals this paragraph. As explained in paragraph 3.4, adjustments to the prime cost formula are only necessary in later income years and not in the start year. As the section 40-340 roll-over only applies for the start year it is unnecessary to have a provision requiring the prime cost formula to be adjusted.
3.7 Paragraph 40-75(2)(e) applies to adjust the prime cost formula where paragraph 40-365(5)(b) (about involuntary disposals) applies. Item 19 replaces ‘adjustable value’ with ‘opening adjustable value’. This amendment makes paragraph 40-75(2)(e) consistent with paragraph 40-365(5)(b), which adjusts an asset’s opening adjustable value, not its adjustable value.
3.8 Paragraph 40-75(2)(f) applies to adjust the prime cost formula where certain provisions regarding the interaction of GST and Division 40 apply. Item 21 adds subsection 27-80(3A) to paragraph 40-75(2)(f) to ensure that the prime cost formula is adjusted where an asset’s opening adjustable value is reduced by an input tax credit in the circumstances set out in subsection 27-80(3A). Further, item 20 deletes an asterisk from the term opening adjustable value which is now unnecessary due to the earlier use of the defined term in paragraph 40-75(2)(c).
Remaining effective life and roll-over relief
3.9 Where roll-over relief applies to a depreciating asset under section 40-340 (e. g. disposal of a depreciating asset to a wholly-owned company), section 40-345 ensures that an amount is not included in assessable income. Section 40-345 also ensures that the transferee deducts the decline in value of the asset using the same method that the transferor was using. This means the transferee will need to apply the formula in subsection 40-75(1), if the transferor was using the prime cost method, and will need to work out the remaining effective life of the transferred asset.
3.10 Currently, the definition of remaining effective life in subsection 40-75(4) refers to the period of an asset’s effective life that is yet to elapse as at the start of the change year. However, as paragraph 40-75(2)(d) is to be repealed (refer to paragraph 3.6), there will be no change year in relation to roll-over relief and therefore the remaining effective life definition would not apply.
3.11 Item 22 amends subsection 40-75(4) to ensure that the definition of remaining effective life can apply to roll-over relief under section 40-340. The amendment will define remaining effective life for roll-over relief purposes as the period of an asset’s effective life that is yet to elapse at the time the balancing adjustment event occurs for the transferor.
Opening adjustable value
3.12 Broadly, the opening adjustable value for a depreciating asset for an income year, as defined in subsection 40-85(2), is its adjustable value to the taxpayer at the end of the previous income year. The adjustable value of an asset, as defined in subsection 40-85(1), generally reflects its cost less its decline in value at a certain point in time. Item 23 repeals the 2 existing notes to subsection 40-85(2) and replaces them with a note that comprehensively lists all the provisions that potentially modify the opening adjustable value of a depreciating asset. This signposts the reader to these other provisions to ensure that they take them into account when working out the opening adjustable value of an asset for an income year.
Subdivision 40-C – costo
3.13 Subdivision 40-C, comprising sections 40-170 to 40-230, deals with how the cost of a depreciating asset is worked out. Section 40-175 provides that the cost of a depreciating asset consists of first and second elements of cost. Item 24 adds a note to section 40-175 to list all the provisions that potentially modify cost. This signposts the reader to these other provisions to ensure that they take them into account when working out the cost of a depreciating asset, for example, in the case where CGT event K7 applies.
3.14 Section 40-180 states that the first element of cost is either the amount worked out by reference to the table contained in subsection 40-180(2), or the amount the taxpayer is taken to have paid to hold the asset under section 40-185.
3.15 Item 25 reverses the order of existing items 5 and 6 in the table in subsection 40-180(2). Existing item 5 in the table sets out the cost of a depreciating asset in the case where roll-over relief applies under section 40-340 for a balancing adjustment event happening to that asset. Existing item 6 in the table sets out cost of a depreciating asset in the case where an asset becomes a partnership asset and was previously held by a person who is a partner or, where there is a variation in the constitution of the partnership or in the interests of the partners in the partnership.
3.16 Where there is a variation in the constitution of a partnership, or in the interests of the partners in the partnership, as envisaged by existing item 6 in the table, there is optional balancing adjustment roll-over relief available under section 40-340. If roll-over relief is chosen, taxpayers should have a cost as determined by item 5. However, because the structure of the table states that you apply the last applicable item, item 6 will always prevail over item 5 in the case of a variation in the partnership. This is irrespective of the fact that roll-over relief under section 40-340 may apply to the balancing adjustment event. Reversing the items in the table will ensure that where roll-over applies, the cost of a depreciating asset is correctly determined by reference to the roll-over relief item.
3.17 Item 26 amends item 12 of the table in subsection 40-180(2) to ensure that the cost for a depreciating asset is able to be worked out where a balancing adjustment event happens to a depreciating asset because a person dies and the asset, which is allocated to a low-value pool, devolves to the person’s legal personal representative. The item in the table currently states that the asset’s cost is its adjustable value at the time of death.
3.18 Where assets are allocated to a low-value pool they do not retain an identifiable adjustable value as the adjustable value is subsumed into the pool balance. Item 26 will ensure that cost is able to be worked out when an asset is allocated to a low-value pool. In that case, the asset’s cost will be so much of the closing pool balance for the income year in which the person dies as is reasonably attributable to that asset. The amendment will also ensure that the terminology used in relation to the person’s death is consistent with terminology used in the CGT provisions.
3.19 Item 38 amends subsection 40-365(5) (about involuntary disposals) to ensure that cost is always adjusted where there has been an involuntary disposal of an asset and the taxpayer has chosen, under section 40-365, to reduce the cost or opening adjustable value of a replacement asset rather than include a balancing adjustment amount in assessable income. Currently, only the opening adjustable value is adjusted in a later income year. This amendment ensures section 40-365 interacts appropriately with the definition of cost by providing that cost is always reduced whether the relevant year is the start year or a later income year.
Car limit
3.20 Special provisions apply under the capital allowances system to luxury cars. Broadly, the first element of cost of a luxury car is reduced to the car limit (an amount that is indexed annually), thereby limiting the amount able to be written off.
3.21 Item 28 amends subsection 40-230(1) and ensures that both section 40-225 and Subdivision 27-B (which deals with the effect of GST on the capital allowances system) apply to reduce the cost of a luxury car before it is reduced by the car limit applicable to the financial year in which the taxpayer starts to hold the car. This ensures that the GST component does not apply after the car limit and does not further reduce the cost of the car below the car limit.
3.22 Item 29 amends section 40-230 to ensure that where a luxury car is held by one or more entities, the car limit is applied to the cost of the car and not to the cost of each entity’s interest in the car. This is despite section 40-35, which generally treats each individual interest in a jointly held depreciating asset as a separate asset. However, once the car limit is applied to the cost of the car, section 40-35 then applies to apportion the cost of the car, as reduced to the car limit, between the holders. This amendment ensures that where the car is jointly held, each entity’s interest in the cost of the car is not compared with the car limit.
Subdivision 40-D – balancing adjustments
3.23 Broadly, section 40-285 explains when an amount is included in assessable income (subsection 40-285(1)) or a deduction is allowed (subsection 40-285(2)) as a result of a balancing adjustment event. Item 31 adds a new note 2 to subsection 40-285(2). The new note highlights to readers that the timing of a deduction under subsection 40-285(2) is determined under Subdivision 170-D (which deals with transactions by a company that is a member of a linked group) where that Subdivision applies to the balancing adjustment event. Item 30 consequentially makes the existing note, ‘note 1’.
Partners and partnerships
3.24 There are special rules that apply to partners and partnerships for the purposes of Subdivisions 40-D (balancing adjustments) and 40-G (which deals with capital expenditure incurred on landcare operations, electricity connections and telephone lines).
3.25 Items 32 and 37 amend paragraphs 40-295(2)(b) (which sets out the meaning of balancing adjustment event) and 40-340(3)(b) (about roll-over relief) of Subdivision 40-D. The amendments replace the word ‘held’ with the words ‘had an interest in’. These amendments arise because item 7 of the table in section 40-40 (which sets out the meaning of ‘hold’) treats the partnership as the holder of partnership assets. As a consequence, when read literally, paragraphs 40-295(2)(b) and 40-340(3)(b) may not apply. For example, where there is a variation in a partnership that holds a partnership asset, the partnership that held the asset prior to the variation will not be the same partnership that holds the asset after the variation. However, one or more of the partners that have an interest in the asset prior to the variation may be the same partners that have an interest in the partnership asset after the variation. Where this is the case, these amendments will ensure that subsections 40-295(2) and 40-340(3) apply as intended.
Termination value
3.26 Section 40-300 provides the meaning of termination value which is used to calculate a balancing amount. Item 33 amends item 9 in the table in subsection 40-300(2) to ensure that the termination value for a depreciating asset is able to be worked out where a balancing adjustment event happens to a depreciating asset because a person dies and the asset, which is allocated to a low-value pool, starts being held by the person’s legal personal representative. It currently states that termination value is the adjustable value of the asset. Assets allocated to a low-value pool do not retain an identifiable adjustable value as the adjustable value is subsumed into the pool balance.
3.27 Item 33 will ensure that the termination value can be worked out when an asset is allocated to a low-value pool. In that case, the asset’s termination value will be so much of the closing pool balance for the income year in which the person died as is reasonably attributable to that asset. This amendment, and the amendment in item 34 of this bill, will also ensure that the terminology used, in relation to a person’s death, in items 9 and 10 in the table in subsection 40-300(2) is consistent with terminology used in the CGT provisions.
3.28 Item 35 amends section 40-300 to ensure that the termination value of an asset does not include an amount that is included in assessable income as ordinary income under section 6-5 of the ITAA 1997, or in statutory income under section 6-10 of that Act, except where the amount is statutory income because of Division 40. It is arguable under the existing law that some amounts may be included in termination value as worked out under the table in paragraph 40-305(1)(b) and may also be regarded as ordinary or statutory income because of some other provision outside of Division 40. This item ensures that double taxation does not occur. It also inserts a note immediately after the provision to highlight to the reader that the termination value may be modified by Subdivision 27-B (about GST).
Car limit
3.29 As explained in paragraph 3.20, certain provisions apply to adjust the first element of cost of a luxury car. Similarly, section 40-325 applies a formula to reduce the termination value of the car so that it reflects an amount proportional to the amount that the taxpayer used to work out the decline in value.
3.30 Item 36 adjusts the equation in section 40-325 so that, in working out the fraction to be applied to adjust the termination value, the total cost of the car (ignoring the car limit) is subject to the application of Subdivision 27-B (about GST). As the GST component is excised from cost before the car limit applies, it should also be excised from the total cost of the car for the purposes of the equation in this provision.
Interaction of Subdivisions 40-B and 40-D with Subdivisions 40-E, 40-F and 40-G
3.31 Subdivision 40-E sets out rules governing the use of low-value pools for certain low-cost assets. Broadly, in relation to low-value pools, a taxpayer may choose to work out the decline in value of a depreciating asset through a low-value pool where that asset is a low-cost asset (i. e. cost is less than $1,000) or where the decline in value has been worked out using the diminishing value method and the asset’s opening adjustable value in the relevant income year is less than $1,000.
3.32 In relation to low-value pool assets, item 14 amends subsection 40-25(5) of Subdivision 40-B. The amendment ensures that, despite subsection 40-25(1), a taxpayer is able to continue to deduct an amount for a depreciating asset that was allocated to a low-value pool, even though the taxpayer no longer holds that asset. Upon disposal of a pooled asset the termination value of that asset is reflected as a reduction of the pool balance. However, where the termination value is less than the amount still to be written off, this amendment will allow the taxpayer to continue to write-off the remaining pool balance attributable to that asset even though they no longer hold it.
3.33 Item 14 creates an exception to the general rule in subsection 40-25(1) that a deduction equal to the decline in value of an asset for an income year is only available if an entity holds the asset during the income year.
3.34 Subdivision 40-F sets out the deduction rules for capital expenditure on depreciating assets that are water facilities, horticultural plants or grapevines. Subdivision 40-G sets out the rules for capital expenditure incurred on landcare operations, electricity connections and telephone lines.
3.35 Item 16 amends subsections 40-50(1) and (2) of Subdivision 40-B (core provisions). These subsections currently ensure that a deduction does not arise under Subdivision 40-B for depreciating assets covered by Subdivision 40-E (in respect of software development pools) or Subdivisions 40-F or 40-G. This amendment ensures that the decline in value of the asset is not worked out under Subdivision 40-B where these other Subdivisions apply. This in turn ensures that the general balancing adjustment rules in Subdivision 40-D do not apply to assets covered by Subdivisions 40-E (in respect of software development pools), 40-F or 40-G. This is the correct result as these assets should either not be subject to balancing adjustment rules or should be subject to specific balancing adjustment rules that are contained in their respective Subdivisions.
3.36 Item 39 amends subsection 40-665(3) (about how Subdivision 40-G applies to partners and partnerships). The amendment ensures that the operation of Subdivision 40-G, and not just section 40-665, is disregarded in calculating the net income or loss of a partnership under section 90 of the ITAA 1936. This will ensure that the deduction, which arises under Subdivision 40-G, is only available to the partners, not both the partners and the partnership.
Subdivision 40-I (capital expenditure that is deductible over time) – section 40-880
3.37 The intention of section 40-880 is to provide deductibility over five years for seven categories of business related capital expenditure that, prior to 1 July 2001, were not recognised in the income tax law (i. e. blackhole expenditure). A number of amendments will be made to subsection 40-880(1) to ensure that it operates as intended and to clarify its operation by the insertion of examples.
3.38 In applying the various tests set out in the relevant paragraphs in subsection 40-880(1) it is necessary that the expenditure be for the appropriate purpose. Item 48 ensures that expenditure can be deductible under subsection 40-880(1) if the business will be carried on for a taxable purpose. Under the current law, the business must be, or have been, carried on for a taxable purpose.
Paragraph 40-880(1)(a) – expenditure to establish your business structure
3.39 Item 40 amends paragraph 40-880(1)(a) to ensure that it operates as intended. The paragraph will cover only capital expenditure incurred by a taxpayer in establishing the business structure through which they will carry on their business. In addition, item 41 inserts an example immediately after the paragraph to provide further clarification of its operation.
3.40 Consistently, with its existing use in paragraph 40-880(1)(b), the term ‘business structure’ will ensure that paragraph 40-880(1)(a) covers the legal entity (such as a company) or the legal relationship (such as a partnership or trust) that is established as the entity that will carry on the business for a taxable purpose and that will hold the business assets. Examples of expenditure that will fall within paragraph 40-880(1)(a) are the expenditure incurred in incorporating a company, forming a partnership or in creating a trust. The example to be included in the law makes this clear.
3.41 It has been suggested that expenditure incurred in relation to leases or other legal or equitable rights, franchise fees or the acquisition of goodwill could be covered by paragraph 40-880(1)(a). It was never intended that the paragraph encompass such expenditure and the amendments to the paragraph and the amendments to subsection 40-880(3) discussed in paragraphs 3.63 to 3.71 ensure that the intended outcome is achieved.
Paragraph 40-880(1)(b) – expenditure to convert your business structure to a different structure
3.42 Paragraph 40-880(1)(b) allows a deduction for capital expenditure incurred by a taxpayer to convert their business structure to a different structure. Item 42 inserts an example immediately after the paragraph to clarify its operation.
3.43 The example deals with a situation in which the partners in a partnership decide to carry on their business through a company structure. Capital expenditure incurred in establishing the company and in transferring the business assets of the partnership to the company falls within this paragraph.
3.44 The same kinds of expenditure are deductible under this paragraph where an individual decides to carry on his or her business through a company structure.
3.45 Another example of expenditure which falls within the paragraph, is expenditure incurred in varying contracts, such as supply contracts, to reflect that the transferee (as opposed to the transferor) is a party to them as a result of the conversion of the business structure.
3.46 However, the costs associated with an internal reorganisation, such as where a holding company incurs expenses in selling off some part of a wholly owned subsidiary, do not come within paragraph 40-880(1)(b). This is because the type of structural change intended by this paragraph is about how something was held and not what was held. If something held is disposed of, the associated expenses are more likely to be costs of disposal rather than costs of structural change and would be recognised through other parts of the income tax law, such as the capital gains and losses provisions of the ITAA 1997.
Paragraph 40-880(1)(c) – expenditure to raise equity for your business
3.47 Paragraph 40-880(1)(c) allows deductions for capital expenditure incurred in both an initial and additional equity raising. Item 43 inserts an example immediately after the paragraph to clarify its operation.
3.48 The example deals with a situation in which a company raises equity through the issue of new shares in order to fund an expansion of its business. The capital expenditure it incurs in raising the equity, such as the preparation and issuing of a prospectus, is covered by this paragraph.
3.49 The intention of paragraph 40-880(1)(c) is to provide similar tax treatment to that afforded to borrowing costs. Borrowing costs are deductible over five years under section 25-25 of the ITAA 1997. Expenditure to raise equity that is not a form of borrowing, as defined in subsection 995-1(1) of the ITAA 1997 is not deductible under section 25-25 of the ITAA 1997 and is considered to be blackhole expenditure. As such, it is appropriate that it be deductible over 5 years under existing paragraph 40-880(1)(c).
3.50 Paragraph 40-880(1)(c) generally only applies where there is a raising of equity capital by a company or a fixed unit trust through either a private placement or public issue of shares or a rights issue. Examples of expenditure associated with these types of equity raisings that could come within paragraph 40-880(1)(c) to the extent to which they are capital expenditure include:
& # 8226; the preparation of disclosure documents such as a prospectus, a short form prospectus, a profile statement or an offer information statement for small fundraisings of $5 million or less;
& # 8226; underwriting costs;
& # 8226; legal fees;
& # 8226; printing costs;
& # 8226; postal costs; o
& # 8226; advertising costs.
3.51 An employee share acquisition scheme is not an equity raising if a company acquires shares in itself and settles them on trust for the benefit of employees. However, if the employee share acquisition scheme involved raising capital from employees through the allotment of new shares to the employees, expenditure incurred in raising that capital may be an equity raising and therefore deductible under paragraph 40-880(1)(c).
3.52 The expenditure associated with the issue of a convertible debt instrument is not deductible under paragraph 40-880(1)(c) but may be deductible under section 25-25 of the ITAA 1997. Where that instrument is converted to shares, the costs of converting that instrument will come within paragraph 40-880(1)(c).
3.53 Likewise, the expenditure associated with the conversion of options and rights to shares comes within paragraph 40-880(1)(c).
Paragraph 40-880(1)(d) – expenditure to defend against a takeover
3.54 Paragraph 40-880(1)(d) allows deductions for capital expenditure incurred by a taxpayer to defend their business against a takeover. The use of the words ‘defend’ and ‘against’ in paragraph 40-880(1)(d) means that there must be resistance of the attempted takeover for paragraph 40-880(1)(d) to apply. Generally, paragraph 40-880(1)(d) applies only where there is a takeover under the Corporations Act 2001 .
3.55 Item 44 inserts an example immediately after the paragraph to clarify its operation. The example deals with a situation in which a public limited company launches a hostile takeover bid for another public limited company. The target company must take certain steps prescribed by the Corporations Act 2001 . The capital expenditure it incurs in following those steps is covered by this paragraph.
3.56 The following types of expenditure incurred in defending a takeover under the Corporations Act 2001 could come within paragraph 40-880(1)(d) to the extent to which they are capital expenditure:
& # 8226; legal and accounting costs;
& # 8226; stockbrokers’ fees;
& # 8226; compliance fees under the Corporations (Fees) Regulations 2001;
& # 8226; consultancy fees paid for public relations, merchant bankers and the media;
& # 8226; printing, advertising and mailing of documents produced for shareholders;
& # 8226; costs of independent evaluations of the takeover offer;
& # 8226; the salary or wages of individuals employed specifically to undertake takeover defence activities; y
& # 8226; the preparation of and issuing of Part B statements or Part D statements.
3.57 Due to the amendments discussed in paragraphs 3.63 to 3.71, expenditure such as the costs of acquiring shares as a defensive manoeuvre engaged in by a company under threat of a takeover will not be deductible under paragraph 40-880(1)(d). Such costs are recognised in the cost base of the shares under the capital gains and losses provisions.
Paragraph 40-880(1)(e) – costs of unsuccessfully attempting a takeover
3.58 Paragraph 40-880(1)(e) allows deductions for capital expenditure incurred in unsuccessfully attempting a takeover. Item 45 inserts an example immediately after the paragraph to clarify its operation. The example will deal with a situation in which a public company tries unsuccessfully to take over another public company. The company attempting the takeover must take certain steps prescribed by the Corporations Act 2001 in the course of attempting the takeover. The capital expenditure it incurs in following those steps is covered by this paragraph.
3.59 Paragraph 40-880(1)(e) generally only applies where there is a takeover under the Corporations Act 2001 . Examples of capital expenditure associated with a takeover under the Corporations Act 2001 that could come within paragraph 40-880(1)(e) to the extent to which they are capital expenditure are similar to those outlined in paragraph 3.56.
Paragraph 40-880(1)(g) – costs to stop carrying on your business
3.60 Item 46 amends paragraph 40-880(1)(g) to clarify that costs incurred by a taxpayer to stop carrying on their business, as opposed to any business, come under the provision.
3.61 In addition, item 47 inserts an example immediately after the paragraph to clarify its operation. The example deals with a situation in which a taxpayer incurs capital expenditure in the form of legal costs for terminating the services of employees when it stops carrying on its business. That expenditure is covered by this paragraph.
3.62 Examples of other categories of expenditure that may come within the paragraph are site rectification costs and the costs associated with the removal of tenant’s fixtures if those costs are not already recognised in the income tax law. For example, if such costs did not form part of the cost of a depreciating asset or did not reduce the termination value of a depreciating asset where a balancing adjustment event occurs for the asset they may be deductible under this paragraph.
Amendments to subsection 40-880(3)
3.63 Section 40-880 is intended to be a provision of last resort. It does not, and is not intended to, encompass all ‘blackhole’ expenditure. Item 49 amends subsection 40-880(3) to add further exclusions from deductibility to ensure that the section operates as intended.
3.64 As a provision of last resort, expenditure should only be deductible under section 40-880 if it is not already recognised elsewhere in the income tax law. In seeking to give effect to this intention, section 40-880, as currently enacted, states that expenditure is only deductible under section 40-880 to the extent that it is not:
& # 8226; included in the cost of a depreciating asset held by the taxpayer;
& # 8226; included in the cost of land; o
& # 8226; deductible under another provision of the income tax law apart from section 40-880.
3.65 However, these exclusions were not sufficient to give effect to the policy intention of section 40-880. This is because they do not exclude expenditure that is already recognised in some other manner, for example, through the cost base of an asset under the capital gains and losses provisions, or that, for other policy reasons, is intended to be excluded from deduction.
3.66 Item 49 amends subsection 40-880(3) to provide that expenditure will only be deductible under section 40-880 to the extent that it is also not:
& # 8226; incurred in relation to leases or other legal or equitable rights [Schedule 3, item 49, paragraph 40-880(3)(d)] ;
& # 8226; taken into account in working out an assessable profit or a deductible loss [Schedule 3, item 49, paragraph 40-880(3)(e)] ;
& # 8226; taken into account in working out a capital gain or capital loss under the capital gains and losses provisions [Schedule 3, item 49, paragraph 40-880(3)(f)] ; o
& # 8226; specifically made non-deductible under a provision of the income tax law [Schedule 3, item 49, paragraph 40-880(3)(g)] .
3.67 The Government is reviewing the treatment of expenditure incurred in relation to leases or other legal or equitable rights as part of the consideration of the recommendations of the Review of Business Taxation. The appropriate income tax treatment of capital expenditure incurred in relation to these leases and rights will be determined as part of that review. Consequently, capital expenditure on leases or other legal or equitable rights will be excluded from deduction under section 40-880. For example, expenditure representing lease surrender payments incurred in closing down your business will not be deductible under section 40-880.
3.68 Under the current income tax law, expenditure may be taken into account in working out an assessable profit or a deductible loss. For example, it may be taken into account in working out a profit arising from the carrying on or carrying out of a profit-making undertaking or plan that is included in assessable income under section 15-15 of the ITAA 1997. Such expenditure is recognised in the income tax law through a lesser amount being included in the taxpayer’s assessable income. It is inappropriate for such expenditure to be deductible and hence it will be excluded from section 40-880.
3.69 The amendments to subsection 40-880(3), together with the amendment to paragraph 48-880(1)(a) discussed in paragraphs 3.39 to 3.41, will make it clear that certain expenditure (e. g. for franchise fees and goodwill incurred in establishing a taxpayer’s business) is not deductible under section 40-880. This expenditure was never intended to come within paragraph 48-880(1)(a). Further, as it is already recognised in the income tax law as part of the cost base of an asset under the capital gains and losses provisions, as it was intended to be excluded by subsection 40-880(3).
3.70 As item 49 excludes expenditure that is taken into account in working out a capital gain or capital loss under the capital gains tax provisions from deductibility under section 40-880, the words ‘apart from this section’ that appear in paragraph 40-880(3)(f) ensure that this exclusion interacts in the correct manner with the cost base rules in the capital gains and losses provisions.
3.71 Finally, the current income tax law specifically makes certain items of expenditure non-deductible. Fines, entertainment expenses and certain taxes are examples of such expenditure. However, taxpayers may incur expenses of these description in, for example, closing down their business. In keeping with the current treatment of these items of expenditure under the income tax law, section 40-880 will be amended to make it clear that these items of expenditure remain non-deductible.
Interaction of Subdivision 27-B (about GST) and Division 40 of the ITAA 1997
3.72 Division 27 sets out the effect of the GST in working out deductions for income tax purposes. Generally speaking, input tax credits, GST, and adjustments under the GST Act, are disregarded. In particular, Subdivision 27-B contains the rules dealing with the interaction of GST and the capital allowances system.
3.73 The amendments made to subsections 27-80(3A), 27-80(4), 27-85(3) and 27-90(3) by items 4, 6, 9 and 11, respectively ensure that the cost of an asset is adjusted whenever the taxpayer is entitled to an input tax credit or, an increasing adjustment or decreasing adjustment is required to be made in relation to that asset.
3.74 Each of these subsections currently adjusts an asset’s opening adjustable value to ensure deductions for decline in value are correctly worked out where a taxpayer is entitled to an input tax credit, or an increasing adjustment or a decreasing adjustment is required to be made in relation to that asset. These amendments similarly ensure that an asset’s cost is also adjusted. This in turn ensures for example, where CGT event K7 happens to a depreciating asset, the capital gain or loss is correctly worked out. CGT event K7 takes into account an asset’s cost to work out a capital gain or loss in respect of the non-taxable use of a depreciating asset. Therefore, the cost of the asset needs to reflect any input tax credits, increasing adjustments or decreasing adjustments as these affect the amount that should be recognised as the gain or loss.
3.75 Item 5 amends subsection 27-80(3A) to make it clear to taxpayers that the reduction in opening adjustable value and cost required by that subsection is the amount of the input tax credit. The subsection does not currently specify the amount of the reduction.
3.76 Items 7 and 8 amend subsection 27-80(5) and paragraph 27-80(5)(b) to ensure that, to the extent an input tax credit for a depreciating asset exceeds the asset’s opening adjustable value, the excess will be included in the assessable income of the taxpayer. These amendments are consequential amendments which were omitted in error at the time the New Business Tax System (Capital Allowances - Transitional and Consequential) Bill 2001 was amended to include subsection 27-80(3A).
3.77 Item 10 amends subsection 27-87(1) to ensure that section 27-87 does not apply where section 27-95 applies to increase the termination value of that asset. Without this amendment, both sections 27-87 and 27-95 may apply simultaneously, with the effect of including the decreasing adjustment amount in assessable income twice. This amendment will ensure that section 27-95 prevails over section 27-87 and that the decreasing adjustment is only included in assessable income once.
3.78 Item 12 amends subsection 27-105(5) to clarify the operation of section 27-105 in relation to the partners in a partnership that is entitled to an input tax credit, or is required to make an increasing adjustment or a decreasing adjustment. It makes it clear that an amount equal to the input tax credit, the increasing adjustment or the decreasing adjustment, is apportioned between the partners and not the partnership. This is because the deduction is attributed to the partners, rather than taken at the partnership level under sections 40-570 and 40-665.
Capital works – Divisions 40 and 43 of the ITAA 1997
3.79 Division 43 sets out the rules for working out deductions for capital works such as assessable income producing buildings. Subsection 40-45(2) ensures that Divisions 40 and 43 interact correctly. It achieves this in 2 ways. First, it excludes from Division 40 those capital works for which an entity can deduct an amount under Division 43 because it satisfies the conditions for deductibility and the expenditure on the capital works is not excluded from Division 43. This ensures that such capital works are not deductible under both Division 40 and 43. Further, it ensures that expenditure on capital works that are plant, and therefore excluded from Division 43, will fall within Division 40.
3.80 Second, subsection 40-45(2) excludes those capital works for which an entity would be able to deduct an amount under Division 43 but for the expenditure being incurred, or the capital works being started, before a particular day. This ensures that those capital works that are not deductible under Division 43, for example, because of the time they were constructed, cannot inappropriately be deductible under Division 40.
3.81 Item 15 effectively amends subsection 40-45(2) to further clarify the interaction between Divisions 40 and 43. This is achieved by excluding from Division 40 those capital works for which an entity would be able to deduct an amount under Division 43 had the capital works been used for the relevant purpose under section 43-140. For example, an individual cannot deduct an amount under Division 43 for their principal place of residence because it is not used for the purposes of producing assessable income. This ensures that such a residence will not come within Division 40.
3.82 Item 50 adds subsection 43-140(2) to section 43-140 to provide that an entity is taken to use property for the purposes of producing assessable income if it is used for environmental protection activities or for carrying out an activity for an environmental impact assessment of a project. The new subsection applies unless another provision of the income tax law expressly provides that the particular use is not to be taken for the purposes of producing assessable income.
3.83 Prior to 1 July 2001 (the start date of the capital allowances system), property used for carrying out environmental protection activities or environmental impact assessments was taken to be used for the purposes of producing assessable income under section 400-100 of the ITAA 1997. This meant that taxpayers may have been able to write-off the cost of capital works used in these activities under Division 43. However, Division 400 was repealed consequential upon the enactment of the capital allowances system and as a result of an oversight former section 400-100 was not replicated elsewhere within the income tax law. The proposed amendment will correct this error and thereby ensure that the relevant capital works may be deductible under Division 43.
3.84 Item 76 amends the definition of capital allowance in subsection 995-1(1) to include a reference to Division 43. The amendment ensures that any reference to capital allowance within the income tax legislation will include deductions allowed under Division 43 for expenditure on capital works. This item gives effect to an omitted consequential amendment.
Disposal of leases and leased plant – Division 45 of the ITAA 1997
3.85 Division 45 deals with the disposal of leases and leased plant and is designed to prevent tax being avoided in certain circumstances where amounts have been deducted for the decline in value of plant. Items 51 to 58 update the terminology used in various provisions in Division 45 to make it consistent with the terminology used by the capital allowances system. These items give effect to omitted consequential amendments.
CGT provisions – Parts 3-1 and 3-3 of the ITAA 1997
CGT event K7
3.86 Broadly, subsection 104-235(1) provides that CGT event K7 happens where a balancing adjustment event occurs for a depreciating asset held by a taxpayer who used it, or had it installed ready for use, for a purpose other than a taxable purpose (e. g. an asset used for private purposes). Subsection 104-235(1A) sets out the circumstances when CGT event K7 will not apply. At present the exclusion only relates to certain assets used for the purposes of research and development activities.
3.87 Item 59 amends subsection 104-235(1A) to ensure that CGT event K7 will also not apply where:
& # 8226; there is roll-over relief for the balancing adjustment event under section 40-340. This will ensure that the CGT consequences align with Division 40 consequences; o
& # 8226; the depreciating asset is covered by Subdivision 40-F (water facilities, horticultural plants or grapevines) or 40-G (landcare operations, electricity connections or telephone lines). As explained in paragraphs 3.95 to 3.97, assets to which Subdivision 40-F or 40-G apply are intended to be subject to the normal operation of the CGT provisions.
3.88 Subsection 115-20(1) only allows a capital gain to be a discount capital gain where it was worked out using a cost base that has not been indexed. However, CGT event K7 does not use the concept of cost base, instead it uses the concept of cost. Item 65 amends subsection 115-20(1) to ensure that a capital gain that arose under CGT event K7 may also be a discount capital gain if it was worked out using cost. This item gives effect to an omitted consequential amendment.
3.89 Item 66 amends the table in section 116-25 by deleting an incorrect reference to CGT event K7 from the table. The reference is incorrect as the table sets out modifications to the concept of capital proceeds and CGT event K7 does not use this concept.
Section 118-24 – general CGT exemption for depreciating assets
3.90 Broadly, subsection 118-24(1) operates to ensure that all capital gains and losses made from a CGT event (that is also a balancing adjustment event) that happens to a depreciating asset, are disregarded where the decline in value of the asset was worked out under Division 40 or 328 or, would have been, had the asset been used. Subsection 118-24(2) excepts from this general rule capital gains or losses arising as a result of CGT event K7 happening.
3.91 Item 67 will repeal and replace section 118-24. New subsection 118-24(1) only differs from the existing subsection in that it ensures that:
& # 8226; ambiguity in the existing provision is removed by inserting brackets before and after the words ‘that is also a balancing adjustment event’. This ensures that the word ‘happens’ refers to the CGT event and not the balancing adjustment event; y
& # 8226; instead of the words ‘where the decline in value of the asset was worked out’ being relevant to both Divisions 40 and 328, they will refer only to Division 40. With regard to Division 328 (which contains particular rules for STS taxpayers), wording more appropriate to that Division has been added. Division 328 does not refer to a ‘decline in value’ for depreciating assets. Broadly, they deduct amounts based on a pool that is treated as a single depreciating asset.
3.92 New subsection 118-24(2) ensures that, in addition to CGT event K7 being excepted from the operation of subsection 118-24(1), subsection 118-24(1) does not apply to disregard capital gains or losses where:
& # 8226; CGT event J2 happens; o
& # 8226; a taxpayer or another entity has deducted, or can deduct, amounts under Subdivision 40-F (water facilities, horticultural plants or grapevines) or 40-G (landcare operations, electricity connections or telephone lines).
CGT event J2
3.93 CGT event J2 happens if an asset, chosen as a replacement asset following a small business roll-over (carried out before 1 July 2001): stops being the taxpayer’s active asset; becomes trading stock; is given as a testamentary gift under the Cultural Bequests Program; or starts being used solely for producing exempt income. CGT event J2 happens when the change in the status of the replacement asset happens. The taxpayer makes a gain from CGT event J2 equal to the notional capital gain (i. e. the tagged capital gain) for the roll-over asset that was ignored because of the small business roll-over.
3.94 Because of the way existing section 118-24 is worded, capital gains and losses arising under CGT event J2 are currently disregarded where they arise in relation to a depreciating asset. This is incorrect. The capital gains arising under CGT event J2 should be taken into account in working out net capital gains. The amendment to section 118-24 ensures that this outcome is achieved.
Subdivision 40-F or 40-G
3.95 Prior to 1 July 2001 (the start date of the capital allowances system), assets that are currently covered by Subdivisions 40-F (water facilities, horticultural plants or grapevines) and 40-G (landcare operations, electricity connections or telephone lines) were not subject to the recoupment of deductions through a balancing adjustment event on disposal. Where the asset did not also qualify as plant, the CGT provisions captured any gain over and above the original cost, or recognised any loss to the extent that the asset’s reduced cost base (reduced by capital allowances deductions) was less than the proceeds received for the asset. However, where the asset also qualified as plant, any gain over and above the original cost was brought to account as further income under former Division 42. Similarly, a further deduction was allowed under former Division 42 where the sale proceeds were less than the adjustable value of the asset.
3.96 Under the current capital allowances system, no gain or loss over and above original cost is brought to account as either a revenue or a capital gain and, similarly, there is no recognition of any loss or further deduction. This is not the intended outcome and to correct the position, amendment discussed in paragraph 3.92 will ensure that any gain or loss is recognised under the CGT provisions for all assets covered by Subdivisions 40-F and 40-G.
3.97 As a result, for non-plant assets now covered by Subdivision 40-F or 40-G, this amendment will reinstate the outcome that applied prior to the enactment of the capital allowances system. However, for assets that were plant under former Division 42, this amendment achieves a more favourable outcome. This is because under former Division 42 any gain on plant over and above the original cost would have been brought to account as a revenue gain and not as a capital gain. Therefore, the CGT discount provisions, for example, would not have applied to reduce that gain.
Section 106-5 – partners and partnerships
3.98 Item 61 repeals subsection 106-5(5) as it is considered unnecessary. Subsection 106-5(1) of the ITAA 1997 provides that any capital gain or loss from a CGT event happening to a partnership asset is made by the partners individually and not the partnership. Subsection 106-5(5) was inserted, as subsection (1) was not intended to apply where a CGT event happens in relation to a partnership asset whose decline in value is worked out under Division 40, or whose deduction is calculated under Division 328. This is because Division 40 assesses the gain in the hands of the partnership and not in the hands of the individual partners. Subsection 106-5(5) is considered unnecessary as, for CGT purposes, paragraph 118-24(1)(b) operates to disregard capital gains or losses in the hands of the partners where the decline in value of the asset was worked out under Division 40 or the deduction was calculated under Division 328.
Division 124 – CGT roll-over relief
3.99 Broadly, Division 124 provides for a replacement asset roll-over to defer the making of a capital gain or loss from one CGT event until a later CGT event happens. In particular, Subdivision 124-B applies where an asset has been compulsorily acquired, lost or destroyed.
3.100 Items 68 to 70 qualify the references to depreciating asset in paragraph 124-75(2)(a) and subsections 124-75(5) and 124-80(2) of Subdivision 124-B to ensure that they only refer to those depreciating assets whose decline in value is worked out and deducted under Division 40 or, for which a deduction is claimed under Division 328. These amendments ensure that roll-over relief under Subdivision 124-B continues to apply for depreciating assets that are not the subject of Division 40 or 328.
Division 152 – small business relief
3.101 Broadly, Division 152 sets out certain CGT concessions that are available to small business where certain conditions are satisfied. Subdivision 152-B sets out the small business 15-year exemption. This concession allows a small business to disregard any capital gain arising from a CGT asset that it has owned for at least 15 years if certain conditions are met. Also any amount of income a company or trust derives from a CGT event covered by this Subdivision is neither assessable income nor exempt income.
3.102 Item 71 amends section 152-110 of Subdivision 152-B, to ensure that the exemption regarding income derived by a company or a trust does not apply to any income derived as a result of a balancing adjustment event occurring to a depreciating asset that is subject to Division 40 or 328. This amendment will limit the operation of subsection 152-110(2) to ensure that it does not apply inappropriately to disregard a balancing adjustment amount.
Miscellaneous
3.103 The amendments in items 62 to 64 are necessary as the result of consequential amendments to those provisions not being taken into account when later amendments repealed and replaced those provisions.
STS taxpayers – Divisions 40 and 328 and Part 3-1 of the ITAA 1997
3.104 Broadly, Division 328 applies to give certain businesses with straightforward, uncomplicated financial affairs the choice of an alternative method of determining their taxable income. If a business chooses to enter the STS, new accounting arrangements, a simplified trading stock regime, and a simplified capital allowances regime will apply.
3.105 Subsection 40-25(1) provides a deduction equal to the decline in value of an asset that is held by a taxpayer during an income year. Item 13 amends note 2 of subsection 40-25(1) to reflect the fact that an STS taxpayer both deducts . and works out the amount they can deduct, under Division 328.
3.106 Item 27 will ensure that the cost of a depreciating asset is not reduced by any deduction allowable under Division 328. Section 40-215 already ensures that the cost of any depreciating assets for which a deduction is allowable under Division 40 is not reduced.
3.107 Item 60 amends paragraph 104-235(4)(b) with the effect of removing the reference to decline in value in relation to Division 328. As there is no reference to decline in value under Division 328, this amendment will ensure the terminology used is consistent.
3.108 Item 72 will allow a deduction to be claimed under the capital allowance provisions in Division 328 unless it is reasonably expected that the depreciating asset will be predominantly leased in the future. Because taxpayers will not always be in a position to know how a depreciating asset is ‘intended to be’ used, they may have had difficulty in interpreting this provision.
3.109 Items 73 and 74 will allow a deduction for a cost addition of less than $1,000 for a low cost asset in the year of purchase. Where the cost addition is $1,000 or more, as well as any subsequent cost additions of any value, both the cost addition and the underlying low cost asset are added to the pool.
3.110 Item 74 will also allow a cost addition of $1,000 or more for a low cost asset, and any subsequent cost additions, regardless of their cost, to be added to a pool, even after the STS taxpayer has left the STS.
3.111 Item 75 will ensure that, in determining the adjustment to the opening pool balance where there has been a change in the business use of an asset, only those cost additions made to the asset until the beginning of the income year in which the adjustment applies are included in the asset value.
3.112 Item 77 will update the definition of ‘capital allowance’ to include a reference to Division 328. The amendment ensures that any reference to capital allowance within the income tax legislation will include deductions allowed under Division 328 for expenditure on capital items.
3.113 Item 78 will update the definition of ‘in-house software’ to include a reference to Division 328. The amendment ensures that any reference to ‘in-house software’ within the income tax legislation will include deductions allowed under Division 328 for expenditure on in-house software.
Division 57, Schedule 2D to the ITAA 1936
3.114 Broadly, Division 57, Schedule 2D to the ITAA 1936 is about the income tax treatment of a taxpayer whose income ceases to be wholly exempt from income tax. Broadly, income, outgoings, gains and losses are attributed to the periods before and after the loss of full exemption.
3.115 Division 58 of the ITAA 1997 also sets out special rules that apply in calculating deductions for the decline in value of depreciating assets and balancing adjustments for assets previously owned by an exempt entity in certain circumstances. Prior to the streamlining of Division 58, it was limited to the depreciation of plant under former Division 42 of the ITAA 1997 and Division 57 applied to all other capital allowances. To avoid any overlap, section 57-130, Schedule 2D was inserted to ensure that Subdivisions 57-I (about depreciation deductions) and 57-K (about balancing adjustments) did not apply to balancing adjustments for plant or depreciating assets where Subdivision 58-B of the ITAA 1997 applied.
3.116 As a result of the streamlining of Division 58 of the ITAA 1997, as part of the introduction of the capital allowances system, Division 58 was extended to apply to all depreciating assets.
3.117 Therefore, where there is an entity sale situation, and there is an amount of expenditure that does not relate to a depreciating asset (e. g. site preparation costs) it is intended that Division 57, Schedule 2D apply to that expenditure instead of Division 58. This intended outcome is achieved by the existing provisions where the expenditure is incurred on or after 1 July 2001. However, where the expenditure was incurred prior to 1 July 2001, it is currently treated as a notional depreciating asset and is made deductible under Subdivision 40-B through section 40-35 of the IT(TP) Act 1997. However, for section 40-35 to work, section 57-90, Schedule 2D must apply. The amendments made by item 1 to items 10 and 11 in the table in subsection 57-85(3), Schedule 2D ensure that Division 57 can apply to expenditure incurred prior to 1 July 2001 that did not constitute a depreciating asset but was transitioned into Division 40 as a notional depreciating asset under section 40-35 of the IT(TP) Act 1997.
3.118 As explained in paragraph 3.116, Division 58 is intended to apply to all depreciating assets. However, there is a potential application of both Division 58 of the ITAA 1997 and Division 57, Schedule 2D to the ITAA 1936 to ‘non-plant’ depreciating assets, for example, intellectual property. As Division 58 is intended to apply to all depreciating assets item 2 prevents the potential dual application by amending section 57-130 to ensure that Subdivision 57-J (capital allowances and certain other deductions) does not apply where Subdivision 58-B of the ITAA 1997 applies.
3.119 Notwithstanding section 57-130 and the amendment made by item 2, Subdivision 57-J still needs to apply when the non-plant depreciating asset is a notional depreciating asset, hence the amendment made by item 1, and explained in paragraph 3.117. Therefore, to overcome the potential conflict between the amendments at items 1 and 2, item 3 inserts a new subsection into section 57-130 to ensure that Subdivision 57-J is still able to apply, for the purposes of section 40-35 of the IT(TP) Act 1997, to capital expenditure incurred by a transition taxpayer before 1 July 2001 that relates to property that is not a depreciating asset.
Division 40 of the IT(TP) Act 1997
3.120 Division 40 of the IT(TP) Act 1997 facilitates the transition of depreciating assets into the capital allowances system from the various separate capital allowances regimes that operated before it. Broadly, the transitional provisions allow taxpayers to apply the new capital allowances system to existing depreciating assets and certain capital expenditures. Effectively, Division 40 of the ITAA 1997 applies to depreciating assets created, acquired etc. after 30 June 2001 and depreciating assets subject to the transitional provisions that are created, acquired etc. on or before that date.
3.121 Items 79 and 80 ensure that the terms, ‘former Act’ and ‘new Act’ in paragraph 40-10(1)(a) and subsection 40-10(2) reflect that the ITAA 1997 is also amended by the New Business Tax System (Capital Allowances – Transitional and Consequential) Act 2001 .
3.122 Items 85, 88, 90 and 91 amend subsections 40-25(2), 40-30(2), 40-45(2) and 40-50(2) to ensure that the cost for depreciating assets covered by those provisions, for example, software, spectrum licences etc. is transitioned into the ITAA 1997 for the purposes of Division 40 and not just Subdivision 40-B of the ITAA 1997. This has flow on consequences for other provisions such as the CGT provisions.
3.123 Items 81 to 84, 86, 87 and 89 ensure that the following provisions – paragraphs 40-10(2)(b), 40-20(1)(a) and (2)(a), 40-25(2)(d) and 40-45(1)(b) and subsections 40-25(2) and 40-30(1) – apply where the taxpayer could have deducted an amount under the relevant provision if they had used the asset for the purpose of producing assessable income before 1 July 2001. These provisions, which apply to transition in various existing assets (e. g. plant, software, etc.) do not presently transition into Division 40, assets that were acquired on or before 30 June 2001 but were yet to be used for an income producing purpose before that date. These amendment will correct this.
3.124 Item 92 adds new section 40-100 which deems determinations of effective life made under former section 42-110 of the ITAA 1997 to be determinations made under new Division 40 of the ITAA 1997. This will ensure that taxpayers can rely upon those previous determinations.
3.125 Items 93 to 95 add a reference to subsection 40-12(3) (which maintains accelerated depreciation in certain circumstances) to paragraphs 40-340(1)(b) and 40-340(2)(d) and subsection 40-340(3), which relate to roll-over relief. These amendments ensure that the transferee maintains accelerated depreciation concessions to which the transferor would have been entitled once the asset had been installed ready for use.
3.126 Section 40-425 allows a taxpayer to allocate an item of plant (held prior to the commencement of the capital allowances system) to a low-value pool under the capital allowances system if they were eligible to allocate that item of plant to the low-value pool under former Division 42 of the ITAA 1997. However, assets that have been depreciated to less than $1,000 under the diminishing value method under former Division 42, may in any case be allocated to a low-value pool. This is achieved through the interaction of section 40-70 and paragraph 40-10(2)(a). Item 96 repeals section 40-425 as it is redundant.
Item 488 of Schedule 2 to the New Business Tax System (Capital Allowances – Transitional and Consequential) Act 2001
3.127 The application clause for the consequential amendments made by Schedule 2 to the New Business Tax System (Capital Allowances – Transitional and Consequential) Act 2001 currently applies the amendments to assets held by a taxpayer on or after 1 July 2001. However, that application clause is not appropriate to all of the consequential amendments that were made by that Act. Items 97 and 98 therefore amend the application clause contained in item 488 of that Schedule to ensure that certain consequential amendments made by that Schedule are able to apply as intended.
3.128 Former Division 388 of the ITAA 1997 which allowed a tax offset for landcare and water facility expenditure over 3 years was repealed with the introduction of the capital allowances system. However, where such expenditure was incurred in the 2000-2001 income year, the tax offset should be available to the taxpayer not only in that income year but also in the 2002 and the 2003 income years. Consequently, item 99 amends subitem 488(3) of that Schedule to ensure that former Division 388 of the ITAA 1997 continues to apply until the end of the 2002-2003 income year.
Application and transitional provisions
3.129 The amendments that relate to provisions that were inserted as part of the capital allowances system will apply in accordance with the application provision to the capital allowances system (i. e. from 1 July 2001). [Schedule 3, subitem 100(1)]
3.130 The amendments to section 40-880 will apply to expenditure incurred on or after 1 July 2001 where that expenditure does not form part of the cost of a depreciating asset. Again, this is in line with the application provision for the original section 40-880. [Schedule 3, subitem 100(2)]
3.131 Due to the changes to the application of some consequential amendments discussed in paragraph 3.127, the amendments to section 104-235 will apply to balancing adjustment events occurring on or after 1 July 2001 [Schedule 3, subitem 100(3)] . All other amendments to the CGT provisions are to apply to CGT events happening on or after 1 July 2001 [Schedule 3, subitem 100(4)] .
3.132 The amendments in items 62 to 64 are as a result of consequential amendments to provisions not being taken into account when later amendments repealed and replaced those provisions. They will apply as originally intended. [Schedule 3, subitems 100(5) to (7)]
3.133 The amendments to the STS provisions will apply in line with the application clause to those provisions (i. e. for assessments for the first income year starting after 30 June 2001) and for later income years. [Schedule 3, subitem 100(8)]
Outline of chapter
4.1 This chapter describes amendments to the ITAA 1936. Part 1 of Schedule 4 contains amendments that will enable:
& # 8226; the Commissioner to recover all PAYG withholding debts that are due and payable by making an estimate of the amount; y
& # 8226; taxpayers to reduce the Commissioner’s estimate of any PAYG withholding amount by making a statutory declaration.
4.2 Part 2 of Schedule 4 contains a number of technical amendments to Divisions 8 and 9 of Part VI of the ITAA 1936.
Context of amendments
4.3 Divisions 8 and 9 of Part VI of the ITAA 1936 facilitate recovery of amounts that have been deducted but not remitted to the Commissioner by empowering the Commissioner to make an estimate of the amount and to recover the estimated amount. The rules facilitate recovery of amounts withheld from payments made under the former PAYE, reportable payments and prescribed payments systems, and from natural resource, dividend, interest and royalty payments. These collection systems were replaced by the PAYG withholding system from 1 July 2000.
4.4 When the PAYG withholding system was introduced it was intended that Divisions 8 and 9 would also allow recovery of amounts payable under that system. Amendments to achieve this were made to section 222AFA, which states the object of the Division, and to the definition of remittance provision in section 222AFB. However, a number of other consequential amendments were inadvertently overlooked. These included amendments to provisions enabling a person who received an estimate of a liability under the PAYG withholding system to make a statutory declaration in order to have the estimate reduced or revoked.
Summary of new law
4.5 The Commissioner is able to take recovery action by estimating a debt for a PAYG withholding amount that has been withheld but not paid to the Commissioner. The amendments will expand this recovery power to all remittances required to be made under the PAYG withholding regime. The amendment will allow a taxpayer to have the estimate of any PAYG withholding debt reduced or revoked by giving the Commissioner a statutory declaration. The Commissioner may then recover the amount under the collection and recovery rules in Part 4-15 of Schedule 1 to the TAA 1953.
Comparison of key features of new law and current law
The Commissioner will be able to recover all remittances required to be made under the PAYG withholding regime. The Commissioner may then recover the amount under the recovery rules in Part 4-15 of Schedule 1 to the TAA 1953. A person who receives an estimate of any PAYG withholding amount will be able to have that estimate reduced or revoked by giving the Commissioner a statutory declaration.
The Commissioner may recover amounts that have been deducted from payments but not remitted under the PAYG withholding system and the former PAYE, reportable payments and prescribed payments systems, and from natural resource, dividend, interest and royalty payments. The Commissioner does this by making an estimate of the amount. A person who receives an estimate, other than an amount deducted under the PAYG withholding system, can have the amount reduced by giving the Commissioner a statutory declaration. The estimate and statutory declaration rules do not apply as intended for the recovery of all PAYG withholding amounts.
Detailed explanation of the amendments
4.6 Subsection 222AFB(1) currently defines ‘due date’ for recovery by estimates of amounts ‘deducted’ but not paid to the Commissioner. The definition is amended to ensure that it covers all amounts that must be paid to the Commissioner under the PAYG withholding provisions. This is done by amending the definition to provide that the due date means the day on, by or before which a person liable to remit an amount must pay that amount to the Commissioner. [Schedule 4, item 1, subsection 222AFB(1)]
4.7 A definition of ‘non-cash benefit’ is included for the purposes of the estimate provisions referring to amounts which must be paid under Division 14 in Part 2-5 of Schedule 1 to the TAA 1953. [Schedule 4, item 2, subsection 222AFB(1)]
4.8 The definition of ‘person’ in subsection 222AFB(1) includes the various entities that have obligations under the different withholding regimes. It is amended to make specific reference to an entity that has an obligation to pay under the PAYG withholding regime under Part 2-5 of Schedule 1 to the TAA 1953. [Schedule 4, item 3, subsection 222AFB(1)]
4.9 Section 222AGA specifies the circumstances when the Commissioner may make an estimate for the recovery of amounts not paid to the Commissioner and the things that the Commissioner may have regard to in making the estimate. It refers to ‘deduction’ obligations which would exclude the provision of non-cash benefits and alienated personal services payments from the scope of the estimate provisions. Paragraphs 222AGA(1)(a) and (b) are amended to remove the reference to deductions. Subsection 222AGA(2) which determines the scope of the Commissioner’s considerations in making an estimate is amended so that it specifically refers to the different obligations to pay under the former deduction regime and the PAYG withholding provisions in Divisions 12 to 14 and 16 of Schedule 1 to the TAA 1953. [Schedule 4, item 4, paragraphs 222AGA(1)(a) and (b) and item 5, subsection 222AGA(2)]
4.10 Section 222AGB specifies that the Commissioner must send a written notice of the estimate made under section 222AGA, to the person liable to pay the estimate. It provides that the notice must state that the estimate will be reduced or revoked if the person, or the person’s trustee, gives the Commissioner a statutory declaration stating that the person deducted a lesser amount or made no deductions. The section is amended to require the Commissioner to include in the notice, advice that the person, or the person’s trustee, may make a statutory declaration about obligations under the PAYG withholding provisions in order to have the estimate reduced or revoked. [Schedule 4, item 6, paragraphs 222AGB(2)(e), (ea) and (eb)]
4.11 Section 222AGD provides that an estimate under section 222AGA is revoked if the person, or the person’s trustee, liable to pay the estimate gives a statutory declaration that no deductions were made during the period concerned under the former PAYE, reportable payments and prescribed payments systems, and from natural resource, dividend, interest and royalty payments. Paragraph 222AGD(1)(b) is repealed and replaced to ensure that the estimate can also be revoked if the person, or the person’s trustee, makes a statutory declaration about amounts withheld, or which must be paid to the Commissioner, under the PAYG withholding provisions. [Schedule 4, item 7, paragraph 222AGD(1)(b)]
4.12 Section 222AGF specifies the requirements for a statutory declaration. Subsection (4) is repealed and replaced with a requirement that the statutory declaration must specify the total of amounts deducted, withheld or paid as appropriate, or that no amounts were deducted, withheld or paid. Subsection (5) is amended so that it makes reference to the generic remittance obligations. These amendments ensure that the declaration covers amounts which must be paid to the Commissioner under the PAYG withholding provisions as well as those under the former withholding system. [Schedule 4, item 8, subsection 222AGF(4) and item 9, subsection 222AGF(5)]
4.13 Subsection 222ANB provides that an amount purported to have been deducted for the purposes of a particular provision of the former collection regimes is taken to have been made for the purposes of that provision. The subsection is amended to also provide that amounts purported to have been withheld for the purpose of a particular PAYG withholding event are taken to have been withheld for the purposes of that withholding event. This will ensure that recovery of an amount by the Commissioner will not be prevented only on the grounds that the amount has been withheld under the wrong withholding provision. [Schedule 4, item 10, subsection 222ANB(3)]
Technical amendments
4.14 Section 222AOF provides notification rules for recovering amounts from directors of companies that received an estimate. It contains references to identifying directors from documents lodged under the Corporations Act 2001 . This Act was renumbered by Company Law Review Act 1998 and Corporate Law Economic Reform Program Act 1999 . Section 222AOF is amended so that it refers to the renumbered provision and to the renamed Australian Securities and Investment Commission. Section 222AIB is also being amended so that it refers to renumbered provisions of the Corporations Act 2001 . [Schedule 4, item 11, paragraph 222AIB(1)(a) and items 16 to 18, section 222AOF]
4.15 A correction is being made to section 222AIC to insert the word ‘of’ into the phrase “for the purposes of that section”. [Schedule 4, item 12, section 222AIC]
4.16 Section 222AJB refers to "penalty" payable under certain withholding Divisions where the underlying liability remains undischarged. From 1 July 1999 the penalty under those Divisions for late payment of tax is imposed by way of a general interest charge. The references to a ‘penalty’ in paragraph 222AJB(1)(b) and subsection 222AJB(3) are replaced by references to the ‘general interest charge’. The heading of the section is also amended to reflect this change. [Schedule 4, items 13 and 14, paragraph 222AJB(1)(b) and item 15, subsection 222AJB(3)]
4.17 Subsection 222AJB(3) refers to provisions of Divisions 1AAA, 3B or 4 of the ITAA 1936 and Subdivision 16B in Schedule 1 to the TAA 1953 which reduce the amount of general interest charge payable where a judgment debt carried interest. These references are no longer applicable as the relevant judgment provisions in those Divisions have been repealed and replaced by a generic judgment provision in section 8AAH of the TAA 1953. The amendment to subsection 222AJB(3) refers to that generic judgment provision. [Schedule 4, item 15, subsection 222AJB(3)]
Application provisions
4.18 The amendments made by Part 1 of Schedule 4 will apply to PAYG withholding amounts that are due and payable in the year ended 30 June 2002 and in subsequent years. [Schedule 4, item 19]
Schedule 1: Special transitional provision for some oyster farmers
While donating money to worthy causes is something we think is great, it can be greater still to donate appreciated stock instead of cash. The tax advantages can be worth it. Here's how it works.
The first thing you need to do is evaluate how long you've held the stock. Stock held for one year or less falls in the short-term category, while stock held for more than a year is long-term. Next, figure out the stock's fair market value. This is what you would receive if you sold the stock on the day you make the charitable contribution. It doesn't mean you have to sell the stock then -- just figure out its value on that date.
With stock held for the short term, you can claim it as a contribution, and deduct the fair market value less the amount it has appreciated since you've held it. In most cases, this means that your deduction is basically your initial cost basis for the stock. For example, if you bought shares for $800, held them for a year or less, and donated the bundle when it was worth $1,000, you're looking at an $800 deduction. Not a very good plan from a tax standpoint.
But, if the sale of the stock on the day of the contribution would result in a long-term capital gain (meaning that you held the shares for more than one year), you can generally deduct the full fair market value of the donated shares. Example: You've held 100 shares of stock for more than one year and the shares are worth $20 each on the day you donate them. Your charitable contribution deduction is $2,000 -- no matter at what price you originally bought the shares.
Consider that, if you bought the shares long ago at $5 per share, your capital gain would be in the neighborhood of $1,500. By donating the stock, there's no gain on which to be taxed. At 20%, the tax on $1,500 would have been $300. You're getting a deduction for a $2,000 donation, and can simply ignore any taxes on the appreciation. You can thumb your nose at Uncle Sammy for the $300 in taxes that you would have paid if you had you actually sold the stock and donated the cash. Powerful stuff, eh?
But, don't forget: The best-laid plans for charitable contributions could backfire on you if you don't itemize your deductions. If you use the "standard" deduction, a charitable contribution of appreciated stock might not provide you with all of the tax benefits you expect. Obviously, the desire to make a charitable contribution shouldn't be exclusively tax-benefit driven, but it's always nice to receive the most tax-favorable treatment available.
How It's Done
To donate stock, you just have to transfer ownership of the shares. That may be easier said than done, but don't become discouraged. Your broker can help you with that, as can the charity to which you're planning to contribute. In some cases, you might find that the charity has an account with the same broker that you use. That would make it a simple "book" entry for the broker to make the transfer. and secure your charitable contribution.
In other cases, you may have to "sign over" the actual shares to the charity. That can be a bit more of a hassle. for both you and the charity. If you are going this route, make sure that you have an understanding of how you physically transfer shares of stock. Perhaps you can talk your charity into opening an account with your broker. Then you would be back to the simple "book" transfer. You'll generally find that charities are very easy to work with when you offer them a donation.
Finally, you might consider using a commercial charitable "gift trust" as a conduit between you and the charity. These gift trusts allow you to transfer the shares to the trust, take the appropriate deduction for the appreciated value of the shares, and then write a check (from the trust) to the charity for the donation amount that you would like to make. Using a gift trust is especially helpful when you have a large position in a stock (or stocks), but you have a number of charities that you want to favor with a contribution. It makes the paperwork much easier to deal with.
Many mutual funds have these types of gift trusts available. One commercial fund that I have used in the past is the Fidelity Charitable Gift Fund. You might want to check this (and others) out, since they offer some real advantages from a tax, administrative, and investment standpoint.
Which Stocks to Give?
If you're planning to donate stock, choose carefully which shares you give. The factors that should most influence your decision are how long you've held the given shares and whether they have appreciated or not (and by how much).
If a stock has actually fallen in value, for example, you're better off selling it so that you can claim the capital loss on your tax return. Then, if you wish, you can donate the proceeds of the sale to generate a contribution deduction.
If the stock you donate has appreciated considerably, you'll realize a large charity deduction. Estupendo. But, remember that your total deductions for this type of charitable contribution are generally limited to 30% of your Adjusted Gross Income (AGI). And, even though you can carry-over (but not back) any excess contribution for five years, you won't receive the most current "bang" for your buck if you over-contribute.
Remember that making a contribution of a stock rids your portfolio of that stock. Is that what you want to do? You might consider making a contribution of a stock that has not only appreciated, but has also fallen out of (your) favor because the fundamentals of the company have changed. Contributing a stock that you really love can be a not-so-great idea, as you'll miss out on any future appreciation. The charity will likely sell the stock that you donate as soon as it receives the shares. So, giving some little gem that you found, thinking that the charity will benefit from its future growth, may not do as much good as you hope, and might also not be healthy for your portfolio. It's all part of the process of managing your investments and maximizing your contributions. It's a balancing act.
Finally, if you do have a winner that you think is going to be a bigger winner in the future, you may still make a contribution of that stock and keep it in your portfolio. How? Simply buy it back after you make the charitable contribution. It'll cost you real live dollars to do it, but you may still benefit greatly in the long run. And, you don't even have to wait more than 30 days before buying it back, as the wash sale rules don't apply to stock sold at a profit.
A Foolish Thought
We believe that charitable giving is just another part of a Fool's life. And, it's a good life. Part of being a Fool is helping others -- and charitable contributions do just that. If done correctly, the only loser is Uncle Sammy, and he isn't upset about being a loser here. These deductions are granted by legislative grace because the government realizes that we're all better off when many of us make contributions to our favorite charities. So, if you can do good things with your contributions, and save yourself tax dollars at the same time, it's certainly something to consider.
Remember, though, as with all tax-related issues, there are always details to consider that relate to your particular situation. You'd be well advised to consult IRS Publication 526 or a tax professional for additional information, restrictions, and requirements.
This forum and the information provided here should not be relied on as a substitute for independent research to original sources of authority. The Motley Fool does not render legal, accounting, tax, or other professional advice. If legal, tax, or other expert assistance is required, the services of a competent professional should be sought. In other words, if you get audited, don't blame us.
Gift Types
Recursos
Legal Name: Graceland University Tax ID Number: #42-0707114 Incorporated In: Lamoni, IA
Graceland has an estate planning attorney on retainer to answer questions and help you through the process. Contact Kelly Everett, VP of Institutional Advancement, to see if our attorney can be of assistance to you.
Cash
Make a cash gift by check or debit/credit card. See our Make a Gift Today web page.
Securities and Stock
Transferring appreciated stock provides the best tax advantage. Transferring the stock to Graceland’s broker avoids capital gains tax AND provides a charitable tax deduction. Use this form to transfer stock from your broker to our broker. Use this form to notify us of the stock transfer.
Bienes raíces
Consider donating your residence, commercial property, farm land or other real estate. Receive a tax deduction with no further rights or liabilities related to the property.
A Life Estate allows property to be donated and the donor retains interest in the property with rights to live in the property or receive income the property generates while the donor is still living. Taxes and expenses to maintain the property remain the obligation of the donor until their passing.
Personal Property
Give assets of value such as jewelry, autos, collections, equipment, or artwork. Assets valued over $5,000 require an appraisal for tax purposes.
Charitable Gift Annuities
Make a gift that pays you income for your lifetime. The contract can be for one or two people. A portion of your gift will be returned to you in fixed annuity payments based on your age and the American Council on Gift Annuities suggested rates. The remainder at your death will be used to support Graceland’s mission. A portion of the gift will qualify for a tax deduction in the year the gift annuity is executed. The annuity payments received may be partially tax exempt.
Charitable Gift Annuity - Deferred
Make the gift now but defer receiving payments. The annuity payments can be considerably larger.
Charitable Remainder Unitrust
Make a gift and receive variable income based on the annual market value of the assets transferred.
Charitable Lead Trusts
Make a gift of trust income for a specified number of years. At the end of the term the trust assets revert back to the donor or designee. The trust assets can be transferred to children while greatly reducing gift taxes.
Life Insurance Beneficiary
Include Graceland as a beneficiary on an existing policy, or purchase a whole life policy making Graceland the owner and beneficiary. Donate the annual premiums for Graceland to continue the policy until it is paid up.
IRA Beneficiary
Simply change your beneficiary on your IRA account to include Graceland University.
Estate Planning Bequests
Include Graceland to receive a share of your estate in your will or trust as an amount or percentage.
Sample Bequest Language
The official bequest language for Graceland University is: "I give [the sum, percentage, or description of property] to Graceland University, Lamoni, IA to be used for the benefit of [the name of the campus, college or program]." NOTE: Gifts may be designated to benefit existing funds, or (for gifts $50,000 and above) to create new endowed funds. In these cases, it would be appropriate to also add "in accordance with the terms of a separate Memorandum of Understanding." Gifts may also be designated as unrestricted, in which case the phrase "to be used for its general tax exempt purposes but without other restrictions to use" may be substituted.
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Dallas Divorce Law Blog
Tag Archives: tax-deduction
By Katie Lewis on January 2, 2017 Posted in Dallas County Divorce
It is important when parents are performing a 50/50 possession schedule that there are agreements contained in the divorce decree dealing with which parent is entitled to receive the tax exemption for the child.… Continue Reading
Property distribution in divorce is difficult even in simple estates, but complications abound for those with more complex mixes of assets.… Continue Reading
How to determine whether payment of money to a spouse post-divorce qualifies as alimony under Internal Revenue Code §71 for tax-deduction purposes - Part 3.… Continue Reading
How to determine whether payment of money to a spouse post-divorce qualifies as alimony under Internal Revenue Code §71 for tax-deduction purposes - Part 2… Continue Reading
How to determine whether payment of money to a spouse post-divorce qualifies as alimony under Internal Revenue Code §71 for tax-deduction purposes. & Hellip; Continue Reading
Michelle May O'Neil strives to provide clients with high-quality representation in a personalized atmosphere. She has over 20 years of experience representing men, women, and children related to family law matters such as divorce, child custody, and complex property division.
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Kroger Company (KR)
The Company has a variety of plans under which employees may acquire common stock of Kroger. Employees of Kroger and its subsidiaries own shares through a profit sharing plan, as well as 401(k) plans and a payroll deduction plan called the Kroger Stock Exchange. If employees have questions concerning their shares in the Kroger Stock Exchange, or if they wish to sell shares they have purchased through this plan, they should contact:
The Bank of New York
Employee Investment Plans Division
Newark, New Jersey 07101
Toll Free 1-800-872-3307
Questions regarding the Company’s 401(k) plan should be directed to the employee’s Human Resources Department or 1-800-2KROGER. Questions concerning any of the other plans should be directed to the employee’s Human Resources Department.
SHAREOWNERS: The Bank of New York is Registrar and Transfer Agent for the Company’s Common Stock. For questions concerning changes of address, etc. individual shareowners should contact:
Income is more than a paycheck when determining child support
Roza Gossage
750 ILCS 5/505 (a)(3)(a) sets forth that “net income is defined as the total of all income from all sources (Italics added) less the deductions set forth in this section.”
Income is not defined in terms of “cash” payments or monies earned but rather the total of all income from all sources. Webster’s Third New International Dictionary defines income as “the money or other form of payment one receives.” It has likewise been defined in Black’s Law Dictionary as “the money or other form of payment that one receives, usually periodically, from employment, business, investments, royalties, gifts, and the like.” (at page 778, 8th ed. 2004). Under these definitions, a variety of payments or benefits received by an employee or sums received by the payor will qualify as “income” for purposes of Section 505(a)(3) of the Act even though the sums would not be taxable, as income, under the Internal Revenue Code.
The Illinois statute relating to income is one of inclusion and not a differentiation or exclusion of the types of income. This is consistent with Illinois public policy of maximizing child support awards.
The language of the statute and case law is clear that income is income from all sources and not just earned income, even if the income is non-recurring income. The concept of income under the statute is generally interpreted broadly by the courts. In IRMO Dodds, 222 Ill App 3d 99 583 NE 2nd 608 (2nd dist 1991), the court held that lump sum worker’s compensation award, was income under the statute. IRMO of Hart, 194 Ill App 3rd 839 551 NE 2nd 737 (4th dist 1990), held that non-recurring income, is included as income for determining child support and may not be deducted in calculating net income pursuant to the statute. The 5th District in the case of IRMO Klomp, 286 Ill App 3rd 710, 676 NE 2nd 686 -1997), indicated that pension benefits, although classified as marital asset and property in the divorce case, is still income for purposes of child support. IRMO Lindman, 356 Ill App 3rd 462, 824 NE 2nd 1219 (2nd dist 2005), indicated that an IRA, also awarded as property, the withdrawals thereof, are still considered income, for purposes of child support. The Eberhardt court, 387 Ill App 3d 226, 900 Ne 2nd 319 (1st dist 2008), also concurs with the courts in determining that income is not limited to specific type of income or monies or assets.
In IRMO: Marriage Worral, 334 Ill App 3d 550, 778 Ne 2nd 397 (2nd dist 2002), the court spoke that income is income is from all sources, and the Illinois Supreme Court specifically made that clear when it stated that in the case of IRMO: Rogers, 213 Ill 2nd 129 820 NE 2nd 386 (2004), which set forth that gifts made to the payor, were to be considered as income, for purposes of child support.
Military allowances for off base housing, (IRMO: Baylor, 324 Ill app 3d 213, 753 Ne 2nd 1264 (4th dist 2001), as well as, other payments or contributions reflecting sums or assets, given to an employee, as part of their compensation, constitutes income for purposes of support.
The 5th District refused to allow the payor/spouse to deduct his bonuses even though it is the subject to the payor meeting certain employee expectations and goals to obtain the bonus, from the gross amount of income in determining child support. IRMO Anderson, no 3-09-0829 (Nov. 15th 2010 (Tazewell Co.).
In the case of Einstein v. Nijim, 831 NE 2nd 50 (4th dist 2005), the court included the bonus of the payor as income for child support. despite the argument that bonus was non-recurring. This court also included the $300 bi-monthly automobile allowance, as income, for purposes of determining child support.
The court addressed the issuance of stock grants as income in the cases of IRMO: Colangelo and Sebela, 355 Ill App 3d 383, 822 NE 2nd 571 (2nd dist 2005). The Husband was awarded stock options in his divorce as his share of the distribution of marital assets. When he exercised the stock options, that were awarded to him in the divorce, he argued that the exercise of the stock should not be included as income for child support. The court disagreed with him and found that the exercise of the stock option constituted income for child support purposes.
Other states have addressed issues regarding stock, in that the Ohio case of Murray v. Murray, 128 Ohio App. 3d 662 716 Ne 2nd (123th dist Warren County 1999), held that unexercised stock options, did constitute income for child support purposes, under their statute, which is similar to our Section 505. In that case, the Ohio court noted that the Husband received stock options, on a periodic basis and that these options were also a part of his compensation for his employment. That court noted that as a matter of policy, if unexercised stock options were not included in the payor’s income, “an employee receiving such options, would be able to shield a significant part of his income, from the courts and deprive his children, of the standard of living, they would otherwise enjoy and that is in direct contradiction to the very purpose of the child support statute.
The Supreme Court, in the Rogers case also commented on the issue of non-recurring income. ‘The relevant focus under Section 505, is the parent’s economic situation at the time the child support calculations are made by the court. If a parent has received payments that would otherwise qualify as “income,” under the statute, nothing in the law permits those payments to be excluded, from consideration, merely because the payments might not be forthcoming in the future. The Act does not provide for a deduction of recurring income, in calculating net income for purposes of child support. & Rdquo;
Other states have explored the issue of what is to be included in determining what gross income is to be considered in determining child support.
The Missouri Supreme Court, in the case of Keller v. Keller, 224 SW 3rd 73. examined the payor’s withdrawal of loans to himself and he was the sole shareholder of the corporation. The court also considered the increase in corporations retained earnings, which had more than doubled since the marital dissolution. The court concluded that these were financial resources, from which he personally benefited. That court considered retained earnings, even though the payor did not receive those funds personally, to be included as income to the payor, for purposes of determining child support. (Missouri RSMO 452 340).
The California case of IRMO Cheriton, 111Cal. Rptr 2d 755 (Cal app 2001), states that stock options are part of a parent’s compensation and is included, as income, for the purpose of child support. “Where a parent enjoys “substantial income, in addition, as part of his overall employment compensation and must be used to calculate child support” Cheriton at pg. 767, citing IRMO Kerr, 77 Cal App.4th at P 96. The Cheriton case also discusses the meaning of “gross income,” which is similar to the wording of the Illinois statute, “gross income means income from whatever source derived ”Section 4058, subd (a).”
The moral of the story is: If it looks like, smells like, and feels like a gain, income or additional asset or money, whether it was earned or received, it is income. ■
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Strategic giving: think beyond cash
Why donating complex assets may be a tax-efficient way to make more of a difference.
Americans have always been known for their generosity and devotion when it comes to giving. But many people with charitable intentions tend to be reactive with donations, giving by cash or check, and often are unaware that donating certain tax-advantaged assets instead of cash may enable them to have a greater impact. So it may be helpful to think more strategically when putting together your personal giving plan.
Typically, cash and appreciated publicly traded securities—such as stocks, bonds, and mutual funds—are the two types of assets used in individual charitable giving, but donating certain complex assets may be a better option in some cases. For many, charitable contributions of illiquid assets—such as private C - and S-corporation stock, restricted stock, limited partnership or LLC interests, and other privately held assets—may be an effective and tax-efficient method of giving. These types of interests often have a relatively low cost basis for the donor—and for entrepreneurs who have founded companies, the cost basis may effectively be zero. The benefits of the strategy of donating low-cost-basis complex assets are even more pronounced when considering that these assets when sold may trigger significant capital gains and can therefore come with a hefty tax liability.
"We are seeing a significant increase in donors—including those investors going through mergers and acquisitions—leveraging a broader spectrum of their assets, such as restricted stock and privately held securities, for charitable purposes. This is a sign of more strategic charitable planning on the part of those who are charitably inclined," said Karla Valas, managing director of the complex assets group of Fidelity Charitable. an IRS-qualified 501(c)(3) public charity with a donor-advised fund program.
Valas believes this is an exciting trend, because these types of assets can have powerful tax advantages, and donating them to a donor-advised fund makes the process easy for the receiving charities.
Options for donating complex assets
When such an asset is donated to a public charity in this manner, not only can it minimize any potential capital gains exposure for the donor, but it also is generally entitled to an income tax deduction in the amount of the full current market value, 1 not just the cost basis. This tax treatment offers significant benefits at the federal level and frequently at the state level as well.
After outlining their charitable goals with their advisers, investors and their advisers typically devise a detailed plan for their privately held assets that outlines immediate and long-term charitable goals, and then decide upon the best method for donating the assets.
Investors often quickly find that their options are limited. Many nonprofit organizations are not well equipped to handle complex assets, and therefore might require that a donor first sell the assets and contribute the proceeds. A donor in this situation may have taxable income, and thus would not, in most cases, choose to donate the entire amount of the proceeds. Rather, the donor might deduct his or her “cost” to liquidate (including both the selling costs and the incurred tax) and then donate the net proceeds—thereby reducing the total amount of the charitable contribution. In this situation, the donor would be able to take a deduction only for the amount of the resulting cash contribution rather than for the fair market value of the contributed asset prior to liquidation.
Donors who look into creating a private foundation often find the setup fraught with complexities and higher costs—similarly reducing the amount of money that eventually reaches the donor’s chosen charities. Moreover, contributions of most illiquid assets to a private foundation are generally limited to the cost basis for deduction purposes rather than the current (or fair) market value. Donating these types of assets to private foundations is further complicated by IRS rules and regulations related to “self-dealing,” “jeopardizing investments,” and “excess business holdings.” However, private foundations do have a certain advantages, such as not being limited to mere “advisory” privileges, and the ability to have family members sit on boards and receive compensation.
In many cases, an optimal method for donating complex assets to charity—measured by cost, flexibility, simplicity, and tax benefits to the donor, as well as by the degree to which it maximizes the net proceeds ultimately made available to charitable organizations—may be to make the contribution to a charity with a donor-advised fund program. Even donors with private foundations may wish to consider establishing a complementary donor-advised fund (DAF) specifically to receive complex asset donations. Once established, the private foundation founders can recommend grants to public charities from the DAF in accordance with the mission of the private foundation.
Many of the larger donor-advised fund programs in the United States, including Fidelity Charitable, have the requisite expertise and dedicated professional resources to work directly with donors and their advisers to maximize the giving power of these assets.
How a donor-advised fund works
For those who may not be familiar with the DAF concept, with charities that have donor-advised fund programs, donors make irrevocable contributions to the charity, and the charity then establishes a DAF account from which the donor is able to recommend grants to other eligible charities—generally speaking, IRS-qualified 501(c)(3) public charities—from the balance in their DAF account.
The benefits of a DAF are numerous. First, donors are able to make a charitable contribution and are eligible for a tax deduction on that contribution in a specific year, but are able to distribute their grants over a period of years. Donors are permitted, of course, to make further contributions at any time, but having the balance in place in their DAF means that they can engage in longer-term charitable giving, allowing them to maintain a certain level of giving regardless of changing financial circumstances—a critical point during challenging economic times, both for donors and for their recommended charities.
Second, individuals who create a donor-advised fund are typically also able to recommend how those funds should be invested. Many DAFs offer a variety of investment pools that allow donors to recommend the investment style that fits best with their time horizon for recommending charitable grants—growth, fixed income, money market, or blended investments. The funds that have been contributed to the DAF have the opportunity thereafter to grow tax free. 2 In addition, DAF programs provide consolidated tax reporting for the year’s contributions, eliminating paperwork for the donor, and simplifying and improving the process for compliance with IRS requirements.
Donor-advised funds are more flexible and cost-effective than many other charitable giving options. They help donors achieve strategic, thoughtful giving for themselves and, in many cases, for their entire family. Often, in fact, donor-advised funds are established in the name of a donor’s family; by planning for charitable contributions and grants over a period of time—one year, five years, 10 years, or more—families can make a continuing difference.
Donating complex assets via a donor-advised fund
In the specific case of donating complex assets, the sponsoring charity of the DAF accepts responsibility for liquidating the assets in compliance with IRS rules and regulations—including handling all legal review of documents and IRS reporting. This enables the grant-receiving charitable organizations to focus on what they do best—fulfilling the organization’s charitable mission—rather than overseeing an often-complicated financial process and being responsible for getting the transactions right for both the donor and themselves.
As mentioned, the donation of these complex assets to a public charity means that donors themselves realize no capital gain, and thus pay no capital gains tax. This helps ensure that the highest possible percentage of the funds from the sale of the asset or assets actually goes to the chosen charitable organization.
Perhaps best of all, by donating complex assets to establish a DAF, these donors are able to diversify their giving with one asset in that they are able to recommend multiple grants to many different charities, as opposed to donating the asset (or assets) to one nonprofit organization—or going through a transfer agent to break up the asset to facilitate multiple gifts. The experienced charitable giving professionals at the DAF program are able to do this work for the donor.
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Learn more about donor-advised funds .
Call a Charitable Planning Specialist at 800-262-6039 for more information.
ch16 - ch16 Student:
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ch16 Student: ___________________________________________________________________________ 1. In general, a corporation may choose to use either the accrual or cash method of accounting no matter how large the corporation. True False 2. Corporations calculate adjusted gross income (AGI) just as individuals do. True False 3. Corporations have a larger standard deduction than individual taxpayers because they generally have higher revenues. True False 4. Large corporations are allowed to use the cash method of accounting for at least the first two years of their existence. True False 5. Although a corporation may report a temporary book-tax difference for an item of income or deduction for a given year, over the long term the total amount of income or deduction it reports with respect to that item will be the same for both book and tax purposes. True False 6. An unfavorable temporary book-tax difference is so named because it causes taxable income to decrease relative to book income. True False 7. Income that is included in book income, but excluded from taxable income, results in a favorable, permanent book-tax difference. True False 8. Federal income tax expense reported on a corporation's books generates a temporary book-tax difference. True False 9. For a corporation, goodwill created in an asset acquisition generally leads to temporary book-tax differences. True False 10. In a given year, Makoto Corporation has goodwill impairment in excess of the allowable amortization for tax purposes. It has a favorable temporary book-tax difference for that year. True False 11. For incentive stock options granted when ASC 718 (a codification of FAS 123R) applies, the value of the options that vest in a given year always creates a permanent, unfavorable book-tax difference. True False 12. For tax purposes, companies using nonqualified stock options deduct expenses in the year the options are exercised. True False 13. A nonqualified stock option will create a permanent book-tax difference in a given year if it vests during the year but is exercised in a later year. True False 14. In contrast to an individual, a corporation may deduct the entire amount of a net capital loss. True False
15. A corporation may carry a net capital loss forward five years to offset capital gains in future years but it may not carry a net capital loss back to offset capital gains in previous years. True False 16. A corporation may carry a net capital loss back two years and forward 20 years. True False 17. A corporation may carry a net capital loss back three years and forward five years. True False 18. Corporations can carry net operating losses (in years other than 2008 and 2009) back two years and forward 20 years. True False
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The wording of new section 46-30 is intended to clarify the table referred to in new section 46-50 when it is adapted to expenditure on software. The words are not to be interpreted restrictively (ie. as applying only to items in the table which contain the words ‘its cost to you’).
Expenditure incurred by software developers and manufacturers
31. New Division 46 is intended to apply to software which is acquired or developed for use within the business. It is not intended to extend to situations where software development for exploitation is the business. To ensure this result the expression ‘expenditure on software’ in new section 46-10 focuses on the functions which the software was intended to perform. If the acquisition or development was principally (at least 50% of the expenditure) for this purpose, the expenditure is dealt with under the Division. A software distributor, manufacturer or developer would acquire or develop software for the principal purpose of exploiting that software with a view to profit.
32. A taxpayer may have a dual purpose in incurring expenditure on software. For example a taxpayer may routinely develop new software applications for its own business purposes but licence it to other taxpayers in its industry. In such situations it will be a question of fact as to the principal reason for the expenditure. Examples 1 and 2 in new section 46-10 further clarify the intended application.
33. Expenditure by software manufacturers, developers and the like which does not come within the definition of ‘expenditure on software’ under new Division 46 may be, depending on the particular circumstances, revenue in nature or covered by specific capital expenditure provisions (eg. Division 373 of the 1997 Act).
34. Section 42-15 will allow you to deduct an amount for depreciation of a unit of software for an income year if, in that year you use the software or have it installed ready for use, for the purpose of producing assessable income.
Effective life
35. New section 46-40 provides that the depreciation arrangements use an effective life, for the purposes of using the depreciation provisions in Division 42, of 2½ años.
36. The following paragraphs elaborate on the linkages to Division 42, the prime cost method and the balancing adjustments where software ceases to be used within the 2½ year effective life.
Prime cost method and rate
37. New section 46-35 provides that the amount you can deduct will be worked out using the prime cost method under Subdivision 42-E of the 1997 Act. However, you cannot deduct more than the undeducted expenditure on the software (subsection 42-20(2)). New section 46-30 provides that the calculation of your deduction will be based on your expenditure on software. The rate you use to calculate your deduction is set out in new section 46-45 as 40% per annum.
38. The prime cost method is set out in section 42-165 of the 1997 Act. Under this method the deduction for an income year is calculated using the following formula:
expenditure x days owned X rate
39. Under the depreciation provisions in Division 42 of the 1997 Act, the deduction is reduced by an amount that reasonably reflects the extent (if any) you neither used the software, nor had it installed ready for use, for the purpose of producing assessable income during the period in the income year you were its owner (section 42-170). In the case of taxpayers who are individuals, for example, this means the extent to which you used the software for private purposes.
Balancing adjustment event
40. Under subsection 42-30(3), a balancing event will occur in relation to software where it is disposed of, is lost or destroyed or subsection 42-330(1) applies (partial change in ownership). New subsection 46-50(1) includes an additional event to cover the situation where you do not dispose of the software but effectively cease to use it and no longer have it installed ready for use.
41. Subsection 42-30(1) provides that where a balancing adjustment event occurs and you have deducted or could have deducted an amount for expenditure on software, you must make a balancing adjustment calculation. A balancing adjustment calculation is also required where a balancing event occurs and, if Common rule 1 (roll-over relief for related entities) applied to your acquisition of software, the transferor or an earlier successive transferor deducted or can deduct an amount for expenditure on software.
42. Subsection 42-30(1) provides that no balancing adjustment calculation is required if Common rule 1 applies to the balancing adjustment event. Also, where a balancing adjustment calculation results in you being required to include an amount in assessable income, balancing adjustment relief may be available (see sections 42-285, 42-290 and 42-295).
Example D – Purchased software no longer used within 2½ years [1]
Consider the case of software which is purchased to assist in the preparation of taxation returns for a specific year. That software is purchased for $350 on 1 June 1998 for the preparation of taxation returns for the year ending 30 June 1998. If you assume that the software is installed ready for use on the date of purchase, the deduction for the income years ending 30 June 1998 and 1999 will be:
30 June 1998: 30/365 days x 40% x $350 = $11.51
30 June 1999: 40% x $350 = $140.00
If you cease to use the software on 30 June 1999 and cease to have it installed ready for use in that income year, a further deduction equal to the undeducted expenditure of the software, $198.49 ($350 less $151.51) will be available in the 1998-99 year of income as a balancing adjustment (section 42-195). This is because new section 46-50 includes as a balancing event where software is permanently ceased to be used and installed.
If in the above example, you continue to use the software over a 2½ year period from the date of purchase and installation, the following deductions for income years will be available in respect of the software:
* subsection 42-20(2) limits deductions to no more than the undeducted expenditure on the software.
Example E – Upgrades etc.
You acquire Windows 95 on 15 May 1998 for $500 and then on 30 July 1998 acquire Windows 98 for $160. Windows 95 is to be depreciated over 2½ years from 15 May and Windows 98 is deductible in full under new section 46-65 in the income year in which the expenditure is incurred as its value does not exceed $300. The undeducted expenditure on Windows 95 cannot be written off on 30 July 1998 as it remains on the system and is required for Windows 98 to operate.
Example F – New acquisition to replace existing software
You acquire Word 6 on 15 May 1998 for $400 and then on 30 July 1998 acquire Word 97 for $500. You uninstall Word 6 and install Word 97. New section 46-50 will allow the undeducted expenditure on Word 6 to be written off in the 1998-99 year of income as Word 6 is no longer used from 30 July 1998.
Software purchased with another asset
43. Sometimes software is purchased as part of a package. For instance a computer may be sold with several software packages, a printer and a fax/modem for one undissected price. The expenditure on software for depreciation purposes will be so much of that total undissected price as is reasonably attributable to the software (item 2 of section 42-65).
Example G – Software acquired as part of a package
A computer is purchased for $3,000 with three software packages included in the price. If the computer and the software were purchased separately, the software would cost $2,000 and the computer would cost $2,000. As the software represents 50% of the value of the package, $1,500 (ie. 50% of $3,000) would be reasonably attributed to the software. Assuming the cost of each package exceeded $300, the $1,500 would be written off at 40% per annum over 2½ años.
Subdivision 46-C Deductions for certain expenditure on software
Minor amounts
44. New subsection 46-65 allows an immediate deduction for expenditure on software which does not exceed $300. The conditions under which this deduction is allowed are:
& # 8226; the total cost of the software does not exceed $300;
& # 8226; the expenditure relates to a unit of software and the total cost to you of that unit of software and any other identical or substantially identical units of software acquired in the current income year does not exceed $300; y
& # 8226; the software is used, or installed ready for use in the current income year, for the purpose of producing assessable income.
45. Section 42-170 will operate to reduce the deduction to the extent that the software is used, or installed ready for use, for purposes other than gaining or producing assessable income.
Multiple Copies of Identical Software
46. Where multiple copies of the same software package (or similar packages) are purchased in a year, and the total expenditure is in excess of $300, the expenditure is required to be written off over 2½ años.
Example H – Bulk purchases
A business with 10 employees connected by a local area network purchases 10 copies of the same $200 software package on the same day. The total expenditure ($2,000) will be deductible over 2½ años.
Example I – Treatment for each software application when more than one is acquired
A taxpayer purchases a copy of a $200 software package on 1 July 1998. The taxpayer purchases another copy of the same package on 1 January 1999. The expenditure on both packages must be deducted over 2½ años. For the 1998-99 year of income, the deduction for the first package will be $80.00 (40% of $200) and the deduction for the second package will be $39.67 [181/365 of (40% of $200)].
Software you will never use
47. New section 46-70 allows an immediate write-off of any unrecouped expenditure where software is effectively abandoned before it is used or installed ready for use. If any consideration is received from disposal of an abandoned software project new subsection 46-70(2) ensures that the total deduction available in respect of the project is equivalent to the total unrecouped expenditure of the software project less any consideration received in respect of the project. Where the proceeds of a sale exceed the total unrecouped expenditure, in relation to a software project, the excess will be assessable either as a capital gain or as income according to ordinary concepts.
48. A deduction for undeducted expenditure is also available where the software is ‘abandoned’ after it is used or installed ready for use under new subsection 46-50(1) .
Software related to Y2K compliance
49. Expenditure on software which has the principal purpose of ensuring that an existing computer system attains Y2K compliance will be deductible in full in the year it is incurred provided the expenditure is incurred before 1 January 2000. Principal purpose means that at least 50% of the expenditure is in respect of Y2K compliance. [New subsection 46-75(1)]
50. Where the expenditure does not have a principal purpose of ensuring Y2K compliance, an immediate deduction will be available to reflect the extent of Y2K expenditure. [New subsection 46-75(2)]
51. New subsection 46-75(3) only allows the deductions available under new subsection 46-75(1) or (2) to the extent that the expenditure is incurred with the intention of producing assessable income.
52. New section 46-75 is necessary to provide the concession available for Y2K expenditure which is no longer immediately deductible following the withdrawal of IT 26. The type of expenditure envisaged would be capital in nature and would cover expenditure incurred in acquiring new/replacement software or substantially rebuilding current software to ensure an existing computer system attains Y2K compliance.
53. ‘Y2K compliance’ work would include, for example, activities to ensure that the following occurrences do not result in the inaccurate representation of a date or dates:
& # 8226; the year 2000, or subsequent years requiring a 4 digit representation;
& # 8226; the year 2000 is a leap year; o
& # 8226; using ‘99’ or ‘00’ as reserve values on the basis that an application would not be used past 1998.
54. Other Y2K compliance work could arise in relation to:
& # 8226; platform limitations such as register storage sizes; o
& # 8226; licences for software expiring when the ‘00’ date is reached.
55. The question of what is the principal purpose of the expenditure will be a question of fact in all cases. A taxpayer may purchase or develop software with a mix of purposes but if Y2K compliance is not the principal purpose, the extent of other expenditure which is not Y2K related will be dealt with under new Subdivision 46-B or 46-D . For example, if a taxpayer purchased a new version of a software program in order to gain the benefits of improvements through increased functionality over the existing version and the new software was also Y2K compliant, the principal purpose of that expenditure may not be to ensure Y2K compliance.
Example J – No immediate deduction
On 10 December 1999, Buford Pty Ltd commences business and incurs $3,000 expenditure on acquiring new software which is Y2K compliant.
Regardless of Buford’s purpose, the expenditure is not immediately deductible under new section 46-75 as it is not in relation to an existing computer system. It must therefore be considered under new Subdivision 46-B and depreciated over 2½ años. The same result would occur where the software was acquired to computerise an activity (eg. invoicing or payroll) which was previously done manually.
Example K – Immediate deduction where principal purpose of expenditure is to achieve Y2K compliance
Buford Pty Ltd incurs $2,000 expenditure on rebuilding software on 10 December 1999, to support its existing business. The rebuild is done in-house. The principal purpose (60%) of the expenditure is to ensure Y2K compliance. The residual (40%) purpose is to provide increased functionality. On 15 January 2000, Buford incurs a further $1,000 in relation to the rebuild before it comes on-line.
The expenditure of $2,000 incurred on 10 December 1999 is immediately deductible under new subsection 46-75(1) as:
& # 8226; it is incurred before 1 January 2000;
& # 8226; it is in relation to an existing computer system; y
& # 8226; its principal purpose is ensuring Y2K compliance.
The expenditure incurred on 15 January 2000 (ie. $1,000) is not immediately deductible under new section 46-75 as it is incurred after 1 January 2000 and therefore must be considered under new Subdivision 46-B or 46-D .
Example L – Not to achieve Y2K compliance
Buford Pty Ltd incurs $2,000 expenditure on rebuilding existing software on 10 December 1999, partly to ensure Y2K compliance (30%). However, the main purpose of the expenditure, is to provide increased functionality (70%). The rebuild is done in-house.
The expenditure incurred on 10 December 1999 (ie. $2,000) is to be apportioned, $600 (being 30% of $2,000) which is immediately deductible under new subsection 46-75(2) as:
& # 8226; it is incurred before 1 January 2000;
& # 8226; it is in relation to an existing computer system; y
& # 8226; part of its purpose is ensuring Y2K compliance.
The remaining expenditure of $1,400 is not immediately deductible under new section 46-50 and therefore must be considered under new Subdivision 46-B or 46-D and depreciated over 2½ años.
Subdivision 46-D Software Pools – Software Pooling Method
Deducting expenditure on in-house development or commissioning the development of software using a pooling method
56. New Subdivision 46-D will allow taxpayers, in certain circumstances, to choose to calculate depreciation deductions under a ‘software pooling method’. Expenditure incurred before 1 July 1999 on software projects which commenced up to 10 am by legal time in the Australian Capital Territory on 11 May 1998 are not pooled as Item 22 allows for an immediate deduction. Software projects may be developed in-house and/or commissioned in terms of new paragraphs 46-10(1)(b) and (c) .
Choice
57. New section 46-80 provides that the choice must be in writing. Once made, the pooling method will apply to all expenditure incurred in developing software, whether developed in-house or commissioned. All expenditure incurred on software development which commenced in the income year when the choice is made will be pooled, including expenditure on projects which were completed and projects which were abandoned during the income year. Transitional arrangements are discussed below.
58. Software development projects commenced before the income year in which the choice to pool is made must continue to be depreciated under the general software provisions contained in new Subdivision 46-B .
Expenditure included in software pools
59. The software pooling method is only available where expenditure is incurred in having software developed. Further, the expenditure must be incurred in relation to software developments which are to be used wholly for income producing purposes. [New paragraph 46-85(c)]
60. Expenditure on software which will be eligible for an immediate deduction under new Subdivision 46-C or the special transitional provisions detailed at Item 22 will be excluded from the pooling arrangements. Such expenditure includes:
& # 8226; expenditure, incurred up to 31 December 1999 to rebuild or replace existing computer software, which has the principal purpose of ensuring Y2K compliance; [new section 46-75] and
& # 8226; expenditure on specifically commissioned and in-house developed software incurred up to 30 June 1999, other than Y2K work above, provided the ‘project’ commenced up to 10 am by legal time in the Australian Capital Territory on 11 May 1998. [Item 22]
61. Expenditure in having software developed may include expenditure on acquiring software which, if it was not part of the software development and was incurred in its own right, would fall within new paragraph 46-10(1)(a) and not be subject to pooling.
62. Once a choice is made to pool, software development expenditure in relation to a project that is abandoned cannot be written off at that time under new section 46-70 . but must continue to be depreciated as part of the pool.
Rate of deduction
63. Under the software pooling method, depreciation will be allowed at the rate of 40% in each of the following two years after the expenditure is incurred and 20% in the third year. No deduction will be allowed in the income year in which the expenditure is incurred. [New section 46-90]
Consideration included in assessable income
64. New section 46-95 requires you to include in your assessable income any consideration you receive for software in relation to which expenditure has been pooled. This would include, for example, consideration received for:
& # 8226; the disposal or part disposal of software;
& # 8226; the granting of a licence in relation to software; y
& # 8226; the loss or destruction of software (insurance proceeds).
Common Rules
65. New section 46-100 will allow Common rules 1, 2 and 3 to apply to new Subdivision 46-D . However, in order to apply correctly to expenditure on software which has been subject to pooling, Common rules 1 and 2 are modified. The major modification to the application of Common rule 1 is that roll over relief is not mandatory in the circumstances set out in section 41-20 relating to capital gains tax rollover. [New subsection 46-100(1)] This recognises that it may not be possible to extract expenditure relating to particular software where that expenditure was incurred over several years and forms part of several pools.
Transitional Arrangements
66. Special transitional arrangements will apply under the pooling arrangements for the first income year after the application date of the amendments (11 May 1998). Where a choice is made in that income year to pool software development expenditure the choice may also apply from 11 May 1998. [Item 23]
67. In these circumstances the first pool would contain expenditure incurred from 11 May 1998 to the end of the relevant income year and a second pool would contain expenditure incurred in the income year for which the choice is made.
Example M – Application of pooling method
Blitz Pty Ltd chooses on 30 June 1999 to apply the pooling method (from 11 May 1998) to software development expenditure for the 1997-98 (from 11 May 1998 to 30 June 1998) and 1998-99 income years. It commenced several software development projects, none of which are in relation to Y2K compliance, and incurred the following expenditure:
* ‘off the shelf’ software cannot be pooled. It is depreciable under new Subdivision 46-B .
** Pool 2 includes expenditure incurred in the 1998-99 income year and therefore includes expenditure incurred in October 1998 ($1,500) January ($2,000) and May 1999 ($3,000).
If a choice is made for the first income year beginning after 11 May 1998, taxpayers will be able to opt out of the pooling arrangements for the second income year after 11 May 1998 and later income years. [Item 24]
Example N – Opting out of the software pooling method
Scuzzy Pty Ltd operates on a 30 June income year. On 15 May 1998 it begins a new software project and incurs the following expenditure:
15 May 1998 $2,000
15 July 1998 $5,000
Scuzzy choses to pool for the first income year after 11 May 1998 (ie. the 1999 income year from 1 July 1998 to 30 June 1999) and to pool all software development expenditure back to 11 May 1998.
Scuzzy could choose to stop using the pooling method for the 2000 income year (being the second income year after 11 May 1998). In this case, Scuzzy would not pool any expenditure incurred during the year ended 30 June 2000 but would have to continue to apply the pooling method to the 1998 and 1999 pools (Pool 1 and Pool 2 respectively).
Assume Scuzzy starts a second project on 1 September 1999 (Project 2) and completes this project in May 2000. The software is installed on 1 June 2000 at a total cost of $7,000. Under the general method of depreciation, Scuzzy is able to write this expenditure off at 40% from 1 June 2000.
Depreciation can be claimed as follows:
* 30 days depreciation claimed
** subsection 42-20(2) limits deductions to no more than the undeducted expenditure on the software.
Policy objective
1. The Government announced on 12 May 1998, as part of the 1998-99 Budget, several measures concerning the taxation treatment of Y2K compliance expenditure and software expenditure.
2. The measures largely involved amending the tax law to include depreciation provisions in respect of expenditure incurred in acquiring, developing or commissioning software. In addition, the Government also proposed other measures to ensure that adequate provision is made for the taxation treatment of Y2K expenditure incurred by businesses up to 31 December 1999 seeking to establish Y2K compliance.
3. The depreciation amendments are in response to the withdrawal of Taxation Ruling IT 26 (IT 26) by the Commissioner of Taxation. Under this ruling software expenditure which was not integral to the computer hardware was immediately deductible. Following the withdrawal of the ruling, some software expenditure would be written off for tax purposes over 25 years. The depreciation amendments will improve the equity of the taxation system by better aligning the true economic life of the asset to the income it generates. The Y2K amendments will address uncertainty concerning the treatment of millennium bug expenses and ensure that taxation arrangements are consistent with the Government’s desire to encourage business to achieve Y2K compliance. Taken together, the proposed amendments for software are broadly more generous than those applying in comparable overseas jurisdictions.
Implementation options
4. Three options were considered for the implementation of these Budget measures:
(a) applying differential write-off rates which closely match the economic life of individual software assets;
(b) applying a 2½ year write-off rate for software with appropriate balancing adjustments; y
(c) amortising software and computer hardware at the same rate (ie. 3.7 years). This would generalise the write-off rate currently applied to software that is integral to a computer (such as operating software) to all software. While computers have an effective life of five years, the write-off rate under accelerated depreciation is 3.7 years.
Design features of options
5. The following design features were proposed for all of the above options.
& # 8226; To reduce taxpayer compliance costs, expenditure on software which does not exceed $300 would continue to be immediately deductible.
& # 8226; To fairly treat taxpayers who have pre-existing commitments to purchase software, the new arrangements will apply to expenditure incurred in relation to contracts entered into to acquire or modify software after 10 am legal time in the Australian Capital Territory on 11 May 1998 – the time of withdrawal of IT 26. They will also apply to expenditures on specifically commissioned and in-house development of software commenced after this date. Expenditures on in-house development, or commissioned software commenced up to announcement will continue to be immediately deductible until 30 June 1999.
& # 8226; To reduce the risk of the arrangements penalising very short lived software:
− taxpayers who cease to use software will be allowed an immediate deduction of its written down value at that time; y
− where expenditure is incurred on commissioned software or software developed in-house and that software is subsequently abandoned and never used, the expenditure will be deductible at the time of abandonment.
& # 8226; To ensure consistency with other policy objectives, software expenditure that currently receives a more favourable treatment (such as the R&D concession) will be excluded from the proposed arrangements.
Assessment of impacts (costs and benefits) of each implementation option
Impact Group Identification
6. The proposed measures will largely impact on business software users. In the 1995-96 income year, over $2 billion was spent on software consultancy services while a further $1.2 billion was spent on packaged software. However, only part of these expenditures would have been undertaken by the commercial sector. Also, these figures do not include expenditure on 'in-house' development of software which constitutes a substantial part of software development activities.
7. Manufacturers, producers and developers of software will be unaffected by these proposed amendments in relation to trading stock.
Government Revenue
8. The revenue impact has been estimated on the basis of the withdrawal of IT 26. This withdrawal provided an environment where expenditure on software would generally not be depreciated, or, at best, depreciated over 25 years. Consequently, the implementation options involve a substantial reduction in Government revenue.
9. The cost to revenue of option (b) and the Y2K measure has been estimated as: $30m in 1998-99; $205m in 1999-00; $295m in 2000-01; and $520m in 2001-02.
Compliance costs of each option
10. The nature of compliance costs for depreciation of software is similar to that for all other capital expenditures – namely increasing taxpayers’ compliance costs marginally as taxpayers will need to keep records of the acquisition and development costs of software as well as deductions claimed in respect of that software until at least 5 years after the deduction is claimed.
11. In terms of the impact on compliance costs:
& # 8226; option (a), which allows expenditure to be written off over the effective life, would have the highest compliance costs due to the requirement for taxpayers to identify the classes of software based on effective life and to depreciate them at different rates. This high compliance cost is the unavoidable down-side to the benefits of option (a) in terms of efficient resource allocation.
& # 8226; option (b), which allows expenditure to be written off over 2½ years, would have lower taxpayer compliance costs than option (a). Option (b) also reduces the time over which depreciation calculations must be made.
& # 8226; option (c), which allows expenditure to be written off over 3.7 years, would have similar levels of compliance costs as option (b). The compliance costs may be marginally less under option (c) than option (b) as hardware and software will be depreciated at the same rate. However, this reduction is offset through the 2½ year write-off period under option (b).
12. In common with the impact of many other taxation provisions, compliance costs are likely to be most onerous for smaller businesses without dedicated accounting personnel. While compliance costs for small and large business may be roughly equivalent in terms of ‘accounting hours’ used, these hours may be more costly for a small business when viewed as percentage of turnover. The proposed $300 threshold (up to which expenditures on software can be deducted as incurred) has the advantage of reducing compliance costs for small one-off purchases of software.
Administrative costs
13. Option (a) would require the ATO to rule on the characteristics of various software assets and to administer different write-off periods for these assets. As well as one-off costs, such as issuing guidelines on the classification of different types of software, the ATO would have significant ongoing costs in the form of audit activities to ensure taxpayers were amortising different software expenditures at the appropriate rate. These costs could be significant.
14. Options (b) and (c) provide a general write-off rate over 2½ and 3.7 years respectively. This would substantially lower ongoing auditing costs for the ATO compared to option (a).
Beneficios
15. All options will substantially reduce the taxation burden on business users of software in comparison to no policy response being made to the withdrawal of IT 26.
16. The greatest reduction in taxation burden will occur under option (b) (2½ year write off). Option (c) would involve a proportionately lesser reduction in taxation burden, reflecting the 3.7 year write off. The reduction in taxation burden would be expected to be lowest under option (a), assuming the average effective life of the larger software applications is greater than 5 years.
Resource allocation benefits of each option
17. All options would better align the taxation life of software assets with the economic life of those assets.
18. Option (a) would be associated with a high degree of economic efficiency. This is because, under ideal conditions, this option would involve the assignment of the taxation life of a software asset to closely match the economic life of that asset.
19. Option (b) allows for less discrimination between software assets on the basis of their effective life than option (a). As such, the resource allocation benefits would be lower than for option (a).
20. Option (c) also allows for less discrimination between software assets than option (a).
Consultation
21. The measures being implemented are as announced in Treasurer’s Press Release No. 52. of 1998 with modifications including the introduction of a software pooling choice. Since the announcement on 12 May 1998, there has been extensive consultation in the form of discussions and seminars on administrative and legislative issues with relevant industry, professional bodies and individuals. The pooling method was developed as a consequence of this consultation and is designed to reduce the compliance costs taxpayers will otherwise incur in identifying separate software projects. Draft legislation was released for public comment on 14 December 1998. Comments received were taken into consideration when finalising the Bill.
Conclusión
22. These measures will address the policy objectives by introducing a depreciation regime for software which better matches the true economic life of software to the income it generates. The Y2K amendments will address the policy objectives of providing certainty concerning the taxation treatment of millennium bug expenses and encouraging businesses to achieve Y2K compliance.
23. Option (b), which allows a 2½ year write-off for all software, is the Government’s preferred option. It would be expected to involve noticeably lower compliance and administration costs than under option (a), but will involve similar costs as under option (c). Option (b) also allows for a shorter average write-off period than options (a) and (c).
24. The Treasury and the ATO will monitor this taxation measure, as part of the whole taxation system, on an ongoing basis.
[1] The examples in this explanatory material are for illustration purposes only and may
not reflect market prices etc.
Can I Deduct Online Stock Trade Fees ?
Can I Deduct Online Stock Trade Fees. Generally speaking, the IRS wants to tax you on your net income, after expenses -- not your gross. Therefore, the IRS allows you to deduct any expenses associated with income-producing assets, including investments, before you report your modified adjusted gross income. You can typically deduct any reasonable expenses associated with investing, including brokerage fees.
Deducting Brokerage Fees
You should get a detailed breakout of all your brokerage fees, including flat fees, statement fees and commissions, in your end-of-year statement from your broker. If you are not a full-time investor, you can generally deduct brokerage fees and commissions on your personal income tax return.
Cost of Advice
If you paid a financial adviser, you can also deduct the fees paid, commissions or other compensation. You can also deduct the cost of any courses taken or newsletter or magazine subscriptions, provided these subscriptions are generally related to your investing.
Professional Traders
If you make most of your living from trading securities, your tax situation changes significantly. The IRS considers you to be running a business, in that event - particularly if you focus on short - term stock market movements and spend much of your time engaging in trading activities.
How to Report Investment Expenses
You must itemize your deductions in order to claim investment expenses against your income. To claim these expenses, fill out Form 1040 and a Schedule A, Miscellaneous Itemized Deductions. List all your investment expenses, other than interest expense, on Line 23. If necessary, complete IRS Form 4942 -- Investment Interest Expense Deduction, along with your other documents. If you are a professional trader, you do not use Schedule A. Instead, you report your expenses as a business expense on Schedule C.
Referencias
Topic 3: C Corps – The Dividends Received Deduction [IRS Materials: Publication 542]
C. Dividends Received Deduction – Limitations and Exceptions
1. The limitations on the dividends received deduction consist of three basic rules, applied in the following order:
Rule 1 - General Rule - The DRD is 70%-80% of the gross dividend; this will always be the case when the operating income of the company is positive
Rule 2 - Taxable Income Limitation - If 70%-80% of taxable income (operating income less operating expenses plus the gross dividends received) before considering the DRD is less than the full amount computed under Rule 1, then the DRD is limited to 70%-80% of that taxable income figure. A prerequisite for this limit is that the corporate income exclusive of dividends shows a loss, so that when gross dividends received are added to this amount, the total is less than gross dividends received (thus invoking the limit).
Rule 3 - Exception to the Limitation - If the full 70%-80% deduction (70%-80% of gross dividends received, computed in Step 1) creates or adds to a net operating loss . then the limitation does not apply). In effect, the full NOL with a full dividends received deduction is reported. See Figure 3 below for a comprehensive example illustrating all three rules described above.
2. The best way to approach DRD questions is to run through the 3 rules in sequence. First, see if operating income is positive; if it is, Rule 1 applies and the DRD will not be limited. If operating income is negative, computed the limited DRD under Step 2, but always check to see if the exception of Step 3 might apply (i. e. would a full 70% or 80% DRD create or add to an NOL?). If a full DRD creates or adds to a net operating loss, then the full DRD should be used, as the limit does not apply.
5733.04 Corporation franchise tax definitions.
As used in this chapter:
(A) "Issued and outstanding shares of stock" applies to nonprofit corporations, as provided in section 5733.01 of the Revised Code, and includes, but is not limited to, membership certificates and other instruments evidencing ownership of an interest in such nonprofit corporations, and with respect to a financial institution that does not have capital stock, "issued and outstanding shares of stock" includes, but is not limited to, ownership interests of depositors in the capital employed in such an institution.
(B) "Taxpayer" means a corporation subject to the tax imposed by section 5733.06 of the Revised Code.
(C) "Resident" means a corporation organized under the laws of this state.
(D) "Commercial domicile" means the principal place from which the trade or business of the taxpayer is directed or managed.
(E) "Taxable year" means the period prescribed by division (A) of section 5733.031 of the Revised Code upon the net income of which the value of the taxpayer's issued and outstanding shares of stock is determined under division (B) of section 5733.05 of the Revised Code or the period prescribed by division (A) of section 5733.031 of the Revised Code that immediately precedes the date as of which the total value of the corporation is determined under division (A) or (C) of section 5733.05 of the Revised Code.
(F) "Tax year" means the calendar year in and for which the tax imposed by section 5733.06 of the Revised Code is required to be paid.
(G) "Internal Revenue Code" means the "Internal Revenue Code of 1986," 100 Stat. 2085, 26 U. S.C. A. 1, as amended.
(H) "Federal income tax" means the income tax imposed by the Internal Revenue Code.
(I) Except as provided in section 5733.058 of the Revised Code, "net income" means the taxpayer's taxable income before operating loss deduction and special deductions, as required to be reported for the taxpayer's taxable year under the Internal Revenue Code, subject to the following adjustments:
(a) Deduct any net operating loss incurred in any taxable years ending in 1971 or thereafter, but exclusive of any net operating loss incurred in taxable years ending prior to January 1, 1971. This deduction shall not be allowed in any tax year commencing before December 31, 1973, but shall be carried over and allowed in tax years commencing after December 31, 1973, until fully utilized in the next succeeding taxable year or years in which the taxpayer has net income, but in no case for more than the designated carryover period as described in division (I)(1)(b) of this section. The amount of such net operating loss, as determined under the allocation and apportionment provisions of section 5733.051 and division (B) of section 5733.05 of the Revised Code for the year in which the net operating loss occurs, shall be deducted from net income, as determined under the allocation and apportionment provisions of section 5733.051 and division (B) of section 5733.05 of the Revised Code, to the extent necessary to reduce net income to zero with the remaining unused portion of the deduction, if any, carried forward to the remaining years of the designated carryover period as described in division (I)(1)(b) of this section, or until fully utilized, whichever occurs first.
(b) For losses incurred in taxable years ending on or before December 31, 1981, the designated carryover period shall be the five consecutive taxable years after the taxable year in which the net operating loss occurred. For losses incurred in taxable years ending on or after January 1, 1982, and beginning before August 6, 1997, the designated carryover period shall be the fifteen consecutive taxable years after the taxable year in which the net operating loss occurs. For losses incurred in taxable years beginning on or after August 6, 1997, the designated carryover period shall be the twenty consecutive taxable years after the taxable year in which the net operating loss occurs.
(c) The tax commissioner may require a taxpayer to furnish any information necessary to support a claim for deduction under division (I)(1)(a) of this section and no deduction shall be allowed unless the information is furnished.
(2) Deduct any amount included in net income by application of section 78 or 951 of the Internal Revenue Code, amounts received for royalties, technical or other services derived from sources outside the United States, and dividends received from a subsidiary, associate, or affiliated corporation that neither transacts any substantial portion of its business nor regularly maintains any substantial portion of its assets within the United States. For purposes of determining net foreign source income deductible under division (I)(2) of this section, the amount of gross income from all such sources other than dividend income and income derived by application of section 78 or 951 of the Internal Revenue Code shall be reduced by:
(a) The amount of any reimbursed expenses for personal services performed by employees of the taxpayer for the subsidiary, associate, or affiliated corporation;
(b) Ten per cent of the amount of royalty income and technical assistance fees;
(c) Fifteen per cent of the amount of all other income.
The amounts described in divisions (I)(2)(a) to (c) of this section are deemed to be the expenses attributable to the production of deductible foreign source income unless the taxpayer shows, by clear and convincing evidence, less actual expenses, or the tax commissioner shows, by clear and convincing evidence, more actual expenses.
(3) Add any loss or deduct any gain resulting from the sale, exchange, or other disposition of a capital asset, or an asset described in section 1231 of the Internal Revenue Code, to the extent that such loss or gain occurred prior to the first taxable year on which the tax provided for in section 5733.06 of the Revised Code is computed on the corporation's net income. For purposes of division (I)(3) of this section, the amount of the prior loss or gain shall be measured by the difference between the original cost or other basis of the asset and the fair market value as of the beginning of the first taxable year on which the tax provided for in section 5733.06 of the Revised Code is computed on the corporation's net income. At the option of the taxpayer, the amount of the prior loss or gain may be a percentage of the gain or loss, which percentage shall be determined by multiplying the gain or loss by a fraction, the numerator of which is the number of months from the acquisition of the asset to the beginning of the first taxable year on which the fee provided in section 5733.06 of the Revised Code is computed on the corporation's net income, and the denominator of which is the number of months from the acquisition of the asset to the sale, exchange, or other disposition of the asset. The adjustments described in this division do not apply to any gain or loss where the gain or loss is recognized by a qualifying taxpayer, as defined in section 5733.0510 of the Revised Code, with respect to a qualifying taxable event, as defined in that section.
(4) Deduct the dividend received deduction provided by section 243 of the Internal Revenue Code.
(5) Deduct any interest or interest equivalent on public obligations and purchase obligations to the extent included in federal taxable income. As used in divisions (I)(5) and (6) of this section, "public obligations," "purchase obligations," and "interest or interest equivalent" have the same meanings as in section 5709.76 of the Revised Code.
(6) Add any loss or deduct any gain resulting from the sale, exchange, or other disposition of public obligations to the extent included in federal taxable income.
(7) To the extent not otherwise allowed, deduct any dividends or distributions received by a taxpayer from a public utility, excluding an electric company and a combined company, and, for tax years 2005 and thereafter, a telephone company, if the taxpayer owns at least eighty per cent of the issued and outstanding common stock of the public utility. As used in division (I)(7) of this section, "public utility" means a public utility as defined in Chapter 5727. of the Revised Code, whether or not the public utility is doing business in the state.
(8) To the extent not otherwise allowed, deduct any dividends received by a taxpayer from an insurance company, if the taxpayer owns at least eighty per cent of the issued and outstanding common stock of the insurance company. As used in division (I)(8) of this section, "insurance company" means an insurance company that is taxable under Chapter 5725. or 5729. of the Revised Code.
(9) Deduct expenditures for modifying existing buildings or structures to meet American national standards institute standard A-117.1-1961 (R-1971), as amended; provided, that no deduction shall be allowed to the extent that such deduction is not permitted under federal law or under rules of the tax commissioner. Those deductions as are allowed may be taken over a period of five years. The tax commissioner shall adopt rules under Chapter 119. of the Revised Code establishing reasonable limitations on the extent that expenditures for modifying existing buildings or structures are attributable to the purpose of making the buildings or structures accessible to and usable by physically handicapped persons.
(10) Deduct the amount of wages and salaries, if any, not otherwise allowable as a deduction but that would have been allowable as a deduction in computing federal taxable income before operating loss deduction and special deductions for the taxable year, had the targeted jobs credit allowed and determined under sections 38, 51, and 52 of the Internal Revenue Code not been in effect.
(11) Deduct net interest income on obligations of the United States and its territories and possessions or of any authority, commission, or instrumentality of the United States to the extent the laws of the United States prohibit inclusion of the net interest for purposes of determining the value of the taxpayer's issued and outstanding shares of stock under division (B) of section 5733.05 of the Revised Code. As used in division (I)(11) of this section, "net interest" means interest net of any expenses taken on the federal income tax return that would not have been allowed under section 265 of the Internal Revenue Code if the interest were exempt from federal income tax.
(a) Except as set forth in division (I)(12)(d) of this section, to the extent not included in computing the taxpayer's federal taxable income before operating loss deduction and special deductions, add gains and deduct losses from direct or indirect sales, exchanges, or other dispositions, made by a related entity who is not a taxpayer, of the taxpayer's indirect, beneficial, or constructive investment in the stock or debt of another entity, unless the gain or loss has been included in computing the federal taxable income before operating loss deduction and special deductions of another taxpayer with a more closely related investment in the stock or debt of the other entity. The amount of gain added or loss deducted shall not exceed the product obtained by multiplying such gain or loss by the taxpayer's proportionate share, directly, indirectly, beneficially, or constructively, of the outstanding stock of the related entity immediately prior to the direct or indirect sale, exchange, or other disposition.
(b) Except as set forth in division (I)(12)(e) of this section, to the extent not included in computing the taxpayer's federal taxable income before operating loss deduction and special deductions, add gains and deduct losses from direct or indirect sales, exchanges, or other dispositions made by a related entity who is not a taxpayer, of intangible property other than stock, securities, and debt, if such property was owned, or used in whole or in part, at any time prior to or at the time of the sale, exchange, or disposition by either the taxpayer or by a related entity that was a taxpayer at any time during the related entity's ownership or use of such property, unless the gain or loss has been included in computing the federal taxable income before operating loss deduction and special deductions of another taxpayer with a more closely related ownership or use of such intangible property. The amount of gain added or loss deducted shall not exceed the product obtained by multiplying such gain or loss by the taxpayer's proportionate share, directly, indirectly, beneficially, or constructively, of the outstanding stock of the related entity immediately prior to the direct or indirect sale, exchange, or other disposition.
(c) As used in division (I)(12) of this section, "related entity" means those entities described in divisions (I)(12)(c)(i) to (iii) of this section:
(i) An individual stockholder, or a member of the stockholder's family enumerated in section 318 of the Internal Revenue Code, if the stockholder and the members of the stockholder's family own, directly, indirectly, beneficially, or constructively, in the aggregate, at least fifty per cent of the value of the taxpayer's outstanding stock;
(ii) A stockholder, or a stockholder's partnership, estate, trust, or corporation, if the stockholder and the stockholder's partnerships, estates, trusts, and corporations own directly, indirectly, beneficially, or constructively, in the aggregate, at least fifty per cent of the value of the taxpayer's outstanding stock;
(iii) A corporation, or a party related to the corporation in a manner that would require an attribution of stock from the corporation to the party or from the party to the corporation under division (I)(12)(c)(iv) of this section, if the taxpayer owns, directly, indirectly, beneficially, or constructively, at least fifty per cent of the value of the corporation's outstanding stock.
(iv) The attribution rules of section 318 of the Internal Revenue Code apply for purposes of determining whether the ownership requirements in divisions (I)(12)(c)(i) to (iii) of this section have been met.
(d) For purposes of the adjustments required by division (I)(12)(a) of this section, the term "investment in the stock or debt of another entity" means only those investments where the taxpayer and the taxpayer's related entities directly, indirectly, beneficially, or constructively own, in the aggregate, at any time during the twenty-four month period commencing one year prior to the direct or indirect sale, exchange, or other disposition of such investment at least fifty per cent or more of the value of either the outstanding stock or such debt of such other entity.
(e) For purposes of the adjustments required by division (I)(12)(b) of this section, the term "related entity" excludes all of the following:
(i) Foreign corporations as defined in section 7701 of the Internal Revenue Code;
(ii) Foreign partnerships as defined in section 7701 of the Internal Revenue Code;
(iii) Corporations, partnerships, estates, and trusts created or organized in or under the laws of the Commonwealth of Puerto Rico or any possession of the United States;
(iv) Foreign estates and foreign trusts as defined in section 7701 of the Internal Revenue Code.
The exclusions described in divisions (I)(12)(e)(i) to (iv) of this section do not apply if the corporation, partnership, estate, or trust is described in any one of divisions (C)(1) to (5) of section 5733.042 of the Revised Code.
(f) Nothing in division (I)(12) of this section shall require or permit a taxpayer to add any gains or deduct any losses described in divisions (I)(12)(f)(i) and (ii) of this section:
(i) Gains or losses recognized for federal income tax purposes by an individual, estate, or trust without regard to the attribution rules described in division (I)(12)(c) of this section;
(ii) A related entity's gains or losses described in division (I)(12)(b) of this section if the taxpayer's ownership of or use of such intangible property was limited to a period not exceeding nine months and was attributable to a transaction or a series of transactions executed in accordance with the election or elections made by the taxpayer or a related entity pursuant to section 338 of the Internal Revenue Code.
(13) Any adjustment required by section 5733.042 of the Revised Code.
(14) Add any amount claimed as a credit under section 5733.0611 of the Revised Code to the extent that such amount satisfies either of the following:
(a) It was deducted or excluded from the computation of the corporation's taxable income before operating loss deduction and special deductions as required to be reported for the corporation's taxable year under the Internal Revenue Code;
(b) It resulted in a reduction of the corporation's taxable income before operating loss deduction and special deductions as required to be reported for any of the corporation's taxable years under the Internal Revenue Code.
(15) Deduct the amount contributed by the taxpayer to an individual development account program established by a county department of job and family services pursuant to sections 329.11 to 329.14 of the Revised Code for the purpose of matching funds deposited by program participants. On request of the tax commissioner, the taxpayer shall provide any information that, in the tax commissioner's opinion, is necessary to establish the amount deducted under division (I)(15) of this section.
(16) Any adjustment required by section 5733.0510 or 5733.0511 of the Revised Code.
(i) Add five-sixths of the amount of depreciation expense allowed under subsection (k) of section 168 of the Internal Revenue Code, including a person's proportionate or distributive share of the amount of depreciation expense allowed by that subsection to any pass-through entity in which the person has direct or indirect ownership.
(ii) Add five-sixths of the amount of qualifying section 179 depreciation expense, including a person's proportionate or distributive share of the amount of qualifying section 179 depreciation expense allowed to any pass-through entity in which the person has a direct or indirect ownership. For the purposes of this division, "qualifying section 179 depreciation expense" means the difference between (I) the amount of depreciation expense directly or indirectly allowed to the taxpayer under section 179 of the Internal Revenue Code, and (II) the amount of depreciation expense directly or indirectly allowed to the taxpayer under section 179 of the Internal Revenue Code as that section existed on December 31, 2002.
The tax commissioner, under procedures established by the commissioner, may waive the add-backs related to a pass-through entity if the person owns, directly or indirectly, less than five per cent of the pass-through entity.
(b) Nothing in division (I)(17) of this section shall be construed to adjust or modify the adjusted basis of any asset.
(c) To the extent the add-back is attributable to property generating income or loss allocable under section 5733.051 of the Revised Code, the add-back shall be allocated to the same location as the income or loss generated by that property. Otherwise, the add-back shall be apportioned, subject to division (B)(2)(d) of section 5733.05 of the Revised Code.
(a) If a person is required to make the add-back under division (I)(17)(a) of this section for a tax year, the person shall deduct one-fifth of the amount added back for each of the succeeding five tax years.
(b) If the amount deducted under division (I)(18)(a) of this section is attributable to an add-back allocated under division (I)(17)(c) of this section, the amount deducted shall be allocated to the same location. Otherwise, the amount shall be apportioned using the apportionment factors for the taxable year in which the deduction is taken, subject to division (B)(2)(d) of section 5733.05 of the Revised Code.
(J) Except as otherwise expressly provided or clearly appearing from the context, any term used in this chapter has the same meaning as when used in a comparable context in the laws of the United States relating to federal income taxes. Any reference in this chapter to the Internal Revenue Code includes other laws of the United States relating to federal income taxes.
(K) "Financial institution" has the meaning given by section 5725.01 of the Revised Code but does not include a production credit association as described in 85 Stat. 597, 12 U. S.C. A. 2091.
(1) A "qualifying holding company" is any corporation satisfying all of the following requirements:
(a) Subject to divisions (L)(2) and (3) of this section, the net book value of the corporation's intangible assets is greater than or equal to ninety per cent of the net book value of all of its assets and at least fifty per cent of the net book value of all of its assets represents direct or indirect investments in the equity of, loans and advances to, and accounts receivable due from related members;
(b) At least ninety per cent of the corporation's gross income for the taxable year is attributable to the following:
(i) The maintenance, management, ownership, acquisition, use, and disposition of its intangible property, its aircraft the use of which is not subject to regulation under 14 C. F.R. part 121 or part 135, and any real property described in division (L)(2)(c) of this section;
(ii) The collection and distribution of income from such property.
(c) The corporation is not a financial institution on the last day of the taxable year ending prior to the first day of the tax year;
(d) The corporation's related members make a good faith and reasonable effort to make timely and fully the adjustments required by division (D) of section 5733.05 of the Revised Code and to pay timely and fully all uncontested taxes, interest, penalties, and other fees and charges imposed under this chapter;
(e) Subject to division (L)(4) of this section, the corporation elects to be treated as a qualifying holding company for the tax year.
A corporation otherwise satisfying divisions (L)(1)(a) to (e) of this section that does not elect to be a qualifying holding company is not a qualifying holding company for the purposes of this chapter.
(i) For purposes of making the ninety per cent computation under division (L)(1)(a) of this section, the net book value of the corporation's assets shall not include the net book value of aircraft or real property described in division (L)(1)(b)(i) of this section.
(ii) For purposes of making the fifty per cent computation under division (L)(1)(a) of this section, the net book value of assets shall include the net book value of aircraft or real property described in division (L)(1)(b)(i) of this section.
(i) As used in division (L) of this section, "intangible asset" includes, but is not limited to, the corporation's direct interest in each pass-through entity only if at all times during the corporation's taxable year ending prior to the first day of the tax year the corporation's and the corporation's related members' combined direct and indirect interests in the capital or profits of such pass-through entity do not exceed fifty per cent. If the corporation's interest in the pass-through entity is an intangible asset for that taxable year, then the distributive share of any income from the pass-through entity shall be income from an intangible asset for that taxable year.
(ii) If a corporation's and the corporation's related members' combined direct and indirect interests in the capital or profits of a pass-through entity exceed fifty per cent at any time during the corporation's taxable year ending prior to the first day of the tax year, "intangible asset" does not include the corporation's direct interest in the pass-through entity, and the corporation shall include in its assets its proportionate share of the assets of any such pass-through entity and shall include in its gross income its distributive share of the gross income of such pass-through entity in the same form as was earned by the pass-through entity.
(iii) A pass-through entity's direct or indirect proportionate share of any other pass-through entity's assets shall be included for the purpose of computing the corporation's proportionate share of the pass-through entity's assets under division (L)(2)(b)(ii) of this section, and such pass-through entity's distributive share of any other pass-through entity's gross income shall be included for purposes of computing the corporation's distributive share of the pass-through entity's gross income under division (L)(2)(b)(ii) of this section.
(c) For the purposes of divisions (L)(1)(b)(i), (1)(b)(ii), (2)(a)(i), and (2)(a)(ii) of this section, real property is described in division (L)(2)(c) of this section only if all of the following conditions are present at all times during the taxable year ending prior to the first day of the tax year:
(i) The real property serves as the headquarters of the corporation's trade or business, or is the place from which the corporation's trade or business is principally managed or directed;
(ii) Not more than ten per cent of the value of the real property and not more than ten per cent of the square footage of the building or buildings that are part of the real property is used, made available, or occupied for the purpose of providing, acquiring, transferring, selling, or disposing of tangible property or services in the normal course of business to persons other than related members, the corporation's employees and their families, and such related members' employees and their families.
(d) As used in division (L) of this section, "related member" has the same meaning as in division (A)(6) of section 5733.042 of the Revised Code without regard to division (B) of that section.
(3) The percentages described in division (L)(1)(a) of this section shall be equal to the quarterly average of those percentages as calculated during the corporation's taxable year ending prior to the first day of the tax year.
(4) With respect to the election described in division (L)(1)(e) of this section:
(a) The election need not accompany a timely filed report;
(b) The election need not accompany the report; rather, the election may accompany a subsequently filed but timely application for refund and timely amended report, or a subsequently filed but timely petition for reassessment;
(c) The election is not irrevocable;
(d) The election applies only to the tax year specified by the corporation;
(e) The corporation's related members comply with division (L)(1)(d) of this section.
Nothing in division (L)(4) of this section shall be construed to extend any statute of limitations set forth in this chapter.
(M) "Qualifying controlled group" means two or more corporations that satisfy the ownership and control requirements of division (A) of section 5733.052 of the Revised Code.
(N) "Limited liability company" means any limited liability company formed under Chapter 1705. of the Revised Code or under the laws of any other state.
(O) "Pass-through entity" means a corporation that has made an election under subchapter S of Chapter 1 of Subtitle A of the Internal Revenue Code for its taxable year under that code, or a partnership, limited liability company, or any other person, other than an individual, trust, or estate, if the partnership, limited liability company, or other person is not classified for federal income tax purposes as an association taxed as a corporation.
(P) "Electric company," "combined company," and "telephone company" have the same meanings as in section 5727.01 of the Revised Code.
(Q) "Business income" means income arising from transactions, activities, and sources in the regular course of a trade or business and includes income from real property, tangible personal property, and intangible personal property if the acquisition, rental, management, and disposition of the property constitute integral parts of the regular course of a trade or business operation. "Business income" includes income, including gain or loss, from a partial or complete liquidation of a business, including, but not limited to, gain or loss from the sale or other disposition of goodwill.
(R) "Nonbusiness income" means all income other than business income.
Amended by 128th General AssemblyFile No.9, HB 1, §101.01, eff. 10/16/2009.
Effective Date: 09-26-2003; 12-30-2004
Retire Ready Tennessee . New Phone Support for TCRS and Deferred Compensation Plans
Now you can ask questions and receive information concerning TCRS and your Tennessee Deferred Compensation plan with one phone call.
Call 800-770-8277 to reach Retire Ready Tennessee customer service representatives who are ready to assist you with questions regarding your entire retirement.
Payees receiving payment by debit card, please refer to the "Headlines" tab for an important notice.
Great news! Concord's Self-Service is now available to Retirees, Employers and Members. Please click on the Self-Service link to access the login page. We are experiencing high call volume at this time. If you have questions about Member Self Service, please refer to the User Guide or Demonstration Video for assistance.
The Tennessee Consolidated Retirement System (TCRS) is a defined benefit pension plan that covers state employees, higher education employees, K-12 public school teachers, and employees of political subdivisions who have elected to participate in the plan. This means that the amount of any future retirement benefits is determined by a benefit formula rather than an account balance.
The TCRS provides retirement benefits as well as death and disability benefits to plan members and their beneficiaries. Benefits are determined by a formula using the member’s high five-year average salary and years of service. Members become eligible to retire at the age of 60 with five years of service or at any age with 30 years of service. A reduced retirement benefit is available to vested members with five years of service who become disabled and cannot engage in gainful employment. There is no service requirement for disability that is the result of an accident or injury occurring while the member was in the performance of duty.
Notice: Please click HERE to view the fees associated with the debit cards issued for retirement payments beginning April 30, 2017.
Active & Inactive Members
2017 COLA (Cost of Living Adjustment) for TCRS Retirees (May 29, 2017) Retired teachers and state employees who have been on the TCRS retired payroll for at least 12 consecutive months as of July 1, 2017 will receive a 1.0% cost-of-living adjustment. Retirees of local governments that have authorized COLAs will receive the same increase.
Fraudulent Email Targeting Debit Card Holders (January 20, 2017)
The Tennessee Consolidated Retirement System (TCRS) has been made aware that a fraudulent email could be distributed to all TCRS debit card holders. Más.
Alert to Active Johnson City Power Board Employees Participating in the Tennessee Consolidated Retirement System (December 23, 2017) The Tennessee Department of Treasury is informing active Johnson City Power Board employees about a theft of personal information. Más.
Alert to Active Metro Nashville Teachers Participating in the Tennessee Consolidated Retirement System (December 14, 2017) The Tennessee Department of Treasury is informing active Metro Nashville teachers about a possible theft of personal information. Más.
Consumer Alert: Misleading Mailout Sent to TCRS Members (September 25, 2017) TCRS has been made aware of a misleading mailout sent to TCRS members from a Texas-based company not affiliated with TCRS. This mailing makes incorrect and misleading statements about TCRS. Members should contact TCRS directly with questions about their benefits. Más.
Tennessee Consolidated Retirement System Approves Four New Investment Commitments (March 28, 2017) The investment committee of the Tennessee Consolidated Retirement System (TCRS) Board of Trustees has approved two new commitments within its private equity portfolio and two new commitments within its strategic lending portfolio. Más.
Tennessee's State Pension Fund Rated Best in Nation for Investment Strategy (March 19, 2017) Tennessee Consolidated Retirement System (TCRS), the state's retirement fund for state government, higher education and other public employees, is managing its investments better than any other large public pension plan in the country. So says Money Management Intelligence, a publication featuring news, trends and analysis about and for institutional investors. Más.
Treasurer Lillard Proposes New Pension Options for State & Teacher Plans (February 25, 2017) State Treasurer David H. Lillard, Jr. is recommending that the General Assembly adopt a number of reforms to the state's retirement plan for public employees. The Tennessee Consolidated Retirement System (TCRS) is a well-funded pension plan. Más.
TCRS Newsletters (November 29, 2012) The Active member employee newsletter is now available. Click here to view the current issue of the TCRS Report.
TCRS Board Meetings (November 1, 2012) Information concerning the current and past board meetings can be found here .
Treasurer Lillard Proposes New Pension Options for Local Governments (January 23, 2012) To give local governments more choices for their employees’ retirement plans, Tennessee State Treasurer David H. Lillard Jr. today proposed several new options to state legislators for their consideration. Más.
2012 COLA for Retirees (January 23, 2012) Retired teachers and state employees who have been on the TCRS retired payroll for at least 12 consecutive months as of July 1, 2012 will receive a 3.0% cost-of-living adjustment. Retirees of local governments that have authorized COLAs will receive the same increase.
2011 COLA for Retirees (April 29, 2011) Retired teachers and state employees who have been on the TCRS retired payroll for at least 12 consecutive months as of July 1, 2011 will receive a 1.5% cost-of-living adjustment. Retirees of local governments that have authorized COLAs will receive the same increase.
Important Tax Notice (January 19, 2011) Many of you may have noticed a change in the withholding tax deducted from your TCRS benefit payment in January. In 2009 and 2010 there was a "Making Work Pay" federal tax credit in effect as part of the American Recovery and Reinvestment Act. The “Making Work Pay” tax credit expired on 12/31/2010. This means that most retirees will notice an increase in the amount of federal withholding deducted.
In addition, TCRS has received several questions concerning the effect the Social Security rate decrease from 6.2% to 4.2% will have on their monthly pension benefits. This change will not affect TCRS pension recipients since the pension benefits are not subject to the Social Security tax.
At any time, you can change the amount of taxes being withheld from your monthly retirement benefit by completing a Substitute Withholding Certificate for Pension or Annuity Payments form. This form can be downloaded at tcrs. tn. gov. You may also send a letter indicating any changes to TCRS, ATTN: Retired Payroll, 502 Deaderick Street, Nashville, TN 37243-0201.
Tennessee's Retirement Fund in Good Shape Compared to Others (July 25, 2010) Good economic news can be hard to find in the Capitol building, but Tennesseans can breathe a little easier about one corner of the state budget. . Más
(Knoxville News Sentinel article by Josh Flory. Posted July 25, 2010.)
Financial Welfare of TCRS The financial marketplace has been exhibiting a high degree of volatility for several months, mainly due to issues related to the mortgage industry. Several Tennessee Consolidated Retirement System (TCRS) members and retirees have expressed concern. . Más
Recent Letters to TCRS Retirees Approximately 10% of TCRS retirees received a letter dated July 30, 2010 from TCRS where the insurance premium(s) was not shown correctly. The letter provided the amount of the COLA increase, the new gross value of the pension benefit, insurance deductions, tax withholding deductions, other deductions, and the net amount deposited to your checking or savings account.
Unfortunately, the medical insurance deduction shown for retired state employees under the age of 65 was not correct. The medical insurance premium did not change. The premium for July was the same amount as the June premium.
In addition, the letters for retirees enrolled in the long term care plan and dental insurance plan did not show a deduction.
The correct deductions were taken from your pension benefit and the correct amount was deposited in your bank account. The only issue occurred in the printing of the letters.
Please contact our office if you have any questions concerning this issue at (800) 770-8277 or 741-4913.
Legislation has been enacted to create a new Hybrid pension plan for state employees and K-12 teachers hired on or after July 1, 2017. Current employees or retirees are not affected by the changes. Local governments also have the option to adopt the new Hybrid pension plan with cost controls. You can find more information concerning the new plan can below.
During the 2012 session, the General Assembly passed legislation which expanded the TCRS retirement options a local government can offer to their employees. These changes would only apply to new local government employees hired after passage of a resolution by the local government. Since these changes are optional, there is no requirement for local governments to implement these changes. To view more information regarding these options, please click on the link(s) below.
Individuals with disabilities who wish to participate in these proceedings and require an accommodation should contact Bridget Dorse with Tennessee Consolidated Retirement System no less than two (2) days prior to the scheduled meeting date to allow time for the Treasury Department to arrange for an accommodation. You may contact the Treasury Department at 502 Deaderick St. Nashville, TN 37243; (615) 741-7063 or the Board Administrator Bridget Dorse by email at bridget. dorse@tn. gov.
Concord is a Tennessee Treasury Department project to replace the computer systems that are used to administer the Tennessee Consolidated Retirement System (TCRS). To learn more about the Concord project, please click here.
Member Reference Materials:
MSS Training Videos :
Session 1. Contact Information, Account History, Annual Statement, Beneficiary Information New!
Employer Reference Materials:
ESS Training Videos :
Session 1. Logging In, Payment Accounts, Office Locations, Contact Persons, Manage Users
Session 2. Changing Your Password, PIN, & Security Questions
Session 3. Death Notice, Seminars, Employer Certification
Session 4. Member Information, Employer Information, Reports, Message Center
Session 5: Submitting Your Monthly Report Session 5a. Submitting via File Upload Session 5b. Submitting via Online Entry
Session 6. Monthly Packets, Download Member ID, Member Plan Search, Invoices
Session 7. Prior Period Adjustments New!
Tax Planning and Consulting Notes
Dale Bandy
Tax planners must look at the marginal impact of tax decisions. This requires familiarity with marginal tax rates.
Marginal tax rates are often the key to determining the tax impact of decisions. Because tax rates are progressive it is not always easy. Large items can change the marginal tax rate. Also, marginal tax rate is often the combination of multiple taxes. Should consider state taxes, payroll taxes, etc. as is appropriate.
For example, in Florida corporations pay a state corporate income tax. If the corporation is in the 35% federal tax bracket, the combined marginal rate is as below:
35% + 5.5% - (35% x 5.5%) = 38.575%
In the case of income from a partnership or proprietorship, self-employment tax and individual income tax apply. One-half of the self-employment tax is deductible in computing both the income tax and the self-employment tax.
Example: Husband finishes education and begins a business. Wife is successful, and they already are in the 35% tax bracket. First dollar of husband's business income is subject to 35% federal income tax and 15.3% (about 11.45% given half is deductible) self-employment tax. So, total tax is 46.45%.
Example: Withdrawal from retirement plan or IRA that resulted in a 35% federal income tax, a 12% state income tax (7.8% effective rate given state tax is deductible on the federal return) plus a 10% penalty for premature distribution. The result was a tax of 52.8%. The result was a problem because the taxpayer may not have the cash to pay the tax.
Explicit and implicit rates may not be the same. Explicit rate is usually obvious, but includes the taxes on corporations and shareholders, the alternative minimum tax, the 10% penalty tax for premature distributions, foreign taxes, and state and local taxes.
Implicit tax rate is the "real" tax rate considering things such as the fact that the tax law impacts prices (tax exempt bonds pay a lower interest rate) or that this year's tax situation may impact future taxes (what is the marginal tax rate of a taxpayer with an NOL carryover?).
Changing Rates Changing rates may also impact decisions. Rates may change for a number of reasons including changing income, statutory changes, change in status (incorporation or change in jurisdiction).
Prepay an Expense
Illustration: Should a taxpayer prepay an expense in order to get the tax deduction earlier? Although accelerating deductions is one tax planning method, it is not always desirable to do so.
Risk and Performance Measures
Decisions often have long run implications. This means that tax planners must consider the present value of alternatives and the relative risk of alternatives.
Return The rate of return over time is usually cited as an indication of an investment's desirability. Reported returns are often over stated because they are before tax and ignore both transaction and interest costs.
Risk Measures Standard Deviation How much an investment's rate of return varies over time is an indication of its risk. Thus, an investment that consistently earns 8% is less risky than an investment that averages 8%, but fluctuates widely from year to year. The investment which earned 8% consistently would have a standard deviation of zero.
Coefficient of Determination R ² represents the correlation between an investment's price fluctuation and the "market's" price fluctuation. If the coefficient of determination approaches 100% it means that the price of an investment moves with the market.
Beta Beta is the ratio of the average change in an investment's value divided by the average change in the "market". Thus, an investment that's value, on average, changes 1.2% when the market changes 1% is said to have a Beta of 1.2 (1.2%/1%). A Beta greater than 1 suggests that an investment's price fluctuates more than the market, and it therefore is said to be a "riskier" investment. A Beta less than 1 indicates that the investment is less risky than the market.
Alpha Alpha is the difference between an investment's actual return and the expected return given the investment's risk (as measured by its Beta). Thus, if the "market" is returning 10% and an investment's Beta is 1.2, then that investment should be returning 12% (10% X 1.2).
Constraints on Tax Planning
Substance over form The essential characteristics of a transaction determines how it will be treated not the labels that are placed on the transaction by the parties. For example, an investment in a corporation is treated as a loan, stock, or a lease depending on the characteristics of the investment and not merely the labels used. In tax cases the idea is sometimes referred to as the economic substance (or economic reality) of the transaction. For tax issues, often it is the economic impact of a transaction that indicates it substance.
Business purpose The tax motivated spin-off of a corporation's liquid assets into a new corporation followed by liquidation of the new corporation was taxed as a dividend even though transaction met the requirements of reorganization-liquidation. Supreme Court established business purpose as a requirement for some but not all transactions. Evelyn F. Gregory v. Helvering . 14 AFTR 1191, 35-1 USTC ¶ 9043 (USSC, 1935) .
Step transaction Combine many steps to determine appropriate treatment of events. Rule from common law. Could be applied to Gregory situation.
Clear reflection of income Accounting methods used by taxpayer must clearly reflect income. IRS can accelerate the reporting income or defer deductions or make other changes in order to clearly reflect income. Segundo. 446(b).
Constructive receipt Taxed on income if it is available to taxpayer even if taxpayer has not yet received it.
Reasonable amount Sec. 162 limits the deduction for compensation to a "reasonable amount." This limitation probably can be extended to rent, interest, royalties, etc. In other words, arm's length dealing and fair market value are ways to determine the substance of a transaction. Thus, rent paid in excess of fair market value may be an indication that the payment is actually a nondeductible dividend.
Assignment of income Lucas v. Guy C. Earl, 8 AFTR 10287, 2 USTC ¶ 496 (USSC, 1930) -- husband's income taxed to him in spite of agreement to share income with wife.
Helvering v. Paul R. Horst . 24 AFTR 1058, 40-2 USTC ¶ 9787 (USSC, 1940) -- coupon interest taxed to father who owned bonds rather than son who was given the coupons and cashed them.
George B. Clifford, Jr. v. Helvering, 23 AFTR 1077, 40-1 USTC ¶ 9265 (USSC, 1940) -- income from a grantor trust is taxed to the grantor.
Reallocation of income Sec. 482 grants the IRS authority to reallocate income, deductions, gains, losses, and credits among related taxpayers. An extension of assignment of income that is particularly useful relative to families, related corporations, and international operations. Thus, salary to child actually dividend to father and a gift to the child, and income of foreign subsidiary actually income of parent.
Major Loss Limitations
Listed below are three rules intended to prevent taxpayers from investing in "tax shelters" designed to generate losses that offset other income. The investment interest limitation prevents taxpayers from using interest deductions to offset income from activities other than the investments. The at-risk rule prevents taxpayers from deducting depreciation, amortization, depletion and other expenses that do not require current cash flow in sutuations where basis is generated by loans for which that taxpayer is not personally liable (i. e. at-risk). The passive loss limitation prevents taxpayers from deducting losses from activities that involve limited amounts of personal participation.
Investment Interest Limitation
Passive Loss Limitation
What is limited
Investment interest deduction is limited to net investment income. Investment income includes taxable interest income. Capital gains and dividend income are included if taxed at ordinary rates.
Deductions for depreciation and amortization are limited to basis of investment reduced by nonrecourse debt and any net income generated from the activity.
Net passive loss cannot be offset against other income until investment is sold. An exception permits investors to deduct up to $25,000 of losses from rental real estate if AGI is $100,000 or less. If AGI exceeds $100,000, the $25,000 limitation is reduced $1 of each $2 of excess AGI.
Order of application
Investment is exempt from IIL if PLL applies. Applies before AR.
Applied before PLL, after IIL
Applied after AR.
Passive loss limitation example Jane purchases a producing orange grove. Jane hires an employee who takes care of the grove. Jane, a physician, provides the capital.
During the first year, the business reports a loss of $20,000 because prices are low and the relatively young trees produce only a few oranges. Jane cannot offset the loss against her medical practice income as she does not materially participate in the business. If Jane held other passive investments that generated a profit, she could deduct the loss from the passive income they generated.
During the second year, the business reports another loss of $20,000. Again, the passive loss limitation prevents Jane from deducting the loss. She now has a $40,000 carryover.
In year three, the business earns $15,000. Jane can use the suspended passive loss to offset her $15,000 income from the orange grove leaving her with a remaining suspended passive loss of $25,000 ($20,000 + $20,000 - $15,000).
At the beginning of year four, Jane sells the business for a gain of $15,000. Jane can deduct the passive loss carryover of $25,000 resulting in a deductible net passive loss of $10,000 for the year. As she sold her complete interest in the business she can deduct the full amount of the suspended loss even though the amount of the loss is greater than the gain.
At-risk rules example Jim invests $10,000 in a partnership and receives a 40% interest. The partnership borrows $400,000 on a nonrecourse basis. Jim's basis in the partnership is $170,000 ($10,000 + 40% x $400,000), but he is at-risk for only $10,000 because the loan is non-recourse. The partnership buys and leases equipment. Jim materially participates in the business. During the first year, the rental revenue is $70,000, depreciation is $40,000, interest expense is $35,000 and other expenses are $25,000. The loss is $30,000 ($70,000 - $40,000 - $35,000 - $25,000). Jim's share of the loss is $12,000 (40% x $30,000). Jim can only deduct $10,000 of loss because he is at-risk for only $10,000. Jim can deduct no future losses unless he invests additional capital or he becomes liable for partnership debts. In reality, what the rule says is that because he is not liable for the debt that is creating the basis for the equipment, his deduction for the depreciation that the debt is generating is limited. He could walk away from the partnership without any obligation to pay the partnership's debt. The rule limits how much depreciation Jim can deduct but not other expenses which are paid or for which he is personally liable.
Investment interest example Jill and Jerry borrow $100,000 at 8% interest to buy stock. The stock pays dividends of $2,000. They have $1,000 of interest income from other investments. They pay $8,000 of interest expense on the borrowed funds. Assuming they elect to have the dividend taxed at ordinary rates, they can claim an itemized deduction of $3,000 for investment interest. The remaining $5,000 of interest is carried over and can be deducted from future investment income.
The next year they sell the stock for $104,000. They retire the loan and pay $7,000 of interest. They received $1,000 of dividends before they sell the stock and again have $1,000 of interest income. They can deduct $6,000 of interest if they elect to have the gain from the stock sale and the dividend income taxed at ordinary rates. If they so elect, they will have an investment interest carryover to future years of $6,000.
If they do not elect to have the gain or the dividends taxed at ordinary rates, they can only deduct $1,000 of investment interest in the first and second years. They have a $7,000 ($8,000 - $1,000) carryover from the first year to the second, and an additional $7,000 (total of $14,000) from the second to the third year. They may be better off to elect to have the dividend income and gain taxed at ordinary rates so they can claim the larger current investment interest deduction. Otherwise, at a rate of $1,000 per year, it would take 14 additional years to use the full carryover.
Tax planning impacts business operations. From the beginning, decisions such as organizational form, jurisdiction (where to form business), capital structure (e. g. whether to receive stock or debt), organizational control, transfers of property, lease or buy, status of workers (as employees or independent contractors), and accounting methods all have major tax implications. Some are difficult, if not practically impossible to change. After considering some practical problems encountered by new business, we will is a look at just a few of the major tax issues.
New Business Checklist
When you start:
Obtain necessary federal, state, and local business licenses
Check on local zoning ordinances
Apply for sales and use tax seller's permit
File with county clerk and publish a fictitious business name, also file an affidavit and proof of publication with the state
Obtain necessary insurance coverage
Form legal entity which normally involves filing required document with state Secretary of State (for example, articles of incorporation and bylaws for a corporation or certificate of limited partnership for a limited partnership)
Apply for employer identification number by filing federal Form SS-4
Make an S election, if applicable
Open bank account, issue stock, elect directors, hold directors' meeting, transfer assets (title) to business
During the year:
File monthly sales tax form--often transfers of assets or leases of assets to a corporation/partnership are subject to sales tax
Make quarterly estimated payments (entity or owner must almost always file even during the first year unless a loss is expected)--do not forget Florida F-1120ES if a corporation.
Make payroll tax deposits and file payroll tax forms
Annually:
File annual tax information returns, Forms 1096, 1098, 1099, W-2, etc.
File federal tax return (Form 1120, 1120S, etc.) and Florida Form F-1120, if applicable and make new estimated payments
File annual report with State and pay necessary fee
Renew licenses
File Personal Property Tax Return, Form DR-405 with the county by April 1.
File Intangible Personal Property Tax Return, Form DR-601 with the state by June 30.
Major Decisions with Tax Implications Associated with the Start of a New Business
Entity choice: What organization form is to be used? How many entities are to be formed? If a corporation is formed should an S election be made?
Capitalization and capital structure: How much capital is required? Should the entity issue debt? Are assets to be leased or purchased? What about other types of equity interests?
Ownership: Who has ownership interest: Family members, passive investors? How much interest and what type of interest does each investor have? This affects who is taxed on income and influences estate plans.
Employment: Are workers employees or independent contractors? What benefits are to be provided? What compensation level is appropriate? When is compensation provided?
Jurisdiction: Where is the entity to be formed? Where does it have nexus? Are multiple entities in multiple jurisdictions appropriate?
Related entities pricing: Inter-company pricing influences who reports income, who benefits from the income, and where the income is taxed. Inter-company pricing includes transfer prices for inventory, capital, and services.
Accounting methods and periods: What accounting methods are to be used? What inventory valuation is used? What taxable period is utilized?
Selecting Organizational Form
The tax law divides entities into four groups each of which contains two major types. The four groups are taxpayers, pass-through entities, hybrid entities, and tax-exempt entities. The taxpayers are C Corporations and individuals. Both are taxed on their income which means a dividend paid by a C Corporation to an individual is taxed twice. Now, however, dividends are taxed at favorable rates. The pass-through entities are S Corporations and partnerships. In general, their income is taxed to the owners, not to the entity itself. Trusts and estates are hybrid entities. They are taxed on the income they retain, but are not taxed on income they currently distribute. Beneficiaries are taxed on currently distributed income. Exempt entities include retirement plans and other tax-exempt entities such as charities and churches.
Most large businesses operate as C Corporations because of liability protection, because other organizational forms are unavailable (e. g. having more than 100 investors or foreign investors), because of access to capital markets, because of certainty regarding the law, and because of favorable fringe benefits rules. Smaller businesses that operate as C Corporations often use compensation and other payments to owners to reduce or eliminate double taxation. Even with "double taxation" smaller C corporations may pay less tax than would be owed with other organizational forms because lower tax rates apply to small amounts of income retained by the business. There are about 2 million C Corporations with most actually being smaller businesses. Only about 100,000 report taxable income of $50,000 or greater.
S Corporations are often used to avoid double taxation, obtain liability protection, limit self-employment tax, and because of somewhat favorable fringe benefits rules. Losses pass through S-Corporations, but are unavailable currently to shareholders who do not materially participate. There are about 3 million S Corporations.
The partnership form is often chosen to avoid double taxation, to utilize special allocations, and to facilitate capital contributions and withdrawals. Many are family partnerships, professional partnerships, and investment partnerships (e. g. real estate partnerships and investment clubs). LLPs, LLC, and other organizational variations have made the partnership form more attractive because they can provide liability protection. Nevertheless, liability protection may be limited because of the partner's direct personal involvement in the business and because lenders often require partners to personally guarantee loans. As with S Corporations, losses may not be currently deductible because of loss limiters. There are about 2 million partnerships.
Many small businesses operate as proprietorships to avoid double taxation and because of the simplicity of that organizational form. Liability protection might not be available for reasons noted above even if the owner selected another organizational form. Many trade workers, professionals, farmers, and other small businesses use this form. There are about 17 million proprietorships.
Accounting Methods and Periods
In most instances, the cash method of reporting is preferred to the accrual method of reporting income for tax purposes. The cash method is simpler to use. The cash method also results in income being reported when the taxpayer receives the cash needed to pay the related tax. The cash method also provides the advantage of permitting taxpayers to control when expenses are deductible by accelerating or delaying payment. In contrast, accrual basis taxpayers must include receivables in income even though they have not received payment and, in some cases, may never receive payment.
C Corporations and partnerships with a corporate partner may use the cash method if their average gross receipts during the three previous years was $5 million or less or if they provide personal services (e. g. law and accounting).
The IRS for years would not allow any taxpayer with inventories to use the cash method. Taxpayers with inventories may now use the cash method if their average gross receipts during the previous three years was $1 million or less. Taxpayers whose primary business is not the sale of inventory may use the cash method if their average gross receipts during the previous three years was $10 million or less. This is true even if they have incidental inventories. Because C Corporations and partnerships with corporate partners must use the accrual method, the threshold for them is $5 million.
Thus, qualifying businesses need not report revenue from sales until the amounts are received. The IRS, however, says that cash basis taxpayers must determine the cost of sales by reducing the amount paid during the year for merchandise by the amount paid for merchandise still on hand. For example, if a new business purchased $500,000 of merchandise during the year but still owes $40,000 for the merchandise, its cash purchases equal $460,000. If the company has $100,000 of inventory on hand at year end, its is assumed to have paid for $60,000 ($100,000 - $40,000) of that inventory. Thus, the cash method cost of sales is equal to $400,000 ($460,000 - $60,000). Note that this results in the same cost of sales as is computed using the accrual method, $400,000 ($500,000 - $100,000). It is not clear what would be done if the amount owed at year end was greater than the amount of inventory on hand.
The taxpayer using the cash method benefits because receivables are not included in income until payment is actually received.
One provision that simplifies reporting for accrual basis taxpayers and at the same time provide a small tax advantage is found is Sec. 461(h) which permits taxpayers to effectively deduct many recurring expenses when paid. A number of requirements must be met--for example, the prepayment cannot be greater than 8.5 months. For example, an accrual basis taxpayer that pays it annual insurance premium on July 1, can deduct the premium in the year paid without having to accrue one-half of the premium as a prepaid expense at year end.
For many years it was common for partnerships and S Corporations to choose fiscal years, often years ending on January 31. This was because owners did not have to report their respective shares of the fiscal year income until the end of their own tax year, usually December 31. That resulted in a delayed tax payment. The tax law now limits that option. The result is that most partnerships and S corporations now must use a calendar tax year. A fiscal year is available to partnerships and S Corporations if the owners are also on the same fiscal year, if there is a business reason for using a fiscal year (e. g. a seasonal business may be able to use a fiscal year), or if the company makes "required payments" that are much like prepayments of the otherwise delayed tax amount.
Uniform Capitalization Rules
The Uniform Capitalization Rules (UNICAP) define what amounts must be included in inventory and capitalized in the cost of long-term contracts.
Manufacturing and long-term contracts In general, when valuing inventory and contracts taxpayers must include a broadly defined group of overhead costs. Previously, many businesses included only factory overhead costs in inventory omitting service costs such as personnel, purchasing, payroll, legal departments, and data processing. Now, such costs must be included in inventory to the extent they are associated with production. UNICAP does not require the inclusion of marketing, internal audit, tax departments and certain other specified activities.
Resale In the case of resale businesses, only off-site storage, purchasing, and handling must be included in inventory, but only if average gross receipts during the previous three years exceed $10 million.
Depreciation and interest When determining the amount to include in inventory, tax depreciation (not financial depreciation) is used.
Interest must be included in inventory in the case of property with either a long production period or a long useful life. A long production period is 2 years or longer (one year or longer in the case of property costing more than $1 million). Property has a long useful life if it is real estate or if the class life is 20 years or longer.
Application These additional costs may be allocated to inventory in a manner similar to an overhead application rate. For example, if these costs are equal to 20% of other manufacturing costs, then the inventory value can simply be increased by 20%. In the case of LIFO users, the adjustment is made only to the current LIFO layer which means no addition is made in years when the ending inventory is lower than the beginning inventory.
Some of the major tax related factors influencing property decisions include:
Ordinary tax rates: The relative tax rates of family members and corporations often indicate who will benefit from deductions and who will have to pay a higher tax on income.
Capital gains: Tax planning relative to property transactions for individual taxpayers involves an effort to insure favorable capital gains treatment when property was sold. Corporate capital gains, however, are taxed at the same rate as other income. Moreover, the fact that it is difficult to remove assets from corporations without recognizing gain and the fact that creditors have access to corporate assets means that it is often desirable to keep major assets out of closely held corporations.
Alternative minimum tax: The AMT provisions require investors choosing tax favored investments to add back many of the items that reduce taxable income in the computation of alternative minimum taxable income. For example, in some instances less depreciation is allowed.
Loss limiters: Passive loss, at-risk, and investment interest can all be factors affecting the tax associated with property investments. While they influence individuals taxpayers, the rules are less an issue for a corporation.
Depreciation: The nature of real estate investments as well as real estate actually used in a business is that the owner receives a depreciation deduction on an asset that may actually be appreciating. Of course, interest and other expenses offset revenues, hence, the asset may show a tax loss at a time when it is actually producing economic income.
Trapping: The question of whether to transfer property to a corporation is often influenced by to a fear of having the appreciation trapped in the corporation. It is difficult to remove appreciated property from a corporation. See above.
Lock in: Owners of appreciated property often feel locked into the property because the sale will produce a large tax. Like kind exchange and other nonrecognition rules may be beneficial. The step-up in basis rules associated with inherited property under current law can permit assist with basis increases, but the step up in basis provision is scheduled to expire in 2010.
Liabilities: The possibility of unexpected liabilities often influences who holds title to property. Frequently real estate and other major assets are separately held. Often a partnership is formed to hold such assets. The assets are in turn leased to the corporation.
Sales Tax: Florida imposes a sales tax on the rental of both real and personal property used in a business even if the property is owned by the individuals who own the business. Can expense reimbursements be used to reduce or completely avoid the sales tax in such cases?
Nonrecognition Rules/Installment sales: Tax on appreciation can be delayed or avoided by Secs. 1031 and 453.
Tax Planning and Employee Compensation
Much tax planning relating to employee compensation relates to four issues.
Regulating amount of compensation: too high or low Unreasonably high compensation is sometimes paid to the C corporation shareholders and their relatives in order to reduce the corporate income tax. The current low tax rate for dividend income makes this less beneficial especially when payroll taxes are considered. Low compensation is sometimes paid to owners of S corporations in an effort to avoid payroll taxes or to effectively shift income to other family members who are shareholders. High compensation can be paid to family members in an effort to shift income to such members, but that can be at the cost of payroll taxes. Such shifts are done to move income to individuals in lower income tax brackets and to move income between generations without transfer taxes.
Controlling employee/ independent contractor status Whether a worker is "controlled" by a business is a critical factor in deciding whether that worker is an employee or independent contractor. If a business is successful in avoiding control, a business is able to avoid payroll taxes, worker's compensation, fringe benefits coverage, and even liability for the worker's actions. Avoiding "control" can also permit the worker to deduct the cost of equipment, tools, transportation, travel, etc. for payroll tax purposes as well as income taxes (if use standard deduction or itemize and face the 2% of AGI floor). Expense reimbursement can sometimes be used as an alternative to assist employees. Often under reporting of income is a hidden motive behind efforts to avoid employee status. Employment status is often an important issue for drivers, plumbers, electricians, real estate and other outside sales personnel, appraisers, surveyors, etc.
Effectively utilizing fringe benefits and deferred compensation As noted below, many fringe benefits are tax favored which means employers should effectively utilize "desired" benefits. Some benefits produce employer deductions without employee income (e. g. health insurance). Some benefits, profit sharing in particular can be used to " zero out" a businesses taxable income. Other benefits provide employers deductions without cash (stock bonus, ESOP). Controlling coverage is important to assure that benefits are not provided to employees who do not perceive the benefits as being worthwhile.
Controlling timing of deduction and income A fiscal year C corporation can pay bonuses to employees in January and obtain a current deduction for itself while employee delays recognition of income. An accrual basis calendar year corporation can accrue bonuses to "unrelated" employees in December and pay bonuses in January. Result is a current deduction for the company with delayed income to the employee. In general, these techniques cannot be used by personal service corporations and corporations controlled by the employees who are receiving the benefit. Other forms of compensation such as stock options and qualified retirement plans, which are discussed below, impact when employees report income and when employers are entitled to any related deduction. Another provision, Sec. 83, permits stock and other property to be issued to employees without current taxes. The property must be restricted. That is, to keep the property the employee must remain with the company for a specified time period and the property cannot be sold until the employment obligation if fulfilled. The employer's deduction is also delayed. When the restrictions lapse, the employee reports the value of the property at that time and the employer receives a deduction at the same time.
Tax Favored Fringe Benefits
Current deduction for employer without taxable income to beneficiary
May be part of a Sec. 125 cafeteria plan a. Segundo. 79 Group-term life insurance (limited to $50,000) b. Segundo. 106 Medical and disability insurance (premiums only) c. Segundo. 105 Medical reimbursement d. Segundo. 129 Dependent care assistance (maximum $5,000)* e. Segundo. 132 Parking, transportation, recreation and athletic facility* f. Segundo. 137 Adoption assistance program (maximum $10,000)
Not part of cafeteria plan g. Segundo. 132 Fringe benefits (no additional cost*, employee discounts*, working condition*, de minimis*, moving expense, and retirement planning) h. Segundo. 274 Employee awards i. Segundo. 119 Meals* and lodging j. Segundo. 127 Educational assistance (maximum $5,250)* k. Business auto*, etc.
*May also be provided to proprietors, partners, and greater than 2% S corporation shareholders on a tax favored basis.
Credit for employer, no taxable income to beneficiary Beginning in 2002, employers may take a credit equal to 25% of qualified child care expenditures (10% of qualified resource and referral expenditures) up to a maximum credit of $150,000. The credit is allowed in lieu of a deduction for the expenditures. Low tax bracket employers prefer the credit to a deduction. Because eligible costs include the cost of constructing a facility the credit will benefit high tax bracket employers who incur such costs.
Current deduction for employer, deferred income for employee a. Segundo. 401 Pension, profit sharing, and stock bonus b. Segundo. 401 Cash or deferred arrangement (if choose deferral) c. Segundo. 423 Employee stock purchase plan option
No deduction, and deferred income for employer a. Segundo. 422A Incentive stock option b. Segundo. 83 Restricted property (appreciation not deductible, balance is a deferred deduction).
More information is provided below for retirement plans and options.
More detailed information on retirement plans.
Alternative forms of compensation often can be compared by looking at the ratio of the employer's after tax cost to the employee's after tax benefit. The lower the ratio the more desirable the form of compensation. In general, employers should not utilize forms of compensation that have a higher ratio than cash compensation as cash compensation is more efficient. A major limitation of such computations is that the computations often produce very different results for individual employees meaning that a form of compensation that is perceived as very beneficial by one employee is perceived as being much less beneficial by another employee.
1. Cash Bonus A corporation in the 35% tax bracket pays a bonus of $100 to an employee in the 33% tax bracket. Medicare tax (1.45%), but not Social Security tax, is applicable.
Company's cost Bonus FICA tax Less: Income tax saved Net cost
3. Defined Benefit Plan Employee is 15 years from retirement and will be in the 15% tax bracket at retirement. Funds in plan will grow at a rate of 10% per year (resulting in a $1 contributed now being worth $4.18 at retirement). Assume employee discount rate of 6% (meaning that a $1 which will be received in 15 years is now worth .417.
Company's cost Contribution Less: Income tax savings Net cost
Employee's benefit Future benefit Less: Income tax on benefit Net future benefit Present value of after tax benefit
Cost benefit ratio .439
If employee discount rate of 8%, then result is .580.
If employee discount rate of 10%, then result is .766.
There are three types of stock options: Incentive Stock Options (ISO's) and Nonqualified Stock Options (NSO's) and Employee Stock Purchase Plan Options (ESPPO's). Each is subject to income taxation under specific rules described below. ISOs and ESPPOs are exempt from FICA and FUTA taxes. The IRS' position is that NSO are subject FICA and FUTA taxes. The illustrations below omit payroll taxes for purposes of simplifying the computations.
ISO Several employer and employee conditions must be met in order that options be covered by ISO rules:
The option price must be no lower than the stock's FMV at the time the option is granted. Employees owning more than 10% of the company must pay at least 110% of the FMV at the time the option is granted. The options must be nontransferable except at death or the result of a divorce. The amount of options that may be exercised by an employee in a year is limited to $100,000. Procedural requirements must be met (e. g. shareholder approval of plan, 10 year limit on plan, etc.).
The employee must not dispose of the stock within two years of the grant date and within one year of the exercise date. The employee must work for the company at the grant date and until within three months before the exercise date.
The advantage of an ISO is that the employee ordinarily reports no income when the ISO is received or exercised (the value of the stock in excess of the option price at the time of exercise is an alternative minimum tax adjustment). The employee reports a capital gain or loss when the stock itself is sold (selling price minus cost of stock) if the holding period requirements are met. Ordinary income if not.
If all ISO requirements are met, the employer receives no deduction. NSO's are often chosen by employers over ISO's because employers do receive deductions.
NSO The treatment of an NSO depends on whether the options have a "readily ascertainable fair market value." If the option price is lower than the value of the stock, the option will likely be deemed to have a market value at least equal to the difference. In such cases, the value of the option is taxable at the time the option is received, and the employer receives a deduction for the value. No tax is imposed on the exercise of such options, but the sale of the stock itself is taxable as a capital gain or loss (selling price minus the total of the cost of the stock and the income recognized when the option was received).
The granting of an NSO with no "readily ascertainable fair market value" has no tax consequence. The exercise of such options results in ordinary income to the employee (and a deduction for the employer) equal to the "discount" (FMV of the stock at the time the option is exercised minus the option price). The employee reports a capital gain or loss when the stock itself is sold (selling price minus FMV of stock at date option is exercised).
ESPPO The option price may as low as 85% of the value of the stock at the time the option is granted or alternatively 85% of the value of the stock at the time the option is exercised. Employees are limited to receiving options for no more than $25,000 of stock per year. If the option price is tied to the value of the stock at the time the option is exercised, the term of the option can be as long as 5 year. If the option price is tied to the value of the stock at the time the option is received, the term of the option can be no longer than 27 months. Option must be offered to most employees (may exclude certain new, part-time, seasonal and highly compensated employees). Employee reports no income until stock is sold. If meet holding period requirement (a minimum of two years after date of the option and a minimum of one year after date of acquisition of stock) the employee reports a capital gain if option price was no lower than the market value of the stock at the time the option was received. If option price was lower than the market value of the stock at the time the option was received, the amount of the discount must be reported as ordinary income and any additional gain is a capital gain. Employer receives no deduction if the holding period requirements are met. The employee reports ordinary income and the employer receives a deduction if holding period requirements are not met.
Stock Option Example
Stock is worth $1 per share today and is appreciating at rate of 10%. Company and employee discount rates are both 10%. Company is in 35% tax bracket. Employee is in 33% ordinary income tax bracket and 15% capital gains bracket.
ISOs and NSOs are at current market value, and must be exercised within five years. Employee will exercise option just before it expires (when the stock will be worth $1.61) and sell stock two years later (when it will be worth $1.95). Employee does not owe AMT.
ESPPO are at $.85, and must be exercised within two years Employee will exercise option just before it expires (when the stock will be worth $1.21) and sell stock five years later (when it will be worth $1.95).
If option is ISO:
($1.95 - .15 X ($1.95 - $1.00) - .33 X ($1.00 -$.85)) X .513 - $.85 X .821
The ESPPO example is not directly comparable to the other examples because the ESPPO rules limit the option period. As noted the IRS's position is that the NSO is subject to payroll taxes which is not incorporated into the example. The computation, as illustrated above, suggests that stock options may not always be an efficient form of compensation. They have been touted because they may both help retain and motivate employees and, in the past at least, could be used without having to show the cost as an expense on financial statements.
Multi-Jurisdictional Taxation Issues Florida Tax Issues
From formation, business must deal with state and local taxes, but as they grow they are faced with taxes in other jurisdictions. Often that is taxes in other states and then taxes in other countries. This is a look at those areas.
Some basics of Florida Taxes are summarized below:
Individual Income Tax -- none (1 of 7 states without an individual income tax).
Corporate Income Tax --the state taxes corporations at 5.5% (3.3% AMT). Honors an S election. Return due first day of fourth month following year end. Tax year same as federal. Some differences between Federal and Florida taxable income include: state income taxes not deductible, no NOL or capital loss carryback, foreign income taxes are deductible, a $5,000 exemption is allowed, a consolidation adjustment is available, and federal interest is exempt while state interest is taxable.
Estate Tax --Florida statutes specify that the Florida estate tax is equal to the amount of federal credit for state death taxes. As the credit was replaced by a deduction after 2004, the Florida estate tax has effectively been repealed.
Sales and Use Tax --6% state tax plus a local tax in some areas. Most food, medicine, real estate, services, and items purchased for resale are exempt. Mail orders and rentals are generally taxable. Transfers/transactions between related parties are generally taxable.
Real Property --no state tax, but counties, cities, school districts, and other units impose tax. The rate varies between districts, but averages about 1.9% state wide. There is a $25,000 homestead exemption as well as several other exemptions.
Personal Property --no state tax, but counties, cities, school districts, and other units impose a tax on the value of tangible personal property used in a business such as such as equipment and business furniture. Real property, intangibles, inventories, and automobiles are exempt along with personal use property such as jewelry and clothing. Rate is the same as real property tax.
Intangible Property --Florida taxes intangibles (such as stocks, bonds, and money market funds) at a rate of .1% (.001) in 2005. The tax is computed on the value of intangibles on December 31 of the prior year. The tax is imposed on the investor, but a corporation may elect to pay the tax on its stock. There are exemptions for cash, bank accounts, receivables, insurance policies, Florida bonds, assets in retirement accounts (pensions, IRAs etc.), and mortgages (which are subject to the nonrecurring intangible tax). Exemption of $250,000 ($500,000 for a joint return) in 2005. Due June 30. Discount generally equal to 1% per month, if paid early. The tax does not have to be paid if tax is less than $60.
The state imposes a nonrecurring intangible tax of .2% (.002) on mortgages secured by Florida real estate. This tax is imposed on the borrower.
Document Stamp Tax --Florida imposes a tax at issuance on the face value of notes, bonds, mortgages, and other written obligations at a rate of .35% (.0035) and on the transfer price of real estate at a rate of .7% (.007). The tax on stocks was repealed in 2002. All parties to the transaction are responsible for the tax. Typically, however, the borrower pays the tax on debt and the seller pays the tax on the transfer of real estate title.
Apportioning Multi-State Income
While the Federal Government taxes the worldwide income of U. S. businesses, states tax only the income determined to have been generated within the state.
All states with an income tax use apportionment to determine the portion of a business's income generated within the state.
Apportionment is a formula system that varies somewhat between states. In most states, however, the formula is based on the percentages of sales, payroll, and property within the state.
Although all states use apportionment, it is not used exclusively.
Mississippi favors the use of "separate accounting" which is an allocation system, but permits apportionment. Separate accounting is effectively used by the federal government in determining the U. S. taxable income of foreign businesses with U. S. source income.
Many states use "separate accounting" for special industries (agriculture, real estate rental, construction, and oil and gas are common).
Separate accounting is used by almost all states for non-business income such as dividends and interest.
Uniform Division of Income for Tax Purposes Act (UDITPA) specifies that the sales, payroll, and property factors are to be equally weighted in the apportionment formula. Over the years, many states have increased the weight on sales and reduced the weight on other factors.
13 states (AK, AL, CO, DE, HI, KS, MO, MS, MT, ND, OK, UT, VT) and DC use UDITPA rules and assign equal weight to each of the three factors (sales, payroll, and property).
24 states (AR, AZ, CA, CT, FL, GA, ID, IN, KY, LA, MA, MD, ME, NC, NH, NJ, NM, NY, RI, SC, TN, VA, WI, and WV) place 50% weight on sales and 25% each on property and payroll.
8 states (CT, IA, IL, MA, MS, MO, NE, and SC) use sales factor only. TX uses sales only in determining state capital stock tax.
5 states (MI, MN, OH, OR, and PA) weight sales more than 50% but less than 100%. Sales are weighted 90%, 75%, 60%, 80%,and 60% respectively.
1 state (CO) uses sales and property only.
6 states (CO, CT, MA, MS, MO, and SC) permit two or more methods.
5 states (NV, SD, TX, WA, and WY) have no state income tax.
Point of delivery is used to determine the location of sales, and where work is done is used to determine the location of services. P. L. 86-272 prevents a business from being taxed if its only contact with a state is to have customers and to solicit orders there. A "throwback" rule is used by most states. Under the "throwback" rule income not taxed elsewhere is taxed at home.
Generally based on average book value. Typically the average of beginning and end of year book values. Intangible property is usually omitted. Property owned by someone else and rented by the taxpayer typically is included in property. Approximately forty states value rented assets at eight times annual rental.
Wages are attributed to state where services are performed. Usually excludes services of independent contractors.
Generally apportioned if part of business activity, but allocated if not. For example, interest on notes receivable from customers would typically be apportioned, while rental income might be allocated to the state where the rental property is located.
Businesses can, in some instances, limit the need to apportion or allocate by forming separate corporations in order to isolate the income generated within the specific state. States, however, may ignore the existence of multiple corporations in cases of unitary businesses. Thus, multiple corporations may be recognized in the case of a chain of restaurants but ignored in the case of an integrated manufacturing company.
S Corporations and partnerships Ordinarily, partners and S corporation shareholders must file individual state income tax returns in states where their businesses have income. Some states permit an S corporation to pay a flat tax tax on its apportioned income in lieu of owners filing individual returns and reporting their respective shares of the corporation's income. Some states (CA, DC, LA, MI, NH, and TN) do not recognize S corporations. These states tax S corporations on their income. Some states (AR, NJ, NY, ND, OH, and PA) recognize S corporation status, but require a separate state election.
The United States taxes most of the world-wide income of it citizens and corporations. At the same time, the United States taxes the U. S. source income of foreign taxpayers. This pattern is followed by most countries which means much income is taxed by two countries. Working to limit taxes on multinational income is one of the largest areas for tax planning today.
There are several provisions in the tax law that provide relief. One major form of relief is the Foreign Tax Credit. Taxpayers may claim a credit against the U. S. income tax for foreign income taxes. The "extraterritorial income exclusion" also provides relief. This exclusion effectively replaces the DISC and FSC rules. There is a limited exclusion for foreign earned income available only to individual taxpayers. There also are relief provision associated with U. S. possessions such as Puerto Rico. At the same time, the pattern provides some opportunity of tax avoidance because U. S. companies can form foreign subsidiaries that operate abroad and, as a result, pay no U. S. income tax until the income is returned to the U. S. in the form of dividends.
Also, there are several provisions in the tax law intended to limit tax planning associated with multinational income. These are found in Secs. 267, 367, 482, and in Subpart F. All are intended to prevent efforts to avoid U. S. tax on international income.
We will briefly look at the tax systems used by various countries. These can be divided into four groups. Finally, we will look at how the U. S. taxes income earned in the U. S. by foreign taxpayers.
Classical or double tax system Shareholders pay a tax on dividends received from foreign corporations. The system is used by U. S. for dividends received by individuals from foreign corporations. Also used by Luxembourg and Netherlands.
Credit or imputation system Shareholders receive a credit for taxes paid by corporation. The system is used by U. S. for foreign taxes paid by subsidiary and for foreign taxes paid by an S corporation on items such as taxes paid on dividends received by the S corporation. This is the system employed by Denmark, Ireland, UK (including Canada, Australia, and New Zealand) France, and Italy. Limited use in Germany.
Split-rate system Corporate profits taxed at different rates, depending on whether they are retained or distributed. Used by Greece and limited use in Germany.
Exemption system Dividends from a foreign subsidiary are exempt. Not exclusively used in any major country, but used to some extent in Belgium and Spain.
The major provisions intended to reduce the burden of double taxation of international income and to encourage international business activity include:
Foreign Tax Credit
The most important relief from the double taxation that can result from classical scheme of taxing multinational income is the foreign tax credit. The credit for foreign taxes is subtracted from the U. S. income tax thereby reducing if not eliminating double taxation.
Credit equals lesser of: a) Actual foreign income tax, or b) Taxable foreign income /Taxable income* x Gross U. S. income tax** *Before personal and dependency exemptions. **Net of personal credits such as the child care credit.
In lieu of the credit may deduct $110,000. If company chooses the credit, the excess foreign tax of $5,000 can be carried back 1 years and carried over 10 years.
Why would anyone take the deduction? If the foreign tax rate is greater than 100%, which could occur when there is a profit in one foreign country but a loss in another.
Also, the credit must be figured separately for passive income (such as dividends, interest, and rents) if the foreign tax rate is lower than the U. S. rate.
Foreign Earned Income Exclusion
May exclude a limited amount of income earned while working in a foreign country (does not cover U. S. government employees).
30% limitation for business income.
Resident or Physical presence (facts and circumstances v. 330 days out of 12 months)
Lesser of $80,000 (adjusted for inflation and pro rated if less than 12 months) or earned income + housing costs over 16% x GS-14, step 1 salary.
Prorate related deductions and credits such as moving and employee:
Nondeductible portion = Deductions X (Exclusion/Foreign Earned Income)
Export Income/Production Income
Congress has attempted in the past to create incentives in the tax law designed to encourage American companies to export more products and services in order to create jobs and improve the balance of payments. Incentives have included Domestic International Sales Companies (DISCs), Foreign Sales Companies (FSC's), and the Extraterritorial Income Exclusion (ETIE). Challenges by trading partners and decisions by the World Trade Organization have caused the DISC provisions to be curtailed to the point they have little implication and have led to the repeal of the FSC rules and effective 2007 the ETIE rules.
The Deduction Relating to U. S. Production Activities (DRUSPA) has been created to replace the previous incentives. With DRUSPA, taxpayers will receive a deduction equal to a phased-in percentage multiplied times the lesser of taxable income (or an individual's adjusted gross income) or qualified U. S. production activities income. The phased-in percentage will be 9% beginning in 2010 (3% in 2005 and 2006, 6% in 2007, 2008, and 2009). Under the system, taxpayers will determine the amount of their income from U. S. production activities (such as manufacturing, producing, growing, and extracting) and take a deduction that is based on that income. Note that this deduction is tied to the type of income being produced by the business and not whether the income is related to export activities. As a result, a manufacturer will be taxed at a lower rate than a retailer.
A Credit for Possessions Corporations was repealed in 1996. A transition rule permits existing Puerto Rican Possessions Corporations to take advantage of the credit through 2005.
A credit against the U. S. income tax was allowed for possession's income. The credit was equal to the lesser of 100% of the U. S. tax on that income, or the sum of (1) qualified possession income taxes for the year, (2) 60% of qualified possession wages and allocable fringe benefits and, (3) 15%, 40%, and 65% of the depreciation for short-life, medium-life, and long-life qualified tangible property. Alternatively, a corporation may elect a credit equal to a percent of U. S. tax on possession income (40% in 1998 through 2002 (2005 in Puerto Rico).
Dividends received from Possessions Corporations qualify for the 70%, 80%, and 100% dividend received deduction.
Residents of U. S. Possessions
Under Secs. 931-935 income earned by bona fide residents of U. S. possessions (from possession sources) is exempt from the U. S. income tax. The income is subject to tax by the possession. Applies only to residents of Puerto Rico, U. S. Virgin Islands, and Guam. Treaty negotiations are underway with other possessions.
Constraints on tax planning relating to international income include:
Controlled Foreign Corporation
Subpart F is designed to prevent taxpayers from channeling income to foreign tax havens such as Netherlands Antilles, Liechtenstein, Bahamas, Switzerland, etc. Shareholders of Controlled Foreign Corporations (CFC) are taxed on the corporation's Subpart F income currently even if it is not distributed.
Controlled Foreign Corporation To be classified as a CFC over 50% of a corporation's voting stock must be owned by U. S. shareholders. U. S. shareholders are persons holding at least 10% of voting power.
Attribution rules are used to determine if a person owns over 10%:
spouse, child, grandchild, parent
stock owned by partnership, trust, estate is attributed to beneficiary on basis of interest in entity
50% shareholders are attributed stock held by corporation.
Subpart F Income Subpart F income is foreign base income associated with products purchased or produced in a country other than the host country and sold in a third country.
Exempt from Subpart F, if foreign tax is 90% of U. S. rate (90% x 35% = 31.5%). This means the rule only applies to "tax havens".
Result U. S. shareholders are taxed currently on the CFC's income. If foreign base sales are under 5% of gross income and under $1 million--then exempt. From 5% to 70%-- proportional part is taxed. Over 70%--taxed on all income. U. S. shareholders are taxed currently on the CFC's income.
Special Rules Relating to International Income
Segundo. 482 gives the IRS the right to allocate income, deduction, gains, losses, credits, etc. among related persons. Is available to IRS in situations when subpart F is not. For example, direct sales to a subsidiary
Segundo. 367 is intended to prevent tax avoidance on both outbound (Sec. 367(a)) and inbound (Sec. 367(b)) property transfers.
Outbound example: Transfer appreciated assets to a foreign subsidiary and to use Sec. 351 to avoid gain recognition. Liquidate a U. S. subsidiary into a foreign parent under Sec. 332. A foreign corporation acquires a U. S. corporation's assets in a C reorganization.
Segundo. 367(a) generally requires the transferor to currently recognize gain on non business assets and specific business assets (inventory, receivables, installment obligations, foreign currency, leased property, and property involving Secs. 1245 and 1250 gain).
Inbound example: Liquidate a foreign subsidiary into a U. S. parent under Sec. 332 (and certain "B", "C" and "D" reorganizations).
Segundo. 367(b) generally requires recognition of "dividend" income equal to earnings and profits.
States that the secretary shall by regulation apply the matching principle in cases in which the person to whom the payment is to be made is not a U. S. person.
Example: Foreign shareholder loans money to an accrual basis U. S. corporation. U. S. corporation cannot deduct related interest expense until paid.
This rule applies even when the foreign taxpayer uses the accrual basis and reports the income before it is paid. An important exception does apply to trade of business income which is reported currently by accrual basis taxpayers.
Example: U. S. corporation owes sales commissions on its products to a foreign subsidiary. Both corporations use accrual method. Deduction is allowed currently.
Foreign Currency Transactions
Because currency exchange rates fluctuate, taxpayers who engage in international business activities realize gains and losses from currency transactions. There are two alternative methods of reporting international transactions.
Records kept using the U. S. dollar In some cases international transactions are recorded using the U. S. dollar. Gains and losses are reported from currency exchanges, debt payments etc. This is often the method used in the case of sales to foreign customers even if payments are received in the foreign currency.
Reports kept using a foreign currency International records are kept in the local currency. Income is computed in the foreign currency and translated into the dollar.
Requirements In general, businesses keep records in the currency of the country where the economic activity takes place. In some cases the U. S. dollar is used rather than the local currency. This may be because the dollar is the medium of exchange in spite of the fact that the economic activity is in a foreign country. It may also be because of hyperinflation of the foreign currency.
How Foreigners Are Taxed
How foreign taxpayers are taxed by the U. S. is based on the following rules unless a treaty between the U. S. and the foreign taxpayer's country specifies different treatment. The rules apply apply to foreign individuals and other foreign entities (corporations, partnerships, estates, trusts, etc.) Foreign individuals are citizens of other countries who neither hold a "green card" or meet a substantial presence test (e. g. present in the U. S. for at least 183 days during the calendar year, or 183 days using a formula computation weighting days over three years).
Tax-exempt interest on private activity bonds issued after August 8, 1986.
Excess deductions for depletion, intangible drilling costs, bad debt deductions for financial institutions, depreciation on buildings acquired before 1987, amortization of certified pollution control facilities acquired before 1987, and depreciation of leased personal property acquired before 1987.
For assets acquired after 1986, difference between MACRS and ADS depreciation. The difference in the gain or loss on assets sold caused by different depreciation methods. Difference between percentage of completion profit and reported profit on long-term contracts. ACE adjustment is equal to 75% of the difference between ACE and AMTI (before this adjustment and the NOL deduction). Difference in charitable contribution because of higher limitation.
NOL NOL deduction, if any, is recomputed using AMT rules, and is limited to 90% of AMTI before the NOL deduction.
ACE ACE depreciation and gains and losses must be recomputed. Exempt income (e. g. interest and life insurance proceeds) is included in ACE. Related deductions are allowed. Installment method is not allowed. The 70% dividend received deduction is disallowed, but the 80% and 100% dividend received deductions are allowed. Organizational costs may not be deducted forACE. LIFO is not allowed for ACE. Depletion is based on cost. Charitable contribution deduction is recomputed using ACE income.
AMT Exemption The AMT does not apply to small corporations (generally those with gross receipts of less than $5,000,000 during the 3 prior years).
Corporations are entitled to an exemption of $40,000, but the exemption is is reduced by 25% of AMTI over $150,000 resulting in the elimination of the exemption when AMTI is over $310,000. Note that corporations with gross receipts over $5,000,000 may still have relatively small AMTI, and benefit from the exemption.
Minimum Tax Credit Taxpayers are allowed to carryover any minimum tax they pay (the difference between AMT and the regular income tax), and subtract it from any regular income tax in the future, as long as it does not reduce that tax below that year's AMT.
AMT Example: AMT Inc.'s taxable income is computed as follows:
Gross margin Installment gain Dividends received Depreciation Operating expenses NOL deduction Net Charitable contribution Dividend rec'd. deduction Taxable income
AMT, Inc. received $3,000,000 of interest on tax exempt bonds issued by the local school district to pay for the construction of schools. Charitable contributions equal $100,000. The company owns an office building with a depreciable basis of $5,000,000 which was purchased a few years ago. Depreciation is $128,200 (.02564 X $5,000,000) for income tax purposes and $125,000 (.025 X $5,000,000) for AMT purposes. The company's AMT NOL carryover is $4,000,000. The company sold land on the installment basis reporting 40% of the gain currently. The AMT is computed as follows:
Gross margin Installment gain Dividends received Exempt interest Depreciation Operating expenses NOL deduction Net Charitable contribution Dividend rec'd. deduction Net ACE adjustment AMTI AMT
The difference between taxable income and AMTI consists of the decrease in the NOL and depreciation deductions ($2,000,000 and $3,200 respectively) plus the ACE adjustment of $3,480,000 (which is equal to 75% of $4,640,000 ($5,403,200 - $763,200)) minus the charitable contributions deduction ($100,000). Alternatively the ACE adjustment can be thought of as 75% of the total of the lost dividend received deduction ($140,000),the additional installment gain ($1,500,000) and, the "tax-exempt income" ($3,000,000))
This can be computed as follows:
Taxable income Adjustments: Depreciation NOL Charitable ACE AMTI
The depreciation rules for the AMT are much simpler today than they have been in the past. Nevertheless, previous rules still apply to assets acquired when the rules were in effect. In the past, separate rules applied to depreciation computed for taxable income purposes, alternative minimum tax purposes, adjusted current earnings purposes. In computing taxable income, MACRS depreciation rules are used to determine depreciation on recently acquired assets. That is, most personal property is depreciated using 200% declining balance over 5 or 7 years. Straight line depreciation is used for real property and the recovery period is 27.5 for residential and 39 years for nonresidential. In computing alternative minimum taxable income and adjusted current earning, personal property is depreciated over MACRS recovery periods using 150% declining balance while real property depreciation is same as taxable income depreciation (i. e. MACRS --27.5 or 39 years straight line). Although the rules for earlier acquisition are very complex, the fact is that in most cases there is no difference between taxable income depreciation and either AMT or ACE depreciation because of the passage of time.
Summary of Tax Depreciation Rules
AMT for Individuals
Differences between individuals and corporations include:
No ACE adjustment.
Personal exemptions and some itemized deductions (taxes, home equity loan interest, and most miscellaneous deductions) are lost. Medical deduction allowed only to extent expenses exceed 10% of AGI.
The bargain element of Incentive Stock Options (the difference between the value of the stock and the option price) is included in AMTI in the year the options are exercised (except in cases where the stock itself is sold during the same year). A compensating adjustment is made in the year the stock is sold.
Exemption is different. For example, for married couples filing jointly the exemption is $58,000 for 2005, but is reduced by 25% of AMTI over $150,000 which means the full amount of the exemption is phased-out at $382,000. The exemption for single taxpayers is $40,250, and with the phased out beginning with AMTI of $112,500.
Rates are 26% of first $175,000, and 28% of additional amounts (except that capital gains and dividend income are taxed at their usual rates).
AMT credit not allowed for tax caused by permanent differences (mainly, private activity bond interest, personal exemptions, some depletion, and itemized deduction differences). Credit is allowed for AMT attributed to timing differences (e. g. depreciation and long-term contracts, etc.)
Family Tax Planning
Family tax planning includes personal financial planning, retirement planning, estate planning, and contributions and tax exempt organizations. Here is a brief look at financial planning. contributions, and tax exempt organizations.
Financial planning is a growing area of financial services offered by accountants.
Comprehensive plan includes:
Personal financial statements
Cash budget
Analysis of debt (payment problems, refinancing for deductibility or lower rate, or longer term)
Investment analysis (amount, diversification, risk)
Retirement plan (establish pension plan, SEP, etc.)
Tax plan (projections, ways to reduce taxes)
Insurance analysis (life, medical, long-term care, homeowners, liability, automobile, and business)
Estate plan (wills, gifts, trusts, title to property)
Financial Planning Steps
Steps to follow:
Gather factual data (tax returns, wills, investment information etc.)
Gather preference information (risk preferences, plans, problems, etc.)
Write up a summary of data relating to insurance, retirement plans, wills, investments, etc.
Prepare a status quo cash flow projection (leave open for taxes). Include personal, business, and investment items, debt service etc.
Prepare a status quo tax projection (and complete cash flow).
Prepare a current and projected status quo balance sheet.
Develop estate plan, investment plan, retirement plan, insurance plan, etc. Involves a subjective weighing of attitude towards risk, plans for retirement, etc.
Prepare revised cash flow, tax projections, and balance sheets.
A useful Excel file for computing future net worth is available. Another Excel file projects retirement income and wealth.
Tax Favored Investments
Oil and Gas Write off intangible drilling costs and dry hole costs. Can take percentage depletion (15% of receipts) or cost depletion which ever is greater. Percentage depletion is not limited to basis. Losses from a "working interest" are not subject to the passive loss limitation.
Rental Real Estate Can deduct interest currently. Depreciation based on a 39 year recovery period (27.5 years in case of residential property). Gains on sale qualify for capital gain treatment. Can use installment method or like kind exchange. Generally subject to the passive loss limitation.
Low Income Housing Receive a credit spread over 10 years with a present value equal to 70% of the basis of the building (or portion that is low income housing). If construction is government subsidized the credit is 30%. Rental rate is limited. For example, for households with income less than 50% of the median income in the area, rent is limited to 15% of the median income. To illustrate, if the median income is $30,000 and family's income is $12,000, rent is limited to $4,500. Although losses are subject to the passive loss limitation, the income phase out is inapplicable.
Building Rehabilitation Credit The rehabilitation credit is equal to 10% of the qualified rehabilitation costs for nonresidential buildings originally placed in service before 1936. In the case of certified historic structures (including rental residential property) the credit is equal to 20% of the qualified rehabilitation costs. The cost of the rehabilitation must be no less than the greater of $5,000 or the basis of the building at the time the rehabilitation begins. Although losses are subject to the passive loss limitation, the income phase out is based on $200,000 of AGI. Basis of property is reduced by the credit.
Tax Favored Investments and Tax Planning
Losses incurred by taxpayers with a with a "working interest" in oil and gas ventures are exempt from the passive loss limitation.
Intangible drilling costs
Investors in oil and gas ventures may deduct the cost of dry holes (cost of unsuccessful efforts) and may deduct the drilling costs of successful efforts.
Lease acquisition costs are capitalized and depleted. Typically the investor acquires the right to produce the oil and does not purchase the land itself. A payment to have access to the property is call "lease acquisition cost".
Taxpayers may use either cost or percentage depletion. Cost depletion involves dividing the capitalized cost over the production period using years or barrels. Alternatively, taxpayers may elect percentage depletion which generally is equal to 14% of sales. Percentage depletion is not limited to the amount of capitalized cost. In many cases, producers contract to pay a royalty to the owner of the land (in lieu of a lease acquisition payment) and deduct both the royalty and percentage depletion.
Only taxpayers who are substantially invested in oil and gas have a tax preference. The following illustrates the rule:
Assume a taxpayer invests in two oil and gas ventures incurring $50,000 of IDC costs on each property. There is no oil or gas income as production has not began. Assume AMTI is $600,000.
First compute "excess IDC" on each property which is IDC in excess of the amount of deduction that would be available if the cost were amortized over 10 years.
Excess IDC = IDC - IDC/10
Next, compute aggregate excess IDC which is the total excess IDC reduced by 65% of net oil and gas income.
Aggregate excess IDC = $45,000 X 2 - 65% X net oil and gas income
Finally, compute the preference. The preference is aggregate excess IDC over 40% of AMTI
Preference = Aggregate Excess IDC - 40% X AMTI
= $90,000 - 40% X $600,000
Low Income Housing Credit
Low income housing is subject to the passive loss limitation. It is treated the same as other real estate rentals except that the AGI phase-out does not apply and that the credit must be converted into an equivalent deduction in order to apply the $25,000 limitation. Rental losses from the low income property or other rentals reduce the $25,000 allowance while net passive income increase the $25,000 allowance. Then, the credit is translated into an equivalent deduction.
Taxpayer has an a loss on low income housing of $10,000 and a tentative credit of $7,000. The taxpayer is in the 35% tax bracket.
The allowable credit is $5,250 = 35% ( $25,000 - $10,000). The remaining credit of $1,750 ($7,000 - $5,250) is carried over or back.
The credit can be deducted from the income tax, but not from the AMT. Business credits including the low income housing credit cannot reduce the income tax below the AMT. Thus, if the credit of $5,250 reduced the income tax below the AMT, the allowable amount would be further limited. If the AMT were greater than the income tax none of the credit would be available currently.
Gift Tax The gift tax is a cumulative tax paid by the donor. There is an annual per donee exclusion of $11,000, and a lifetime unified credit $345,800that is the equivalent of a $1,000,000 exclusion in 2005. Gifts in excess of the equivalent exclusion are taxed at 47%. The rate is scheduled to be phased down to 45% in 2009 and apply to taxable gifts over $1,500,000. In 2010, the rate is scheduled to drop to 35% and apply to taxable gifts over $500,000.
The tax is computed on the fair market value of taxable gifts. The fair market value of gifts is the value of the property in excess of any mortgage or other debt and any consideration paid by the donee. Husbands and wives may split gifts of separately owned property. In general, gifts of jointly owned property are considered to gifts made by the owners.
The following transfers are not subject to the gift tax:
Gifts between spouses and property settlements that are part of a divorce are exempt.
Taxpayers who fulfill their legal obligation to provide support are not making taxable gifts, but support provided that does not fulfill a legal obligation is a gift. An exception permits taxpayers to directly pay medical expenses and tuition without the payments being considered gifts.
Charitable contributions and political contributions are exempt from the gift tax. Charitable contributions, but not political contributions, are deductible for income taxes.
Qualified disclaimers are not taxable gifts. An individual who is entitled to inherit property may decline the inheritance without the disclaimer being treated as a gift.
Estate Tax Tax is imposed on the taxable value of estates. This is the value of assets in excess of decedent's debts, funeral and administration expenses, casualty and theft losses, charitable contributions, and marital deduction. In order to prevent individuals from avoiding the estate tax, taxable gifts made after 1976 are added to the taxable estate, and any gift tax paid can be subtracted from the estate tax. Estates are entitled to a credit that is the equivalent of a $1,500,000 exemption in 2005. This exempts most estates from the tax. The credit is scheduled to reach the equivalent of a $3,500,000 exemption in 2009. If Congress does nothing there will be no estate tax in 2010, but the tax will return in 2011 at the 2001 level. The rates that apply to taxable estates in excess of the equivalent exemption is 47% in 2005 with the top rate scheduled to be reduced to 45% in 2009. If Congress does nothing the rates will revert to their 2001 level in 2011 with the highest rate being 55% and the equivalent exemption being $1,000,000. Planning Techniques Common estate planning techniques include:
Make annual gifts to multiple donees to take advantage of the annual gift tax exclusions and to reduce the size of the taxable estate. Married couples can both make gifts doubling the amount of the annual exclusion. Valuable assets can be transferred this way by using "Self-Canceling Installment Notes."
Make both lifetime and testamentary charitable charitable contributions to reduce the size of the taxable estate. "Charitable Lead Trusts" permit the donor to take a charitable deduction for a temporary interest given to charity. The present value of remainder interest is a taxable gift to named beneficiaries. "Charitable Remainder Trusts" permit the donor to take a charitable deduction for the present value of a future interest given to charity. The donor benefits from the retained interest while removing the property for the donor's estate.
Form a "Family Limited Partnership" in order to obtain valuation discounts based on limited marketability and lack of control.
Gift assets expected to increase in value. Examples include interests in a newly formed business and life insurance policies. "Insurance Trusts" are sometimes formed to fund life insurance premiums.
Use both spouses' unified credit and lower brackets. The law provides for "Qualified Terminable Interest Property" which allows the surviving spouse to receive limited interest in the deceased spouse's property without the interest being included in the survivor's eventual estate.
Use marriage deduction to defer tax to the death of the second spouse.
Use generation skipping transfers to avoid tax (note a separate tax does limit this technique). Gifts to grandchildren and great-grandchildren can skip the estate tax that might be paid by the intermediate generations. Trusts created for this purpose are sometimes called "Dynasty Trusts." Especially useful for assets that family plans to retain such as a vacation home. Florida law allows trusts to be created for a term up to 360 years.
Sell options for family members to purchase assets in order to lock-in values. "Intentionally Defective Irrevocable Trusts" are sometime used to produce a similar result. Assets are sold to a grantor trust which names heir as remainder beneficiary. Selling price sets value for transfer tax purposes, but is ignored for income tax purposes as transaction is between grantor and the trust. These techniques are subject to IRS challenge.
Gifts of future interests are taxed on the present value of the interest. The unified credit (but not the annual exclusion) can be used to offset any gift tax. If donor dies during the interim, the full value of the property is included in the estate. If donor outlives term, the interest passes to the donees without additional tax. Works well for assets expected to appreciate. Residence can be transferred through "Qualified Personal Residence Trust." Other assets can be transferred through "Grantor Retained Annuity Trust."
Tax Exempt Organizations
Governmental agencies are generally exempt from taxation under the Constitution. Other organizations are tax exempt because they perform services that would have to be performed by the government if the organizations did not perform them. These organizations includes educational organizations, churches, social clubs, chambers of commerce, and others. Organizations exempt from income taxation are not automatically exempt from social security taxes, state, or local taxes.
Exemptions extend from: Exemptions extend from both judicial and statutory sources. McCulloch v. State of Maryland, 4 AFTR 4491 (USSC, 1819) established the doctrine of inter-government immunity, and contains the phrase, "The power to tax is the power to destroy." The Code does not contain specific exemptions for cities, states, and counties, but instead exempts income derived from providing any essential government service (Sec. 115). As a result, some government services, such as city owned power companies are taxed. Although one might argue that utilities are essential services, the view is that it is not essential that the service be provided by the government.
Other statutory exemptions include Secs. 501(a) and 401.
Segundo. 501 lists 21 different categories of tax exempt organizations.
Segundo. 401 exempts pension, profit sharing, stock bonus, and certain other retirement plans.
Exempt accounts and programs include Secs. 220, 223, 529 and 530.
Segundo. 220 Archer medical savings accounts--limited plan that expires in 2005. Predecessor to Sec. 223 plans.
Segundo. 223 Health savings accounts--provides that individuals who are covered by high deductible medical insurance plans (which can be as low as $1,000 per covered individual) may make deductible contributions (up to $2,250 or higher for an individual, $4,500 for a family couple) to a tax-exempt health savings account. Withdrawals are exempt if used to pay medical expenses. Withdrawals used for other purposes are taxable and subject to a 10% penalty.
Segundo. 529 Qualified tuition programs--prepaid tuition programs offered by states and educational institutions are generally exempt from income tax. Individuals may purchase tuition, books, fees, supplies, equipment, meals and housing for family members. Such purchases are subject to gift tax, but not income tax. Income earned by program from investing funds is generally tax exempt. Distributions are exempt if used for education purposes.
Segundo. 530 Coverdell educational savings accounts--banks and other approved institutions may offer education savings accounts. Lower and middle income individuals may contribute up to $2,000 per year to accounts set up to pay education expenses of designated beneficiaries. Amounts in account accumulate on tax exempt basis. Distributions are exempt if funds are used pay educations expenses.
Partial exemptions include Secs. 526, 527, and 528.
Segundo. 527 Political parties and campaign committees--contributions are not taxed; investment income taxed at the maximum corporate rates except congressional campaign committee which are taxed at regular corporate tax rates.
Segundo. 528 Home owners associations--dues are exempt; investment income is taxable at 30% with a $100 exemption.
Segundo. 526 Shipowner's associations--dividends and interest are taxable at corporate rates.
Note the difference between:
Nonprofit (American Automobile Association)
Tax exempt (Labor union, pension plans)
Partially exempt (Republican party)
Qualified charitable (UCF or Red Cross)
Nonprofit is an organizational form granted by the state. Tax exempt status is granted by the federal government. In most cases the federal exemption also exempts the entity from state income taxes, and in some cases other taxes. Qualified charities are eligible to receive deductible charitable contributions. If not, recipient must report as income (assuming distributions are permitted (e. g. assets of a pension or profit sharing plan)).
Tax exempt status is available to qualified organizations that apply and are granted such status. Application for tax exempt status is made on:
Form 1023 [Application for Recognition of Exemption under Sec. 501(c)(3)] or
Form 1024 [Application for Recognition of Exemption under Sec. 501(a)].
Annual Filing: Form 990 [Return of Organizations Exempt from Income Tax]
Churches, government agencies, and organizations with gross receipts of $25,000 or less are exempt from filing.
Form 990T [Unrelated Business Income Tax]
Form 990PF [Private Foundations]
Form 4720 [Excise Tax on Private Foundations]
Conditions for exempt status include :
For the common good-- means that the organization must benefit a broad group of individuals and not a narrowly defined group such as members of a single family.
Not-for-profit--means that if revenue exceeds expenses that the difference is plowed back into the organization rather than being distributed in the form of dividends or otherwise.
Net earnings do not inure to the benefit of any private individual --Excess salary can be a problem. Should the organization liquidate, assets must normally be passed on to other exempt organizations.
Not political--Political activity is prohibited for churches and private foundations. Other exempt organizations, at their elections, are permitted to engage in limited amounts of lobbying and grass roots political activity, but are subject to a tax under Sec. 4911. Note that campaigning for specific candidates is precluded even for electing organizations. Lobbying includes both expenditures to influence legislation and expenditures to influence public opinion. Grass roots political activity is permitted, but the distinction between electioneering and grass roots activity is often difficult to make.
Not contrary to public policy--Although not clearly defined, discrimination by a private university (Bob Jones University v. U. S., 52 AFTR2d 83-5001, 83-1 USTC ¶ 9366 (USSC, 1983)) caused it to lose its tax exempt status.
Unrelated Business Income
Business is related if the activity in and of itself carries out the exempt purpose. The fact that the profits are used to carry out the exempt purpose is irrelevant.
Examples:
The AICPA publishes the Journal of Accountancy . Subscription income is considered related, but advertising is unrelated.
A college bookstore is a related activity, but could possibly grow to the point that it became unrelated--e. g. sold significant amounts of clothing to non-students. Similarly, rental income received during summer from the operation of a summer tennis camp constituted unrelated business income (Rev. Rul. 76-402, 1976-2 CB 177).
Salvation Army's Thrift Stores are related, because the activity is a part of the training efforts of the organization.
What is a business--on going as opposed to occasional--e. gramo. candy sale by high school students raising money for a band trip would not normally be a business. Investment income is not business income. Therefore, dividend and interest income is not subject to the tax.
Debt financed income is unrelated without regard to whether it is otherwise unrelated. Therefore, if borrow money in order to engage in a business, the net income is taxable.
In general, corporate tax rules apply. For example, the tax rates and charitable contribution deduction limitation are based on the rules for a corporation. A $1,000 exemption is available.
Stated simply, private foundations are family (or perhaps business) supported tax exempt organizations. A private foundation maintains its tax exempt status, and is permitted to receive deductible charitable contribution. They are subject to closer examination by the IRS than other tax exempt organizations and are subject to several special taxes. Although contributions made to private foundations are deductible, they are subject to special limitations.
Two tests to determine if an entity is a private foundation:
Fall within an entity definition: Sec.501(c)(3) organization (other than church, hospital, educational and a few others), and
Lack public support: less than one third of support comes from "public" (the term public excludes substantial contributors (2%)) or over one third of support comes from gross investment income and net unrelated business income.
Private foundations are generally subject to a 2% (4% for foreign private foundations) tax on investment income. Investment income includes interest, dividends, rents, royalties, and certain capital gains. The tax can be reduced to 1% if certain conditions are met which include having payouts of at least 5% of asset value.
A series of "taxes" apply to private foundations, their managers, and other related persons if they engage in activities that are judged inappropriate.
Amount of the Deduction Deduction is normally the lower of the value of the property or its basis. An important exception allows taxpayers to deduct the value of certain appreciated capital assets. The value of contributed property can be deducted if the property is intangible (e. g. stock) or real (e. g. land) and is given to a public charity. In the case of tangible personal property (e. g. a painting), the value can be deducted only if the property is used by the charity in its exempt function (e. g. displayed in a museum as opposed to being sold). In the case of property subject to depreciation recapture, the deduction is equal to the value of the property reduced by depreciation recapture. Lower AGI limitations apply if a taxpayer deducts the value of appreciated capital assets.
The overall limitation for deductible charitable contributions is 50% of AGI, and applies to contributions made to public charities. The limitation is applied first, but in the initial computation amounts subject to the 30% and 20% limitations are ignored.
The limitation applies to contributions of capital again property to public charities if the taxpayer chooses to deduct the value of the property and to contributions to private nonoperating foundations (other than capital gain property). The 50% limitation is reapplied and contributions deductible under the 30% limitation are now considered.
The limitation applies to contributions of capital gain property to private nonoperating foundations. The 50% and 30% limitations are reapplied considering these gifts to private nonoperating foundations. In general, deductions are limited to the basis of the property.
Can avoid the 20% and 30% limitations for contribution of appreciated assets by electing to deduct the basis rather than the value of the property.
Carryovers Contributions in excess of the above limitations may be carried over five years, and are subject to the same AGI limitations when they are carried over.
No Deduction There is no deduction for contributions of services or for contributions to individuals, nonqualified organizations, or to foreign charities. Individuals may not deduct pledges.
Corporations The contribution limitation for corporations is 10% of taxable income computed without the contribution deduction, the dividend received deduction, or NOL or capital loss carrybacks . Corporations may deduct pledges if the actual contribution is made by the normal return due date. Corporations can deduct the value of inventory reduced by 50% of the income that would be recognized if the property were sold at its FMV (limited to twice the basis of the property), but the exception only applies to certain scientific equipment and to property used for the care of the ill, needy, or infants.
Treasury Decision 8599 (July 19, 1995)
This material amending the Income Tax Regulations is being maintained as part of the Pillsbury Winthrop Shaw Pittman LLP Tax Page. a demonstration World Wide Web project. Comments are welcome on the presentation of this material.
FEDERAL REGISTER Vol. 60, No. 138 60 FR 36995 Wednesday, July 19, 1995
DEPARTMENT OF THE TREASURY 26 CFR Parts 1 and 602
TD 8599 RIN 1545-AN55
Deductions for Transfers of Property
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations concerning deductions for transfers of property. The regulations amend the special rule that required an employer to deduct and withhold income tax as a prerequisite for claiming a deduction for property transferred to an employee in connection with the performance of services. Under the former regulation, employers that failed to deduct and withhold income tax were denied a deduction even where the employee reported the income and paid the tax. The new rules permit service recipients to claim a deduction for the amount included in the service provider's gross income. The service provider will be deemed to have included an amount in gross income if the service recipient provides a timely Form W-2 or 1099, as appropriate. These regulations apply to all service recipients who transfer property in connection with the performance of services.
DATES: These regulations are effective July 19, 1995. For dates of applicability, see § 1.83-6(a)(5) .
FOR FURTHER INFORMATION CONTACT: Charles T. Deliee, telephone 202-622-6060 (not a toll-free number).
Paperwork Reduction Act
The collection of information contained in these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U. S.C. 3504(h)) under control number 1545-1448. The estimated annual burden of reporting will be reflected in the reporting requirements for Form 1099-MISC.
Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.
On December 5, 1994, the IRS published in the Federal Register (59 FR 62370) proposed amendments to the income tax regulations (26 CFR part 1) under section 83(h) of the Internal Revenue Code (Code), which permits a deduction for property transferred in connection with the performance of services.
Three written comments were received from the public on the proposed regulations. No public hearing was held. After consideration of the written comments received, the proposed regulations are adopted by this Treasury decision with one technical clarification.
Explanation of Provisions
Under section 83(h) of the Code, in the case of a transfer of property to which section 83(a) applies, the person for whom services were provided may deduct an amount equal to the amount included in the service provider's gross income. In light of the difficulty that a service recipient may have in demonstrating that an amount has actually been included in the service provider's gross income, the general rule in former § 1.83-6(a)(1) permitted the deduction for the amount "includible" in the service provider's gross income. Thus, the deduction was allowed to the service recipient even if the service provider did not properly report the includible amount. Where the service provider was an employee of the service recipient, however, the special rule in § 1.83-6(a)(2) provided that a deduction could be claimed only if the service recipient (employer) deducted and withheld income tax in accordance with section 3402. The special rule was designed to ensure that the service recipient's deduction was in fact offset by a corresponding inclusion in the service provider's gross income. The special rule was limited to employer-employee situations because in other situations there was no underlying withholding requirement upon which the deduction could be conditioned.
Taxpayers expressed concern that it was often difficult to satisfy the prerequisite that employers must deduct and withhold income tax from payments in kind as a condition for claiming a deduction. These regulations address this concern by eliminating this prerequisite, while still ensuring consistent treatment between service recipients and service providers as required by the statute. In addition, because the deduction no longer is conditioned on withholding, there no longer is a need to have different rules for those who receive services from employees and those who receive services from others.
Under these regulations, the former general rule and special rule are replaced by a revised general rule that more closely follows the statutory language of section 83(h). The service recipient is allowed a deduction for the amount "included" in the service provider's gross income. For this purpose, the amount included means the amount reported on an original or amended return or included in gross income as a result of an IRS audit of the service provider.
Because of the potential difficulty of demonstrating actual inclusion by the service provider, a special rule provides that, if the service recipient timely complies with applicable Form W-2 or 1099 reporting requirements under section 6041 (or 6041A), as appropriate, with respect to the amount includible in income by the service provider, the service provider is deemed to have included the amount in gross income for this purpose. Thus, the regulations allow the deduction without requiring the service recipient to demonstrate actual inclusion by the service provider. If a transfer meets the requirements for exemption from reporting for payments aggregating less than $600 in any taxable year, or is eligible for any other reporting exemption, no reporting is required in order for the service recipient to rely on the deemed inclusion rule.
In order to allow service recipients to take advantage of the deemed inclusion rule with respect to property transfers to all service providers, these regulations also permit service recipients to use the special rule in the case of transfers to corporate service providers. To that end, service recipients are permitted, solely for purposes of this rule, to treat the Form 1099 reporting requirements as applicable to transfers to corporate service providers in the same manner as those requirements apply to transfers to noncorporate service providers. Thus, if a service recipient who transferred property to a corporate service provider timely reports that income on Form 1099 (to both the service provider and the federal government), the service recipient is entitled to rely on the deemed inclusion rule in claiming a deduction for the amount of that income. If the transfer meets the requirements for exemption from reporting for payments aggregating less than $600 in any taxable year, or is eligible for any other reporting exemption applicable to a service provider that is not a corporation, no reporting is required in order for the service recipient to rely on the deemed inclusion rule.
The deemed inclusion rule may be used only by a service recipient whose compliance with applicable Form W-2 or 1099 reporting requirements is timely. Thus, for example, under the current reporting requirements, if amounts attributable to one or more section 83 transfers of property are includible in an employee's income in year 1 (and are not eligible for any reporting exemption), the employer generally is required to furnish the employee a Form W-2 reflecting that amount by January 31 of year 2 and generally is required to file a copy of the Form W-2 with the federal government by the last day of February of year 2. If the employer reports to the employee and the government in a timely manner, the employer can rely on the deemed inclusion rule to claim a deduction for the amount in year 1. If the employee's Form W-2 is not furnished until after January 31 of year 2 or the government's copy of Form W-2 is not filed until after the last day of February of year 2, the employer generally is required to demonstrate that the employee actually included the amount in income in order to support its deduction of the amount.
Under these regulations, a special rule applies with respect to an amount includible in an employee's or former employee's income by reason of a disqualifying disposition of stock that had been acquired pursuant to a statutory stock option. In the case of such a disposition, and solely for the purpose of determining whether an employer may use the deemed inclusion rule under these regulations, a Form W-2 or W-2c (as appropriate) will be considered timely if it is furnished to the employee or former employee, and filed with the federal government, by the date on which the employer files its tax return (including an amended return) claiming a deduction for that amount.
With respect to disqualifying dispositions, these regulations modify the conditions for an employer's deduction under section 83(h) in a manner that is not inconsistent with the guidance provided by Notice 87-49 (Changes to Incentive Stock Option Requirements by Section 321 of the Tax Reform Act of 1986), 1987-2 C. B. 355. These regulations are not intended to have any effect on the application of Notice 87-49 or the analysis contained therein, and therefore should not be viewed as constituting a reconsideration of Revenue Ruling 71-52, 1971-1 C. B. 278, within the meaning of Notice 87-49.
Three written comments were received from the public on the proposed regulations. One dealt specifically with the withholding requirements as they apply to disqualifying dispositions of stock received under an employee stock purchase plan and, therefore, is beyond the scope of this regulation. The remaining two comments generally applauded the proposed amendments, but they both expressed a concern that, even after elimination of the withholding requirement as a prerequisite for claiming a deduction under section 83(h). there remains a statutory requirement, under subtitle C, to withhold income tax from compensatory transfers of property. Both commentators suggested that regulations be published to exclude transfers of property in payment for services from the withholding requirements.
Treasury and the IRS have carefully considered the comments. However, section 3402 of the Code requires every employer making payment of wages to deduct and withhold income tax from the wages. Section 3401(a) (relating to the definition of wages for income tax withholding purposes), section 3121(a) (relating to the definition of wages for FICA tax purposes), and section 3306(b) (relating to the definition of wages for FUTA tax purposes) of subtitle C all provide that "wages" means all remuneration "including the cash value of all remuneration (including benefits) paid in any medium other than cash," except as specified otherwise in those sections. A transfer of property in connection with the performance of services is not one of the specified exceptions.
Therefore, although the withholding requirement is eliminated as a prerequisite for claiming a deduction, these regulations do not relieve the service recipient from any applicable withholding requirements of subtitle C or from the statutorily prescribed penalties or additions to tax for noncompliance with those requirements. Thus, for example, if an employer transferred to an employee property to which section 83 applies and failed to withhold income tax on the payment, the employer would be liable for the tax under section 3403. However, under section 3402(d), any tax liability assessed against the employer would be offset by any tax paid by the employee. In addition, nothing in these regulations relieves the service recipient from penalties or additions to tax for noncompliance with the requirements of section 6041 or 6041A (relating to information reporting) to the extent they otherwise apply.
These regulations are effective for deductions allowable for taxable years beginning on or after January 1, 1995. However, taxpayers may apply these regulations when claiming a deduction for any year not closed by the statute of limitations. For example, if substantially vested (within the meaning of § 1.83-3(b) ) stock was transferred to an employee in 1992 upon the exercise of a nonstatutory stock option, and if the calendar year employer furnished a Form W-2 to the employee by January 31, 1993, reflecting the income generated by the transfer and filed the appropriate Form W-2 with the federal government by February 28, 1993, then the employer could apply these regulations to claim a deduction for 1992 for the amount of the income, even if the employer failed to withhold in accordance with section 3402 and could not demonstrate actual inclusion in income by the employee. If that employer did not claim a deduction for the amount of the income on its 1992 tax return, it could file an amended return for 1992 claiming such a deduction pursuant to these regulations, provided that 1992 is still an open year.
The proposed regulation that was published in the Federal Register on November 16, 1983 (48 FR 52079), proposing to amend the special rule in § 1.83-6(a)(2), was withdrawn by the Notice of Proposed Rulemaking published on December 5, 1994 (59 FR 62371).
It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U. S.C. chapter 5) and the Regulatory Flexibility Act (5 U. S.C. chapter 6) do not apply to these regulations and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.
Drafting Information: The principal author of these regulations is Charles T. Deliee, Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations), IRS. However, personnel from other offices of the IRS and Treasury Department participated in their development.
List of Subjects
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
Paragraph 1. The authority for part 1 continues to read in part as follows:
Authority: 26 U. S.C. 7805 * * *
Par. 2. Section 1.83-6 is amended as follows:
Paragraphs (a) (1) and (2) are revised.
Paragraph (a)(5) is added.
The revisions and addition read as follows:
Income Tax Regulations § 1.83-6
Deduction by employer
(a) Allowance of deduction --
(1) General rule . In the case of a transfer of property in connection with the performance of services, or a compensatory cancellation of a nonlapse restriction described in section 83(d) and § 1.83-5. a deduction is allowable under section 162 or 212 to the person for whom the services were performed. The amount of the deduction is equal to the amount included as compensation in the gross income of the service provider under section 83 (a). (b). or (d)(2). but only to the extent the amount meets the requirements of section 162 or 212 and the regulations thereunder. The deduction is allowed only for the taxable year of that person in which or with which ends the taxable year of the service provider in which the amount is included as compensation. For purposes of this paragraph, any amount excluded from gross income under section 79 or section 101(b) or subchapter N is considered to have been included in gross income.
(2) Special rule . For purposes of paragraph (a)(1) of this section, the service provider is deemed to have included the amount as compensation in gross income if the person for whom the services were performed satisfies in a timely manner all requirements of section 6041 or section 6041A, and the regulations thereunder, with respect to that amount of compensation. For purposes of the preceding sentence, whether a person for whom services were performed satisfies all requirements of section 6041 or section 6041A, and the regulations thereunder, is determined without regard to § 1.6041-3(c) (exception for payments to corporations). In the case of a disqualifying disposition of stock described in section 421(b), an employer that otherwise satisfies all requirements of section 6041 and the regulations thereunder will be considered to have done so timely for purposes of this paragraph (a)(2) if Form W-2 or Form W-2c, as appropriate, is furnished to the employee or former employee, and is filed with the federal government, on or before the date on which the employer files the tax return claiming the deduction relating to the disqualifying disposition.
(5) Effective date. Paragraphs (a)(1) and (2) of this section apply to deductions for taxable years beginning on or after January 1, 1995. However, taxpayers may also apply paragraphs (a)(1) and (2) of this section when claiming deductions for taxable years beginning before that date if the claims are not barred by the statute of limitations. Paragraphs (a)(3) and (4) of this section are effective as set forth in § 1.83-8(b).
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 3. The authority citation for part 602 continues to read as follows:
Authority: 26 U. S.C. 7805.
§ 602.101 [Amended]
Par. 4. In § 602.101, paragraph (c) is amended by adding the entry "1.83-6 * * * 1545-1448" in numerical order to the table.
Approved: June 19, 1995.
Margaret Milner Richardson, Commissioner of Internal Revenue.
Leslie Samuels, Assistant Secretary of the Treasury.
[FR Doc. 95-17494 Filed 7-18-95; 8:45 am] BILLING CODE 4830-01-U
Mortgage-interest tax break says a lot about you
LOS ANGELES (MarketWatch) -- The mortgage-interest deduction claimed by millions of homeowners every year may prove to be a useful window for the IRS to peek into taxpayers' income situation -- and potentially reap millions of dollars in unpaid taxes.
First, some history. Each year, your lender sends you a Form 1098, known as the mortgage-interest statement. The IRS gets a copy, too. It shows the total interest you paid as part of your monthly mortgage payment.
Historically, the IRS computers have been matching the totals on those Forms 1098 to ensure that you didn't deduct more mortgage-interest expense than the lender reported. When deductions are higher than the total amounts on all Forms 1098 with your Social Security number and that of your spouse, the IRS sends you a letter. They ask you to identify the lender whose interest you are deducting.
The goal is twofold: To ensure you don't deduct interest you didn't pay, and to ensure that the person you paid reported the interest income. This makes perfect sense.
New use for 1098s
But there's an interesting way to use those 1098 forms to catch non-filers and tax cheats, according to a new report by J. Russell George, the Treasury Inspector General for Taxpayer Administration, also known as TIGTA.
According to the TIGTA report, the IRS had their computer match up filed tax returns with Form 1098s from 2004 and 2005 showing residential mortgage interest paid by individuals. There were hundreds of thousands of 1098s that had no corresponding tax return on file. After some filtering, IRS sent notices to 227,019 non-filers asking that they either file their tax returns or explain why they do not need to file. (Many people were living on savings or tax-free income.)
As a result, nearly 70,000 new tax returns were filed for those two years by the non-filers. For 2005, about 28,000 of those tax returns generated $276 million in assessments. TIGTA estimates that in a given year, this type of audit system will generate between $352 million and $900 million per year in additional tax assessments.
Of course, simply assessing taxes does not guarantee they can be collected. Remember, many people who earned a great deal of money last year or the year before are nearly broke now.
What's the likelihood that this money will be collected? George and his staff don't deal in that kind of information. And the IRS doesn't publish statistics that track collections by these criteria. But look at this population logically:
The Form 1098 shows mortgage interest actually paid, not just assessed.
These people are paying mortgage interest of $10,000 or more (the TIGTA study considered Forms 1098 with interest of $20,000 or more). People wouldn't waste that kind of money without equity in the home.
Therefore, even if they don't pay the taxes, when the IRS or a state files a lien, there's apt to be enough equity in the house to force the taxpayer to pay the tax bill if they refinance or sell.
This is a brilliant collection tactic, don't you think?
Expect to see more of this from IRS
In response to TIGTA's recommendations, the IRS said it will expand an existing local audit project on the mortgage-interest deduction to a Nationwide Compliance Initiative Project. IRS's Small Business/Self-Employed Division will study existing processes to ensure that mortgage interest is appropriately considered when selecting non-filer cases for further examination.
Don't expect to see this implemented within the next year or so, according to Eric Smith, an IRS spokesman. Who will be targeted? Smith says it's premature to speculate on the contours of any possible program. So, you can take a deep breath -- for now.
But will a similar program be coming soon to a state near you?
California started a pilot program in 2007, says John Barrett, a spokesman for the California Franchise Tax Board. The FTB sent out 56,000 notices to folks with mortgage interest of $10,000 or more. The state collected about $40 million dollars.
To select the winners of this mortgage lottery, California runs a screening process, eliminating folks whose records show indications of savings or other non-taxable sources of funds. After all, as long as worldwide income is less than $14,845 in 2008, there is no need to file a California tax return.
With these IRS and California pilot programs showing such rich results, you can expect your state to implement this kind of scavenger hunt, too. ¡Prepararse!
How will this affect you?
When you get a notice, there are two ways to respond. The right way and the wrong way. Consider the following two examples.
In West Hills, Calif. tax attorney Bruce Drooks has a client who received a notice from the California Franchise Tax Board asking how he pays his mortgage. His client responded to the notice on his own, before contacting Drooks, saying the source of the mortgage money was gifts from family.
California thanked the gentleman and promptly requested proof, including copies of the checks or wire transfers used to give him the money, the names and Social Security numbers of the people making his mortgage payments, and the first two pages of their tax returns! In fact, the FTB wants this information for any other years they've been paying his mortgage. This could get ugly.
Although Drooks' client is undoubtedly truthful, this is going to be a major inconvenience to the family members helping him out.
Across the country, Laurence Rubin, a certified public accountant and a partner at Aronson & Company in Rockville, Md. has a client whose letter from the IRS arrived a couple of months ago. This fellow's Form 1098 mortgage interest showed $45,000, and he had not filed a tax return. They guy didn't respond to the IRS himself. He brought the notice to Rubin, who responded for him.
Rubin has a philosophy when it comes to the IRS and state tax-agency correspondence. He aims to settle the matter at once, rather than letting it turn into some agent's career project. Rubin's response included proof of the source of the funds -- the relevant page of a divorce agreement showing a very generous settlement. Since he knew the IRS would ultimately ask for it anyway, Rubin included a copy of the bank statement showing that money in the bank account, and how little interest it was earning.
With all the relevant back-up documents, Rubin outlined the situation, proving the client's income is too low to require filing a tax return. Rubin's client got a thank-you letter from the IRS saying the file was closed.
See, that's how you do it. Don't equivocate or be vague. Give the agency useful information straight off and you won't get the kind of terrifying letter Drooks' client got from California.
Review your tax return before filing it
Read Page 14 of the TIGTA report. It includes an example of how the IRS works backwards from your tax return or the data they have on file from W-2s, 1099s, 1098s, etc. to compute how much money you need to live on in the area where you live. See the report (PDF).
Use this concept to review your own tax return before filing it. If the bottom line on your tax return does not support your living expenses, consider adding a statement to your tax return explaining how you're paying your living expenses. Is it non-taxable income from state bonds, or draws from partnerships? Are you drawing down savings? Are you a trust-fund baby, where the trust is paying all the taxes? The IRS doesn't know any of this until you tell them.
A word of warning: Did you know that if you don't file a tax return, the IRS and your state can audit that year forever? Yes indeed! If the government is really desperate for money and finds that you owe them money and have the funds to pay the taxes, beware. If you have not filed tax returns for years, file them now and close the statute of limitations for audits and collections. Otherwise the un-filed years are always in jeopardy.
One last tip, file a tax return for yourself or your senior relatives, even if you have no filing obligation. It locks up that statute of limitations and protects you from intrusive inquiries years later, when tax authorities are trying to raise money.
Eva Rosenberg is the founder of TaxMama. com and an enrolled agent licensed to represent taxpayers before the IRS. She is the author of the new e-book "The 100% Home-Based Business Tax Solution." Reach her at taxwatch@gmail. com.
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How To Donate Stocks and Mutual Funds - A Better Option Over Cash Donations?
Is it time to make your yearly donation to your favorite charity? Have you ever considered donating your securities (i. e. stocks and mutual funds) as an alternative to cash. Many charities accept securities as a donation, and there might be additional tax advantages associated with it.
So, when is it better to donate securities over cash?
Well, that all depends on whether you have gained or lost money on the investments.
If your securities have increased in value since you purchased it, it is better to donate the securities to charity.
Benefits When Securities Have Increased In Value
When you donate your securities that has appreciated in value, you do not have to pay federal or state tax on the capital gains.
You deduct the full market value of the securities from your income taxes. **Important** In order to take advantage of this benefit, appreciated securities must be held for over one year. Please note that tax laws consistently change, and it is advised to check with your tax advisor.
You are making a donation that is lower than what you initially paid for.
If your securities have decreased in value since you purchased it, it is better to sell the securities first and then donate the cash.
Benefits When Securities Have Decreased In Value
When you sell securities at a loss, you'll be able to utilize the loss to offset capital gains or deduct the capital loss versus income up to $3,000. Please note that tax laws constantly change, and it is advised to check with your tax advisor.
And you will still be able to deduct the cash donation.
The Math When Securities Have Increased In Value
Here is an example of how you can benefit from donating security instead of cash.
As you can see, in this example, you save over $1,000 in taxes by donating the security directly instead of selling the security and then donating the remaining amount net of taxes in cash.
Instructions On Donating Securities
You must be itemizing your tax deductions to take advantage of the benefit
Again, securities must be held over a year
Make sure the charity is a registered 501(c)(3) charity or qualified religious organization that can lawfully accept your donation and from which you can get a tax deduction
Contact your charity for instruction on donating your securities.
Please contact your financial or tax adviser, who can assist you in evaluating the tax advantages available to you.
Examples Of Charities Willing To Accept Securities Donation
American Red Cross ( www. redcross. org/donate/donatestock. html )
Global Fund for Women ( www. globalfundforwomen. org/cms/content/view/215/208/ )
Save the children fund ( //www. savethechildren. org/donate/stock. html )
Emergency Family Assistance Association ( www. efaa. org/pages/donation_stock. htm )
North Shore Animal League America ( www. nsalamerica. org/donate/donate_stock. html )
Additional Information About Contributions From The IRS
“The amount of your deduction is limited to 50% of your adjusted gross income, and may be limited to 30% or 20% of your adjusted gross income, depending on the type of property you give and the type of organization you give it to.” See Publication 526 Limits on Deductions for more information.
Recursos
Qualifying For a Tax-Free Exchange Under Section 351(a)
Two requirements must be met to qualify for tax-free treatment under Section 351(a):
Stock:
You get only stock in exchange for your property ( not stock plus other property).
You (or you and your transferor group, for example, partners incorporating the partnership) may only receive stock (other than nonqualified preferred stock) from the corporation in exchange for the property you transfer.
Control:
You (or you and your transferor group) must be in control of the corporation, immediately after the exchange.
Section 368(C) defines control and is covered below.
Nonqualified Preferred Stock:
This is stock in which the holder of the stock has the right to require the issuer to redeem or buy it back or the issuer is required to redeem or buy it back. Also, the dividend rate on such stock varies with reference to interest rates, commodity prices, or similar indices.
For a detailed definition of nonqualified preferred stock see IRC Section 351(g)(2).
General Rule Under Section 351(a)
No gain or loss shall be recognized if -
Property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and
Immediately after the exchange such person or persons are in control of the corporation (as defined in IRC Section 368(c).
Section 368(c)-Control Requirement
The second rule for getting tax-free treatment in an exchange is the extent of your control (or the control of you and others in the transferor group) after the exchange.
What is meant by control?
Section 368(c) defines control:
Control means 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 outstanding shares of all other classes of stock of the corporation.
The control requirement applies to both tax-free and partially taxable exchanges.
Attach a statement to your tax return. Both the corporation and any person involved in a nontaxable exchange of property for stock must attach to their income tax return a complete statement of all facts pertinent to the exchange.
For more information, see section 1.351-3 of the regulations.
Partially taxable exchanges: Another section under Section 351 applies to partially taxable exchanges. It is Section 351(b).
Related Content
New Jersey Department of Labor Authorizes Deductions for Health Club Memberships and Child Care Services
Effective September 21, 2009, the New Jersey Department of Labor and Workforce Development, Division of Wage and Hour Compliance. adopted a new rule allowing employers to make payroll deductions for health club membership fees or for child care services if payment is authorized in writing by an employee or pursuant to a collective bargaining agreement and approved by the employer. In promulgating this new rule, the Department of Labor amended New Jersey Administrative Code § 12:55-2.1. which sets forth the very limited circumstances in which an employer may make a payroll deduction.
New Jersey also permits employers to make payroll deductions that are:
authorized by state or federal law;
authorized in writing by the employee or pursuant to a collective bargaining agreement as contributions to welfare, insurance, hospitalization, medical, pension, retirement, and profit-sharing plans, etc. on behalf of the employee, his or her spouse, or both;
authorized as contributions either in writing by the employee or under collective bargaining agreement for payment into company-operated thrift plans, or security options, or security purchase plans to buy securities of the employing corporation or other corporations, provided the securities are listed on the stock exchange or are marketable over the counter;
approved by the employee as payment into the employee’s personal savings account, credit union, saving fund society, savings and loan or building and loan association, and payments to banks for Christmas, vacation, or other savings funds, provided all deductions are approved by the employer;
owed as payments for company products or loans, payments for safety equipment, purchase of U. S. government bonds, and/or payments to correct payroll errors, provided all deductions are approved by the employer;
authorized as contributions to recognized charities, provided deductions are approved by the employer;
authorized by the employee or collective bargaining agent as payments for rental, laundering, or dry cleaning of work clothing or uniforms, provided all deductions are approved by the employer;
permitted as union dues, initiation fees, or other charges;
authorized in writing by the employee, pursuant to collective bargaining agreement to a political committee, continuing political committee, or both, established by the employee’s labor union for the purpose of making contributions to aid or promote nomination, election, or defeat of any candidate for public office of a state or of a county, municipality, or school district, or passage or defeat of any public question;
authorized in writing by the employee to any political committee or continuing political committee, for purposes of making contributions to aid or promote the nomination, election, or defeat of any candidate for public office of a state or of a county, municipality, or school district, or passage or defeat of any public question (administrative expenses in making a payroll deduction shall be borne by the committee, at the option of the employer);
authorized by the employee for employer-sponsored programs for purchase of insurance or annuities on a group or individual basis, if otherwise permitted by law; o
authorized as a deduction by Commissioner of Labor, by regulation, if approved by the employer.
This entry was written by Michael Grosso .
Giant Cisco Didn't Pay Any Federal Income Tax / Businesses get break on employee stock options
2000-10-09 04:00:00 PDT SAN JOSE -- Cisco Systems, the second-most valuable company in America, paid no federal income taxes for its latest fiscal year thanks to a little-known corporate tax break on employee stock options.
Microsoft, which ranks No. 4 in market value, did not pay any federal taxes either, it seems.
Like many high-tech firms, Cisco and Microsoft are allowed to take a tax deduction for money their employees earn when they "exercise" options and buy stock in the company at a preset price.
These options have become an increasingly popular way for businesses to reward employees, but they also have huge benefits to the companies themselves.
The tax break was established decades ago, when companies doled out stock options to only a handful of top executives and the tax benefit they generated was minimal.
But now that many companies -- including Cisco, Microsoft and most other new-economy firms -- give options to everyone, the tax break is becoming enormous.
In Cisco's case, this benefit wiped out $1.8 billion in federal taxes, and probably more than twice that for Microsoft.
Some people, even those who oppose taxes, think it is unfair that wealthy companies paid none to Uncle Sam.
For the fiscal year ended July 31, Cisco had $23 billion in sales last year, $2.7 billion in net income, and its almost $400 billion market value is exceeded only by General Electric's.
"For a company that makes that kind of money not to pay taxes raises serious tax-equity questions," said Jon Coupal. president of the Howard Jarvis Taxpayers Association.
He also said he believes it is "hypocritical" for Cisco to take this "massive tax break" and at the same time support Proposition 39, which would make it easier to raise property taxes on California homeowners. Prop 39 would allow local school bonds to be approved by a vote of 55 percent instead of the current two-thirds.
ENTITLED TO DEDUCTION
Cisco is entitled to a deduction for stock option income because "in reality, that's compensation," and tax law has always treated employee compensation as a deductible expense, said Dennis Powell. Cisco's corporate controller.
When an employee exercises an option to buy stock, the difference between the strike price (what the employee pays) and the market price (which is almost always higher) becomes taxable income for the employee and a tax deduction for the employer.
Most Americans do not realize how enormous this tax break has become, because companies do not deduct employee stock options from the earnings they report to shareholders and the public. In fact, American companies fought long and hard to prevent employee stock options from showing up as an expense on their income statements, although they are happy to consider them as an expense for income tax purposes.
Cisco's and Microsoft's annual reports make it appear as if they had paid billions of dollars in income taxes.
Cisco's income statement for fiscal 2000, which was published about a week ago, shows net income before taxes of $4.34 billion, and a provision for income taxes of $1.67 billion.
That number includes federal, state, foreign and deferred taxes. The firm's actual federal tax liability, buried deep in the report, was $1.8 billion.
But in reality, the San Jose maker of computer networking gear paid no federal income taxes for fiscal 2000.
That is because its employees earned more than $7 billion exercising stock options in fiscal 2000. That $7-plus billion deduction generated a $2.5 billion tax benefit for Cisco, which wiped out its entire federal tax liability. The benefit shows up on Cisco's cash flow statement.
STOCK OPTIONS EXERCISED
Cisco employees exercised "an unusually large number" of stock options during fiscal 2000, mainly because the company's stock price more than doubled, said Cisco's Powell.
By comparison, Cisco's tax benefit from employee stock options was only $837 million in 1999 and $422 million in 1998.
Unlike Cisco, which acknowledges that it paid no federal income taxes, a Microsoft spokeswoman would not say whether that firm did or not.
But its annual report for fiscal 2000, which ended June 30, shows stock option income tax benefits of $5.5 billion, exceeding its $4.85 billion provision for income taxes. (Its actual federal and state tax liability for 2000 was $4.74 billion.)
"I'd say their federal income tax was next to nothing or probably nothing," said Robert Willens. a tax and accounting analyst with Lehman Brothers in New York.
Willens said another company that will be wiping out its federal tax liability is Seagate, which is undergoing a complicated leveraged buyout.
SHAREHOLDERS GET REMAINDER
When the deal is completed, "all of Seagate's options have to be exercised. The tax deduction they're going to get is so large, it will wipe out their income for the year of the merger," with some left over, he said. The remainder will be passed on to Seagate shareholders as a tax-refund right.
Companies do not pay anything for stock options, at least not in the traditional sense. The real cost is borne by shareholders.
That is because stock options increase a company's shares outstanding, which reduces earnings per share. All other things being equal, that will lower the company's stock price unless earnings rise enough to compensate for the additional shares.
Theoretically, employees with stock options will want to do everything they can to increase earnings, since they are also shareholders who will benefit if the stock price rises.
"Shareholders have decided they want to share some money with employees to provide an incentive" to increase earnings, said Powell.
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Chapter 1707: SECURITIES
As used in this chapter:
(A) Whenever the context requires it, "division" or "division of securities" may be read as "director of commerce" or as "commissioner of securities."
(B) "Security" means any certificate or instrument, or any oral, written, or electronic agreement, understanding, or opportunity, that represents title to or interest in, or is secured by any lien or charge upon, the capital, assets, profits, property, or credit of any person or of any public or governmental body, subdivision, or agency. It includes shares of stock, certificates for shares of stock, an uncertificated security, membership interests in limited liability companies, voting-trust certificates, warrants and options to purchase securities, subscription rights, interim receipts, interim certificates, promissory notes, all forms of commercial paper, evidences of indebtedness, bonds, debentures, land trust certificates, fee certificates, leasehold certificates, syndicate certificates, endowment certificates, interests in or under profit-sharing or participation agreements, interests in or under oil, gas, or mining leases, preorganization or reorganization subscriptions, preorganization certificates, reorganization certificates, interests in any trust or pretended trust, any investment contract, any life settlement interest, any instrument evidencing a promise or an agreement to pay money, warehouse receipts for intoxicating liquor, and the currency of any government other than those of the United States and Canada, but sections 1707.01 to 1707.45 of the Revised Code do not apply to the sale of real estate.
(1) "Sale" has the full meaning of "sale" as applied by or accepted in courts of law or equity, and includes every disposition, or attempt to dispose, of a security or of an interest in a security. "Sale" also includes a contract to sell, an exchange, an attempt to sell, an option of sale, a solicitation of a sale, a solicitation of an offer to buy, a subscription, or an offer to sell, directly or indirectly, by agent, circular, pamphlet, advertisement, or otherwise.
(2) "Sell" means any act by which a sale is made.
(3) The use of advertisements, circulars, or pamphlets in connection with the sale of securities in this state exclusively to the purchasers specified in division (D) of section 1707.03 of the Revised Code is not a sale when the advertisements, circulars, and pamphlets describing and offering those securities bear a readily legible legend in substance as follows: "This offer is made on behalf of dealers licensed under sections 1707.01 to 1707.45 of the Revised Code, and is confined in this state exclusively to institutional investors and licensed dealers."
(4) The offering of securities by any person in conjunction with a licensed dealer by use of advertisement, circular, or pamphlet is not a sale if that person does not otherwise attempt to sell securities in this state.
(5) Any security given with, or as a bonus on account of, any purchase of securities is conclusively presumed to constitute a part of the subject of that purchase and has been "sold."
(6) "Sale" by an owner, pledgee, or mortgagee, or by a person acting in a representative capacity, includes sale on behalf of such party by an agent, including a licensed dealer or salesperson.
(D) "Person," except as otherwise provided in this chapter, means a natural person, firm, partnership, limited partnership, partnership association, syndicate, joint-stock company, unincorporated association, trust or trustee except where the trust was created or the trustee designated by law or judicial authority or by a will, and a corporation or limited liability company organized under the laws of any state, any foreign government, or any political subdivision of a state or foreign government.
(1) "Dealer," except as otherwise provided in this chapter, means every person, other than a salesperson, who engages or professes to engage, in this state, for either all or part of the person's time, directly or indirectly, either in the business of the sale of securities for the person's own account, or in the business of the purchase or sale of securities for the account of others in the reasonable expectation of receiving a commission, fee, or other remuneration as a result of engaging in the purchase and sale of securities. "Dealer" does not mean any of the following:
(a) Any issuer, including any officer, director, employee, or trustee of, or member or manager of, or partner in, or any general partner of, any issuer, that sells, offers for sale, or does any act in furtherance of the sale of a security that represents an economic interest in that issuer, provided no commission, fee, or other similar remuneration is paid to or received by the issuer for the sale;
(b) Any licensed attorney, public accountant, or firm of such attorneys or accountants, whose activities are incidental to the practice of the attorney's, accountant's, or firm's profession;
(c) Any person that, for the account of others, engages in the purchase or sale of securities that are issued and outstanding before such purchase and sale, if a majority or more of the equity interest of an issuer is sold in that transaction, and if, in the case of a corporation, the securities sold in that transaction represent a majority or more of the voting power of the corporation in the election of directors;
(d) Any person that brings an issuer together with a potential investor and whose compensation is not directly or indirectly based on the sale of any securities by the issuer to the investor;
(f) Any person that the division of securities by rule exempts from the definition of "dealer" under division (E)(1) of this section.
(2) "Licensed dealer" means a dealer licensed under this chapter.
(1) "Salesman" or "salesperson" means every natural person, other than a dealer, who is employed, authorized, or appointed by a dealer to sell securities within this state.
(2) The general partners of a partnership, and the executive officers of a corporation or unincorporated association, licensed as a dealer are not salespersons within the meaning of this definition, nor are clerical or other employees of an issuer or dealer that are employed for work to which the sale of securities is secondary and incidental; but the division of securities may require a license from any such partner, executive officer, or employee if it determines that protection of the public necessitates the licensing.
(3) "Licensed salesperson" means a salesperson licensed under this chapter.
(G) "Issuer" means every person who has issued, proposes to issue, or issues any security.
(H) "Director" means each director or trustee of a corporation, each trustee of a trust, each general partner of a partnership, except a partnership association, each manager of a partnership association, and any person vested with managerial or directory power over an issuer not having a board of directors or trustees.
(I) "Incorporator" means any incorporator of a corporation and any organizer of, or any person participating, other than in a representative or professional capacity, in the organization of an unincorporated issuer.
(J) "Fraud," "fraudulent," "fraudulent acts," "fraudulent practices," or "fraudulent transactions" means anything recognized on or after July 22, 1929, as such in courts of law or equity; any device, scheme, or artifice to defraud or to obtain money or property by means of any false pretense, representation, or promise; any fictitious or pretended purchase or sale of securities; and any act, practice, transaction, or course of business relating to the purchase or sale of securities that is fraudulent or that has operated or would operate as a fraud upon the seller or purchaser.
(K) Except as otherwise specifically provided, whenever any classification or computation is based upon "par value," as applied to securities without par value, the average of the aggregate consideration received or to be received by the issuer for each class of those securities shall be used as the basis for that classification or computation.
(1) "Intangible property" means patents, copyrights, secret processes, formulas, services, good will, promotion and organization fees and expenses, trademarks, trade brands, trade names, licenses, franchises, any other assets treated as intangible according to generally accepted accounting principles, and securities, accounts receivable, or contract rights having no readily determinable value.
(2) "Tangible property" means all property other than intangible property and includes securities, accounts receivable, and contract rights, when the securities, accounts receivable, or contract rights have a readily determinable value.
(M) "Public utilities" means those utilities defined in sections 4905.02. 4905.03. 4907.02. and 4907.03 of the Revised Code; in the case of a foreign corporation, it means those utilities defined as public utilities by the laws of its domicile; and in the case of any other foreign issuer, it means those utilities defined as public utilities by the laws of the situs of its principal place of business. The term always includes railroads whether or not they are so defined as public utilities.
(N) "State" means any state of the United States, any territory or possession of the United States, the District of Columbia, and any province of Canada.
(O) "Bank" means any bank, trust company, savings and loan association, savings bank, or credit union that is incorporated or organized under the laws of the United States, any state of the United States, Canada, or any province of Canada and that is subject to regulation or supervision by that country, state, or province.
(P) "Include," when used in a definition, does not exclude other things or persons otherwise within the meaning of the term defined.
(1) "Registration by description" means that the requirements of section 1707.08 of the Revised Code have been complied with.
(2) "Registration by qualification" means that the requirements of sections 1707.09 and 1707.11 of the Revised Code have been complied with.
(3) "Registration by coordination" means that there has been compliance with section 1707.091 of the Revised Code. Reference in this chapter to registration by qualification also includes registration by coordination unless the context otherwise indicates.
(R) "Intoxicating liquor" includes all liquids and compounds that contain more than three and two-tenths per cent of alcohol by weight and are fit for use for beverage purposes.
(S) "Institutional investor" means any of the following, whether acting for itself or for others in a fiduciary capacity:
(1) A bank or international banking institution;
(2) An insurance company;
(3) A separate account of an insurance company;
(4) An investment company as defined in the "Investment Company Act of 1940," 15 U. S.C. 80a-3 ;
(5) A broker-dealer registered under the "Securities Exchange Act of 1934," 15 U. S.C. 78o, as amended, or licensed by the division of securities as a dealer;
(6) An employee pension, profit-sharing, or benefit plan if the plan has total assets in excess of ten million dollars or its investment decisions are made by a named fiduciary, as defined in the "Employee Retirement Income Security Act of 1974," 29 U. S.C. 1001, that is one of the following:
(a) A broker-dealer registered under the "Securities Exchange Act of 1934," 15 U. S.C. 78o, as amended;
(b) An investment adviser registered or exempt from registration under the "Investment Advisers Act of 1940," 15 U. S.C. 80b-3 ;
(c) An investment adviser registered under this chapter, a bank, or an insurance company.
(7) A plan established and maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or a political subdivision of a state for the benefit of its employees, if the plan has total assets in excess of ten million dollars or its investment decisions are made by a duly designated public official or by a named fiduciary, as defined in the "Employee Retirement Income Security Act of 1974," 29 U. S.C. 1001, that is one of the following:
(a) A broker-dealer registered under the "Securities Exchange Act of 1934," 15 U. S.C. 78o, as amended;
(b) An investment adviser registered or exempt from registration under the "Investment Advisers Act of 1940," 15 U. S.C. 80b-3 ;
(c) An investment adviser registered under this chapter, a bank, or an insurance company.
(8) A trust, if it has total assets in excess of ten million dollars, its trustee is a bank, and its participants are exclusively plans of the types identified in division (S)(6) or (7) of this section, regardless of the size of their assets, except a trust that includes as participants self-directed individual retirement accounts or similar self-directed plans;
(9) An organization described in section 501(c)(3) of the "Internal Revenue Code of 1986," 26 U. S.C. 1, as amended, corporation, Massachusetts trust or similar business trust, limited liability company, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of ten million dollars;
(10) A small business investment company licensed by the small business administration under section 301(c) of the "Small Business Investment Act of 1958," 15 U. S.C. 681(c), with total assets in excess of ten million dollars;
(11) A private business development company as defined in section 202(a)(22) of the "Investment Advisers Act of 1940," 15 U. S.C. 80b - 2(a)(22), with total assets in excess of ten million dollars;
(12) A federal covered investment adviser acting for its own account;
(13) A "qualified institutional buyer" as defined in 17 C. F.R. 230.144A(a)(1), other than 17 C. F.R. 230.144A(a)(1)(H) ;
(14) A "major U. S. institutional investor" as defined in 17 C. F.R. 240.15 a - 6(b)(4)(i);
(15) Any other person, other than an individual, of institutional character with total assets in excess of ten million dollars not organized for the specific purpose of evading this chapter;
(16) Any other person specified by rule adopted or order issued under this chapter.
(T) A reference to a statute of the United States or to a rule, regulation, or form promulgated by the securities and exchange commission or by another federal agency means the statute, rule, regulation, or form as it exists at the time of the act, omission, event, or transaction to which it is applied under this chapter.
(U) "Securities and exchange commission" means the securities and exchange commission established by the Securities Exchange Act of 1934.
(1) "Control bid" means the purchase of or offer to purchase any equity security of a subject company from a resident of this state if either of the following applies:
(a) After the purchase of that security, the offeror would be directly or indirectly the beneficial owner of more than ten per cent of any class of the issued and outstanding equity securities of the issuer.
(b) The offeror is the subject company, there is a pending control bid by a person other than the issuer, and the number of the issued and outstanding shares of the subject company would be reduced by more than ten per cent.
(2) For purposes of division (V)(1) of this section, "control bid" does not include any of the following:
(a) A bid made by a dealer for the dealer's own account in the ordinary course of business of buying and selling securities;
(b) An offer to acquire any equity security solely in exchange for any other security, or the acquisition of any equity security pursuant to an offer, for the sole account of the offeror, in good faith and not for the purpose of avoiding the provisions of this chapter, and not involving any public offering of the other security within the meaning of Section 4 of Title I of the "Securities Act of 1933," 48 Stat. 77, 15 U. S.C. A. 77d(2), as amended;
(c) Any other offer to acquire any equity security, or the acquisition of any equity security pursuant to an offer, for the sole account of the offeror, from not more than fifty persons, in good faith and not for the purpose of avoiding the provisions of this chapter.
(W) "Offeror" means a person who makes, or in any way participates or aids in making, a control bid and includes persons acting jointly or in concert, or who intend to exercise jointly or in concert any voting rights attached to the securities for which the control bid is made and also includes any subject company making a control bid for its own securities.
(1) "Investment adviser" means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as a part of regular business, issues or promulgates analyses or reports concerning securities.
(2) "Investment adviser" does not mean any of the following:
(a) Any attorney, accountant, engineer, or teacher, whose performance of investment advisory services described in division (X)(1) of this section is solely incidental to the practice of the attorney's, accountant's, engineer's, or teacher's profession;
(b) A publisher of any bona fide newspaper, news magazine, or business or financial publication of general and regular circulation;
(c) A person who acts solely as an investment adviser representative;
(d) A bank holding company, as defined in the "Bank Holding Company Act of 1956," 70 Stat. 133, 12 U. S.C. 1841, that is not an investment company;
(e) A bank, or any receiver, conservator, or other liquidating agent of a bank;
(f) Any licensed dealer or licensed salesperson whose performance of investment advisory services described in division (X)(1) of this section is solely incidental to the conduct of the dealer's or salesperson's business as a licensed dealer or licensed salesperson and who receives no special compensation for the services;
(g) Any person, the advice, analyses, or reports of which do not relate to securities other than securities that are direct obligations of, or obligations guaranteed as to principal or interest by, the United States, or securities issued or guaranteed by corporations in which the United States has a direct or indirect interest, and that have been designated by the secretary of the treasury as exempt securities as defined in the "Securities Exchange Act of 1934," 48 Stat. 881, 15 U. S.C. 78c ;
(h) Any person that is excluded from the definition of investment adviser pursuant to section 202(a)(11)(A) to (E) of the "Investment Advisers Act of 1940," 15 U. S.C. 80b - 2(a)(11). or that has received an order from the securities and exchange commission under section 202(a)(11)(F) of the "Investment Advisers Act of 1940," 15 U. S.C. 80b - 2(a)(11)(F), declaring that the person is not within the intent of section 202(a)(11) of the Investment Advisers Act of 1940.
(i) A person who acts solely as a state retirement system investment officer or as a bureau of workers' compensation chief investment officer;
(j) Any other person that the division designates by rule, if the division finds that the designation is necessary or appropriate in the public interest or for the protection of investors or clients and consistent with the purposes fairly intended by the policy and provisions of this chapter.
(1) "Subject company" means an issuer that satisfies both of the following:
(a) Its principal place of business or its principal executive office is located in this state, or it owns or controls assets located within this state that have a fair market value of at least one million dollars.
(b) More than ten per cent of its beneficial or record equity security holders are resident in this state, more than ten per cent of its equity securities are owned beneficially or of record by residents in this state, or more than one thousand of its beneficial or record equity security holders are resident in this state.
(2) The division of securities may adopt rules to establish more specific application of the provisions set forth in division (Y)(1) of this section. Notwithstanding the provisions set forth in division (Y)(1) of this section and any rules adopted under this division, the division, by rule or in an adjudicatory proceeding, may make a determination that an issuer does not constitute a "subject company" under division (Y)(1) of this section if appropriate review of control bids involving the issuer is to be made by any regulatory authority of another jurisdiction.
(Z) "Beneficial owner" includes any person who directly or indirectly through any contract, arrangement, understanding, or relationship has or shares, or otherwise has or shares, the power to vote or direct the voting of a security or the power to dispose of, or direct the disposition of, the security. "Beneficial ownership" includes the right, exercisable within sixty days, to acquire any security through the exercise of any option, warrant, or right, the conversion of any convertible security, or otherwise. Any security subject to any such option, warrant, right, or conversion privilege held by any person shall be deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by that person, but shall not be deemed to be outstanding for the purpose of computing the percentage of the class owned by any other person. A person shall be deemed the beneficial owner of any security beneficially owned by any relative or spouse or relative of the spouse residing in the home of that person, any trust or estate in which that person owns ten per cent or more of the total beneficial interest or serves as trustee or executor, any corporation or entity in which that person owns ten per cent or more of the equity, and any affiliate or associate of that person.
(AA) "Offeree" means the beneficial or record owner of any security that an offeror acquires or offers to acquire in connection with a control bid.
(BB) "Equity security" means any share or similar security, or any security convertible into any such security, or carrying any warrant or right to subscribe to or purchase any such security, or any such warrant or right, or any other security that, for the protection of security holders, is treated as an equity security pursuant to rules of the division of securities.
(1) "Investment adviser representative" means a supervised person of an investment adviser, provided that the supervised person has more than five clients who are natural persons other than excepted persons defined in division (EE) of this section, and that more than ten per cent of the supervised person's clients are natural persons other than excepted persons defined in division (EE) of this section. "Investment adviser representative" does not mean any of the following:
(a) A supervised person that does not on a regular basis solicit, meet with, or otherwise communicate with clients of the investment adviser;
(b) A supervised person that provides only investment advisory services described in division (X)(1) of this section by means of written materials or oral statements that do not purport to meet the objectives or needs of specific individuals or accounts;
(c) Any other person that the division designates by rule, if the division finds that the designation is necessary or appropriate in the public interest or for the protection of investors or clients and is consistent with the provisions fairly intended by the policy and provisions of this chapter.
(2) For the purpose of the calculation of clients in division (CC)(1) of this section, a natural person and the following persons are deemed a single client: Any minor child of the natural person; any relative, spouse, or relative of the spouse of the natural person who has the same principal residence as the natural person; all accounts of which the natural person or the persons referred to in division (CC)(2) of this section are the only primary beneficiaries; and all trusts of which the natural person or persons referred to in division (CC)(2) of this section are the only primary beneficiaries. Persons who are not residents of the United States need not be included in the calculation of clients under division (CC)(1) of this section.
(3) If subsequent to March 18, 1999, amendments are enacted or adopted defining "investment adviser representative" for purposes of the Investment Advisers Act of 1940 or additional rules or regulations are promulgated by the securities and exchange commission regarding the definition of "investment adviser representative" for purposes of the Investment Advisers Act of 1940, the division of securities shall, by rule, adopt the substance of the amendments, rules, or regulations, unless the division finds that the amendments, rules, or regulations are not necessary for the protection of investors or in the public interest.
(DD) "Supervised person" means a natural person who is any of the following:
(1) A partner, officer, or director of an investment adviser, or other person occupying a similar status or performing similar functions with respect to an investment adviser;
(2) An employee of an investment adviser;
(3) A person who provides investment advisory services described in division (X)(1) of this section on behalf of the investment adviser and is subject to the supervision and control of the investment adviser.
(EE) "Excepted person" means a natural person to whom any of the following applies:
(1) Immediately after entering into the investment advisory contract with the investment adviser, the person has at least seven hundred fifty thousand dollars under the management of the investment adviser.
(2) The investment adviser reasonably believes either of the following at the time the investment advisory contract is entered into with the person:
(a) The person has a net worth, together with assets held jointly with a spouse, of more than one million five hundred thousand dollars.
(b) The person is a qualified purchaser as defined in division (FF) of this section.
(3) Immediately prior to entering into an investment advisory contract with the investment adviser, the person is either of the following:
(a) An executive officer, director, trustee, general partner, or person serving in a similar capacity, of the investment adviser;
(b) An employee of the investment adviser, other than an employee performing solely clerical, secretarial, or administrative functions or duties for the investment adviser, which employee, in connection with the employee's regular functions or duties, participates in the investment activities of the investment adviser, provided that, for at least twelve months, the employee has been performing such nonclerical, nonsecretarial, or nonadministrative functions or duties for or on behalf of the investment adviser or performing substantially similar functions or duties for or on behalf of another company.
If subsequent to March 18, 1999, amendments are enacted or adopted defining "excepted person" for purposes of the Investment Advisers Act of 1940 or additional rules or regulations are promulgated by the securities and exchange commission regarding the definition of "excepted person" for purposes of the Investment Advisers Act of 1940, the division of securities shall, by rule, adopt the substance of the amendments, rules, or regulations, unless the division finds that the amendments, rules, or regulations are not necessary for the protection of investors or in the public interest.
(1) "Qualified purchaser" means either of the following:
(a) A natural person who owns not less than five million dollars in investments as defined by rule by the division of securities;
(b) A natural person, acting for the person's own account or accounts of other qualified purchasers, who in the aggregate owns and invests on a discretionary basis, not less than twenty-five million dollars in investments as defined by rule by the division of securities.
(2) If subsequent to March 18, 1999, amendments are enacted or adopted defining "qualified purchaser" for purposes of the Investment Advisers Act of 1940 or additional rules or regulations are promulgated by the securities and exchange commission regarding the definition of "qualified purchaser" for purposes of the Investment Advisers Act of 1940, the division of securities shall, by rule, adopt the amendments, rules, or regulations, unless the division finds that the amendments, rules, or regulations are not necessary for the protection of investors or in the public interest.
(1) "Purchase" has the full meaning of "purchase" as applied by or accepted in courts of law or equity and includes every acquisition of, or attempt to acquire, a security or an interest in a security. "Purchase" also includes a contract to purchase, an exchange, an attempt to purchase, an option to purchase, a solicitation of a purchase, a solicitation of an offer to sell, a subscription, or an offer to purchase, directly or indirectly, by agent, circular, pamphlet, advertisement, or otherwise.
(2) "Purchase" means any act by which a purchase is made.
(3) Any security given with, or as a bonus on account of, any purchase of securities is conclusively presumed to constitute a part of the subject of that purchase.
(HH) "Life settlement interest" means the entire interest or any fractional interest in an insurance policy or certificate of insurance, or in an insurance benefit under such a policy or certificate, that is the subject of a life settlement contract.
For purposes of this division, "life settlement contract" means an agreement for the purchase, sale, assignment, transfer, devise, or bequest of any portion of the death benefit or ownership of any life insurance policy or contract, in return for consideration or any other thing of value that is less than the expected death benefit of the life insurance policy or contract. "Life settlement contract" includes a viatical settlement contract as defined in section 3916.01 of the Revised Code, but does not include any of the following:
(1) A loan by an insurer under the terms of a life insurance policy, including, but not limited to, a loan secured by the cash value of the policy;
(2) An agreement with a bank that takes an assignment of a life insurance policy as collateral for a loan;
(3) The provision of accelerated benefits as defined in section 3915.21 of the Revised Code;
(4) Any agreement between an insurer and a reinsurer;
(5) An agreement by an individual to purchase an existing life insurance policy or contract from the original owner of the policy or contract, if the individual does not enter into more than one life settlement contract per calendar year;
(6) The initial purchase of an insurance policy or certificate of insurance from its owner by a viatical settlement provider, as defined in section 3916.01 of the Revised Code, that is licensed under Chapter 3916. of the Revised Code.
(II) "State retirement system" means the public employees retirement system, Ohio police and fire pension fund, state teachers retirement system, school employees retirement system, and state highway patrol retirement system.
(JJ) "State retirement system investment officer" means an individual employed by a state retirement system as a chief investment officer, assistant investment officer, or the person in charge of a class of assets or in a position that is substantially equivalent to chief investment officer, assistant investment officer, or person in charge of a class of assets.
(KK) "Bureau of workers' compensation chief investment officer" means an individual employed by the administrator of workers' compensation as a chief investment officer or in a position that is substantially equivalent to a chief investment officer.
Amended by 131st General Assembly File No. TBD, HB 64, §101.01, eff. 9/29/2017.
Effective Date: 09-16-2003; 09-15-2004; 09-29-2005; 10-12-2006; 2007 HB100 09-10-2007
(A) "Exempt," as used in this section, means exempt from sections 1707.08 to 1707.11 and 1707.39 of the Revised Code.
(1) Except as provided in division (B)(2) of this section, the following securities are exempt, if the issuer or guarantor has the power of taxation or assessment for the purpose of paying the obligation represented by the security, or is in specific terms empowered by the laws of the state of issuance to issue securities payable as to principal or interest, or as to both, out of revenues collected or administered by such issuer:
(a) Any security issued or guaranteed by the United States;
(b) Any security issued or guaranteed by, and recognized, at the time of sale, as its valid obligation by, any foreign government with which the United States is, at the time of sale, maintaining diplomatic relations;
(c) Any security issued or guaranteed, and recognized as its valid obligation, by any political subdivision or any governmental or other public body, corporation, or agency in or of the United States, any state, territory, or possession of the United States, or any foreign government with which the United States is, at the time of sale, maintaining diplomatic relations.
(2) If a security described in division (B)(1) of this section is not payable out of the proceeds of a general tax, the security is exempt only if, at the time of its first sale in this state, there is no default in the payment of any of the interest or principal of the security, and there are no adjudications or pending suits adversely affecting its validity.
(C) Any security issued or guaranteed by a state or nationally chartered bank, savings and loan association, savings bank, or credit union, or a governmental corporation or agency created by or under the laws of the United States or of Canada is exempt, if it is under the supervision of or subject to regulation by the government or state under whose laws it was organized.
(D) Any interim certificate is exempt, if the securities to be delivered therefor are themselves exempt, are the subject matter of an exempt transaction, have been registered by description or registered by qualification, or are the subject matter of a transaction which has been registered by description.
(1) A security is exempt if it meets any of the following requirements:
(a) The security is listed, or authorized for listing, on the New York stock exchange, the American stock exchange, or the national market system of the NASDAQ stock market, or any successor to such entities.
(b) The security is listed, or authorized for listing, on a national securities exchange or system, or on a tier or segment of such exchange or system, designated by the securities and exchange commission in rule 146(b) promulgated under section 18(b)(1) of the Securities Act of 1933.
(c) The security is listed, or authorized for listing, on a national securities exchange or system, or on a tier or segment of such exchange or system, that has listing standards that the division of securities, on its own initiative or on the basis of an application, determines by rule are substantially similar to the listing standards applicable to securities described in division (E)(1)(a) of this section.
(d) The security is a security of the same issuer that is equal in seniority or that is a senior security to a security described in division (E)(1)(a), (b), or (c) of this section.
(2) Application for approval of a stock exchange or system not approved in this section may be made by any organized stock exchange or system, or by any dealer who is a member of such exchange, in such manner and upon such forms as are prescribed by the division, accompanied by payment of an approval fee of two hundred dollars, and the division shall make such investigation and may hold such hearings as it deems necessary to determine the propriety of giving approval. The cost of such investigation shall be borne by the applicant. The division may enter an order of approval, and if it does so, it shall notify the applicant of such approval.
(3) The division may revoke the approval of an exchange or system enumerated in division (E)(1) of this section, provided that the exchange or system is not listed in section 18(b)(1) of the Securities Act of 1933 or any rule promulgated thereunder. The division may effect a revocation after due notice, investigation, a hearing, and a finding that the practices or requirements of such exchange or system have been so changed or modified, or are, in their actual operation, such that the contemplated protection is no longer afforded. The principles of res adjudicata ordinarily applicable in civil matters shall not be applicable to this matter, which is hereby declared to be administrative rather than judicial. Notice of the hearing may be given by certified mail at least ten days before such hearing.
(4) The division may suspend the exemption of any security described in division (E)(1) of this section, provided that the security is listed or authorized for listing on an exchange or system that is not listed in section 18(b)(1) of the Securities Act of 1933 or any rule promulgated thereunder. The division may effect a suspension by giving notice, by certified mail, to that effect to the exchange or system upon which such security is listed or designated and to the issuer of such security. After notice and hearing, the division may revoke such exemption if it appears to it that sales of such security have been fraudulent or that future sales of it would be fraudulent. The division shall set such hearing not later than ten days from the date of the order of suspension, but may for good cause continue such hearing upon application of the exchange or system upon which such security is listed or designated or upon application of the issuer of such security.
(F) Any security, issued or guaranteed as to principal, interest, or dividend or distribution by a corporation owning or operating any public utility, is exempt, if such corporation is, as to its rates and charges or as to the issuance and guaranteeing of securities, under the supervision of or regulated by a public commission, board, or officer of the United States, or of Canada, or of any state, province, or municipal corporation in either of such countries. Equipment-trust securities based on chattel mortgages, leases, or agreements for conditional sale, of cars, locomotives, motor trucks, or other rolling stock or of motor vehicles mortgaged, leased, or sold to, or finished for the use of, a public utility, are exempt; and so are equipment securities where the ownership or title of such equipment is pledged or retained, in accordance with the laws of the United States or of any state, or of Canada or any province thereof, to secure the payment of such securities.
(G) Commercial paper and promissory notes are exempt when they are not offered directly or indirectly for sale to the public.
(H) Any security issued or guaranteed by an insurance company, except as provided in section 1707.32 of the Revised Code, is exempt if such company is under the supervision of, and the issuance or guaranty of such security is regulated by, a state.
(I) Any security, except notes, bonds, debentures, or other evidences of indebtedness or of promises or agreements to pay money, which is issued by a person, corporation, or association organized not for profit, including persons, corporations, and associations organized exclusively for conducting county fairs, or for religious, educational, social, recreational, athletic, benevolent, fraternal, charitable, or reformatory purposes, and agricultural cooperatives as defined in section 1729.01 of the Revised Code, is exempt, if no part of the net earnings of such issuer inures to the benefit of any shareholder or member of such issuer or of any individual, and if the total commission, remuneration, expense, or discount in connection with the sale of such securities does not exceed two per cent of the total sale price thereof plus five hundred dollars.
(1) Any securities outstanding for a period of not less than five years, on which there has occurred no default in payment of principal, interest, or dividend or distribution for the five years immediately preceding the sale, are exempt.
(2) For the purpose of division (J) of this section, the dividend, distribution, or interest rate on securities in which no such rate is specified shall be at the rate of at least four per cent annually on the aggregate of the price at which such securities are to be sold.
(K) All bonds issued under authority of Chapter 165. or 761. or section 4582.06 or 4582.31 of the Revised Code are exempt.
Effective Date: 09-16-2003
(A) As used in this section, "exempt" means that, except in the case of securities the right to buy, sell, or deal in which has been suspended or revoked under an existing order of the division of securities under section 1707.13 of the Revised Code or under a cease and desist order under division (G) of section 1707.23 of the Revised Code, transactions in securities may be carried on and completed without compliance with sections 1707.08 to 1707.11 of the Revised Code.
(B) A sale of securities made by or on behalf of a bona fide owner, neither the issuer nor a dealer, is exempt if the sale is made in good faith and not for the purpose of avoiding this chapter and is not made in the course of repeated and successive transactions of a similar character. Any sale of securities over a stock exchange that is lawfully conducted in this state and regularly open for public patronage and that has been established and operated for a period of at least five years prior to the sale at a commission not exceeding the commission regularly charged in such transactions also is exempt.
(C) The sale of securities by executors, administrators, receivers, trustees, or anyone acting in a fiduciary capacity is exempt, where such relationship was created by law, by a will, or by judicial authority, and where such sales are subject to approval by, or are made in pursuance to authority granted by, any court of competent jurisdiction or are otherwise authorized and lawfully made by such fiduciary.
(D) A sale to the issuer, to a dealer, or to an institutional investor is exempt.
(E) A sale in good faith, and not for the purpose of avoiding this chapter, by a pledgee of a security pledged for a bona fide debt is exempt.
(F) The sale at public auction by a corporation of shares of its stock because of delinquency in payment for the shares is exempt.
(1) The giving of any conversion right with, or on account of the purchase of, any security that is exempt, is the subject matter of an exempt transaction, has been registered by description, by coordination, or by qualification, or is the subject matter of a transaction that has been registered by description is exempt.
(2) The giving of any subscription right, warrant, or option to purchase a security or right to receive a security upon exchange, which security is exempt at the time the right, warrant, or option to purchase or right to receive is given, is the subject matter of an exempt transaction, is registered by description, by coordination, or by qualification, or is the subject matter of a transaction that has been registered by description is exempt.
(3) The giving of any subscription right or any warrant or option to purchase a security, which right, warrant, or option expressly provides that it shall not be exercisable except for a security that at the time of the exercise is exempt, is the subject matter of an exempt transaction, is registered by description, by coordination, or by qualification, or at such time is the subject matter of a transaction that has been registered by description is exempt.
(H) The sale of notes, bonds, or other evidences of indebtedness that are secured by a mortgage lien upon real estate, leasehold estate other than oil, gas, or mining leasehold, or tangible personal property, or which evidence of indebtedness is due under or based upon a conditional-sale contract, if all such notes, bonds, or other evidences of indebtedness are sold to a single purchaser at a single sale, is exempt.
(I) The delivery of securities by the issuer on the exercise of conversion rights, the sale of securities by the issuer on exercise of subscription rights or of warrants or options to purchase securities, the delivery of voting-trust certificates for securities deposited under a voting-trust agreement, the delivery of deposited securities on surrender of voting-trust certificates, and the delivery of final certificates on surrender of interim certificates are exempt; but the sale of securities on exercise of subscription rights, warrants, or options is not an exempt transaction unless those rights, warrants, or options when granted were the subject matter of an exempt transaction under division (G) of this section or were registered by description, by coordination, or by qualification.
(J) The sale of securities by a bank, savings and loan association, savings bank, or credit union organized under the laws of the United States or of this state is exempt if at a profit to that seller of not more than two per cent of the total sale price of the securities.
(1) The distribution by a corporation of its securities to its security holders as a share dividend or other distribution out of earnings or surplus is exempt.
(2) The exchange or distribution by the issuer of any of its securities or of the securities of any of the issuer's wholly owned subsidiaries exclusively with or to its existing security holders, if no commission or other remuneration is given directly or indirectly for soliciting the exchange, is exempt.
(3) The sale of preorganization subscriptions for shares of stock of a corporation prior to the incorporation of the corporation is exempt, when the sale is evidenced by a written agreement, no remuneration is given, or promised, directly or indirectly, for or in connection with the sale of those securities, and no consideration is received, directly or indirectly, by any person from the purchasers of those securities until registration by qualification, by coordination, or by description of those securities is made under this chapter.
(L) The issuance of securities in exchange for one or more bona fide outstanding securities, claims, or property interests, not including securities sold for a consideration payable in whole or in part in cash, under a plan of reorganization, recapitalization, or refinancing approved by a court pursuant to the Bankruptcy Act of the United States or to any other federal act giving any federal court jurisdiction over such plan of reorganization, or under a plan of reorganization approved by a court of competent jurisdiction of any state of the United States is exempt. As used in this division, "reorganization," "recapitalization," and "refinancing" have the same meanings as in section 1707.04 of the Revised Code.
(M) A sale by a licensed dealer, acting either as principal or as agent, of securities issued and outstanding before the sale is exempt, unless the sale is of one or more of the following:
(1) Securities constituting the whole or a part of an unsold allotment to or subscription by a dealer as an underwriter or other participant in the distribution of those securities by the issuer, whether that distribution is direct or through an underwriter, provided that, if the issuer is such by reason of owning one-fourth or more of those securities, the dealer has knowledge of this fact or reasonable cause to believe this fact;
(2) Any class of shares issued by a corporation when the number of beneficial owners of that class is less than twenty-five, with the record owner of securities being deemed the beneficial owner for this purpose, in the absence of actual knowledge to the contrary;
(3) Securities that within one year were purchased outside this state or within one year were transported into this state, if the dealer has knowledge or reasonable cause to believe, before the sale of those securities, that within one year they were purchased outside this state or within one year were transported into this state; but such a sale of those securities is exempt if any of the following occurs:
(a) A recognized securities manual contains the names of the issuer's officers and directors, a balance sheet of the issuer as of a date within eighteen months, and a profit and loss statement for either the fiscal year preceding that date or the most recent year of operations;
(b) Those securities, or securities of the same class, within one year were registered or qualified under section 1707.09 or 1707.091 of the Revised Code, and that registration or qualification is in full force and effect;
(c) The sale is made by a licensed dealer on behalf of the bona fide owner of those securities in accordance with division (B) of this section;
(d) Those securities were transported into Ohio in a transaction of the type described in division (L), (K), or (I) of this section, or in a transaction registered under division (A) of section 1707.06 of the Revised Code.
(N) For the purpose of this division and division (M) of this section, "underwriter" means any person who has purchased from an issuer with a view to, or sells for an issuer in connection with, the distribution of any security, or who participates directly or indirectly in any such undertaking or in the underwriting thereof, but "underwriter" does not include a person whose interest is limited to a discount, commission, or profit from the underwriter or from a dealer that is not in excess of the customary distributors' or sellers' discount, commission, or profit; and "issuer" includes any person or any group of persons acting in concert in the sale of such securities, owning beneficially one-fourth or more of the outstanding securities of the class involved in the transactions in question, with the record owner of securities being deemed the beneficial owner for this purpose, in the absence of actual knowledge to the contrary.
(1) The sale of any equity security is exempt if all the following conditions are satisfied:
(a) The sale is by the issuer of the security.
(b) The total number of purchasers in this state of all securities issued or sold by the issuer in reliance upon this exemption during the period of one year ending with the date of the sale does not exceed ten. A sale of securities registered under this chapter or sold pursuant to an exemption under this chapter other than this exemption shall not be integrated with a sale pursuant to this exemption in computing the number of purchasers under this exemption.
(c) No advertisement, article, notice, or other communication published in any newspaper, magazine, or similar medium or broadcast over television or radio is used in connection with the sale, but the use of an offering circular or other communication delivered by the issuer to selected individuals does not destroy this exemption.
(d) The issuer reasonably believes after reasonable investigation that the purchaser is purchasing for investment.
(e) The aggregate commission, discount, and other remuneration, excluding legal, accounting, and printing fees, paid or given directly or indirectly does not exceed ten per cent of the initial offering price.
(f) Any such commission, discount, or other remuneration for sales in this state is paid or given only to dealers or salespersons registered pursuant to this chapter.
(2) For the purposes of division (O)(1) of this section, each of the following is deemed to be a single purchaser of a security: husband and wife, a child and its parent or guardian when the parent or guardian holds the security for the benefit of the child, a corporation, a limited liability company, a partnership, an association or other unincorporated entity, a joint-stock company, or a trust, but only if the corporation, limited liability company, partnership, association, entity, joint-stock company, or trust was not formed for the purpose of purchasing the security.
(3) As used in division (O)(1) of this section, "equity security" means any stock or similar security of a corporation or any membership interest in a limited liability company; or any security convertible, with or without consideration, into such a security, or carrying any warrant or right to subscribe to or purchase such a security; or any such warrant or right; or any other security that the division considers necessary or appropriate, by such rules as it may prescribe in the public interest or for the protection of investors, to treat as an equity security.
(P) The sale of securities representing interests in or under profit-sharing or participation agreements relating to oil or gas wells located in this state, or representing interests in or under oil or gas leases of real estate situated in this state, is exempt if the securities are issued by an individual, partnership, limited partnership, partnership association, syndicate, pool, trust or trust fund, or other unincorporated association and if each of the following conditions is complied with:
(1) The beneficial owners of the securities do not, and will not after the sale, exceed five natural persons;
(2) The securities constitute or represent interests in not more than one oil or gas well;
(3) A certificate or other instrument in writing is furnished to each purchaser of the securities at or before the consummation of the sale, disclosing the maximum commission, compensation for services, cost of lease, and expenses with respect to the sale of such interests and with respect to the promotion, development, and management of the oil or gas well, and the total of that commission, compensation, costs, and expenses does not exceed twenty-five per cent of the aggregate interests in the oil or gas well, exclusive of any landowner's rental or royalty;
(4) The sale is made in good faith and not for the purpose of avoiding this chapter.
(Q) The sale of any security is exempt if all of the following conditions are satisfied:
(1) The provisions of section 5 of the Securities Act of 1933 do not apply to the sale by reason of an exemption under section 4 (2) of that act.
(2) The aggregate commission, discount, and other remuneration, excluding legal, accounting, and printing fees, paid or given directly or indirectly does not exceed ten per cent of the initial offering price.
(3) Any such commission, discount, or other remuneration for sales in this state is paid or given only to dealers or salespersons registered under this chapter.
(4) The issuer or dealer files with the division of securities, not later than sixty days after the sale, a report setting forth the name and address of the issuer, the total amount of the securities sold under this division, the number of persons to whom the securities were sold, the price at which the securities were sold, and the commissions or discounts paid or given.
(5) The issuer pays a filing fee of one hundred dollars for the first filing and fifty dollars for every subsequent filing during each calendar year.
(R) A sale of a money order, travelers' check, or other instrument for the transmission of money by a person qualified to engage in such business under section 1109.60 or Chapter 1315. of the Revised Code is exempt.
(S) A sale by a licensed dealer of securities that are in the process of registration under the Securities Act of 1933, unless exempt under that act, and that are in the process of registration, if registration is required under this chapter, is exempt, provided that no sale of that nature shall be consummated prior to the registration by description or qualification of the securities.
(T) The execution by a licensed dealer of orders for the purchase of any security is exempt, provided that the dealer acts only as agent for the purchaser, has made no solicitation of the order to purchase the security, has no interest in the distribution of the security, and delivers to the purchaser written confirmation of the transaction that clearly itemizes the dealer's commission. "Solicitation," as used in this division, means solicitation of the order for the specific security purchased and does not include general solicitations or advertisements of any kind.
(U) The sale insofar as the security holders of a person are concerned, where, pursuant to statutory provisions of the jurisdiction under which that person is organized or pursuant to provisions contained in its articles of incorporation, certificate of incorporation, partnership agreement, declaration of trust, trust indenture, or similar controlling instrument, there is submitted to the security holders, for their vote or consent, (1) a plan or agreement for a reclassification of securities of that person that involves the substitution of a security of that person for another security of that person, (2) a plan or agreement of merger or consolidation or a similar plan or agreement of acquisition in which the securities of that person held by the security holders will become or be exchanged for securities of any other person, or (3) a plan or agreement for a combination as defined in division (Q) of section 1701.01 of the Revised Code or a similar plan or agreement for the transfer of assets of that person to another person in consideration of the issuance of securities of any person, is exempt if, with respect to any of the foregoing transactions, either of the following conditions is satisfied:
(a) The securities to be issued to the security holders are effectively registered under sections 6 to 8 of the Securities Act of 1933 and offered and sold in compliance with section 5 of that act;
(b) At least twenty days prior to the date on which a meeting of the security holders is held or the earliest date on which corporate action may be taken when no meeting is held, there is submitted to the security holders, by that person, or by the person whose securities are to be issued in the transaction, information substantially equivalent to the information that would be required to be included in a proxy statement or information statement prepared by or on behalf of the management of an issuer subject to section 14(a) or 14(c) of the Securities Exchange Act of 1934.
(V) The sale of any security is exempt if the division by rule finds that registration is not necessary or appropriate in the public interest or for the protection of investors.
(W) Any offer or sale of securities made in reliance on the exemptions provided by Rule 505 of Regulation D made pursuant to the Securities Act of 1933 and the conditions and definitions provided by Rules 501 to 503 thereunder is exempt if the offer or sale satisfies all of the following conditions:
(1) No commission or other remuneration is given, directly or indirectly, to any person for soliciting or selling to any person in this state in reliance on the exemption under this division, except to dealers licensed in this state.
(a) Unless the cause for disqualification is waived under division (W)(2)(b) of this section, no exemption under this section is available for the securities of an issuer unless the issuer did not know and in the exercise of reasonable care could not have known that any of the following applies to any of the persons described in Rule 262(a) to (c) of Regulation A under the Securities Act of 1933:
(i) The person has filed an application for registration or qualification that is the subject of an effective order entered against the issuer, its officers, directors, general partners, controlling persons or affiliates thereof, pursuant to the law of any state within five years before the filing of a notice required under division (W)(3) of this section denying effectiveness to, or suspending or revoking the effectiveness of, the registration statement.
(ii) The person has been convicted of any offense in connection with the offer, sale, or purchase of any security or franchise, or any felony involving fraud or deceit, including, but not limited to, forgery, embezzlement, fraud, theft, or conspiracy to defraud.
(iii) The person is subject to an effective administrative order or judgment that was entered by a state securities administrator within five years before the filing of a notice required under division (W)(3) of this section and that prohibits, denies, or revokes the use of any exemption from securities registration, prohibits the transaction of business by the person as a dealer, or is based on fraud, deceit, an untrue statement of a material fact, or an omission to state a material fact.
(iv) The person is subject to any order, judgment, or decree of any court entered within five years before the filing of a notice required under division (W)(3) of this section, temporarily, preliminarily, or permanently restraining or enjoining the person from engaging in or continuing any conduct or practice in connection with the offer, sale, or purchase of any security, or the making of any false filing with any state.
(i) Any disqualification under this division involving a dealer may be waived if the dealer is or continues to be licensed in this state as a dealer after notifying the commissioner of the act or event causing disqualification.
(ii) The commissioner may waive any disqualification under this paragraph upon a showing of good cause that it is not necessary under the circumstances that use of the exemption be denied.
(3) Not later than five business days before the earlier of the date on which the first use of an offering document or the first sale is made in this state in reliance on the exemption under this division, there is filed with the commissioner a notice comprised of offering material in compliance with the requirements of Rule 502 of Regulation D under the Securities Act of 1933 and a fee of one hundred dollars. Material amendments to the offering document shall be filed with the commissioner not later than the date of their first use in this state.
(4) The aggregate commission, discount, and other remuneration paid or given, directly or indirectly, does not exceed twelve per cent of the initial offering price, excluding legal, accounting, and printing fees.
(X) Any offer or sale of securities made in reliance on the exemption provided in Rule 506 of Regulation D under the Securities Act of 1933, and in accordance with Rules 501 to 503 of Regulation D under the Securities Act of 1933, is exempt provided that all of the following apply:
(1) The issuer makes a notice filing with the division on form D of the securities and exchange commission within fifteen days of the first sale in this state;
(2) Any commission, discount, or other remuneration for sales of securities in this state is paid or given only to dealers or salespersons licensed under this chapter;
(3) The issuer pays a filing fee of one hundred dollars to the division; however, no filing fee shall be required to file amendments to the form D of the securities and exchange commission.
(Y) The offer or sale of securities by an issuer is exempt provided that all of the following apply:
(1) The sale of securities is made only to persons who are, or who the issuer reasonably believes are, accredited investors as defined in Rule 501 of Regulation D under the Securities Act of 1933.
(2) The issuer reasonably believes that all purchasers are purchasing for investment and not with a view to or for sale in connection with a distribution of the security. Any resale of a security sold in reliance on this exemption within twelve months of sale shall be presumed to be with a view to distribution and not for investment, except a resale to which any of the following applies:
(a) The resale is pursuant to a registration statement effective under section 1707.09 or 1707.091 of the Revised Code.
(b) The resale is to an accredited investor, as defined in Rule 501 of Regulation D under the Securities Act of 1933.
(c) The resale is to an institutional investor pursuant to the exemptions under division (B) or (D) of this section.
(3) The exemption under this division is not available to an issuer that is in the development stage and that either has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entities or persons.
(4) The exemption under this division is not available to an issuer, if the issuer, any of the issuer's predecessors, any affiliated issuer, any of the issuer's directors, officers, general partners, or beneficial owners of ten per cent or more of any class of its equity securities, any of the issuer's promoters presently connected with the issuer in any capacity, any underwriter of the securities to be offered, or any partner, director, or officer of such underwriter:
(a) Within the past five years, has filed a registration statement that is the subject of a currently effective registration stop order entered by any state securities administrator or the securities and exchange commission;
(b) Within the past five years, has been convicted of any criminal offense in connection with the offer, purchase, or sale of any security, or involving fraud or deceit;
(c) Is currently subject to any state or federal administrative enforcement order or judgment, entered within the past five years, finding fraud or deceit in connection with the purchase or sale of any security;
(d) Is currently subject to any order, judgment, or decree of any court of competent jurisdiction, entered within the past five years, that temporarily, preliminarily, or permanently restrains or enjoins the party from engaging in or continuing to engage in any conduct or practice involving fraud or deceit in connection with the purchase or sale of any security.
(5) Division (Y)(4) of this section is inapplicable if any of the following applies:
(a) The party subject to the disqualification is licensed or registered to conduct securities business in the state in which the order, judgment, or decree creating the disqualification was entered against the party described in division (Y)(4) of this section.
(b) Before the first offer is made under this exemption, the state securities administrator, or the court or regulatory authority that entered the order, judgment, or decree, waives the disqualification.
(c) The issuer did not know and, in the exercise of reasonable care based on reasonable investigation, could not have known that a disqualification from the exemption existed under division (Y)(4) of this section.
(6) A general announcement of the proposed offering may be made by any means; however, the general announcement shall include only the following information, unless additional information is specifically permitted by the division by rule:
(a) The name, address, and telephone number of the issuer of the securities;
(b) The name, a brief description, and price of any security to be issued;
(c) A brief description of the business of the issuer;
(d) The type, number, and aggregate amount of securities being offered;
(e) The name, address, and telephone number of the person to contact for additional information; y
(f) A statement indicating all of the following:
(i) Sales will only be made to accredited investors as defined in Rule 501 of Regulation D under the Securities Act of 1933;
(ii) No money or other consideration is being solicited or will be accepted by way of this general announcement;
(iii) The securities have not been registered with or approved by any state securities administrator or the securities and exchange commission and are being offered and sold pursuant to an exemption from registration.
(7) The issuer, in connection with an offer, may provide information in addition to the general announcement described in division (Y)(6) of this section, provided that either of the following applies:
(a) The information is delivered through an electronic database that is restricted to persons that are accredited investors as defined in Rule 501 of Regulation D under the Securities Act of 1933.
(b) The information is delivered after the issuer reasonably believes that the prospective purchaser is an accredited investor as defined in Rule 501 of Regulation D under the Securities Act of 1933.
(8) No telephone solicitation shall be done, unless prior to placing the telephone call, the issuer reasonably believes that the prospective purchaser to be solicited is an accredited investor as defined in Rule 501 of Regulation D under the Securities Act of 1933.
(9) Dissemination of the general announcement described in division (Y)(6) of this section to persons that are not accredited investors, as defined in Rule 501 of Regulation D under the Securities Act of 1933, does not disqualify the issuer from claiming an exemption under this division.
(10) The issuer shall file with the division notice of the offering of securities within fifteen days after notice of the offering is made or a general announcement is made in this state. The filing shall be on forms adopted by the division and shall include a copy of the general announcement, if one is made regarding the proposed offering, and copies of any offering materials, circulars, or prospectuses. A filing fee of one hundred dollars also shall be included.
Effective Date: 10-08-2001; 09-15-2004
(A) The division of securities may consider and conduct hearings upon any plan of reorganization, recapitalization, or refinancing of a corporation organized under the laws of this state, or having its principal place of business within this state, when such plan is proposed by such corporation or by any of its shareholders or creditors and contains a proposal to issue securities in exchange for one or more bona fide outstanding securities, claims, or property interests, or partly in such exchange or partly for cash. The division may also approve the terms of such issuance and exchange and the fairness of such terms, after a hearing upon such fairness at which all persons to whom it is proposed to issue securities in such exchange have the right to appear, if application for such a hearing is made by such corporation, by the holders of a majority in amount of its debts, or by the holders of a majority in amount of any outstanding class of securities issued by it. Notice in person or by mail of the time and place of such hearing shall be given to all persons to whom it is proposed to issue such securities, and evidence satisfactory to the division that such notice has been given shall be filed with the division. Securities issued in accordance with a plan so approved by the division are exempt from sections 1707.01 to 1707.45 of the Revised Code, relating to registration or qualification of securities or the registration of transactions therein.
(B) "Reorganization," "recapitalization," and "refinancing," as used in this section, include the following:
(1) A readjustment by the modification of the terms of securities by agreement;
(2) A readjustment by the exchange of securities by the issuer for others of its securities;
(3) The exchange of securities by the issuer for securities of another issuer;
(4) The acquisition of assets of a person, directly or indirectly, partly or wholly in consideration for securities distributed or to be distributed as part of the same transaction, directly or indirectly, to holders of securities issued by such person or secured by assets of such person;
(5) A merger or consolidation.
(C) Upon filing an application with the division under this section, the applicant shall pay to the division a filing fee of one hundred dollars and shall deposit with the division such sum, not in excess of one thousand dollars, as the division requires for the purpose of defraying the costs of the hearing provided for in this section and of any investigation which the division may make in connection herewith.
Effective Date: 07-30-1979
(1) No control bid for any securities of a subject company shall be made pursuant to a tender offer or request or invitation for tenders until the offeror files with the division of securities the information prescribed in division (A)(2) of this section. The offeror shall deliver a copy of the information specified in division (A)(2) of this section, by personal service, to the subject company at its principal office not later than the time of the filing with the division. The offeror shall send or deliver to all offerees in this state, as soon as practicable after the filing, the material terms of the proposed offer and the information specified in division (A)(2) of this section.
(2) The information to be filed with the division, with the subject company, and with any other offeror, pursuant to division (A)(1) of this section, shall include:
(a) Copies of all prospectuses, brochures, advertisements, circulars, letters, or other matter by means of which the offeror proposes to disclose to offerees all information material to a decision to accept or reject the offer;
(b) The identity and background of all persons on whose behalf the acquisition of any equity security of the subject company has been or is to be effected;
(c) The source and amount of funds or other consideration used or to be used in acquiring any equity security, including a statement describing any securities, other than the existing capital stock or long term debt of the offeror, which are being offered in exchange for the equity securities of the subject company;
(d) A statement of any plans or proposals that the offeror, upon gaining control, may have to liquidate the subject company, sell its assets, effect a merger or consolidation of it, establish, terminate, convert, or amend employee benefit plans, close any plant or facility of the subject company or of any of its subsidiaries or affiliates, change or reduce the work force of the subject company or any of its subsidiaries or affiliates, or make any other major change in its business, corporate structure, management personnel, or policies of employment;
(e) The number of shares of any equity security of the subject company of which each offeror is beneficial or record owner or has a right to acquire, directly or indirectly, together with the name and address of each person defined in this section as an offeror;
(f) Particulars as to any contracts, arrangements, or understandings to which an offeror is party with respect to any equity security of the subject company, including transfers of any equity security, joint ventures, loan or option arrangements, puts and calls, guarantees of loan, guarantees against loss, guarantees of profits, division of losses or profits, or the giving or withholding of proxies, naming the persons with whom such contracts, arrangements, or understandings have been entered into;
(g) Complete information on the organization and operations of the offeror, including the year of organization; the form of organization; the jurisdiction in which it is organized; a description of each class of the offeror's capital stock and of its long term debt; financial statements for the current period and for the three most recent annual accounting periods, unless the division by rule determines that the financial statements are not material or permits the filing of financial statements for less than the three most recent annual accounting periods; a brief description of the location and general character of the principal physical properties of the offeror and its subsidiaries; a description of pending legal proceedings other than routine litigation to which the offeror or any of its subsidiaries is a party or of which any of their property is the subject; a brief description of the business done and projected by the offeror and its subsidiaries and the general development of such business over the past three years; the names of all directors and executive officers together with biographical summaries of each for the preceding three years to date; and the approximate amount of any material interest, direct or indirect, of any of the directors or officers in any material transaction during the past three years, or in any proposed material transactions, to which the offeror or any of its subsidiaries was or is to be a party;
(h) Such other and further documents, exhibits, data, and information as required by regulations of the division, or as necessary to make fair, full, and effective disclosure to offerees of all information material to a decision to accept or reject the offer.
(3) Within five calendar days of the date of filing by an offeror of information specified in division (A)(2) of this section, the division may by order summarily suspend the continuation of the control bid if the division determines that all of the information specified has not been provided by the offeror or that the control bid materials provided to offerees do not provide full disclosure to offerees of all material information concerning the control bid. Such a suspension shall remain in effect only until the determination following a hearing held pursuant to division (A)(4) of this section.
(4) A hearing shall be scheduled and held by the division with respect to each suspension imposed under division (A)(3) of this section. The hearing shall be held within ten calendar days of the date on which the suspension is imposed. Chapter 119. of the Revised Code does not apply to a hearing held under division (A)(4) of this section. The division may allow any interested party to appear at and participate in the hearing in a manner considered appropriate by the division. The determination of the division made following the hearing shall be made within three calendar days after the hearing has been completed, and no later than fourteen calendar days after the date on which the suspension is imposed. The division, by rule or order, may prescribe time limits for conducting the hearing and for the making of the determination that are shorter than those specified in this division. If, based upon the hearing, the division determines that all of the information required to be provided by division (A)(2) of this section has not been provided by the offeror, that the control bid materials provided to offerees do not provide full disclosure to offerees of all material information concerning the control bid, or that the control bid is in material violation of any provision of this chapter, the division shall maintain the suspension of the continuation of the control bid, subject to the right of the offeror to correct disclosure and other deficiencies identified by the division and to reinstitute the control bid by filing new or amended information pursuant to this section.
(a) If an offeror increases or decreases the percentage of the class of securities being sought, the consideration offered, or the dealer's soliciting fee in connection with a control bid for any securities of a subject company pursuant to a tender offer or request or invitation for tenders, or makes any other change in the terms or conditions of the tender offer or request or invitation for tenders that requires the offeror to hold the tender offer or request or invitation for tenders open for at least ten business days from the date that notice of the change is first published or sent to security holders in this state, the offeror shall file with the division both of the following:
(i) All material information, including all information sent or otherwise provided to offerees in this state, pertaining to the increase, decrease, or other change;
(ii) All material information required to update the information filed with the division pursuant to division (A)(2) of this section.
(b) The offeror shall file the information described in division (A)(5)(a) with the division not later than the date on which the information regarding the increase, decrease, or other change first is published or sent to offerees in this state. The offeror shall deliver a copy of the information, by personal services, to the subject company at its principal office not later than the time of the filing with the division.
(6) Within three calendar days of the date of filing by an offeror of the information specified in division (A)(5) of this section, the division, by order, may summarily suspend the continuation of the control bid if the division determines that all of the information specified has not been provided by the offeror or that the information provided to offerees does not provide full disclosure to offerees of all material information concerning the increase, decrease, or other change. The suspension shall remain in effect only until the determination following a hearing held pursuant to division (A)(7) of this section.
(7) The division shall schedule and hold, within three calendar days of the date on which the suspension is imposed, a hearing with respect to each suspension imposed under division (A)(6) of this section. Chapter 119. of the Revised Code does not apply to a hearing held under division (A)(7) of this section. The division may allow any interested party to appear at and participate in the hearing in a manner considered appropriate by the division. The division shall make a determination following the hearing within three calendar days after the hearing has been completed, and not later than nine calendar days after the date on which the information regarding the increase, decrease, or other change first is published or sent to offerees in this state. The division, by rule or order, may prescribe time limits for conducting the hearing and for the making of the determination that are shorter than those specified in this division. If, based upon the hearing, the division determines that all of the information required to be provided by division (A)(5) of this section has not been provided by the offeror; that the information provided to offerees does not provide full disclosure to offerees of all material information concerning the increase, decrease, or other change; or that the control bid is in material violation of any provision of this chapter, the division shall maintain the suspension of the continuation of the control bid, subject to the right of the offeror to correct disclosure and other deficiencies identified by the division and to reinstate the control bid by filing new or amended information pursuant to this section.
(1) No control bid shall be made pursuant to a tender offer or request or invitation for tenders unless division (A) of section 1707.14 of the Revised Code has been complied with, and no offeror shall make a control bid that is not made to all holders residing in this state of the equity security that is the subject of the control bid, or that is not made to holders on the same terms as the control bid is made to holders of such equity security not residing in this state.
(2) No offeror may make a control bid pursuant to a tender offer or request or invitation for tenders or acquire any equity security in this state pursuant to a control bid at any time during which any proceeding by the division alleging a violation of any provision of this chapter is pending against the offeror.
(3) No offeror may acquire from any resident of this state, in any manner, any equity security of any class of a subject company at any time within two years following the last acquisition of any security of the same class pursuant to a control bid pursuant to a tender offer or request or invitation for tenders by that offeror, whether the acquisition was made by purchase, exchange, merger, consolidation, partial or complete liquidation, redemption, reverse stock split, recapitalization, reorganization, or any other similar transaction, unless the resident is afforded, at the time of the later acquisition, a reasonable opportunity to dispose of the security to the offeror upon substantially the same terms as those provided in the earlier control bid.
(4) If an offeror makes a tender offer or request or invitation for tenders not subject to Rule 14D-1 or Rule 14D-4 of the securities and exchange commission under the "Securities Exchange Act of 1934," for less than all the outstanding equity securities of a class, and if a greater number of securities is deposited pursuant thereto within ten days after copies of the offer or request or invitation for tenders are first published or sent or given to security holders than the offeror is bound or willing to take up and pay for, the securities shall be taken up as nearly as may be pro rata, disregarding fractions, according to the number of securities deposited by each offeree. The preceding sentence applies to securities deposited within ten days after notice of an increase in the consideration offered to security holders, as described in the next sentence, is first published or sent or given to security holders. If the terms of a control bid are changed before its expiration by increasing the consideration offered to offerees, the offeror shall pay the increased consideration for all equity securities taken up, whether the same are deposited or taken up before or after the change in the terms of the control bid.
(C) If the offeror or the subject company is a banking corporation or savings and loan association subject to regulation by the division of financial institutions, or is a public utility corporation subject to regulation by the public utilities commission, the division of securities shall immediately, upon receipt of the filing required under division (A) of this section, furnish a copy of the filing to the regulatory body having jurisdiction over the offeror or subject company.
(D) An offeror is subject to the liabilities and penalties applicable to a seller, and an offeree is entitled to the remedies applicable to a purchaser, as set forth in sections 1707.041 to 1707.44 of the Revised Code.
(E) The division of securities may, pursuant to Chapter 119. of the Revised Code, prescribe reasonable rules:
(1) Defining fraudulent, evasive, deceptive, or grossly unfair practices in connection with control bids and defining the terms used in this section;
(2) Exempting from this section control bids not made for the purpose of, and not having the effect of, changing or influencing the control of a subject company;
(3) Covering other matters as necessary to give effect to this section.
(F) If the offeror or a subject company is an insurance company subject to regulation under Title XXXIX of the Revised Code, the superintendent of insurance shall for all purposes of this section be substituted for the division of securities. This section shall not be construed to limit or modify in any way any responsibility, authority, power, or jurisdiction of the division of securities or the superintendent of insurance pursuant to any other section of the Revised Code.
(G) This section does not apply when:
(1) The offeror or the subject company is a public utility or a public utility holding company as defined in section 2 of the "Public Utility Holding Company Act of 1935," 49 Stat. 803, 15 U. S.C. 79, as amended, and the control bid is subject to approval by the appropriate federal agency as provided in such act;
(2) The offeror or the subject company is a bank or a bank holding company as subject to the "Bank Holding Company Act of 1956," 70 Stat. 133, 12 U. S.C. 1841, and subsequent amendments thereto, and the control bid is subject to approval by the appropriate federal agency as provided in such act;
(3) The offeror or the subject company is a savings and loan holding company as defined in section 2 of the "Savings and Loan Holding Company Amendments of 1967," 82 Stat. 5, 12 U. S.C. 1730a, as amended, and the control bid is subject to approval by the appropriate federal agency as provided in such act;
(4) The offeror and the subject company are banks and the offer is part of a merger transaction subject to approval by appropriate federal supervisory authorities.
(H) If any application of any provision of this section is for any reason held to be illegal or invalid, the illegality or invalidity shall not affect any legal and valid provision or application of this section, and the parts and application of this section are severable.
Effective Date: 10-08-2001; 10-12-2006
(A) No person who makes or opposes a control bid to offerees in this state shall knowingly do any of the following:
(1) Make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading;
(2) Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any such offeree;
(3) Engage in any manipulative act or practice.
(B) Any person who makes or opposes a control bid to offerees in this state, or who realizes any profit which inures to and is recoverable by a corporation, formed in this state, pursuant to section 1707.043 of the Revised Code, is conclusively presumed to have designated the secretary of state as its agent for the service of process in any action or proceeding under this chapter. Upon receipt of any such process, together with an affidavit showing the last known address of the person who made or opposed the control bid or who realized such profit, the secretary of state shall forthwith give notice by telegraph of the fact of the service of process and forward a copy of such process to such address by certified mail, return receipt requested. This section does not affect any right to serve process in any other manner permitted by law.
(C) Any person who makes or opposes a control bid is subject to the liabilities and penalties applicable to a seller, and an offeree is entitled to the remedies applicable to a purchaser, as set forth in sections 1707.41 to 1707.45 of the Revised Code.
(D) In case any provision or application of any provision of this section is for any reason held to be illegal or invalid, such illegality or invalidity shall not affect any legal and valid provision or application of this section.
Effective Date: 04-11-1990
(A) For the purpose of preventing manipulative practices by a person who makes a proposal, or publicly discloses the intention or possibility of making a proposal, to acquire control of a corporation formed under the laws of this state, any profit realized, directly or indirectly, from the disposition of any equity securities of a corporation by a person who, within eighteen months before disposition directly or indirectly, alone or in concert with others, made a proposal, or publicly disclosed the intention or possibility of making a proposal, to acquire control of the corporation, inures to and is recoverable by the corporation.
(B) No profit from the disposition of equity securities shall inure to or be recoverable by a corporation under this section if any of the following apply:
(1) The equity securities were acquired by the person disposing of them at any of the following times:
(a) More than eighteen months before the date on which the proposal or public disclosure was made;
(b) Before the effective date of this section;
(c) Pursuant to a contract executed prior to the effective date of this section.
(2) The person who disposed of the equity securities proves in a court of competent jurisdiction either of the following:
(a) At the time the proposals or public disclosures were made, the person's sole purpose in making the proposals or public disclosures was to succeed in acquiring control of the corporation and under the circumstances, including, without limitation, the person's proposed price, financing and other acquisition plans, the person's financial resources and capabilities, and all other alternatives reasonably anticipated to become available to the corporation's shareholders, there were reasonable grounds to believe that the person would acquire control of the corporation;
(b) The person's public disclosure concerning the intention or possibility of making a proposal to acquire control of the corporation and all other potentially manipulative conduct and practices by or on his behalf were not effected with a purpose of affecting market trading and thereby increasing any profit or decreasing any loss which the person might realize, directly or indirectly, from the disposition of the equity securities and did not have a material effect upon the price or volume of market trading in the equity securities. Evidence with respect to the past practices of such person is admissible and relevant in respect to the person's intent or purpose under divisions (B)(2)(a) and (b) of this section.
(3) The aggregate amount of all profit the person realized, directly or indirectly, does not exceed two hundred fifty thousand dollars.
(C) Equity securities acquired by a person as a result of a share split, share dividend, or other similar distribution by a corporation of equity securities issued by it not involving a sale of the equity securities, is deemed to have been acquired by such person on the date on which the person acquired the equity security with respect to which the equity securities were subsequently distributed by the corporation.
(D) No profit or any portion thereof recoverable by a corporation in an action brought under section 16(b) of the federal "securities exchange act of 1934," is recoverable by the corporation under this section.
(1) A corporation may commence an action to recover any profit recoverable under this section in any court of competent jurisdiction. If the corporation fails or refuses to bring the action within sixty days after written request by any holder of any equity security in the corporation or fails to diligently prosecute the action, the holder may bring the action on behalf of the corporation. If a court of competent jurisdiction enters a judgment requiring the payment of any such profits, the party who brought the action is entitled to all costs, including reasonable attorney fees, incurred in connection with the enforcement of this section.
(2) No action shall be brought by or on behalf of a corporation upon a cause of action arising under this section at any time after two years from the date on which the disposition of equity securities occurred.
(F) This section does not apply to any corporation which does not have issued and outstanding shares that are listed on a national securities exchange or are regularly quoted in an over-the-counter market by one or more members of a national or affiliated securities association or to any corporation whose articles or regulations provide by specific reference to this section that this section does not apply to the corporation and its equity securities.
(G) The division of securities, pursuant to Chapter 119. of the Revised Code, may adopt reasonable rules to define terms used in this section and types of conduct or practices which the division determines are either of the following:
(1) Comprehended as within the purpose of this section as set forth in division (A) of this section and therefore subject to this section;
(2) Not comprehended as within the purpose of division (A) of this section and therefore exempt from this section.
(H) As used in this section:
(1) "Corporation" and "person" have the same meanings as in section 1701.01 of the Revised Code.
(2) "Profit from the disposition of equity securities of a corporation" means both of the following:
(a) The excess of the fair market value of the consideration directly or indirectly received or to be received from the disposition, less the usual and customary broker's commissions actually paid in connection with the disposition, over the fair market value of the consideration directly or indirectly paid for the acquisition of the equity securities, plus the usual and customary broker's commissions actually paid in connection with the acquisition;
(b) The value of any tax benefit to which a person is directly or indirectly entitled resulting from disposition of equity securities of the corporation for consideration with a value that is less than the fair market value of the equity securities at the time of disposition.
(3) "Disposition of equity securities of a corporation" means any sale, exchange, transfer, or other disposition of any kind of the equity securities or any contract to sell, exchange, transfer, or otherwise dispose of the equity securities, to any other person, including the corporation, for valuable consideration.
(4) "Equity securities" means any of the following:
(a) Shares of any class or series of a corporation;
(b) Any securities convertible into or exercisable for shares of any class or series of a corporation, with or without additional consideration;
(c) Any warrant, right, or option to subscribe for or to purchase shares of any class or series of the corporation, or any securities convertible into shares of any class or series;
(d) Any interest, direct or indirect, in any equity securities.
(5) "Publicly disclosed," "publicly discloses," and "public disclosure" includes, but is not limited to, any disclosure, whether or not required by law, that becomes public and was made or caused to be made by a person:
(a) With the intent or expectation that the disclosure become public; o
(b) To another person where the person making or causing to be made the disclosure, knows or reasonably should know, that the person who receives the disclosure is not under an obligation to refrain from making the disclosure, directly or indirectly, to the public and such person does make the disclosure, directly or indirectly, to the public.
(6) "To acquire control of the corporation" means the acquisition by any person, directly or indirectly, either alone or in concert with another person, of the power, whether or not exercised, to direct or cause the direction of the management and policies of the corporation, whether through the ownership of voting shares, by contract or otherwise, unless any proposal, or public disclosure of the intention or possibility of making a proposal, to acquire control of the corporation made by such person affirmatively states that the person does not intend, either alone or in concert with another person, to exercise control of the corporation and such person does not, directly or indirectly, exercise control of the corporation prior to his disposition of any equity securities of the corporation.
Effective Date: 04-11-1990
Effective Date: 10-08-2001
(A) The following transactions in securities may be carried out upon compliance with sections 1707.08 and 1707.11 of the Revised Code:
(1) The sale of its securities by a corporation may be so carried out when no part of the securities to be sold is issued directly or indirectly in payment or exchange for intangible property or for property not located in this state, and when the total commission, remuneration, expense, or discount, excluding legal, accounting, and printing fees of the corporation, in connection with the sale of those securities does not exceed three per cent of the initial offering price of those securities.
(2) The sale of its securities by any corporation may be so carried out when the securities are sold to not more than a maximum of thirty-five purchasers, the aggregate commission, discount, or other remuneration, excluding legal, accounting, and printing fees, paid or given directly or indirectly in connection with the sale of those securities does not exceed ten per cent of the initial offering price, and those securities are issued and disposed of for the sole account of the issuer in good faith and not for the purpose of avoiding this chapter. For the purposes of this division, neither of the following shall be included among the thirty-five purchaser maximum:
(a) Any purchaser of at least one hundred thousand dollars of the offered securities;
(b) Any director or executive officer of the issuing corporation.
(3) The sale of securities representing an interest in a partnership, limited liability company, limited partnership, partnership association, syndicate, pool, trust, trust fund, or other unincorporated association may be so carried out if the securities are sold to not more than a maximum of thirty-five purchasers, the aggregate commission, discount, or other remuneration, excluding legal, accounting, and printing fees, paid or given directly or indirectly in connection with the sale of those securities does not exceed ten per cent of the initial offering price, and the sale is made in good faith and not for the purpose of avoiding this chapter. For the purposes of this division, neither of the following shall be included among the thirty-five purchaser maximum:
(a) Any purchaser of at least one hundred thousand dollars of the offered securities;
(b) Any trustee, general partner, director, or executive officer of the issuer, or any member of a limited liability company, if the issuer is a limited liability company in which the management is reserved to its members, or manager of a limited liability company, if the issuer is a limited liability company in which the management is not reserved to its members.
(4) The offering and sale of additional securities of a corporation, made by it to its own security holders exclusively, may be so carried out where no commission or other remuneration is paid or given directly or indirectly in connection with the offering and sale, other than a commission in respect of the securities purchased by such security holders or a discount in respect of the securities not purchased by the security holders, or both, paid by the corporation to a dealer who has agreed to purchase all of those securities not taken by the security holders.
(B) An issuer engaging in any transaction specified in this section shall not be deemed a dealer. Any commission, discount, or other remuneration for sales in this state of securities specified in this section shall be paid only to dealers or salespersons licensed pursuant to this chapter.
(C) For the purpose of this section, each of the following is deemed to be a single purchaser of a security:
(1) Husband and wife;
(2) A child and its parent or guardian when the parent or guardian holds the security for the benefit of the child;
(3) A corporation, a limited liability company, a partnership, an association or other unincorporated entity, a joint-stock company, or a trust, but only if the corporation, limited liability company, partnership, association, entity, joint-stock company, or trust was not formed for the purpose of purchasing the security.
(D) A sale of securities registered under section 1707.09 or 1707.091 of the Revised Code or sold pursuant to an exemption under this chapter shall not be integrated with a sale pursuant to this section in computing the number of purchasers under this section.
Effective Date: 10-08-2001
Effective Date: 10-08-2001
(A) The transactions enumerated in section 1707.06 of the Revised Code may be consummated on compliance with this section and section 1707.11 of the Revised Code.
(B) A description, verified either by the oath of the individual filing it or of any individual having knowledge of the facts, shall be filed with the division of securities by the issuer, or by a majority of the incorporators of the issuer prior to election of officers if it is an incorporated issuer, or by a licensed dealer, which description shall be on forms prescribed by the division and shall set forth:
(1) The name of the issuer;
(2) A brief description of the securities;
(3) The amount of the securities to be offered after the filing of the description for sale in this state and, if all the securities are not to be offered by the person filing the description, then the respective amounts to be offered by others, so far as those amounts are known, and the names and addresses of the other offerors;
(4) A brief statement of the facts which show that the securities are the subject matter of a transaction enumerated in section 1707.06 of the Revised Code;
(5) The price at which the securities are to be offered for sale.
(C) The individual who executes the application for registration by description on behalf of the applicant shall state the individual's relationship to the applicant and certify all of the following:
(1) The individual has executed the application on behalf of the applicant.
(2) The individual is fully authorized to execute and file the application on behalf of the applicant.
(3) The individual is familiar with the applicant's application.
(4) To the best of the individual's knowledge, information, and belief, the statements made in the application are true, and the documents submitted with the application are true copies of the original documents.
(D) A registration by description is effective seven business days after the division receives the description on applicable forms, together with any filing fee required under this division, if no proceeding is pending under section 1707.13 or 1707.131 of the Revised Code. However, the division may permit an earlier effective date by rule or by issuing a certificate of acknowledgment for the registration by description.
For an offering that exceeds fifty thousand dollars, a filing fee of fifty dollars shall be submitted with the registration by description.
(E) In order to correct errors or omissions, a registration by description may be amended by the person that originally filed it, by the filing, in the same manner as in the case of an original registration by description, of an amended registration by description or of an amendment of the original registration by description.
(F) When transactions in any securities enumerated in section 1707.06 of the Revised Code have been registered and the fees prescribed by this section have been paid, the transactions may be consummated so long as the registration remains in full force.
Amended by 129th General AssemblyFile No.127, HB 487, §101.01, eff. 9/10/2012.
Effective Date: 09-16-2003
(1) All securities, except those enumerated in section 1707.02 of the Revised Code and those that are the subject matter of a transaction permitted by section 1707.03. 1707.04. or 1707.06 of the Revised Code, shall be qualified in the manner provided by this section before being sold in this state.
(2) Applications for qualification, on forms prescribed by the division of securities, shall be made in writing either by the issuer of the securities or by any licensed dealer desiring to sell them within this state and shall be signed by the applicant, sworn to by any individual having knowledge of the facts stated in the application, and filed in the office of the division.
(3) The individual who executes the application for qualification of securities on behalf of the applicant shall state the individual's relationship to the applicant and certify that: the individual has executed the application on behalf of the applicant; the individual is fully authorized to execute and file the application on behalf of the applicant; the individual is familiar with the applicant's application; and to the best of the individual's knowledge, information, and belief, the statements made in the application are true, and the documents submitted with the application are true copies of the original documents.
(B) The division shall require the applicant for qualification of securities to submit to it the following information:
(1) The names and addresses of the directors or trustees and of the officers of the issuer, if the issuer is a corporation or an unincorporated association; of all the members of the issuer, if the issuer is a limited liability company in which management is reserved to its members; of all the managers of the issuer, if the issuer is a limited liability company in which management is not reserved to its members; of all partners, if the issuer is a general or limited partnership or a partnership association; and the name and address of the issuer, if the issuer is an individual;
(2) The address of the issuer's principal place of business and principal office in this state, if any;
(3) The purposes and general character of the business actually being transacted, or to be transacted, by the issuer, and the purpose of issuing the securities named in the application;
(4) A statement of the capitalization of the issuer; a balance sheet made up as of the most recent practicable date, showing the amount and general character of its assets and liabilities; a description of the security for the qualification of which application is being made; and copies of all circulars, prospectuses, advertisements, or other descriptions of the securities, that are then prepared by or for the issuer, or by or for the applicant if the applicant is not the issuer, or by or for both, to be used for distribution or publication in this state;
(5) A statement of the amount of the issuer's income, expenses, and fixed charges during the last fiscal year or, if the issuer has been in actual business less than one year, for the time that the issuer has been in actual business;
(6) A statement showing the price at which the security is to be offered for sale;
(7) A statement showing the considerations received or to be received by the issuer of the securities purchased or to be purchased from the issuer and an itemized statement of all expenses of financing to be paid from those considerations so as to show the aggregate net amount actually received or to be received by the issuer;
(8) All other information, including an opinion of counsel as to the validity of the securities that are the subject matter of the application, that the division considers necessary to enable it to ascertain whether the securities are entitled to qualification;
(9) If the issuer is a corporation, there shall be filed with the application a certified copy of its articles of incorporation with all amendments to the articles, if the articles or amendments are not already on file in the office of the secretary of state; if the issuer is a limited liability company, there shall be filed with the application a certified copy of its articles of organization with all amendments to the articles, if the articles or amendments are not already on file in the office of the secretary of state; if the issuer is a trust or trustee, there shall be filed with the application a copy of all instruments by which the trust was created; and if the issuer is a partnership or an unincorporated association, or any other form of organization, there shall be filed with the application a copy of its articles of partnership or association and of all other papers pertaining to its organization, if the articles or other papers are not already on file in the office of the secretary of state;
(10) If the application is made with respect to securities to be sold or distributed by or on behalf of the issuer, or by or on behalf of an underwriter, as defined in division (N) of section 1707.03 of the Revised Code, a statement showing that the issuer has received, or will receive at or prior to the delivery of those securities, not less than eighty-five per cent of the aggregate price at which all those securities are sold by or on behalf of the issuer, without deduction for any additional commission, directly or indirectly, and without liability to pay any additional sum as commission;
(11) If the division so permits with respect to a security, an applicant may file with the division, in lieu of the division's prescribed forms, a copy of the registration statement relating to the security, with all amendments to that statement, previously filed with the securities and exchange commission of the United States under the "Securities Act of 1933," as amended, together with all additional data, information, and documents that the division requires.
(C) If the division finds that it is not necessary in the public interest and for the protection of investors to require all the information specified in divisions (B)(1) to (10) of this section, it may permit the filing of applications for qualification that contain the information that it considers necessary and appropriate in the public interest and for the protection of investors, but this provision applies only in the case of applications for qualification of securities previously issued and outstanding that may not be made the subject matter of transactions exempt under division (M) of section 1707.03 of the Revised Code by reason of the fact that those securities within one year were purchased outside this state or within one year were transported into this state.
(D) All the statements, exhibits, and documents required by the division under this section, except properly certified public documents, shall be verified by the oath of the applicant for qualification, of the issuer, or of any individual having knowledge of the facts, and in the manner and form that may be required by the division. Failure or refusal to comply with the requests of the division shall be sufficient reason for a refusal by the division to register securities.
(E) If it appears to the division that substantially the only consideration to be paid for any of the securities to be qualified is to be intangible property of doubtful value, the division may require that the securities be delivered in escrow to a bank in this state under the terms that the division may reasonably prescribe or require to prevent a deceitful misrepresentation or sale of the securities; that the securities be subordinated in favor of those sold for sound value until they have a value bearing a reasonable relation to the value of those sold for sound value; or that a legend of warning specifying the considerations paid or to be paid for the securities be stamped or printed on all advertisements, circulars, pamphlets, or subscription blanks used in connection with the sale of any securities of the same issuer; or it may impose a combination of any two or more of these requirements.
(F) At the time of filing the information prescribed in this section, the applicant shall pay to the division a filing fee of one hundred dollars.
(1) The division, at any time, as a prerequisite to qualification, may make an examination of the issuer of securities sought to be qualified. The applicant for qualification of any securities may be required by the division to advance sufficient funds to pay all or any part of the actual expenses of that examination, an itemized statement of which shall be furnished the applicant.
(2) If the division finds that the business of the issuer is not fraudulently conducted, that the proposed offer or disposal of securities is not on grossly unfair terms, that the plan of issuance and sale of the securities referred to in the proposed offer or disposal would not defraud or deceive, or tend to defraud or deceive, purchasers, and that division (B)(10) of this section applies and has been complied with, the division shall notify the applicant of its findings, and, upon payment of a registration fee of one-tenth of one per cent of the aggregate price at which the securities are to be sold to the public in this state, which fee, however, shall in no case be less than one hundred or more than one thousand dollars, the division shall register the qualification of the securities.
(H) An application for qualification of securities may be amended by the person filing it at any time prior to the division's action on it either in registering the securities for qualification or in refusing to do so. Subsequent to any such action by the division, the person who filed the application may file with the consent of the division one or more amendments to it that shall become effective upon the making by the division of the findings enumerated in division (G) of this section; the giving of notice of those findings to the applicant by the division; and the payment by the applicant of the additional fee that would have been payable had the application, as it previously became effective, contained the amendment.
(I) When any securities have been qualified and the fees for the qualification have been paid as provided in this section, any licensed dealer subsequently may sell the securities under the qualification, so long as the qualification remains in full force, and any dealer of that nature that desires may file with the division a written notice of intention to sell the securities or any designated portion of them. For that filing, no fee need be paid.
Effective Date: 09-16-2003
(A) Any security for which a registration statement has been filed pursuant to section 6 of the Securities Act of 1933 or for which a notification form and offering circular has been filed pursuant to regulation A of the general rules and regulations of the securities and exchange commission, 17 C. F.R. sections 230.251 to 230.256 and 230.258 to 230.263, as amended before or after the effective date of this section, in connection with the same offering may be registered by coordination.
(B) A registration statement filed by or on behalf of the issuer under this section with the division of securities shall contain the following information and be accompanied by the following items in addition to the consent to service of process required by section 1707.11 of the Revised Code:
(1) One copy of the latest form of prospectus or offering circular and notification filed with the securities and exchange commission;
(2) If the division of securities by rule or otherwise requires, a copy of the articles of incorporation and code of regulations or bylaws, or their substantial equivalents, as currently in effect, a copy of any agreements with or among underwriters, a copy of any indenture or other instrument governing the issuance of the security to be registered, and a specimen or copy of the security;
(3) If the division of securities requests, any other information, or copies of any other documents, filed with the securities and exchange commission;
(4) An undertaking by the issuer to forward to the division, promptly and in any event not later than the first business day after the day they are forwarded to or thereafter are filed with the securities and exchange commission, whichever occurs first, all amendments to the federal prospectus, offering circular, notification form, or other documents filed with the securities and exchange commission, other than an amendment that merely delays the effective date;
(5) A filing fee of one hundred dollars.
(C) A registration statement filed under this section becomes effective either at the moment the federal registration statement becomes effective or at the time the offering may otherwise be commenced in accordance with the rules, regulations, or orders of the securities and exchange commission, if all of the following conditions are satisfied:
(1) No stop order is in effect, no proceeding is pending under section 1707.13 of the Revised Code, and no cease and desist order has been issued pursuant to section 1707.23 of the Revised Code;
(2) The registration statement has been on file with the division for at least fifteen days or for such shorter period as the division by rule or otherwise permits; provided, that if the registration statement is not filed with the division within five days of the initial filing with the securities and exchange commission, the registration statement must be on file with the division for thirty days or for such shorter period as the division by rule or otherwise permits.
(3) A statement of the maximum and minimum proposed offering prices and the maximum underwriting discounts and commissions has been on file with the division for two full business days or for such shorter period as the division by rule or otherwise permits and the offering is made within those limitations;
(4) The division has received a registration fee of one-tenth of one per cent of the aggregate price at which the securities are to be sold to the public in this state, which fee, however, shall in no case be less than one hundred or more than one thousand dollars.
(D) The issuer shall promptly notify the division by telephone or telegram of the date and time when the federal registration statement became effective, or when the offering may otherwise be commenced in accordance with the rules, regulations, or orders of the securities and exchange commission, and of the contents of the price amendment, if any, and shall promptly file the price amendment.
"Price amendment" for the purpose of this division, means the final federal registration statement amendment that includes a statement of the offering price, underwriting and selling discounts or commissions, amount of proceeds, conversion rates, call prices, and other matters dependent upon the offering price.
If the division fails to receive the required notice and required copies of the price amendment, the division may enter a provisional stop order retroactively denying effectiveness to the registration statement or suspending its effectiveness until there is compliance with this division, provided the division promptly notifies the issuer or its representative by telephone or telegram, and promptly confirms by letter or telegram when it notifies by telephone, of the entry of the order. If the issuer or its representative proves compliance with the requirements of this division as to notice and price amendment filing, the stop order is void as of the time of its entry. The division may by rule or otherwise waive either or both of the conditions specified in divisions (C)(2) and (3) of this section. If the federal registration statement becomes effective, or if the offering may otherwise be commenced in accordance with the rules, regulations, or orders of the securities and exchange commission, before all of the conditions specified in divisions (C) and (D) of this section are satisfied and they are not waived by the division the registration statement becomes effective as soon as all of the conditions are satisfied.
If the issuer advises the division of the date when the federal registration statement is expected to become effective, or when the offering may otherwise be commenced in accordance with the rules, regulations, or orders of the securities and exchange commission, the division shall promptly advise the issuer or its representative by telephone or telegram, at the issuer's expense, whether all of the conditions have been satisfied or whether the division then contemplates the institution of a proceeding under section 1707.13 or 1707.23 of the Revised Code, but such advice does not preclude the institution of such a proceeding at any time.
Effective Date: 10-11-1994
(A) For the purposes of selling securities in this state, except securities that are the subject matter of transactions enumerated in section 1707.03 of the Revised Code, an investment company, as defined by the Investment Company Act of 1940, that is registered or has filed a registration statement with the securities and exchange commission under the Investment Company Act of 1940, shall file the following with the division of securities:
(1) A notice filing consisting of either of the following:
(a) A copy of the investment company's federal registration statement as filed with the securities and exchange commission;
(b) A form U-1 or form NF of the North American securities administrators association.
(2) Appropriate filing fees consisting of both of the following:
(a) A flat fee of one hundred dollars;
(b) A fee calculated at one-tenth of one per cent of the aggregate price at which the securities are to be sold to the public in this state, which calculated fee, however, shall in no case be less than one hundred or more than one thousand dollars.
(1) Upon payment of the maximum filing fees as provided in division (A)(2) of this section, an investment company may sell an indefinite amount of securities in this state.
(2) An investment company making a notice filing as provided in this section shall comply with section 1707.11 of the Revised Code. An investment company that previously filed with the division a valid consent to service of process pursuant to section 1707.11 of the Revised Code may incorporate that consent by reference.
(1) For offerings involving covered securities, as defined in section 18 of the "Securities Act of 1933," 15 U. S.C. 77r, that are not subject to section 1707.02. 1707.03. 1707.04. 1707.06. 1707.08. 1707.09. or 1707.091 of the Revised Code, or division (A) of this section, a notice filing shall be submitted to the division together with a consent to service of process pursuant to section 1707.11 of the Revised Code and a filing fee as provided in division (A)(2) of this section.
(2) The notice filing described in division (C)(1) of this section shall consist of any document filed with the securities and exchange commission pursuant to the Securities Act of 1933, together with annual or periodic reports of the value of the securities sold or offered to be sold to persons located in this state.
(D) A notice filing submitted under this section shall be effective for thirteen months.
Effective Date: 06-18-2002
Notwithstanding any provision of Chapter 1707. of the Revised Code, or any rule adopted by the division of securities under that chapter, requiring a signature or verification, the division may provide by rule for the electronic filing or submission of any form, document, material, or information that is required or permitted to be filed with or submitted to the division.
Effective Date: 03-18-1999
Any securities required by sections 1707.01 to 1707.45. inclusive, of the Revised Code, to be registered by qualification before being sold in this state may be offered for sale and sold preliminary to and pending their full qualification, where the division of securities is satisfied that the issuer is solvent and of good business repute and that such preliminary offering will not deceive or tend to deceive the public; but no such preliminary offering shall be made until the division consents thereto in writing, and such consent shall be on condition that within thirty days from the date thereof, or within such further time as the division allows, there is filed in the office of the division application under such sections for the full qualification of said securities, or for a registration of such securities by description if, within such time, such securities become entitled to registration by description; and the entire proceeds of the sale of such securities, without deduction for commissions or other charges, shall be segregated or deposited in escrow in such manner and for such time as the division directs.
No applicant which is an issuer not a resident of this state shall be entitled to the benefit of this section unless there shall also be on file with the division a consent to service as provided in section 1707.11 of the Revised Code.
At the time of filing the statement prescribed in this section, the applicant shall pay to the division the filing fee prescribed by section 1707.09 of the Revised Code; and upon receipt of notice of the division's favorable action on the application, the applicant shall pay to the division the registration fee prescribed by such section for the qualification of securities.
If the dealer is unable to complete such qualification or such registration by description, or if the division, acting upon more complete information furnished or obtained from its examination, does not finally register such security by description or qualification, the issuer or dealer who has sold it or offered it for sale shall withdraw the security from the market and return or tender to purchasers of the security, within such time as the division specifies, the amounts paid for it by them.
Effective Date: 10-01-1953
(A) Each person that is not organized under the laws of this state, that is not licensed under section 1703.03 of the Revised Code, or that does not have its principal place of business in this state, shall submit to the division of securities an irrevocable consent to service of process, as described in division (B) of this section, in connection with any of the following:
(1) Filings to claim any of the exemptions enumerated in division (Q), (W), or (Y) of section 1707.03 of the Revised Code;
(2) Applications for registration by description, qualification, or coordination;
(3) Notice filings pursuant to section 1707.092 of the Revised Code.
(B) The irrevocable written consent shall be executed and acknowledged by an individual duly authorized to give the consent and shall do all of the following:
(1) Designate the secretary of state as agent for service of process or pleadings;
(2) State that actions growing out of the sale of such securities, the giving of investment advice, or fraud committed by a person on whose behalf the consent is submitted may be commenced against the person, in the proper court of any county in this state in which a cause of action may arise or in which the plaintiff in the action may reside, by serving on the secretary of state any proper process or pleading authorized by the laws of this state;
(3) Stipulate that service of process or pleading on the secretary of state shall be taken in all courts to be as valid and binding as if service had been made upon the person on whose behalf the consent is submitted.
(C) Notwithstanding any application, form, or other material filed with or submitted to the division that purports to appoint as agent for service of process a person other than the secretary of state, the application, form, or other material shall be considered to appoint the secretary of state as agent for service of process.
(D) Service of any process or pleadings may be made on the secretary of state by duplicate copies, of which one shall be filed in the office of the secretary of state, and the other immediately forwarded by the secretary of state by certified mail to the principal place of business of the person on whose behalf the consent is submitted or to the last known address as shown on the filing made with the division. However, failure to mail such copy does not invalidate the service.
(E) Notwithstanding any provision of this chapter, or of any rule adopted by the division of securities under this chapter, that requires the submission of a consent to service of process, the division may provide by rule for the electronic filing or submission of a consent to service of process.
Amended by 129th General AssemblyFile No.28, HB 153, §101.01, eff. 9/29/2011.
Effective Date: 09-16-2003
(A) Except for offering materials filed with the division of securities in connection with exempt transactions under divisions (Q) and (W) of section 1707.03 of the Revised Code, all applications and other papers filed with the division shall be open to inspection at all reasonable times, except for unreasonable or improper purposes.
(B) Information obtained by the division through any offering materials filed with the division in connection with exempt transactions under divisions (Q) and (W) of section 1707.03 of the Revised Code or through any investigation shall be retained by the division and shall not be available to inspection by persons other than those having a direct economic interest in the information or the transaction under investigation, or by law enforcement agencies, state agencies, federal agencies, and other entities as set forth by rules adopted by the division.
(C) Confidential law enforcement investigatory records and trial preparation records of the division of securities or any other law enforcement or administrative agency which are in the possession of the division of securities shall in no event be available to inspection by other than law enforcement agencies, state agencies, federal agencies, and other entities as set forth by rules adopted by the division.
(D) All public records shall be prepared and made available promptly to any member of the general public at all reasonable times for inspection. Upon request, the custodian of public records shall make copies of the records available at cost, within a reasonable period of time. To facilitate public access, the division shall maintain public records in such a manner that they can be made available pursuant to this section.
(E) No employee or representative of the division or the department of commerce shall be required to testify concerning any document or record subject to division (B) or (C) of this section, except as set forth by rules adopted by the division.
(F) As used in this section:
(1) "Confidential law enforcement investigatory record" means any record that pertains to a law enforcement matter of a criminal, quasi-criminal, civil, or administrative nature, provided that release of the record would create a high probability of disclosure of any of the following:
(a) The identity of a suspect who has not been charged with the offense to which the record pertains, or of an information source or witness to whom confidentiality reasonably has been promised;
(b) Information provided by an information source or witness to whom confidentiality reasonably has been promised, which information reasonably would tend to disclose the identity of the information source or witness;
(c) Specific confidential investigatory techniques or procedures or specific investigatory work product.
(2) "Trial preparation record" means any record that contains information that is specifically compiled in reasonable anticipation of, or in defense of, a criminal, quasi-criminal, civil, or administrative action or proceeding, including, but not limited to, the independent thought processes and personal trial preparation of an attorney and division personnel, their notes, diaries, and memoranda.
Effective Date: 06-18-2002
The division of securities may suspend the registration by description or by qualification of any securities, or the right of any dealers or of the issuer, or of both, to buy, sell, or deal in any particular security whether it is registered, qualified, or exempt or even though transactions in it are registered or exempt, if the division finds that the issuer has violated sections 1707.01 to 1707.45. inclusive, of the Revised Code, or any lawful order or requirement of the division, has fraudulently conducted its business, or has been engaged in or is engaged or about to engage in deceptive or fraudulent acts, practices, or transactions; that such security is being disposed of or purchased on grossly unfair terms, in such manner as to deceive or defraud or as to tend to deceive or defraud purchasers or sellers, or in disregard of the lawful rules and regulations of the division applicable to such security or to transactions therein; or, in the case of securities being sold under a registration or qualification, that the issuer is insolvent. Notice of such suspension shall be mailed by the division to the issuer and to all licensed dealers concerned. Such notice shall specify the particular security whose registration is being suspended and shall set a date, not more than ten days later than the date of the order of suspension, for a hearing on the continuation or revocation of such suspension. For good cause the division may continue such hearing on application of any interested party. In conducting such hearing the division shall have all the authority and powers set forth in section 1707.23 of the Revised Code. Following such hearing the division shall either confirm or revoke such suspension. No such suspension shall invalidate any sale of securities made prior thereto; the rights of persons defrauded by any sale shall in no wise be impaired.
If the issuer of a security refuses to permit an examination to be made by the division of its books, records, and property, or refuses to furnish the division any information which it may lawfully require under sections 1707.01 to 1707.45. inclusive, of the Revised Code, such refusal is a sufficient ground for the division to suspend the registration by description or by qualification of such security, or the right of any dealers or of the issuer, or of both, to buy, sell, or deal in such security.
If any interested party desires an investigation at a place other than the office of the division, such person may be required by the division to advance sufficient funds to pay the actual expenses of such investigation.
Whenever the division determines, upon hearing, that any application for qualification was made, or that any securities or any transaction was registered by description, by a person who knew that untrue statements were contained in such application or description, the division may proceed under sections 1707.19. 1707.23. and 1707.44 of the Revised Code, or any of them, against the person who filed such application or such registration by description.
Effective Date: 10-01-1953
(A) For purposes of this section, "five per cent shareholder" means a beneficial owner of five per cent or more of the issuer's outstanding securities.
(B) The division of securities shall refuse any registration by description, by qualification, or by coordination if the issuer is in the development stage and either has no specific business plan or purpose or has indicated that its business is to engage in a merger or acquisition with an unidentified company or companies, or other entities or persons.
(C) The division may refuse any registration by description, by qualification, or by coordination if either of the following applies:
(1) The issuer does not disclose in the final offering circular, prospectus, or form U-7 of the North American securities administrators association that any future transaction with an officer, director, five per cent shareholder, manager, trustee, or general partner will be on terms no less favorable to the issuer than could be obtained from an independent third party.
(2) The issuer does not disclose both of the following in the final offering circular, prospectus, or form U-7 of the North American securities administrators association:
(a) Any outstanding loan from the issuer to an officer, director, five per cent shareholder, manager, trustee, or general partner is required to be repaid within six months of the offering, except for a loan or extension of credit made by a bank.
(b) Any future loan from the issuer to an officer, director, five per cent shareholder, manager, trustee, or general partner will be for a bona fide business purpose and approved by a majority of the disinterested directors, managers, trustees, or general partners, or will be a type of transaction involving a director or executive officer of the issuer that is permitted by section 13(k) of the "Securities Exchange Act of 1934," 116 Stat. 787, 15 U. S.C. A. 78m, as amended.
Effective Date: 09-16-2003
(A) No person shall act as a dealer, unless the person is licensed as a dealer by the division of securities, except when at least one of the following cases applies:
(1) When the person is transacting business through or with a licensed dealer;
(2) When the securities are the subject matter of one or more transactions enumerated in divisions (B) to (L), (O) to (R), and (U) to (Y) of section 1707.03. or in section 1707.06 of the Revised Code, except when a commission, discount, or other remuneration is paid or given in consideration with transactions enumerated in divisions (O), (Q), (W), (X), and (Y) of section 1707.03. or in section 1707.06 of the Revised Code;
(3) When the person is an issuer selling securities issued by it or by its subsidiary, if such securities are specified under division (G) or (I) of section 1707.02. or under section 1707.04 of the Revised Code;
(4) When the person is participating in transactions exempt, under section 1707.34 of the Revised Code, from this chapter;
(5) When the person has no place of business in this state, is registered with the securities and exchange commission, and the only transactions effected in this state are with institutional investors.
(B) Each dealer that in any twelve-month or shorter period, alone or with any other dealer with which it is affiliated, has total revenues of one hundred fifty thousand dollars or more derived from the business of buying, selling, or otherwise dealing in securities, and that at any time during such period has one hundred or more retail securities customers, shall be registered as a broker or dealer with the securities and exchange commission under the Securities Exchange Act of 1934, except the following entities:
(2) A dealer that enters into and is in compliance with an undertaking accepted by the division, in which the dealer agrees that it will not engage in any transaction involving the buying, selling, or otherwise dealing in securities with any natural person in this state, except for transactions involving either of the following:
(a) Securities of corporations or associations that have qualified for treatment as nonprofit organizations pursuant to section 501(c)(3) of the "Internal Revenue Code of 1986," 100 Stat. 2085, 26 U. S.C. A. 501, as amended;
(b) Securities or transactions that are described in divisions (A)(1) to (4) of this section.
(C) Every dealer that must be registered as a broker or dealer with the securities and exchange commission pursuant to division (B) of this section shall become so registered no later than ninety days after the date on which the dealer meets the requirements for such registration.
(D) The division by rule may exempt any dealer from complying with the licensing or registration requirements of this section, if the division finds that such licensing or registration is not necessary for the protection of investors or in the public interest.
(E) As used in division (B) of this section, "retail securities customer" means a person that purchases from or through or sells securities to or through a dealer, and that is not an officer, a director, a principal, a general partner, or an employee of, the dealer. Each of the following is deemed to be a single retail securities customer:
(1) A husband and wife;
(2) A minor child and the minor child's parent or legal guardian;
(3) A corporation, a partnership, an association or other unincorporated entity, a joint stock company, or a trust.
Amended by 131st General Assembly File No. TBD, HB 64, §101.01, eff. 9/29/2017.
Effective Date: 10-08-2001
(A) No person shall act as an investment adviser, unless one of the following applies:
(1) The person is licensed as an investment adviser by the division of securities; however, nothing in this section shall be construed to prohibit a person from being licensed by the division as both an investment adviser and a dealer or salesperson.
(2) The person is registered under section 203 of the "Investment Advisers Act of 1940," 15 U. S.C. 80b-3, as an investment adviser and is in compliance with the notice filing requirements of division (B) of this section.
(3) The person has no place of business in this state, and the person's only clients in this state are any of the following:
(a) Investment companies as defined in the Investment Company Act of 1940;
(b) Other investment advisers;
(e) Insurance companies subject to regulation under Title XXXIX [39] of the Revised Code and health insuring corporations regulated under Chapter 1751. of the Revised Code;
(f) Employee benefit plans with assets of not less than one million dollars;
(g) Government agencies or instrumentalities, whether acting for themselves or trustees with investment control;
(h) Other institutional investors as the division may designate by rule.
(4) The person has no place of business in this state, and during the preceding twelve-month period, the person has had not more than five clients, other than those described in division (A)(3) of this section, that are residents of this state.
(5) The person is a charitable organization, as defined in section 3(c)(10) of the "Investment Company Act of 1940," 54 Stat. 797, 15 U. S.C. 80a - 3(c) (10 ), as amended, or is a trustee, director, officer, employee, or volunteer of such a charitable organization acting within the scope of the person's employment or duties with such an organization, whose advice, analysis, or reports are provided only to one or more of the following:
(a) Any such charitable organization;
(b) A fund that is excluded from the definition of an investment company under section 3(c)(10)(B) of the "Investment Company Act of 1940," 54 Stat. 797, 15 U. S.C. 80a - 3(c) (10 )(B), as amended;
(c) A trust or other donative instrument described in section 3(c)(10)(B) of the "Investment Company Act of 1940," 54 Stat. 797, 15 U. S.C. 80a - 3(c) (10 )(B), as amended, or the trustees, administrators, settlors and potential settlors, or beneficiaries of any such trust or other instrument.
(6) The person is a plan described in subsection 414(e) of the "Internal Revenue Code of 1986," 100 Stat. 2085, 26 U. S.C. 414, as amended, any person or entity eligible to establish and maintain such a plan under Title 26 of the United States Code, or any trustee, director, officer, or employee of or volunteer for any such plan or person, if such person or entity, acting in such capacity, provides investment advice exclusively to, or with respect to, any plan, person, or entity, or any company, account, or fund that is excluded from the definition of an investment company under section 3(c)(14) of the "Investment Company Act of 1940," 54 Stat. 797, 15 U. S.C. 80a - 3(c) (14 ), as amended.
(1) No person who is registered under section 203 of the "Investment Advisers Act of 1940," 15 U. S.C. 80b-3, as an investment adviser shall act as an investment adviser, unless the person has done both of the following:
(a) Filed with the division a copy of those documents that have been filed by the investment adviser with the securities and exchange commission as specified in rules adopted by the division;
(b) Paid the notice filing fee specified in division (B) of section 1707.17 of the Revised Code.
(2) Upon compliance with division (B)(1) of this section, the division shall issue to the person an acknowledgment of notice filing.
(3) The notice filing and fee requirements of division (B)(1) of this section do not apply to a person described in division (A)(3), (4), (5), or (6) of this section.
Effective Date: 06-18-2002
(A) Every dealer required to be licensed under section 1707.14 of the Revised Code shall comply with all broker and dealer capital, custody, margin, financial responsibility, record-making, record-keeping, bonding, financial reporting, and operational reporting requirements contained in Section 15 of the "Securities Exchange Act of 1934," 48 Stat. 881, 15 U. S.C. 78o, as amended, and section 17 of the "Securities Exchange Act of 1934," 48 Stat. 881, 15 U. S.C. 78q, as amended, and the rules of the securities and exchange commission promulgated under those sections.
(1) Subject to division (B)(2) of this section, every dealer required to be licensed under section 1707.14 of the Revised Code shall file with the division of securities any report or document that rules adopted pursuant to section 15 of the "Securities Exchange Act of 1934," 48 Stat. 881, 15 U. S.C. 78o, as amended, and section 17 of the "Securities Exchange Act of 1934," 48 Stat. 881, 15 U. S.C. 78q, as amended, require federally registered brokers or dealers to file with the securities and exchange commission.
(2) Except as otherwise provided by rule or order of the division, if a dealer has filed a report or document described in division (B)(1) of this section with the securities and exchange commission, the document or report shall be deemed to also have been filed with the division.
(C) The division by order or rule may permit, but not require, a dealer that is not required by federal law or the law of this state to register as a broker or dealer with the securities and exchange commission to do both of the following:
(1) Elect one or more alternative financial and reporting provisions that are acceptable to the division. For purposes of division (C)(1) of this section, "alternative financial and reporting provision" means any capital, custody, margin, financial responsibility, record-making, record-keeping, bonding, financial reporting, or operational reporting provision that differs from those established by the securities and exchange commission.
(2) Elect an exemption, the scope of which is acceptable to the division, from all or a specified part of the capital, custody, margin, financial responsibility, record-making, record-keeping, bonding, financial reporting, or operational reporting requirements contained in section 15 of the "Securities Exchange Act of 1934," 48 Stat. 881, 15 U. S.C. 78o, as amended, or section 17 of the "Securities Exchange Act of 1934," 48 Stat. 881, 15 U. S.C. 78q, as amended, or the rules of the securities and exchange commission promulgated under those sections.
(D) For purposes of division (C) of this section, in determining an acceptable alternative financial and reporting provision and in determining the acceptable scope of any exemption that is elected, the division shall consider the size, scope, and type of business of the dealers who will be permitted to elect the provision or exemption and shall consider the protection of investors and customers of the electing dealers.
Effective Date: 10-12-2006
(A) Application for a dealer's license shall be made in accordance with this section and by filing with the division of securities the information, materials, and forms specified in rules adopted by the division, along with all of the following information:
(1) The name and address of the applicant;
(2) The location and addresses of the principal office and all other offices of the applicant;
(3) A general description of the business of the applicant done prior to the application, including a list of states in which the applicant is a licensed dealer.
(1) The division may investigate any applicant for a license, and may require such additional information as it deems necessary to determine the applicant's business repute and qualifications to act as a dealer in securities.
(2) If the application for any license involves investigation outside of this state, the applicant may be required by the division to advance sufficient funds to pay any of the actual expenses of such examination. An itemized statement of any such expenses which the applicant is required to pay shall be furnished the applicant by the division.
(C) The division shall by rule require one natural person who is a principal, officer, director, general partner, manager, or employee of a dealer to pass an examination designated by the division. Each dealer that is not a natural person shall notify the division of the name and relationship to the dealer of the natural person who has passed the examination on behalf of the dealer and who will serve as the designated principal on behalf of the dealer.
(D) Dealers shall employ as salespersons only those salespersons who are licensed under this chapter. If at any time a salesperson resigns or is discharged or a new salesperson is added, the dealer shall promptly notify the division.
(E) If the division finds that the applicant is of good business repute, appears qualified to act as a dealer in securities, and has fully complied with this chapter and rules adopted under this chapter by the division, the division, upon payment of the fees prescribed by division (B) of section 1707.17 of the Revised Code, shall issue to the applicant a license authorizing the applicant to act as a dealer.
Effective Date: 06-18-2002
(A) Application for an investment adviser's license shall be made in accordance with this section and by filing with the division of securities the information, materials, and forms specified in rules adopted by the division.
(1) The division may investigate any applicant for a license and may require any additional information as it considers necessary to determine the applicant's business repute and qualifications to act as an investment adviser.
(2) If the application for any license involves investigation outside of this state, the applicant may be required by the division to advance sufficient funds to pay any of the actual expenses of the examination. The division shall furnish the applicant with an itemized statement of such expenses that the applicant is required to pay.
(C) The division shall by rule require a natural person who is an applicant for an investment adviser's license to pass an examination designated by the division or achieve a specified professional designation.
(D) An investment adviser licensed under section 1707.141 of the Revised Code shall employ only investment adviser representatives licensed, or exempted from licensure, under section 1707.161 of the Revised Code.
(E) If the division finds that the applicant is of good business repute, appears to be qualified to act as an investment adviser, and has complied with this chapter and rules adopted under this chapter by the division, the division, upon payment of the fees prescribed by division (B) of section 1707.17 of the Revised Code, shall issue to the applicant a license authorizing the applicant to act as an investment adviser.
Effective Date: 06-18-2002
(A) Every salesperson of securities must be licensed by the division of securities and shall be employed, authorized, or appointed only by the licensed dealer specified in the salesperson's license. If the relationship between the salesperson and the dealer is severed, the salesperson's license shall be void.
(B) Application for a salesperson's license shall be made in accordance with this section and by filing with the division the information, materials, and forms specified in rules adopted by the division, along with all of the following information:
(1) The name and complete residence and business addresses of the applicant;
(2) The name of the dealer who is employing the applicant or who intends to employ the applicant;
(3) The applicant's age and education, and the applicant's experience in the sale of securities; whether the applicant has ever been licensed by the division, and if so, when; whether the applicant has ever been refused a license by the division; and whether the applicant has ever been licensed or refused a license or any similar permit by any division or commissioner of securities, whatsoever name known or designated, anywhere.
(C) The division shall by rule require an applicant to pass an examination designated by the division.
(D) If the division finds that the applicant is of good business repute, appears to be qualified to act as a salesperson of securities, and has fully complied with this chapter, and that the dealer named in the application is a licensed dealer, the division shall, upon payment of the fees prescribed by section 1707.17 of the Revised Code, issue a license to the applicant authorizing the applicant to act as salesperson for the dealer named in the application.
Effective Date: 09-16-2003
(A) No person shall act as an investment adviser representative, unless one of the following applies:
(1) The person is licensed as an investment adviser representative by the division of securities.
(2) The person is a natural person who is licensed as an investment adviser by the division, and does not act as an investment adviser representative for another investment adviser; however, a natural person who is licensed as an investment adviser by the division may act as an investment adviser representative for another investment adviser if the natural person also is licensed by the division, or is properly excepted from licensure, as an investment adviser representative of the other investment adviser.
(3) The person is employed by or associated with an investment adviser registered under section 203 of the "Investment Advisers Act of 1940," 15 U. S.C. 80b-3, and does not have a place of business in this state.
(4) The person is employed by or associated with an investment adviser that is excepted from licensure pursuant to division (A)(3), (4), (5), or (6) of section 1707.141 of the Revised Code or excepted from notice filing pursuant to division (B)(3) of section 1707.141 of the Revised Code.
(1) No investment adviser representative required to be licensed under this section shall act as an investment adviser representative for more than two investment advisers. An investment adviser representative that acts as an investment adviser representative for two investment advisers shall do so only after the occurrence of both of the following:
(a) Being properly licensed, or properly excepted from licensure under this section, as an investment adviser representative for both investment advisers;
(b) Complying with the requirements set forth in rules adopted by the division regarding consent of both investment advisers and notice.
(2) Nothing in this section shall be construed to prohibit a natural person from being licensed by the division as both an investment adviser and an investment adviser representative.
(3) Nothing in this section shall be construed to prohibit a natural person from being licensed by the division as both a salesperson and an investment adviser representative.
(4) Nothing in this section shall be construed to prohibit a natural person from being licensed by the division as both a dealer and an investment adviser representative.
(C) An investment adviser representative's license issued under this section shall not be effective during any period when the investment adviser representative is not employed by or associated with an investment adviser that is licensed by the division or that is in compliance with the notice filing requirements of division (B) of section 1707.141 of the Revised Code. Notice of the commencement and termination of the employment or association of an investment adviser representative licensed under this section shall be given to the division within thirty days after the commencement or termination by either of the following:
(1) The investment adviser, in the case of an investment adviser representative licensed under this section and employed by or associated with, or formerly employed by or associated with, an investment adviser licensed under section 1707.141 of the Revised Code;
(2) The investment adviser representative, in the case of an investment adviser representative licensed under this section and employed by or associated with, or formerly employed by or associated with, an investment adviser that is subject to the notice filings requirements of division (B) of section 1707.141 of the Revised Code.
(1) Application for an investment adviser representative license shall be made in accordance with this section and by filing with the division the information, materials, and forms specified in rules adopted by the division.
(2) The division shall by rule require an applicant to pass an examination designated by the division or achieve a specified professional designation.
(3) Prior to issuing the investment adviser representative license, the division may require the applicant to reimburse the division for the actual expenses incurred in investigating the applicant. An itemized statement of any such expenses that the applicant is required to pay shall be furnished to the applicant by the division.
(E) If the division finds that the applicant is of good business repute, appears to be qualified to act as an investment adviser representative, and has complied with sections 1707.01 to 1707.45 of the Revised Code and the rules adopted under those sections by the division, the division, upon payment of the fees prescribed by division (B) of section 1707.17 of the Revised Code, shall issue to the applicant a license authorizing the applicant to act as an investment adviser representative for the investment adviser, or investment advisers that are under common ownership or control, named in the application.
Effective Date: 06-18-2002
(A) No person shall act as a state retirement system investment officer unless the person is licensed as a state retirement system investment officer by the division of securities.
(B) No state retirement system investment officer shall act as a dealer, salesperson, investment advisor, or investment advisor representative.
Effective Date: 12-14-2004
(A) Application for a state retirement system investment officer's license shall be made in accordance with this section by filing with the division of securities the information, materials, and forms specified in rules adopted by the division.
(1) The division may investigate any applicant for a license and may require any additional information as it considers necessary to determine the applicant's business repute and qualifications to act as an investment officer.
(2) If the application for a state retirement system investment officer's license involves investigation outside of this state, the applicant may be required by the division to advance sufficient funds to pay any of the actual expenses of the investigation. The division shall furnish the applicant with an itemized statement of the expenses the applicant is required to pay.
(C) The division shall by rule require an applicant for a state retirement system investment officer's license to pass an examination designated by the division or achieve a specified professional designation unless the applicant meets both of the following requirements:
(1) Acts as a state retirement system investment officer on the effective date of this section;
(2) Has experience or equivalent education acceptable to the division.
(D) If the division finds that the applicant is of good business repute, appears to be qualified to act as a state retirement system investment officer, and has complied with this chapter and rules adopted under this chapter by the division, the division, on payment of the fees prescribed by division (B) of section 1707.17 of the Revised Code, shall issue to the applicant a license authorizing the applicant to act as a state retirement system investment officer.
Effective Date: 09-15-2004
(A) No person shall act as a bureau of workers' compensation chief investment officer unless the person is licensed as a bureau of workers' compensation chief investment officer by the division of securities.
(B) No bureau of workers' compensation chief investment officer shall act as a dealer, salesperson, investment advisor, or investment advisor representative.
Effective Date: 09-29-2005
(A) Application for a bureau of workers' compensation chief investment officer's license shall be made in accordance with this section by filing with the division of securities the information, materials, and forms specified in rules adopted by the division.
(B) The division may investigate any applicant for a license and may require any additional information as it considers necessary to determine the applicant's business repute and qualifications to act as a chief investment officer. If the application for a bureau of workers' compensation chief investment officer's license involves investigation outside of this state, the applicant may be required by the division to advance sufficient funds to pay any of the actual expenses of the investigation. The division shall furnish the applicant with an itemized statement of the expenses the applicant is required to pay.
(C) The division shall by rule require an applicant for a bureau of workers' compensation chief investment officer's license to pass an examination designated by the division or achieve a specified professional designation unless the applicant meets both of the following requirements:
(1) Acts as a bureau of workers' compensation chief investment officer on the effective date of this section;
(2) Has experience or education acceptable to the division.
(D) If the division finds that the applicant is of good business repute, appears to be qualified to act as a bureau of workers' compensation chief investment officer, and has complied with this chapter and rules adopted by the division under this chapter, the division, upon receipt of the fees prescribed by division (B) of section 1707.17 of the Revised Code, shall issue to the applicant a license authorizing the applicant to act as a bureau of workers' compensation chief investment officer.
Effective Date: 09-29-2005
(1) The license of every dealer in and salesperson of securities shall expire on the thirty-first day of December of each year, and may be renewed upon the filing with the division of securities of an application for renewal, and the payment of the fee prescribed in this section. The division shall give notice, without unreasonable delay, of its action on any application for renewal of a dealer's or salesperson's license.
(2) The license of every investment adviser and investment adviser representative licensed under section 1707.141 or 1707.161 of the Revised Code shall expire on the thirty-first day of December of each year. The licenses may be renewed upon the filing with the division of an application for renewal, and the payment of the fee prescribed in division (B) of this section. The division shall give notice, without unreasonable delay, of its action on any application for renewal.
(3) An investment adviser required to make a notice filing under division (B) of section 1707.141 of the Revised Code annually shall file with the division the notice filing and the fee prescribed in division (B) of this section, no later than the thirty-first day of December of each year.
(4) The license of every state retirement system investment officer licensed under section 1707.163 of the Revised Code and the license of a bureau of workers' compensation chief investment officer issued under section 1707.165 of the Revised Code shall expire on the thirtieth day of June of each year. The licenses may be renewed on the filing with the division of an application for renewal, and the payment of the fee prescribed in division (B) of this section. The division shall give notice, without unreasonable delay, of its action on any application for renewal.
(1) The fee for each dealer's license, and for each annual renewal thereof, shall be two hundred dollars.
(2) The fee for each salesperson's license, and for each annual renewal thereof, shall be sixty dollars.
(3) The fee for each investment adviser's license, and for each annual renewal thereof, shall be one hundred dollars.
(4) The fee for each investment adviser notice filing required by division (B) of section 1707.141 of the Revised Code shall be one hundred dollars.
(5) The fee for each investment adviser representative's license, and for each annual renewal thereof, shall be thirty-five dollars.
(6) The fee for each state retirement system investment officer's license, and for each annual renewal thereof, shall be fifty dollars.
(7) The fee for a bureau of workers' compensation chief investment officer's license, and for each annual renewal thereof, shall be fifty dollars.
(C) A dealer's, salesperson's, investment adviser's, investment adviser representative's, bureau of workers' compensation chief investment officer's, or state retirement system investment officer's license may be issued at any time for the remainder of the calendar year. In that event, the annual fee shall not be reduced.
(D) The division may, by rule or order, waive, in whole or in part, any of the fee requirements of this section for any person or class of persons if, in the same calendar year, the person or class of persons is required to pay an additional fee as a result of changes in federal law and regulations implemented under Title IV of the "Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010," 124 Stat. 1576 (2010), 15 U. S.C. 80b - 3a(a), under which a person or class of persons formerly subject to regulation under the United States securities and exchange commission is subject to state regulation under Chapter 1707. of the Revised Code.
Amended by 129th General AssemblyFile No.28, HB 153, §101.01, eff. 9/29/2011.
Amended by 128th General AssemblyFile No.9, HB 1, §101.01, eff. 10/16/2009.
Effective Date: 06-18-2002; 09-15-2004; 09-29-2005
(1) If a partnership licensed as a dealer is terminated under the laws of the state where the partnership is organized, or by death, resignation, withdrawal, or addition of a general partner, the license of the partnership shall be automatically extended for a period of thirty days after the termination. The license of the partnership and the licenses of its salespersons may be transferred to the successor partnership within that period if the division of securities finds that the successor partnership is substantially similar to its predecessor partnership, and if an application for transfer of license has been filed. The fee for such a transfer shall be fifty dollars, plus fifteen dollars for every salesperson's license that is transferred.
(2) If a partnership licensed as an investment adviser is terminated under the laws of the state where the partnership is organized, or by death, resignation, withdrawal, or addition of a general partner, the license of the partnership shall be automatically extended for a period of thirty days after the termination. The license of the partnership shall, and the licenses of its investment adviser representatives may, be transferred to the successor partnership within that period if the division finds that the successor partnership is substantially similar to its predecessor partnership, and if an application for transfer of license has been filed. The fee for such transfer shall be fifty dollars, plus fifteen dollars for every investment adviser representative's license that is transferred.
(1) If a licensed dealer changes its business form, reincorporates, or by merger or otherwise becomes a different person, as person is defined in section 1707.01 of the Revised Code, upon application the division may transfer the dealer's license and the licenses of its salespersons to the successor entity, if the division finds that the successor entity is substantially similar to the predecessor entity. The fee for such a transfer shall be fifty dollars plus fifteen dollars for every salesperson's license transferred.
(2) If a licensed investment adviser changes its business form, reincorporates, or by merger or otherwise becomes a different person, as person is defined in section 1707.01 of the Revised Code, upon application, the division may transfer the investment adviser license and the licenses of its investment adviser representatives to the successor entity, if the division finds that the successor entity is substantially similar to the predecessor entity. The fee for the transfer shall be fifty dollars plus fifteen dollars for every investment adviser representative's license transferred.
Amended by 128th General AssemblyFile No.9, HB 1, §101.01, eff. 10/16/2009.
Effective Date: 03-18-1999
(A) An original license, or a renewal thereof, applied for by a dealer or salesperson of securities, or by an investment adviser, investment adviser representative, bureau of workers' compensation chief investment officer, or state retirement system investment officer, may be refused, and any such license granted may be suspended and, after notice and hearing in accordance with Chapter 119. of the Revised Code, may be revoked, by the division of securities, if the division determines that the applicant or the licensed dealer, salesperson, investment adviser, investment adviser representative, bureau of workers' compensation chief investment officer, or state retirement system investment officer:
(1) Is not of good business repute;
(2) Is conducting an illegitimate or fraudulent business;
(3) Is, in the case of a dealer or investment adviser, insolvent;
(4) Has knowingly violated any provision of sections 1707.01 to 1707.45 of the Revised Code, or any regulation or order made thereunder;
(5) Has knowingly made a false statement of a material fact or an omission of a material fact in an application for a license, in a description or application that has been filed, or in any statement made to the division under such sections;
(6) Has refused to comply with any lawful order or requirement of the division under section 1707.23 of the Revised Code;
(7) Has been guilty of any fraudulent act in connection with the sale of any securities or in connection with acting as an investment adviser, investment adviser representative, bureau of workers' compensation chief investment officer, or state retirement system investment officer;
(8) Conducts business in purchasing or selling securities at such variations from the existing market as in the light of all the circumstances are unconscionable;
(9) Conducts business in violation of such rules and regulations as the division prescribes for the protection of investors, clients, or prospective clients;
(a) Has failed to furnish to the division any information with respect to the purchases or sales of securities within this state that may be reasonably requested by the division as pertinent to the protection of investors in this state.
(b) Has failed to furnish to the division any information with respect to acting as an investment adviser, investment adviser representative, bureau of workers' compensation chief investment officer, or state retirement system investment officer within this state that may be reasonably requested by the division.
(B) For the protection of investors the division may prescribe reasonable rules defining fraudulent, evasive, deceptive, or grossly unfair practices or devices in the purchase or sale of securities.
(C) For the protection of investors, clients, or prospective clients, the division may prescribe reasonable rules regarding the acts and practices of an investment adviser or an investment adviser representative.
(D) Pending any investigation or hearing provided for in sections 1707.01 to 1707.45 of the Revised Code, the division may order the suspension of any dealer's, salesperson's, investment adviser's, investment adviser representative's, bureau of workers' compensation chief investment officer's, or state retirement system investment officer's license by notifying the party concerned of such suspension and the cause for it. If it is a salesperson whose license is suspended, the division shall also notify the dealer employing the salesperson. If it is an investment adviser representative whose license is suspended, the division also shall notify the investment adviser with whom the investment adviser representative is employed or associated. If it is a state retirement system investment officer whose license is suspended, the division shall also notify the state retirement system with whom the state retirement system investment officer is employed. If it is a bureau of workers' compensation chief investment officer whose license is suspended, the division shall also notify the bureau of workers' compensation.
(1) The suspension or revocation of the dealer's license suspends the licenses of all the dealer's salespersons.
(2) The suspension or revocation of the investment adviser's license suspends the licenses of all the investment adviser's investment adviser representatives. The suspension or revocation of an investment adviser's registration under section 203 of the "Investment Advisers Act of 1940," 15 U. S.C. 80b-3, suspends the licenses of all the investment adviser's investment adviser representatives.
(F) It is sufficient cause for refusal, revocation, or suspension of the license in case of a partnership, partnership association, corporation, or unincorporated association if any general partner of the partnership, manager of the partnership association, or executive officer of the corporation or unincorporated association is not of good business repute or has been guilty of any act or omission which would be cause for refusing or revoking the license of an individual dealer, salesperson, investment adviser, or investment adviser representative.
Effective Date: 10-08-2001; 09-15-2004; 09-29-2005
(1) The division of securities may adopt, amend, and rescind such rules, forms, and orders as are necessary to carry out sections 1707.01 to 1707.45 of the Revised Code, including rules and forms governing registration statements, applications, and reports, and defining any terms, whether or not used in sections 1707.01 to 1707.45 of the Revised Code, insofar as the definitions are not inconsistent with these sections. For the purpose of rules and forms, the division may classify securities, persons, and matters within its jurisdiction, and prescribe different requirements for different classes.
(2) Notwithstanding sections 121.71 to 121.76 of the Revised Code, the division may incorporate by reference into its rules any statute enacted by the United States congress or any rule, regulation, or form promulgated by the securities and exchange commission, or by another federal agency, in a manner that also incorporates all future amendments to the statute, rule, regulation, or form.
(B) No rule, form, or order may be made, amended, or rescinded unless the division finds that the action is necessary or appropriate in the public interest or for the protection of investors, clients, prospective clients, state retirement systems, or the workers' compensation system and consistent with the purposes fairly intended by the policy and provisions of sections 1707.01 to 1707.45 of the Revised Code. In prescribing rules and forms and in otherwise administering sections 1707.01 to 1707.45 of the Revised Code, the division may cooperate with the securities administrators of the other states and the securities and exchange commission with a view of effectuating the policy of this section to achieve maximum uniformity in the form and content of registration statements, applications, reports, and overall securities regulation wherever practicable.
(C) The division may by rule or order prescribe:
(1) The form and content of financial statements required under sections 1707.01 to 1707.45 of the Revised Code;
(2) The circumstances under which consolidated financial statements will be filed;
(3) Whether any required financial statements shall be certified by independent or certified public accountants. All financial statements shall be prepared in accordance with generally accepted accounting practices.
(D) All rules and forms of the division shall be published; and in addition to fulfilling the requirements of Chapter 119. of the Revised Code, the division shall prescribe, and shall publish and make available its rules regarding the sale of securities, the administration of sections 1707.01 to 1707.45 of the Revised Code, and the procedure and practice before the division.
(1) No provision of sections 1707.01 to 1707.45 of the Revised Code imposing any liability applies to any act done or omitted in good faith in conformity with any rule, form, or order of the division of securities, notwithstanding that the rule, form, or order may later be amended or rescinded or be determined by judicial or other authority to be invalid for any reason, except that the issuance of an order granting effectiveness to a registration under section 1707.09 or 1707.091 of the Revised Code for the purposes of this division shall not be deemed an order other than as the establishment of the fact of registration.
(2) No provision of sections 1707.01 to 1707.45 of the Revised Code imposing any liability, penalty, sanction, or disqualification applies to any act done or omitted in good faith in conformity with either of the following:
(a) Any provision of sections 1707.01 to 1707.45 of the Revised Code that incorporates by reference a federal statute, rule, regulation, or form;
(b) Any rule, form, or order of the division that incorporates by reference a federal statute, rule, regulation, or form.
Division (E)(2) of this section applies notwithstanding that the incorporation by reference, or any application of the incorporated provision, is later determined by judicial or other authority to be unconstitutional or invalid for any reason.
Effective Date: 06-18-2002; 09-15-2004; 09-29-2005; 10-12-2006
Notwithstanding any provision of the Revised Code, if the "Securities Act of 1933," the "Securities Exchange Act of 1934," the "Investment Company Act of 1940," the "Investment Advisers Act of 1940," and any amendments to any of those federal acts, if any rule, regulation, release, statement, or position promulgated or adopted under the authority of any of those federal acts, and any amendments to those federal acts, or if any rule, regulation, or guideline of a self-regulatory organization registered under the "Securities Exchange Act of 1934," and any amendments to that act, contains a provision that is not contained in this chapter or the rules adopted under this chapter and that affects any matter within the scope of this chapter, the division of securities by rule may promulgate a similar provision.
A rule adopted under the authority granted in this section becomes effective on the later of the date on which the division issues the rule or the date on which the federal statute or the rule, regulation, release, statement, or position on which the division's rule is based becomes effective. The division, upon thirty days' written notice, may revoke any rule adopted under the authority granted in this section. A rule adopted under the authority granted in this section, and not revoked by the commissioner of securities, lapses and has no further force and effect eighteen months after the rule's effective date.
Effective Date: 06-18-2002
In so far as any information required to be filed with the division of securities under sections 1707.01 to 1707.45. inclusive, of the Revised Code, is contained in a registration statement filed with the securities and exchange commission of the United States and such registration statement is in effect, such required information may, with the consent of the division, be furnished by filing with the division a copy of such registration statement together with an affidavit of an interested party that it is in effect.
Effective Date: 10-01-1953
Whenever a dealer's, salesperson's, investment adviser's, investment adviser representative's, bureau of workers' compensation chief investment officer's, or state retirement system investment officer's license has been refused, suspended, or revoked, or a renewal thereof has been denied, by the division of securities, or whenever the division has refused to qualify securities or has suspended or revoked the registration of any particular security by description or by qualification, or the right to buy, sell, or deal in any particular security whether it is registered or qualified or exempt, or whether the transactions in it are registered or exempt, the aggrieved party may appeal in accordance with Chapter 119. of the Revised Code.
An order sustaining the refusal of the division to grant or renew a dealer's, salesperson's, investment adviser's, investment adviser representative's, bureau of workers' compensation chief investment officer's, or state retirement system investment officer's license or to grant qualification of securities, or an order sustaining the division in suspending or revoking a dealer's, salesperson's, investment adviser's, investment adviser representative's, bureau of workers' compensation chief investment officer's, or state retirement system investment officer's license, the registration of any particular security by description or by qualification, or the right to buy, sell, or deal in any particular security, shall not bar, after ten days from the order, a new registration by description, or a new application of the plaintiff for such a license or qualification or for a withdrawal of a revocation or suspension; nor shall an order in favor of the plaintiff prevent the division, after proper notice and hearing, from thereafter revoking or suspending such license, registration, or right to buy, sell, or deal in a particular security, for any proper cause which may, after the order, accrue or be discovered.
Effective Date: 03-18-1999; 09-15-2004; 09-29-2005
Whenever it appears to the division of securities, from its files, upon complaint, or otherwise, that any person has engaged in, is engaged in, or is about to engage in any practice declared to be illegal or prohibited by this chapter or rules adopted under this chapter by the division, or defined as fraudulent in this chapter or rules adopted under this chapter by the division, or any other deceptive scheme or practice in connection with the sale of securities, or acting as a dealer, a salesperson, an investment adviser, investment adviser representative, bureau of workers' compensation chief investment officer, or state retirement system investment officer or when the division believes it to be in the best interests of the public and necessary for the protection of investors, the division may do any of the following:
(A) Require any person to file with it, on such forms as it prescribes, an original or additional statement or report in writing, under oath or otherwise, as to any facts or circumstances concerning the issuance, sale, or offer for sale of securities within this state by the person, as to the person's acts or practices as a dealer, a salesperson, an investment adviser, investment adviser representative, bureau of workers' compensation chief investment officer, or state retirement system investment officer within this state, and as to other information as it deems material or relevant thereto;
(B) Examine any investment adviser, investment adviser representative, state retirement system investment officer, bureau of workers' compensation chief investment officer, or any seller, dealer, salesperson, or issuer of any securities, and any of their agents, employees, partners, officers, directors, members, or shareholders, wherever located, under oath; and examine and produce records, books, documents, accounts, and papers as the division deems material or relevant to the inquiry;
(C) Require the attendance of witnesses, and the production of books, records, and papers, as are required either by the division or by any party to a hearing before the division, and for that purpose issue a subpoena for any witness, or a subpoena duces tecum to compel the production of any books, records, or papers. The subpoena shall be served by personal service or by certified mail, return receipt requested. If the subpoena is returned because of inability to deliver, or if no return is received within thirty days of the date of mailing, the subpoena may be served by ordinary mail. If no return of ordinary mail is received within thirty days after the date of mailing, service shall be deemed to have been made. If the subpoena is returned because of inability to deliver, the division may designate a person or persons to effect either personal or residence service upon the witness. The person designated to effect personal or residence service under this division may be the sheriff of the county in which the witness resides or may be found or any other duly designated person. The fees and mileage of the person serving the subpoena shall be the same as those allowed by the courts of common pleas in criminal cases, and shall be paid from the funds of the division. Fees and mileage for the witness shall be determined under section 119.094 of the Revised Code, and shall be paid from the funds of the division upon request of the witness following the hearing.
(D) Initiate criminal proceedings under section 1707.042 or 1707.44 of the Revised Code or rules adopted under those sections by the division by laying before the prosecuting attorney of the proper county any evidence of criminality which comes to its knowledge; and in the event of the neglect or refusal of the prosecuting attorney to prosecute such violations, or at the request of the prosecuting attorney, the division shall submit the evidence to the attorney general, who may proceed in the prosecution with all the rights, privileges, and powers conferred by law on prosecuting attorneys, including the power to appear before grand juries and to interrogate witnesses before such grand juries.
(E) Require any dealers immediately to furnish to the division copies of prospectuses, circulars, or advertisements respecting securities that they publish or generally distribute, or require any investment advisers immediately to furnish to the division copies of brochures, advertisements, publications, analyses, reports, or other writings that they publish or distribute;
(F) Require any dealers to mail to the division, prior to sale, notices of intention to sell, in respect to all securities which are not exempt under section 1707.02 of the Revised Code, or which are sold in transactions not exempt under section 1707.03 or 1707.04 of the Revised Code;
(G) Issue and cause to be served by certified mail upon all persons affected an order requiring the person or persons to cease and desist from the acts or practices appearing to the division to constitute violations of this chapter or rules adopted under this chapter by the division. The order shall state specifically the section or sections of this chapter or the rule or rules adopted under this chapter by the division that appear to the division to have been violated and the facts constituting the violation. If after the issuance of the order it appears to the division that any person or persons affected by the order have engaged in any act or practice from which the person or persons shall have been required, by the order, to cease and desist, the director of commerce may apply to the court of common pleas of any county for, and upon proof of the validity of the order of the division, the delivery of the order to the person or persons affected, and of the illegality and the continuation of the acts or practices that are the subject of the order, the court may grant an injunction implementing the order of the division.
(H) Issue and initiate contempt proceedings in this state regarding subpoenas and subpoenas duces tecum at the request of the securities administrator of another state, if it appears to the division that the activities for which the information is sought would violate this chapter if the activities had occurred in this state.
(I) The remedies provided by this section are cumulative and concurrent with any other remedy provided in this chapter, and the exercise of one remedy does not preclude or require the exercise of any other remedy.
Effective Date: 09-16-2003; 09-15-2004; 09-29-2005; 2008 HB525 07-01-2009
In case any person fails to file any statement or report, to obey any subpoena, to give testimony, to answer questions, or to produce any books, records, or papers as required by the division of securities under sections 1707.01 to 1707.45. inclusive, of the Revised Code, the court of common pleas of any county in the state, upon application made to it by the division and upon proof made to it by the division of such failure, may make an order awarding process of subpoena or subpoena duces tecum for such person to appear and testify before the division, and may order any person to give testimony and answer questions, and to produce books, records, or papers, as required by the division. Upon the filing of such order in the office of the clerk of the court of common pleas, said clerk, under the seal of said court, shall issue process of subpoena for such person to appear before the division at a time and place named in such subpoena, and thereafter from day to day until the examination of such person is completed. Such subpoena may contain a direction that such witness bring with him to such examination any books, records, or papers mentioned in such subpoena. Said clerk shall also issue, under the seal of said court, such other orders, in reference to such examination, appearance, and production of books, records, or papers, as said court directs. If any person so summoned by subpoena fails to obey such subpoena, to give testimony, to answer questions as required, to produce any books, records, or papers so required, or to obey an order of the court, the court, on motion supported by proof, may order an attachment for contempt to be issued against the person charged with disobedience of any order or injunction issued by such court under sections 1707.01 to 1707.45. inclusive, of the Revised Code. If such person is brought before the court by virtue of said attachment, and if upon a hearing such disobedience appears, such court may order such offender to be committed and kept in close custody.
Effective Date: 10-01-1953
In case any person fails to file any statement or report required by sections 1707.01 to 1707.45 of the Revised Code, to obey any subpoena the issuance of which is provided for in those sections, or to produce books, records, or papers, give testimony, or answer questions, as required by those sections, the director of commerce may apply to a court of common pleas of any county for, and upon proof of such failure the court may grant, an injunction restraining the acting as an investment adviser, investment adviser representative, bureau of workers' compensation chief investment officer, or state retirement system investment officer, or the issuance, sale, or offer for sale of any securities by the person or by its agents, employees, partners, officers, directors, or shareholders, until such failure has been remedied and other relief as the facts may warrant has been had. Such injunctive relief is available in addition to the other remedies provided for in sections 1707.01 to 1707.45 of the Revised Code.
Where the person refusing to comply with such order of court is an issuer of securities, the court may enjoin the sale by any dealer of any securities of the issuer, and the division of securities may revoke the qualification of the securities of the issuer, or suspend or revoke the sale of any securities of the issuer which have been registered by description, and such securities shall not thereafter be sold by any dealer until the order of the court or of the division is withdrawn.
Effective Date: 03-18-1999; 09-15-2004; 09-29-2005
Whenever it appears to the division of securities, upon complaint or otherwise, that any person has engaged in, is engaging in, or is about to engage in, any deceptive, fraudulent, or manipulative act, practice, or transaction, in violation of sections 1707.01 to 1707.45 of the Revised Code, the director of commerce may apply to a court of common pleas of any county in this state for, and upon proof of any of such offenses such court shall grant an injunction restraining such person and its agents, employees, partners, officers, directors, and shareholders from continuing, engaging in, or doing any acts in furtherance of, such acts, practices, or transactions, and may order such other equitable relief as the facts warrant.
Effective Date: 11-19-1982
(A) If a court of common pleas grants an injunction pursuant to section 1707.26 of the Revised Code, after consultation with the attorney general the director of commerce may request that court to order the defendant or defendants that are subject to the injunction to make restitution or rescission to any purchaser or holder of securities damaged by the defendant's or defendants' violation of any provision of sections 1707.01 to 1707.45 of the Revised Code.
(B) If the court of common pleas is satisfied with the sufficiency of the director's request for restitution or rescission under division (A) of this section and with the sufficiency of the proof of a substantial violation of any provision of sections 1707.01 to 1707.45 of the Revised Code, or of the use of any act, practice, or transaction declared to be illegal or prohibited or defined as fraudulent by those sections or rules adopted under those sections by the division of securities, to the material prejudice of a purchaser or holder of securities, the court may order the defendant or defendants subject to the injunction to make restitution or rescission to any purchaser or holder of securities damaged by the defendant's or defendants' violation of sections 1707.01 to 1707.45 of the Revised Code.
(C) A court order granting restitution or rescission based upon a request made pursuant to division (A) of this section shall meet the requirements of division (B) of this section and may not be based solely upon a final order issued by the division of securities pursuant to Chapter 119. of the Revised Code or upon an action to enforce a final order issued by the division pursuant to that chapter. Notwithstanding the foregoing provision, a request for restitution or rescission pursuant to division (A) of this section may concern the same acts, practices, or transactions that were, or may later be, the subject of a division of securities action for a violation of any provision of sections 1707.01 to 1707.45 of the Revised Code. If a request for restitution or rescission pursuant to division (A) of this section concerns the same acts, practices, or transactions that were the subject of a final order issued by the division of securities pursuant to Chapter 119. of the Revised Code, the court shall review the request in accordance with division (B) of this section, and the standard of review in section 119.12 of the Revised Code shall not apply to the request.
(D) No purchaser or holder of securities who is entitled to restitution or rescission under this section shall recover, pursuant to this section or any other proceeding, a total amount in excess of the person's purchase price for the securities sold in violation of sections 1707.01 to 1707.45 of the Revised Code.
(1) If a court of common pleas grants an injunction pursuant to section 1707.26 of the Revised Code against any state retirement system investment officer, after consultation with the attorney general, the director of commerce may request that court to order the state retirement system investment officer or officers that are subject to the injunction to make restitution to the state retirement system damaged by the state retirement system investment officer's or officers' violation of any provision of sections 1707.01 to 1707.45 of the Revised Code.
(2) If the court of common pleas is satisfied with the sufficiency of the director's request for restitution under division (E)(1) of this section and with the sufficiency of the proof of a substantial violation of any provision of sections 1707.01 to 1707.45 of the Revised Code, or of the use of any act, practice, or transaction declared to be illegal or prohibited or defined as fraudulent by those sections or rules adopted under those sections by the division of securities, to the material prejudice of a state retirement system, the court may order the state retirement system investment officer or officers subject to the injunction to make restitution to the state retirement system damaged by the state retirement system investment officer's or officers' violation of sections 1707.01 to 1707.45 of the Revised Code. A request for restitution pursuant to division (E)(1) of this section may concern the same acts, practices, or transactions that were, or may later be, the subject of a division of securities action for a violation of any provision of section 1707.01 to 1707.45 of the Revised Code.
(1) If a court of common pleas grants an injunction pursuant to section 1707.26 of the Revised Code against a bureau of workers' compensation chief investment officer, after consultation with the attorney general, the director of commerce may request that court to order the bureau of workers' compensation chief investment officer who is subject to the injunction to make restitution to the bureau of workers' compensation damaged by the bureau of workers' compensation chief investment officer's violation of any provision of sections 1707.01 to 1707.45 of the Revised Code.
(2) If the court of common pleas is satisfied with the sufficiency of the director's request for restitution under division (F)(1) of this section and with the sufficiency of the proof of a substantial violation of any provision of sections 1707.01 to 1707.45 of the Revised Code, or of the use of any act, practice, or transaction declared to be illegal or prohibited or defined as fraudulent by those sections or rules adopted under those sections by the division of securities, to the material prejudice of the bureau of workers' compensation, the court may order the bureau of workers' compensation chief investment officer subject to the injunction to make restitution to the bureau of workers' compensation damaged by the bureau of workers' compensation chief investment officer's violation of sections 1707.01 to 1707.45 of the Revised Code. A request for restitution pursuant to division (F)(1) of this section may concern the same acts, practices, or transactions that were, or may later be, the subject of a division of securities action for a violation of any provision of section 1707.01 to 1707.45 of the Revised Code.
Effective Date: 09-16-2003; 09-15-2004; 09-29-2005
If the court of common pleas is satisfied with the sufficiency of the application for a receivership, and of the sufficiency of the proof of substantial violation of sections 1707.01 to 1707.45 of the Revised Code, or of the use of any act, practice, or transaction declared to be illegal or prohibited, or defined as fraudulent by those sections or rules adopted under those sections by the division of securities, to the material prejudice of a purchaser or holder of securities, or client of an investment adviser or investment adviser representative, the court may appoint a receiver, for any person so violating sections 1707.01 to 1707.45 of the Revised Code or rules adopted under those sections by the division, with power to sue for, collect, receive, and take into the receiver's possession all the books, records, and papers of the person and all rights, credits, property, and choses in action acquired by the person by means of any such act, practice, or transaction, and also all property with which the property has been mingled, if the property cannot be identified in kind because of the commingling, and with power to sell, convey, and assign the property, and to hold and dispose of the proceeds under the direction of the court of common pleas. The court shall have jurisdiction of all questions arising in the proceedings and may make orders and decrees therein as justice and equity require.
Effective Date: 03-18-1999
No prosecution or action by the division of securities or the director of commerce for a violation of any provision of sections 1707.01 to 1707.45 of the Revised Code shall bar any prosecution or action by the division of securities or the director of commerce, or be barred by any prosecution or other action, for the violation of any other provision of any of those sections or of any other statute; but prosecutions and actions by the division of securities or the director of commerce for a violation of any provision of sections 1707.01 to 1707.45 of the Revised Code must be commenced within five years after the commission of the alleged violation.
Effective Date: 09-16-2003
In any prosecution brought under sections 1707.01 to 1707.45 of the Revised Code, except prosecutions brought for violation of division (A) of section 1707.042 of the Revised Code, the accused shall be deemed to have had knowledge of any matter of fact, where in the exercise of reasonable diligence, he should, prior to the alleged commission of the offense in question, have secured such knowledge.
Effective Date: 11-19-1982
In any prosecution, action, or proceeding based upon sections 1707.01 to 1707.45. inclusive, of the Revised Code, a certificate signed by the division of securities, showing the filing of or the failure to file any statement, description, or application required by such sections, shall constitute prima-facie evidence of such filing or of such failure to file, and shall be admissible in evidence in any action at law or in equity to enforce sections 1707.01 to 1707.45. inclusive, of the Revised Code, or to prosecute violations of such sections.
Effective Date: 10-01-1953
Copies of any statement and documents filed in the office of the division of securities and of any records of the division, if such copies are certified to by the division, shall be admissible in any prosecution, action, or proceeding based upon sections 1707.01 to 1707.45. inclusive, of the Revised Code, to the same effect as the originals of such statements, documents, or records would be.
Effective Date: 10-01-1953
If an issuer of securities is incorporated or organized to make any insurance named in Title XXXIX[39] of the Revised Code, the superintendent of insurance shall, for all the purposes of sections 1707.01 to 1707.45. inclusive, of the Revised Code, be substituted for the division of securities and the issuer and the beneficial owners of shares thereof shall be subject to section 3901.31 of the Revised Code. The superintendent of insurance shall have over any company disposing or attempting to dispose of any of its securities within this state the powers of regulation, supervision, and examination conferred on him by law, with reference to companies licensed to transact the business of insurance within this state.
No person shall, for the purpose of organizing or promoting any insurance company, or of assisting in the sale of the securities of any insurance company after its organization, dispose or offer to dispose, within this state, of any such securities, unless the contract of subscription or disposal is in writing and contains a provision substantially in the following language:
No sum shall be used for commission, promotion, and organization expenses on account of any share of stock in this company in excess of. per cent of the amount actually paid upon separate subscriptions, and the remainder of such payment shall be invested as authorized by the law governing such company and shall be held by the organizers of such company before organization, and by its directors and officers after organization, as bailees for the subscriber, to be used only in the conduct of the business of such company after the company has been licensed and authorized for such business by proper authority.
In lieu of "in excess of. per cent of the amount actually paid upon separate subscriptions," the language of such contract may be, ". dollars per share from every fully paid subscription"; and in lieu of "organizers" it may be "trustees" if such payments are to be held by trustees.
Funds and securities held by such organizers, trustees, directors, or officers, as bailees, shall be deposited with a bank or trust company of this state, or invested as provided in sections 3925.05 and 3925.08 of the Revised Code, until such company has been licensed to transact the business of insurance in this state.
The amount of such commission, promotion, and organization expenses shall in no case exceed fifteen per cent of the amount actually received upon the subscriptions; except that in the case of joint-stock life insurance companies and joint-stock insurance companies other than life, the amount of such commission, promotion, and organization expenses shall in no case exceed ten per cent of the amount actually received upon the subscriptions.
Effective Date: 11-11-1965
Effective Date: 09-11-1985
(A) Sections 1707.01 to 1707.45 of the Revised Code do not apply to the sale of warehouse receipts for intoxicating liquor to distillers, to rectifiers, or to any person engaged in the business of dealing in warehouse receipts.
(B) Warehouse receipts for intoxicating liquor may be sold in this state in accord with and upon compliance with sections 1707.01 to 1707.45 of the Revised Code.
Effective Date: 04-11-1985
All securities which were "certificated" by the division of securities before July 22, 1929, are, if the "certification" remained unrevoked on such date, qualified for all purposes under sections 1707.01 to 1707.45. inclusive, of the Revised Code.
All securities authorized to be sold by reason of the filing of information relative thereto before July 22, 1929, shall for all purposes be deemed registered by description under such sections, but the division shall have the same power to require further information with respect to the further sale of such securities as with respect to the further sale of securities registered by description or by qualification under sections 1707.01 to 1707.45. inclusive, of the Revised Code.
Effective Date: 10-01-1953
(A) There is hereby created in the division of securities a position to be known as attorney-inspector, which shall be held only by an attorney at law. The duties of this position are to investigate and report upon all complaints and alleged violations of this chapter or rules adopted under this chapter by the division and to represent the division in prosecutions and other matters arising from such complaints and alleged violations.
The office of the attorney-inspector is hereby designated a criminal justice agency in investigating reported violations of law relating to securities and investment advice, and as such is authorized by this state to apply for access to the computerized databases administered by the national crime information center or the law enforcement automated data system in Ohio, and to other computerized databases administered for the purpose of making criminal justice information accessible to state criminal justice agencies.
(B) There is hereby created in the division of securities two positions to be known as control-bid attorneys, which shall be held only by attorneys at law. The duties of these positions are to investigate and report upon all matters relating to control-bids and related matters and to represent the division in the regulatory matters arising under the Ohio control-bid law.
(C) The attorney-inspector and each control-bid attorney shall be paid at a rate not less than pay range 47 set out in schedule E-2 of section 124.152 of the Revised Code, to be paid as other operating expenses of the division.
Effective Date: 09-13-1999
(A) All fees and charges collected under this chapter shall be paid into the state treasury to the credit of the division of securities fund, which is hereby created. All expenses of the division of securities, other than those specified in division (B) of this section, shall be paid from the fund.
The fund shall be assessed a proportionate share of the administrative costs of the department of commerce in accordance with procedures prescribed by the director of commerce and approved by the director of budget and management. The assessments shall be paid from the division of securities fund to the division of administration fund.
If moneys in the division of securities fund are determined by the director of budget and management and the director of commerce to be in excess of those necessary to defray all the expenses in any fiscal year, the director of budget and management shall transfer the excess to the general revenue fund.
(B) There is hereby created in the state treasury the division of securities investor education and enforcement expense fund, which shall consist of all money received in settlement of any violation of this chapter and any cash transfers. Money in the fund shall be used to pay expenses of the division of securities relating to education or enforcement for the protection of securities investors and the public. The division may adopt rules pursuant to section 1707.20 of the Revised Code that establish what qualifies as such an expense.
Amended by 128th General AssemblyFile No.9, HB 1, §101.01, eff. 7/17/2009.
Effective Date: 10-11-1994
The issuance or sale of any security in violation of sections 1707.01 to 1707.45. inclusive, of the Revised Code, does not invalidate such security; but the rights of persons defrauded by any such issuance or sale shall not be impaired.
Effective Date: 10-01-1953
When any securities have been sold without compliance with sections 1707.01 to 1707.45 of the Revised Code, or any former law in force at the time of such sale, any interested person may apply in writing to the division of securities for the qualification of such securities under such sections. If it appears to the division that no person has been defrauded, prejudiced, or damaged by such noncompliance or sale and that no person will be defrauded, prejudiced, or damaged by such qualification, the division may permit such securities to be so qualified upon the payment of a fee of one hundred dollars plus a fee of one-fifth of one per cent of the aggregate price at which the securities have been sold in this state, which fee shall in no case be less than one hundred dollars nor more than two thousand dollars. In addition, the division may require the applicant to advance sufficient funds to pay the actual expenses of an examination or investigation by the division, whether to be conducted in this state or outside this state. An itemized statement of such expenses shall be furnished to the applicant.
Such qualification shall estop the division from proceeding under division (D) of section 1707.23 of the Revised Code against anyone who has violated division (C)(1) of section 1707.44 of the Revised Code for acts within the scope of the application, or from proceeding with administrative action pursuant to section 1707.13 of the Revised Code.
Effective Date: 04-11-1985; 09-15-2004
When any securities have been sold in reliance upon division (Q), (W), (X), or (Y) of section 1707.03 of the Revised Code, section 1707.08 of the Revised Code, or any other section of this chapter that the division of securities may specify by rule, but such reliance was improper because the required filings were not timely or properly made due to excusable neglect, upon the effective date of an application made to the division and payment of any applicable fee, if required and not already paid, and upon payment of a penalty fee equal to the greater of the fee or one hundred dollars, the sale of the securities shall be deemed exempt, qualified, or registered, as though timely and properly filed. The application shall become effective upon the expiration of fourteen days after the date of the filing in question if prior thereto the division did not give notice to the applicant that the application was denied based on a finding of lack of excusable neglect. The division shall promptly adopt and promulgate rules establishing provisions defining excusable neglect and otherwise establishing reasonable standards for determining excusable neglect.
The effectiveness of an application under this section does not relieve anyone who has, other than for excusable neglect, violated sections 1707.01 to 1707.45 of the Revised Code, or any previous law in force at the time of sale, from prosecution thereunder.
Amended by 129th General AssemblyFile No.127, HB 487, §101.01, eff. 9/10/2012.
Effective Date: 10-08-2001
Except as provided in section 1707.261 of the Revised Code, sections 1707.01 to 1707.45 of the Revised Code create no new civil liabilities, and do not limit or restrict common law liabilities for deception or fraud other than as specified in sections 1707.042. 1707.043. 1707.41. 1707.42. and 1707.43 of the Revised Code, and there is no civil liability for noncompliance with orders, requirements, rules, or regulations made by the division of securities under sections 1707.19. 1707.20. 1707.201. and 1707.23 of the Revised Code.
Effective Date: 09-16-2003
(A) In addition to the other liabilities imposed by law, any person that, by a written or printed circular, prospectus, or advertisement, offers any security for sale, or receives the profits accruing from such sale, is liable, to any person that purchased the security relying on the circular, prospectus, or advertisement, for the loss or damage sustained by the relying person by reason of the falsity of any material statement contained therein or for the omission of material facts, unless the offeror or person that receives the profits establishes that the offeror or person had no knowledge of the publication prior to the transaction complained of, or had just and reasonable grounds to believe the statement to be true or the omitted facts to be not material.
(1) Whenever a corporation is liable as described in division (A) of this section, each director of the corporation is likewise liable unless the director shows that the director had no knowledge of the publication complained of, or had just and reasonable grounds to believe the statement therein to be true or the omission of facts to be not material.
(2) Any director, upon the payment by the director of a judgment so obtained against the director, shall be subrograted to the rights of the plaintiff against the corporation, and shall have the right of contribution for the payment of the judgment against the director's fellow directors as would be individually liable under this section.
(C) For purposes of this section, lack of reasonable diligence in ascertaining the fact of a publication or the falsity of any statement contained in it or of the omission of a material fact shall be deemed knowledge of the publication and of the falsity of any untrue statement in it or of the omission of material facts.
(D) No action brought against any director, based upon the liability imposed by this section, shall be brought unless it is brought within two years after the plaintiff knew, or had reason to know, of the facts by reason of which the actions of the person or the director were unlawful, or within five years after the purchase of the securities, whichever is the shorter period, or, in the case of an action to enforce a right of contribution under this section, the action is brought within two years after the payment of the judgment for which contribution is sought.
Effective Date: 09-16-2003
(A) Whoever, with intent to secure financial gain to self, advises and procures any person to purchase any security, and receives any commission or reward for the advice or services without disclosing to the purchaser the fact of the person's agency or interest in such sales, shall be liable to the purchaser for the amount of the purchaser's damage thereby, upon tender of the security to, and suit brought against, the adviser, by the purchaser. No suit shall be brought more than one year subsequent to the purchase.
(B) Whoever acts as an investment adviser or investment adviser representative in violation of Chapter 1707. of the Revised Code shall be liable for damages resulting from the violation in an action at law in a court of competent jurisdiction. Damages may include consideration paid for the advice, any loss due to the advice, and all court costs, less the amount of any income received from the advice. No person may bring an action under this division more than five years after the rendering of investment advice or two years after discovery of facts constituting the violation, whichever is the shorter period.
Effective Date: 09-16-2003
(A) Subject to divisions (B) and (C) of this section, every sale or contract for sale made in violation of Chapter 1707. of the Revised Code, is voidable at the election of the purchaser. The person making such sale or contract for sale, and every person that has participated in or aided the seller in any way in making such sale or contract for sale, are jointly and severally liable to the purchaser, in an action at law in any court of competent jurisdiction, upon tender to the seller in person or in open court of the securities sold or of the contract made, for the full amount paid by the purchaser and for all taxable court costs, unless the court determines that the violation did not materially affect the protection contemplated by the violated provision.
(B) No action for the recovery of the purchase price as provided for in this section, and no other action for any recovery based upon or arising out of a sale or contract for sale made in violation of Chapter 1707. of the Revised Code, shall be brought more than two years after the plaintiff knew, or had reason to know, of the facts by reason of which the actions of the person or director were unlawful, or more than five years from the date of such sale or contract for sale, whichever is the shorter period.
(C) No purchaser is entitled to the benefit of this section who has failed to accept, within thirty days from the date of such offer, an offer in writing made after two weeks from the date of the sale or contract of sale, by the seller or by any person that has participated in or aided the seller in any way in making the sale or contract of sale, to take back the security in question and to refund the full amount paid by the purchaser.
Effective Date: 09-16-2003
For purposes of this section, the following persons shall not be deemed to have effected, participated in, or aided the seller in any way in making, a sale or contract of sale in violation of sections 1707.01 to 1707.45 of the Revised Code:
(A) Any attorney, accountant, or engineer whose performance is incidental to the practice of the person's profession;
(B) Any person, other than an investment adviser, investment adviser representative, bureau of workers' compensation chief investment officer, or state retirement system investment officer, who brings any issuer together with any potential investor, without receiving, directly or indirectly, a commission, fee, or other remuneration based on the sale of any securities by the issuer to the investor. Remuneration received by the person solely for the purpose of offsetting the reasonable out-of-pocket costs incurred by the person shall not be deemed a commission, fee, or other remuneration.
Any person claiming exemption under this division for a publicly advertised meeting shall file a notice with the division of securities indicating an intent to cause or hold such a meeting at least twenty-one days prior to the meeting. The division may, upon receipt of such notice, issue an order denying the availability of an exemption under this division not more than fourteen days after receipt of the notice based on a finding that the applicant is not entitled to the exemption. Notwithstanding the notice described in this section, a failure to file the notice does not create a presumption that a person was participating in or aiding in the making of a sale or contract of sale in violation of this chapter.
(C) Any person whom the division exempts from this provision by rule.
Effective Date: 03-18-1999; 09-15-2004; 09-29-2005
Effective Date: 10-05-2001
(1) No person shall engage in any act or practice that violates division (A), (B), or (C) of section 1707.14 of the Revised Code, and no salesperson shall sell securities in this state without being licensed pursuant to section 1707.16 of the Revised Code.
(2) No person shall engage in any act or practice that violates division (A) of section 1707.141 or section 1707.161 of the Revised Code.
(3) No person shall engage in any act or practice that violates section 1707.162 of the Revised Code.
(4) No person shall engage in any act or practice that violates section 1707.164 of the Revised Code.
(B) No person shall knowingly make or cause to be made any false representation concerning a material and relevant fact, in any oral statement or in any prospectus, circular, description, application, or written statement, for any of the following purposes:
(1) Registering securities or transactions, or exempting securities or transactions from registration, under this chapter;
(2) Securing the qualification of any securities under this chapter;
(3) Procuring the licensing of any dealer, salesperson, investment adviser, investment adviser representative, bureau of workers' compensation chief investment officer, or state retirement system investment officer under this chapter;
(4) Selling any securities in this state;
(5) Advising for compensation, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities;
(6) Submitting a notice filing to the division under division (X) of section 1707.03 or section 1707.092 or 1707.141 of the Revised Code.
(C) No person shall knowingly sell, cause to be sold, offer for sale, or cause to be offered for sale, any security which comes under any of the following descriptions:
(1) Is not exempt under section 1707.02 of the Revised Code, nor the subject matter of one of the transactions exempted in section 1707.03. 1707.04. or 1707.34 of the Revised Code, has not been registered by coordination or qualification, and is not the subject matter of a transaction that has been registered by description;
(2) The prescribed fees for registering by description, by coordination, or by qualification have not been paid in respect to such security;
(3) The person has been notified by the division, or has knowledge of the notice, that the right to buy, sell, or deal in such security has been suspended or revoked, or that the registration by description, by coordination, or by qualification under which it may be sold has been suspended or revoked;
(4) The offer or sale is accompanied by a statement that the security offered or sold has been or is to be in any manner indorsed by the division.
(D) No person who is an officer, director, or trustee of, or a dealer for, any issuer, and who knows such issuer to be insolvent in that the liabilities of the issuer exceed its assets, shall sell any securities of or for any such issuer, without disclosing the fact of the insolvency to the purchaser.
(E) No person with intent to aid in the sale of any securities on behalf of the issuer, shall knowingly make any representation not authorized by such issuer or at material variance with statements and documents filed with the division by such issuer.
(F) No person, with intent to deceive, shall sell, cause to be sold, offer for sale, or cause to be offered for sale, any securities of an insolvent issuer, with knowledge that such issuer is insolvent in that the liabilities of the issuer exceed its assets, taken at their fair market value.
(G) No person in purchasing or selling securities shall knowingly engage in any act or practice that is, in this chapter, declared illegal, defined as fraudulent, or prohibited.
(H) No licensed dealer shall refuse to buy from, sell to, or trade with any person because the person appears on a blacklist issued by, or is being boycotted by, any foreign corporate or governmental entity, nor sell any securities of or for any issuer who is known in relation to the issuance or sale of the securities to have engaged in such practices.
(I) No dealer in securities, knowing that the dealer's liabilities exceed the reasonable value of the dealer's assets, shall accept money or securities, except in payment of or as security for an existing debt, from a customer who is ignorant of the dealer's insolvency, and thereby cause the customer to lose any part of the customer's securities or the value of those securities, by doing either of the following without the customer's consent:
(1) Pledging, selling, or otherwise disposing of such securities, when the dealer has no lien on or any special property in such securities;
(2) Pledging such securities for more than the amount due, or otherwise disposing of such securities for the dealer's own benefit, when the dealer has a lien or indebtedness on such securities.
It is an affirmative defense to a charge under this division that, at the time the securities involved were pledged, sold, or disposed of, the dealer had in the dealer's possession or control, and available for delivery, securities of the same kinds and in amounts sufficient to satisfy all customers entitled to the securities, upon demand and tender of any amount due on the securities.
(J) No person, with purpose to deceive, shall make, issue, publish, or cause to be made, issued, or published any statement or advertisement as to the value of securities, or as to alleged facts affecting the value of securities, or as to the financial condition of any issuer of securities, when the person knows that the statement or advertisement is false in any material respect.
(K) No person, with purpose to deceive, shall make, record, or publish or cause to be made, recorded, or published, a report of any transaction in securities which is false in any material respect.
(L) No dealer shall engage in any act that violates the provisions of section 15(c) or 15(g) of the "Securities Exchange Act of 1934," 48 Stat. 881, 15 U. S.C. A. 78o(c) or (g), or any rule or regulation promulgated by the securities and exchange commission thereunder.
(1) No investment adviser or investment adviser representative shall do any of the following:
(a) Employ any device, scheme, or artifice to defraud any person;
(b) Engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person;
(c) In acting as principal for the investment adviser's or investment adviser representative's own account, knowingly sell any security to or purchase any security from a client, or in acting as salesperson for a person other than such client, knowingly effect any sale or purchase of any security for the account of such client, without disclosing to the client in writing before the completion of the transaction the capacity in which the investment adviser or investment adviser representative is acting and obtaining the consent of the client to the transaction. Division (M)(1)(c) of this section does not apply to any investment adviser registered with the securities and exchange commission under section 203 of the "Investment Advisers Act of 1940," 15 U. S.C. 80b-3, or to any transaction with a customer of a licensed dealer or salesperson if the licensed dealer or salesperson is not acting as an investment adviser or investment adviser representative in relation to the transaction.
(d) Engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative. The division of securities may adopt rules reasonably designed to prevent acts, practices, or courses of business that are fraudulent, deceptive, or manipulative.
(2) No investment adviser or investment adviser representative licensed or required to be licensed under this chapter shall take or have custody of any securities or funds of any person, except as provided in rules adopted by the division.
(3) In the solicitation of clients or prospective clients, no person shall make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made not misleading in light of the circumstances under which the statements were made.
(N) No person knowingly shall influence, coerce, manipulate, or mislead any person engaged in the preparation, compilation, review, or audit of financial statements to be used in the purchase or sale of securities for the purpose of rendering the financial statements materially misleading.
(O) No state retirement system investment officer shall do any of the following:
(1) Employ any device, scheme, or artifice to defraud any state retirement system;
(2) Engage in any act, practice, or course of business that operates or would operate as a fraud or deceit on any state retirement system;
(3) Engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative. The division of securities may adopt rules reasonably designed to prevent such acts, practices, or courses of business as are fraudulent, deceptive, or manipulative;
(4) Knowingly fail to comply with any policy adopted regarding the officer established pursuant to section 145.094. 742.104. 3307.043. 3309.043. or 5505.065 of the Revised Code.
(P) No bureau of workers' compensation chief investment officer shall do any of the following:
(1) Employ any device, scheme, or artifice to defraud the workers' compensation system;
(2) Engage in any act, practice, or course of business that operates or would operate as a fraud or deceit on the workers' compensation system;
(3) Engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative. The division of securities may adopt rules reasonably designed to prevent such acts, practices, or courses of business as are fraudulent, deceptive, or manipulative;
(4) Knowingly fail to comply with any policy adopted regarding the officer established pursuant to section 4123.441 of the Revised Code.
Effective Date: 09-16-2003; 09-15-2004; 09-29-2005; 10-12-2006
In any indictment, complaint, or information under section 1707.44 of the Revised Code, it shall not be necessary to negative the existence of facts which would bring a security within section 1707.02 of the Revised Code, or would bring a transaction within section 1707.03. 1707.04. or 1707.06 of the Revised Code, or to negative the existence of facts which would bring a transaction within the exceptions of section 1707.34 of the Revised Code. The burden of proof shall be upon the party claiming the benefits of any of such sections.
Effective Date: 10-08-2001
The principal executive officer of the division of securities shall be the commissioner of securities, who shall be appointed by the director of commerce. The commissioner of securities shall enforce all the laws and administrative rules enacted or adopted to regulate the sale of bonds, stocks, and other securities and to prevent fraud in such sales. The commissioner also shall enforce all the laws and administrative rules enacted or adopted to regulate investment advisers, investment adviser representatives, state retirement system investment officers, and the bureau of workers' compensation chief investment officer and to prevent fraud in their acts, practices, and transactions.
The commissioner shall be paid at a rate not less than pay range 47 set out in schedule E-2 of section 124.152 of the Revised Code, to be paid as other operating expenses of the division.
Effective Date: 03-18-1999; 09-15-2004; 09-29-2005
Effective Date: 10-11-1994
The division of securities shall retain the originals or copies of all documents filed with the division pertaining to registration by description, qualification, or coordination and all filings for claims of exemption for eight years from the date of the initial filing. For purposes of this section, the date of the initial filing shall be the date upon which the first fee for such filing was received by the division.
The division shall retain all documents, testimony transcripts, investigative reports, and investigative notes that the division has compiled in original or copy form for five years from the date of the alleged or suspected violation of any provision of this chapter.
All other documents filed with the division shall be retained in original or copy form for five years.
The division may by rule exempt any document or record from this section, provided that any document or record exempted is retained by the division for at least as long as it would have been retained had it been subject to this section.
Effective Date: 03-18-1999
Whoever commits any act described in division (A) of section 1707.042 or section 1707.44 of the Revised Code is guilty of a violation of sections 1707.01 to 1707.45 of the Revised Code and the following apply to the offender:
(A) If the value of the funds or securities involved in the offense or the loss to the victim is less than one thousand dollars, the offender is guilty of a felony of the fifth degree, and the court may impose upon the offender an additional fine of not more than two thousand five hundred dollars.
(B) If the value of the funds or securities involved in the offense or the loss to the victim is one thousand dollars or more but less than seven thousand five hundred dollars, the offender is guilty of a felony of the fourth degree, and the court may impose upon the offender an additional fine of not more than five thousand dollars.
(C) If the value of the funds or securities involved in the offense or the loss to the victim is seven thousand five hundred dollars or more but less than thirty-seven thousand five hundred dollars, the offender is guilty of a felony of the third degree, and the court may impose upon the offender an additional fine of not more than ten thousand dollars.
(D) If the value of the funds or securities involved in the offense or the loss to the victim is thirty-seven thousand five hundred dollars or more but less than one hundred fifty thousand dollars, the offender is guilty of a felony of the second degree, and the court may impose upon the offender an additional fine of not more than fifteen thousand dollars.
(E) If the value of the funds or securities involved in the offense or the loss to the victim is one hundred fifty thousand dollars or more, the offender is guilty of a felony of the first degree, and the court may impose upon the offender an additional fine of not more than twenty thousand dollars.
Amended by 129th General AssemblyFile No.29, HB 86, §1, eff. 9/30/2011.
Effective Date: 03-18-1999
Business Expenses to Deduct Now
Excerpted from Tax Planning for Business (Entrepreneur Press)
In order to maximize your business deductions and minimize the tax you must pay-either directly from the business or due to flow-through income reportable on your personal tax return-[it's critical to] familiarize yourself with the following deductions. Remember, each dollar not paid in tax is an extra dollar that may be taken out as profits.
Automobile Expenses The deduction for automobile expenses isn't limited to automobiles. It applies to all the vehicles used in your business, including cars, vans, pickup trucks, trucks, buses and anything else that serves the same purpose of transporting people or things for your business. There are special rules, however, that apply to automobiles, as opposed to heavier commercial transportation equipment like specially equipped trucks, big-rig tractor-trailers, etc. By the way, some of the larger SUVs-those heavier than 6,000 pounds-are not subject to the limitations applicable to automobiles.
Business-related use of an automobile or other vehicle is deductible. Personal use, including commuting to and from work, is not. The burden is on your business-or you personally if the income and expenses of the business flow through to your individual tax return as a sole proprietor, partner, LLC member or S corporation stockholder-to keep sufficient records to document your allocation of the vehicle use between deductible business use and non-deductible personal use. To meet this burden, you should:
Keep records to support your business mileage. Record all business use of the vehicle at or near the time you drive anywhere for business reasons. Keep a log reflecting the date, your starting location, your destination and a brief description of the business purpose. It's best to also record your starting and finishing odometer reading, but it may be difficult to train yourself and your employees to be that careful. If you don't record odometer readings from every trip, be prepared to provide proof of the distance traveled on each trip, such as computer maps reflecting route and mileage. These records can be an automobile logbook kept on the dashboard of the vehicle, or your daily calendar (if you keep it with you when you drive for business reasons). What is important is that you make entries at or about the time that you make each trip in the vehicle and that you keep the records readily available for seven years (in case the business is audited).
Determine what percentage of the vehicle's usage is business related, and what percentage is personal. Keep in mind that commuting from your home to and from your office is personal use, just as much as taking family trips or driving to the grocery store. Perhaps the easiest way to determine the percentage of business and personal use is to record the odometer reading on the vehicle on January 1 of each year (or the first day of your business's taxable year if it uses something different than a calendar year). That will tell you how many total miles (business plus personal) the vehicle was driven during the year. Next, add up the total number of business miles reflected in your log (or the entries on your calendar). That will determine the total number of business miles driven during the year. Divide the total business miles driven for the year by the total combined miles driven. That will give you a number that is your business use percentage. Subtract your business use percentage from 100, and you will have your personal use percentage.
Compare your deduction using the standard mileage rate method and the actual expenses method to determine which will give you the best tax result. The IRS rules allow you to simply multiply the number of business-related miles driven during the year times a standard, per mile rate (48.5 cents per mile in 2007). Alternatively, you're allowed to add up the actual costs that you incur in operating the vehicle-gasoline, license fees, registration fees, maintenance and repairs, car insurance, etc. as well as an estimate of the reduction in value of the vehicle each year (known as depreciation). The standard mileage rate method is beautifully simple (fewer receipts to save, just keep the mileage log on the dashboard), and if you drive very few business-related miles or if the vehicle you buy for the business is a relatively inexpensive used car, the result may be as good or better than the actual expenses method. However, in most cases where there is more than incidental business use of the vehicle, the actual expenses method will result in greater tax savings. For the first year or two, you should keep complete enough records (and all those gasoline, repair and maintenance receipts) so that you can compare both methods and determine which saves the most money in your situation. Then you can decide which method to use going forward.
Employee-Related Expenses The cost of compensating your employees-whether the direct cost of paying salaries or such indirect costs as training employees or providing fringe benefits-is a deductible expense for your business.
Compensation. The salary and bonuses that your business pays to its employees is deductible to the company, and included in each employee's taxable income (except for tax-free or tax-deferred fringe benefits). This is equally true whether the compensation is paid in cash, in property or in services. Of course, the compensation is only deductible if it's an ordinary and necessary business expense. In addition, the pay must be:
Reasonable under all the facts and circumstances. If the pay is excessive, the deduction will be partially disallowed. Factors to consider in determining whether the pay is reasonable include duties performed by the employee, volume of work handled by the employee, type and amount of responsibility, complexities of the business, hours involved, local living costs, the employee's skill level and pay history, your general policies regarding pay for all your employees, and whether the pay represents a reasonable portion of the business's gross and net income (especially when compared with distributions to owners of the business). . For services performed by the employee. In particular, compensation paid to an owner-employee should not be unreasonably high considering the services actually performed, or the excessive portion of the salary will be recharacterized as "disguised dividends."
Keep in mind that the business can pay a portion of the employee's compensation as tax-free fringe benefits, such as awards for the employee's safety achievements, or length-of-service awards given after at least five years of employment (and then after intervals of five years or greater). Length-of-service awards can't be given to managers, administrators, clerical or professional employees, and can't be given to more than 10 percent of the business's employees in any one year. Your business also can't deduct more than $1,600 for such awards to any one employee (and that amount is reduced to $400 unless the award is made as part of a written plan that does not improperly favor "highly compensated employees").
Health Insurance and Other Fringe Benefits. In addition to direct compensation to your employees, the business may also deduct the cost of fringe benefits such as health and accident insurance, dependent care assistance, life insurance coverage, and adoption assistance. Although deductible to the company, many of the fringe benefits can be provided to the employee free of income tax (or, at least, tax deferred).
The cost of health insurance provided to employees is deductible, as long as the expense is not greater than the business's net profit. When paid by a C corporation, the deduction is always taken by the business. When paid by other types of entities, the deduction is taken by the business if paid to provide insurance for non-owner employees, and is deducted by each owner on his or her individual tax return if paid to provide insurance for an owner of the business. Remember, owner can mean sole proprietor, partner, LLC member or S corporation stockholder. In addition, the company can deduct the cost of providing life insurance coverage (up to maximum coverage limits), dependent care assistance, or adoption assistance.
Retirement Plans. Contributions can be made to 401(k)s, SIMPLE IRAs, profit-sharing plans, or defined contribution plans. The company can deduct the amount of the contribution, and the employee receiving the benefit of the contribution is not taxed until the funds, including the earnings accumulated in the retirement account, are withdrawn from the retirement account.
Vacation Pay, Sick Pay and Disability Benefits. Any amount that your business pays to employees as vacation pay, sick pay or disability benefits-whether paid as salary continuation on ordinarily scheduled paydays or as a larger lump-sum benefit-is deductible to the company as long as the employee doesn't also receive compensation for the same loss of pay from insurance or any other source. Of course, the sick pay or vacation pay is taxable to the employee as ordinary income.
Education Expenses. Educational expenses paid directly on behalf of an employee, or reimbursed to an employee, can be deducted by the company if the expenses are ordinary and necessary to maintain or improve the employee's skills for the business, or if incurred by the employee pursuant to a written educational assistance program. Any educational expenses that are deductible only as part of an educational assistance program (because they aren't related to the employee's job duties) are limited to a maximum of $5,250 per employee per year, and must be part of a qualified, written plan that does not discriminate in favor of highly compensated employees.
Office Operation Expenses Ordinary and necessary expenses incurred to maintain and operate the company's business office and other general overhead expenses are deductible on the business's income tax return. Several of the most common such expenses are discussed below.
Rent. The cost of renting property that you use in your business-office space, equipment, etc.-is deductible. However, rent is not deductible if, and to the extent that, it exceeds a reasonable rent under all the facts and circumstances. The issue of unreasonable rent ordinarily arises only when the property is being rented from a related party (such as a closely related relative or a business entity that is owned by common owners). Rent can be a set dollar amount, or it can be a variable amount calculated as a percentage of gross sales. The fact that some portion of the rent is determined as a percentage of gross sales does not, in and of itself, make the rent unreasonable.
As a general rule, the rent paid is deductible by the business in the year that it is paid or incurred. If rent is paid in advance, the company can deduct only the portion that is paid for the use of the property during the current taxable year, and the portion of the rent applicable to future years will be deductible over the future period of time to which the prepaid rent applies. For example, if your company is taxed based upon a calendar year, and enters into a new lease on September 1, 2007, requiring it to pay $12,000 up front as the first year's rent, the rent for September 1 through December 31 ($4,000; calculated as $12,000 x 4/12 of a year) is deductible in the current year. The remaining $8,000 will be deducted as rent in 2008, since it is the rent for January 1 through August 31, 2008.
An amount paid to terminate a lease early is properly deductible as rent paid. On the other hand, rent payments may not be deductible where the total rent paid in a relatively short period of time equals a large part of the price the business would normally pay to purchase the property and the company is granted an option to purchase the property for a nominal price upon termination of the lease. In that situation, the property would be treated as a capital asset being purchased by the company that must be depreciated over its useful life (unless the option expires without being exercised).
Home Office Expense. You may deduct some of the expenses associated with a portion of your home used in your business if the part of your home used in the business is used exclusively for business purposes on a regular basis, and it is either your principal place of business, a place where you meet or deal with clients or customers in the normal course of your business, or a separate structure that is not attached to your home.
In general, the exclusive-use rule prohibits a deduction for use of part of your home in the business if the space used for business is also sometimes used for a non-business purpose. Your home office space does not need to be behind a closed door, or even marked off by any permanent partition, but you or your family cannot use the space for anything other than the business use. The exclusive-use rule does not apply, however, if the business use is either storage of inventory or product samples, or operation of a day care facility.
Miscellaneous Office Expenses. Examples of other office-related expenses that can be deducted include:
fire, flood, theft or similar insurance on the business premises . legal and professional fees directly related to the operation of the business . workers' compensation insurance . supplies and materials used in the business . bank fees incurred by the business . licenses and regulatory fees . repairs and maintenance to equipment and to the office . utilidades
Marketing Expenses The expenses that you incur in promoting your business are deductible, subject to certain limitations. This includes formal advertising expenses, as well as the costs of meals and entertainment incurred in promoting the business.
The company may deduct business-related meals or entertainment expenses for entertaining a client, customer, or employee. However, in most cases, the deduction is limited to 50 percent of the actual food or drink expense incurred. To be deductible, the expenses must be an ordinary and necessary expense for an activity that is neither lavish not extravagant under the circumstances. In addition, the activity must meet either the directly related test or the associated test in order to qualify for the deduction.
Meals or entertainment satisfy the directly related test if the entertainment takes place in a clear business setting, or if the main purpose of the entertainment is to actively conduct business and is engaged in with more than a general expectation of generating income or some other specific business benefit. The directly related test is satisfied, for example, when business negotiations or demonstrations are conducted while a meal is being served.
If the entertainment does not meet the directly related test, the expense will be deductible only if it is associated with your trade or business and the entertainment immediately precedes or follows a substantial business discussion. A meal immediately before or after a substantial business meeting or negotiation would satisfy this test.
Finally, modest gifts to clients or customers may be deducted, but only up to $25 of value per client per year.
Miscellaneous Expenses Many other deductions may be taken for expenses that do not readily fit into the categories of vehicle expenses, employee-related expenses, office operation expenses or marketing expenses.
Start-Up Costs. The first $5,000 of costs of starting up your business-investigating and acquiring a new business, or forming an entity for your new business-can be deducted in the beginning. However, if your total start-up costs exceed $50,000, then no portion of the expense can be deducted. Any portion that you are not permitted to deduct immediately must be amortized over five years.
Start-up costs include:
Amounts paid to analyze potential markets, products or other aspects of the business. . Pre-opening advertising to promote the business. . Wages paid related to training employees prior to opening. . Attorney and accounting fees incurred during the formation of the business. . All expenses related to securing suppliers, customers or distributors for the prospective business.
The rules applicable to start-up costs apply to all costs incurred prior to the day that you actively engage in business activity. If you can actively engage in the business on a modest scale prior to incurring a substantial portion of the start-up expenses, they will be characterized as ongoing business expenses, rather than start-up, and may be deductible immediately.
Investigation Costs. When you investigate a business opportunity but decide not to go forward with the business venture, the general costs of investigating a general type of business (such as conducting a study to determine whether or not a particular type of business is viable in your geographic area) are not deductible. However, investigative expenses and professional fees incurred in a failed effort to purchase a particular business may be deductible as investment expenses.
Research and Development. Research and development costs are costs you incur in the business to learn information about the development or improvement of a product. Product is broadly defined to include formulas, inventions, patents, process, techniques, and similar property. Research and development costs do not include the cost of quality control testing, consumer surveys, advertising or the cost of purchasing someone else's process or patent.
You can elect to deduct the costs of research and development in the year that you pay or incur the expenses by taking the full deduction for such costs in the first year that you incur the expenses. If you don't make the election to take the full deduction in the first year, then you must treat the expense as a capital expense related to the product or process, and amortize the deduction over the anticipated life of the product or process.
If you choose to deduct the expenses in the very first year, then you must continue to deduct research and development expenses in the future years in the same way (unless you get IRS approval to treat the expenses as capital expenses in future years). Conversely, if you treat your research and development costs as capital expenses in the first year, you must continue to use that method unless you get IRS approval to change.
Impuestos. Taxes may be deductible when they are paid or incurred in the operation of your business. However, not all taxes can be deducted immediately; some must be capitalized and then amortized over the life of the asset that was taxed. The most common taxes incurred in business, and the proper treatment for each type of tax, are discussed below.
Payroll taxes (Social Security and Medicare tax) can be deducted when paid. Keep in mind, however, that the company will deduct only the portion of the payroll tax that is paid by the company (7.65 percent of the initial $97,500 of pay for each employee, and 1.45 percent of any pay in excess of $97,500). An equal amount is withheld by the company from each employee's paycheck and sent to the government. Because the portion withheld from the employee's paycheck is paid by the employee (not by the company), no deduction is available to the company. The payroll tax incurred on the earnings paid to the owners of a business other than a C corporation (sole proprietors, partners, LLC members or S corporation stockholders) is paid by the owners as self-employment taxes. Because they are paid by the owner, no deduction is taken by the company. Instead, each owner may deduct one half of the self-employment tax paid as a deduction on his or her personal income tax return.
Real property taxes paid on property used in the business are fully deductible.
Sales taxes paid on supplies that are used in the business are included as part of the total price of the supplies and deducted immediately, except that sales taxes incurred on capitalized assets (such as a motor vehicle or substantial equipment) must be capitalized and amortized over the expected life of the asset. If you sell retail goods and collect state or local income tax on your sales to customers, the sales taxes collected by you is not included in the business's gross revenues, and also should not be taken as a deduction.
Federal income taxes paid by a C corporation are not deductible to the company, but state and local income taxes are deductible when paid. Federal income taxes resulting from profits generated by businesses that are operated as something other than a C corporation-for example, sole proprietorship, partnership, LLC, or S corporation-are paid by each owner on his or her individual tax return, since the income (or loss) flows through to each owner in proportion to his or her interest. There is no deduction available to the company, or to each owner, for the federal income tax incurred.
Other Deductible Expenses . Other expenses-some recurring, some infrequent-can be deducted by your business. Expenses that are commonly deductible include:
Interest paid or accrued during the business's tax year on debts related to the business is deductible as long as the company is legally liable for payment of the debt. Interest paid or accrued for personal (non-business debt) cannot be deducted. Where proceeds of a loan are used in part to pay the business's operating expenses or acquire a business-related assets, and in part for non-business purposes, the interest accrued on the loan must be allocated between the business and non-business use of the proceeds. The rules for tracing proceeds of a loan to allocate the interest, and for allocating partial repayment of the loan, are complex. Work with a qualified CPA when dealing with loans that are used for both business and non-business purposes.
Travel expenses incurred while you are away from your primary business home (your primary office, not your family home) can be deducted if your job duties require you to be away from your primary business home and you need to sleep or rest in order to meet the demands of your work while away from your office. Allowable travel expenses include transportation costs such as a tickets for air, rail, or bus travel, or costs of taking your car. In addition, travel costs include the cost of taxis or other local transportation during the trip, lodging and meals, tips, business calls, cleaning and laundry during the trip, and other similar ordinary and necessary expenses related to the trip.
Bad debt losses may be taken as a deduction when a customer fails to pay an account receivable due to the company, if the company has already treated the sales related to the account receivable as taxable income because the company determines its taxable income on the accrual basis. In addition, the bad debt deduction may be taken when money lent for a business purpose (for example, a loan to a customer of the company to assist the customer in expanding the customer's business in hopes that it will increase the customer's need for the company's products or services) cannot be repaid by the borrower. The bad debt deduction can be taken only after the company has taken reasonable steps to collect the debt and it has become clear that there is no longer any chance the amount owed will be paid.
Charitable contributions can be deducted by a C corporation, but the deduction taken each year cannot exceed 10 percent of the corporation's taxable income (calculated before taking the charitable deduction). Charitable contributions made by businesses that are not C corporations flow to each owner's individual tax return and can be deducted by each owner.
Moving expenses may be deducted by the company when paid to any employee, including an owner-employee, when the employee is moving because the new job location is at least 50 miles from his or her prior job location (or, if not employed at the time of the move, 50 miles from his or her residence).
Tax credits-that is, dollar-for-dollar reductions against the tax payable-may be available for many different various actions taken by the company, such as:
- Purchasing an alternative-fuel, or hybrid, vehicle. - Payment of certain employee childcare expenses paid by the company. - Increasing research activity. - Payment of small employer pension plan start-up costs. - Hiring long-term recipients of family assistance (welfare) as employees of the company.
The list of available credits is long and changing constantly (for example, a credit was available to assist employers impacted by Hurricane Katrina). Work with a good CPA who can advise you of any credits that may be available for your type of business or in your geographic location.
Advantages and Disadvantages of Employee Stock Ownership Plans
Advantages of ESOP
The corporation receives a deduction for its contributions to the ESOP that are used to pay principal and interest on the loan. For a non-leveraged ESOP, the corporation receives a deduction for contributions to the ESOP. Certain financial organizations lending to the ESOP can exclude from income 50% of the interest received on the loan. However, the availability of the partial interest exclusion is limited to situations in which the ESOP owns, immediately after the sale. The corporation receives a deduction for the dividends paid on employer securities used to repay the ESOP loan or paid to participants. A seller of nonpublic employer securities to the ESOP is not taxed on gain realized on the sale to the ESOP if specific rules are met. These rules include, among others, a requirement that the ESOP must own 30% of the corporation's stock after the sale, and the seller must purchase "qualified replacement property." This technique allows the gains from a sale to an ESOP to be rolled over into publicly held securities. Such gain is untaxed until such securities are sold. The corporation receives a tax deduction for the fair market value of employer securities contributed to the ESOP.
A leveraged ESOP may help in divesting a subsidiary or division. A leveraged ESOP may be used as an anti-takeover device. A leveraged ESOP may be used to make a tender offer to all shareholders. A leveraged ESOP may be used to facilitate a leveraged buyout. Noncallable preferred stock may be used in an ESOP if it is convertible at any time into common stock which has dividend and voting rights equal to or in excess of any other common stock of the corporation. An ESOP may help create a market for employer securities. An ESOP may help a corporation obtain equity capital for general corporate purposes, such as business expansion. An ESOP can borrow or acquire stock from related parties, such as major shareholders. An ESOP may provide an important source of compensation and retirement benefits for employees to participate in the future growth, earnings and dividends of the employer. Through proper structuring and communication, an employer may be able to reduce the costs of other benefit programs by implementing the ESOP.
Issues or disadvantages of ESOPs
There are numerous special rules applicable to ESOPs under the Code and ERISA, including detailed and complex loan rules. Pass-through of voting rights is required for ESOP participants under specific circumstances. An initial independent appraisal of non-publicly traded securities is required and annual independent appraisals are required thereafter. The reporting and disclosure rules of ERISA apply to ESOPs. Employee direction of investment of accounts for older employees is required generally starting when a participant attains age 55 and has 10 years of participation in the ESOP. Distributions are required to be made in employer securities and put options are required for distributions of nonpublic securities. Terminated employees may hold stock and cause problems. The sale to an ESOP of closely-held employer securities may be recharacterized as a constructive dividend. Creation of an ESOP may result in loss of control of a company by the controlling shareholder. Employee-shareholders acquire rights to information regarding the corporation, which may present a problem for closely-held businesses. The Department of Labor has begun to closely scrutinize ESOP transactions, especially with respect to the price paid by the ESOP for the stock it acquires. Future legislation can change rules and limit benefits. An ESOP must be established and maintained for the exclusive benefit of its participants and beneficiaries.
Table of Contents:
Jump to: Filing and Procedural Basics (Grounds for Divorce and Fault, Where to File, Residency Requirement, Filing Costs, Automatic Restraining Orders, Waiting Period, Case Management Program)
Jump to: Property: Division of Marital Property (Court's Authority to Divide Property, Marital and Separate Property, Marital Residence, Stock Options, Personal Injury Awards, Inheritances and Gifts, Medical Degree, Pension's and 401-K type Contribution Plans, Social Security and Finality of Property Distributions)
Jump to: Alimony: Division of Income (Beware of Formulas, Modifiability, Waiver of Alimony, Effect of Cohabitation on the Payment of Alimony)
Jump to: Children: Custody (Impact of Divorce on Children, Tips for Divorcing Parents, Elements of Legal and Physical Custody, Best Interests of the Child Standard, Parenting Education, Visitation by Grandparents and Other Third Parties)
Jump to: Children: Child Support ( Connecticut's Child Support Guidelines, Types of Child Support, Definitions of Physical Custody Arrangements, Child Support in Shared Custody Cases, New Spouse or Domestic Partner's Income, Other Reasons to Deviate from the Guidelines, Wage Garnishment for Payment of Support, Earning Capacity)
Jump to: Children: College Education Support Orders ("Post-majority support", College Education, Effective Dates, The Educational Support Orders Statute, Other Types of Post-Majority Support")
Jump to: Tax Aspects (Important Legal Notice, Filing Status, Alimony, Exemptions and Deductions for Children, Property Transfers, Sale of Principal Residence, Refunds, "Innocent Spouse" Protection)
Jump to: Enforcement of Orders (Contempt, Penalties, A Warning about "Self Help")
Filing and Procedural Basics
Spouses In Connecticut do not need to prove "grounds" in order to obtain a divorce. The Court will issue a judgment of divorce on the ground that the marriage has "irretrievably broken down." People refer to this as a "no-fault" divorce. Fault can be considered by the court, however, in determining the financial orders (alimony and assignment of property). Link to Article: Marital Misconduct: Does It Count? Fault generally makes a difference in the court's award when the fault is substantial and it substantially contributes to the breakdown of the marriage or the loss of marital assets. Fault plays less of a role in modern divorce than people think; courts and lawyers are more focused on how the finances and other issues can be handled fairly and equitably.
Where you must file: See Court House Guide - a table of Connecticut Judicial Districts, towns served by each, addresses and phone numbers. For additional information, including travel directions and office hours, see the State's judicial website page.
One party must have been domiciled continuously in Connecticut for a period of 12 months prior to the date that the Court issues the judgment. You may file for divorce without meeting the 12-month residency requirement as long as you meet the requirement on the date of the divorce. There are other exceptions as well: if the reason for the divorce arose after you and your spouse moved to Connecticut, if you were Connecticut residents before going on duty which took you out of state, or if you were previously a resident of Connecticut and moved back to Connecticut with the intent of making Connecticut your permanent residence.
Court Filing Fee: $350.00 (eff. July 1, 2012)
Sheriff's Fee: $50-$75 (unless waived)
Parenting Education Class: $125.00 per party
Certified Copy of Decree: $25 per party
Judicial Branch Page for Court Fees and Forms
The "Automatic Orders" are restraining orders which are entered upon the issuance of a complaint for divorce. The orders are binding upon the plaintiff (person who files for the divorce) at the time the papers are issued and are binding on the defendant spouse at the time the papers are served. The purpose of the automatic orders is to provide a cooling off period to maintain the status quo and to deter the parties from raiding assets or taking other steps to disadvantage the other spouse at the outset of a divorce. The secondary purpose of the automatic orders is to save the parties the expense of filing motions for restraining orders and certain discovery motions at the beginning of each case. For example, the automatic orders restrain (prohibit) the parties from:
withdrawing large amounts of funds,
incurring major expenses,
selling or mortgaging property,
changing life insurance beneficiaries
locking a spouse out of the house.
Important Point: Each spouse has equal access to the marital home while the divorce is pending unless one of them is residing elsewhere when the divorce papers issue, or unless the judge awards exclusive use of the home to one party while the divorce is pending. If one of the spouses leaves the house either before or during the divorce period, it does not have an impact on their ownership rights, nor does it impact rights to children. It is an urban myth that leaving your home constitutes an abandonment of your financial interest in the home or your right to request that the home be allocated to you in the property division.
The Court has the discretion to modify any of the orders. The parties may also agree to waive any of the orders so long as they do so in writing.
The waiting period is 90 days from the "Return Date" (official starting date of your case), but additional time is needed for the marshal to make service and for the served papers to be returned to the court prior to the Return Date. Actual time is about 4 months under the best of all circumstances. All deadlines and statutory periods are measured from the "Return Date."
NEW: Starting October 1, 2017 there are new rules concerning waiting periods and documents for non-adversarial divorces. For instance, parties who meet the requirements for a "Simple Divorce" may file a joint petition and may proceed to finalize their agreement 30 days after the joint petition has been filed in court. There are a number of requirements to qualify, including: the couple has no children, neither owns a home, assets are less than $35,000, neither party has a traditional pension. The Court has not yet issued streamlined forms for the new procedure. To see if you qualify, look at the full text of the Act at: http://www. cga. ct. gov/2017/act/pa/pdf/2017PA-00007-R00SB-01029-PA. pdf
NEW: In addition, the Court now allows qualified individuals to finalize their divorces before the 90-day waiting period.
Case Management Program
There is a mandatory Case Management Conference 90 days from the Return Date (the official starting date of the case). If a case is contested, deadlines for completing discovery, financial affidavits, identifying expert witnesses, taking depositions and dates for a Special Masters' Pretrial and a Judicial pretrial will be assigned by the court.
The Special Masters are a pair of experienced family lawyers who will look at the parties' claims and affidavits, and listen to the parties and the lawyers make a presentation of the case. Thereafter, the Masters meet separately to fashion a recommendation for resolving your case.
If your case is not settled at the Special Masters' Pretrial, the parties continue to prepare their cases and wait for an assignment for a Pretrial with a Family Judge. The Judge will also listen to the parties, review documents and make a recommendation. If still not resolved, the case will be assigned for trial.
If the parties are in agreement as to the scheduling requirements of the Case Management program, they may file an Agreement and thereby avoid the in-court Conference.
If a case is "Uncontested," the parties may file a Case Management Agreement on the Case Management Date (90 days after the Return Date) and request a date for their for their "Uncontested Hearing." Under Connecticut's statutory scheme, each divorce must be reviewed and approved by a Judge. The purpose of the Uncontested Hearing is for the parties to present their Financial Affidavits, their Agreement and other required papers. The Judge reviews the papers, may ask some questions, and then (in most cases) accepts the agreement and pronounces the parties divorced. In most instances parties who have mediated their divorces follow this path. Mediation parties often are ready to bring their agreements into Court from 3 to 4 months after they have started. It requires about a year to a year and 1/2, and sometimes longer, for parties to finalize their divorces under the traditional model.
Court's Authority to Divide Property . Connecticut is referred to as an "all property equitable distribution state." In Connecticut, the Court has the power to "assign to either the husband or wife all or any part of the estate of the other." Conn. Gen. Stats. § 46b-81. Any property, therefore, regardless of when or how acquired, can be re-distributed by the Court. Véase, p. North v. North, 183 Conn. 35 (1981) (all property, including pre-marital or inherited property, is subject to division by the court). The statute "does not limit, either by timing or method of acquisition or by source of funds, the property subject to a trial court's broad power [to allocate]." Lopiano v. Lopiano . 247 Conn. 356, 364 (1998).
Considering all the evidence, factors the Court will consider the length of the marriage, the causes of the dissolution or separation, the age, health, station, occupation, amount and sources of income, earning capacity, vocational skills, education, employability, estate, liabilities and needs of each party, and the opportunity of each for future acquisition of capital assets and income. Conn. Gen. Stat. § 46b-81, rev. 2017.
The court also considers the contribution of each of the parties in the acquisition, preservation or appreciation of the assets. Conn. Gen. Stat. § 46b-81. Homemaking is considered a valuable contribution to the acquisition and appreciation of assets.
Marital and Separate Property . Courts and lawyers talk about "marital property" and "separate" property. Property acquired as a result of the marital joint venture is considered marital, regardless of which spouse earns the income to acquire it and regardless of whose name is on the title to the property. P roperty acquired prior to the marriage is often, but not always, considered the separate and exclusive property of the person who acquired it. Gifts and inheritances can also be considered separate, as can personal injury settlements. Take note: This is an over-generalized summary. How a court will treat separate property is dependent on all the facts and circumstances. In Connecticut, a judge has the authority and discretion to draw on separate property when allocating assets. Any allocation is based upon all the facts and circumstances existing in the case.
The Marital Residence
The home that the parties live in prior to divorce is often referred to as the M arital Residence. Like all property acquired during the marriage, both parties have an interest in it, regardless of how the property was acquired or is titled. Important Point: Leaving the marital residence prior to or during the divorce does not constitute a legal abandonment of your property interest in the home.
If you are living together at the commencement of the divorce, the Automatic Orders state that "neither party may deny the other party use of the current primary residence. without order of a judicial authority." Once the case starts, however, either party may file a motion for exclusive use of the home and the judge will make a decision as to who should occupy the home until the case is decided. "The court may also award exclusive use of the family home. to either of the parties as is just and equitable without regard to the respective interests of the parties in the property." Conn. Gen. Stats. § 46b-83. If the case has not officially started (i. e. it is before the starting day of the case "Return Day") a party can file a motion and an order to show cause to bring the person denying access to the family home into court.
The realities of our current economic condition result in many couples living together during the divorce and, in some instances, after the divorce. Agreements are drafted to create the ground rules of cohabitation and a plan for a future sale or buyout of one party's interest. Because mortgage financing is more difficult, sometimes the only option is to retain joint interest in the home and continue joint liability on the mortgage, with the goal to sell at a future date and divide the net proceeds.
Stock Options and Other Forms of Employment Awards
Vested and unvested stock options can be part of the marital estate and can be distributed by the Court at the time of dissolution. If the options, or other types of executive compensation, were earned based on work performed during the marriage, the options (including unvested options) are mostly treated as marital property.
There are several schemes that lawyers and Judges look to for division of stock options and other forms of executive compensation. Bornemann v. Bornemann . 245 Conn. 508 (1998). A discussion of how the marital portion ("coverture factor") of unvested options can be calculated is discussed in Wendt v. Wendt . 59 Conn. App. 656 (2000). Compare Hopfer v. Hopfer . 59 Conn. App. 452 (2000) (wife not entitled to portion of unvested options which were granted after the divorce was filed and shortly before the divorce decree was issued).
The general rule is that the marital estate is valued at the time of the issuance of the decree. Exceptions can be found in Wendt and several other cases where the court looked at the circumstances of the marriage and separation and valued certain assets at the time of the separation.
Dividing something that might increase in value in the future is a difficult task. Some valuation methods require the services of an expert economist or financial analyst. Evaluation services can be expensive and sometimes less precise fractional methods may be acceptable to the parties.
Personal injury awards
Settlements, judgments and workers' compensation payments can be treated as marital property and distributed by the court to either party. Lopiano v. Lopiano . 247 Conn. 356 (1998). The court looks at multiple factors and all the facts and circumstances when deciding whether an award be shared with a spouse.
Inheritances and Gifts
The court has jurisdiction to allocate Inheritances and gifts that have been received to either party regardless of the source. The court looks at multiple factors when deciding whether an inheritance or gifts should be shared with a spouse. When the money was received, how it was used during the marriage, whether it was kept separate and what it was received for.
The concept of "property" includes a presently existing, enforceable right to receive income in the future. The mere hope or expectation of an inheritance does not make a future inheritance "property" and part of the marital estate to be divided. The legal term for hope or expectation is "a mere expectancy." For example, in Rubin v. Rubin, 204 Conn. 224, 230-31, 527 A.2d 1184 (1987), the husband's status as a possible residuary beneficiary under revocable trust and will of his mother was a "mere expectancy" and his possible future inheritance should not have been the subject of a contingent order of the court, nor was evidence of the estate plan admissible at trial. The existence of this type of guideline does not limit a couple's ability to come to voluntary agreements about future inheritances as a way to achieve equity in the division of property.
A medical degree is not marital property which may be divided by the court in a dissolution of marriage. Simmons v. Simmons, 244 Conn. 158 (1998).
Pensions and 401K's.
Defined contribution plans (401-K's, i. e.) and defined benefit plans (pensions, i. e.) are considered marital property and are subject to assignment by the Court. Véase, p. Stamp v. Visconti, 51 Conn. App. 84 (1998) (wife's 401K should have been included as a marital asset even though completely funded by her employer). Qualified Domestic Relations Orders ("QDRO's") are typically ordered by the court in connection with the final decree, and when issued, requires the plan administrator to transfer all or part of a plan's interest from one spouse to another. Transfers made by QDRO incident to a divorce are free of taxes or penalties. See Wicki article on QDROs .
In Bender v. Bender . 258 Conn. 141 (2001), the Supreme Court ruled that unvested pensions are marital property and can be subject to division.
You can collect social security based upon your divorced spouse's income if (1) you were married for at least 10 years; (2) you have been divorced for two years; and (3) your divorced spouse is eligible to receive benefits. The two-year waiting period does not apply if the divorced spouse was receiving benefits prior to the divorce. There is no impact on the benefits of the spouse against whose account the divorced spouse collects benefits. The right to spousal benefits is lost if you remarry. See Social Security FAQ from the Nolo Press. See Section 216 of the Social Security Act, 42 U. S.C. 416 .
Finality of Property Settlements
Property settlements in divorce judgments can only be reopened for a limited time after they entered and only on specific grounds (i. e. fraud or mutual mistake). Once entered, property settlements are very difficult to change. (Orders concerning children can always be modified in the event of a substantial change of circumstances.)
Alimony is available to either party but neither party is absolutely entitled to receive alimony. The basis for awarding alimony is not to punish a guilty spouse but to continue a duty to support the other. Judges in Connecticut have varying opinions about alimony awards.
Beware of formulas!
Judges award alimony based upon all the facts and circumstances of the parties and do not rely upon formulas or rules of thumb. Many of the common formulas that parties hear about have been repudiated by their authors.
Considering all the evidence, the court will consider are: the length of the marriage, the causes for the divorce, the age, health, station, occupation, amount and sources of income, earning capacity, vocational skills, education, employability, estate and needs of each of the parties, and the nature of the property awarded to each party by the court. Conn. Gen. Stats. § 46b-82 rev. 2017. When children are involved, the court will also consider the desirability of the custodial parent's securing employment. Alimony is an area where Judges differ and there are no formulas. Whether to issue an alimony award and its type, amount and duration varies according to the Judge and the geographical location of the Court.
The options for alimony are: (1) none, (2) $1.00 per year, (3) lump-sum alimony or (4) periodic alimony. If the divorce judgment provides for $1.00 per year, that figure give the court the authority to modify the amount in the future, if the legal requirements for modification are met. "Rehabilitative alimony" is transitional support awarded to one of the spouses during a period of education or training necessary to achieve self-sufficiency or make up for time that the spouse has been withdrawn from the workplace. Lifetime alimony is available in Connecticut, but the Judge ordering a lifetime award must articulate with specificity the basis for the alimony order.
Connecticut courts employ an expansive and flexible definition of income when fashioning financial orders. In addition to the traditional evidence of income, the court may infer income from the lifestyle and personal expenses of the parties. Carasso v. Carasso . 80 Conn. App. 299, 304 (2003), cert. denied (2004). In Brown v. Brown . norte. 6. Conn. App. (Aug. 2, 2011), the husband's derivative cash flow from his various business interests was so complex that the court essentially used a reverse cash method (what was spent) to analyze the income.
Because alimony is deductible to the party who pays it, it is a device to shift the tax burden to the spouse who is likely in a lower tax bracket. Alimony is therefore an important divorce financial planning device.
Alimony can also be made non-modifiable as to amount or duration by agreement of the parties.
If the agreement or decree contains no prohibition precluding modification, the court will have the ability to to modify in the future based upon a substantial change in circumstances. The parties can specify that an order be modifiable under specific circumstances. When a Judge determines how an order should be modified, he must take all the circumstances of the parties to the same extent as if it were the initial order.
Waiver of Alimony
If the parties waive their right to alimony, or if the court's judgment contains no provision for alimony, neither party will be able to go back into court at any time in the future to request that alimony be ordered, even if there is a drastic change in circumstances that was not foreseeable at the time of the divorce. Unless there is some kind of alimony provision, the door will be closed forever.
Effect of Cohabitation on the Payment of Alimony
In DeMaria v. DeMaria . 247 Conn. 715 (1999), the Supreme Court (Katz, J.) ruled that a provision to terminate alimony in the event of a recipient's cohabitation must be interpreted in conjunction with the requirements of Conn. Gen. Stats. Section 46b-86(b). The statute allows the court to modify an alimony order on grounds that the recipient is "living with another person" only if the new living arrangement causes a change of circumstances so as to alter the financial needs of that party. The Supreme Court ruled that a trial court must evaluate the financial impact of the living arrangement regardless of the terms of the separation agreement and decree. A party seeking modification upon the ground of cohabitation must therefore plead and prove "altered financial needs."
Parties now have a alternative in addition to the strict DeMaria approach. If parties wish to fashion their own cohabitation criteria, or to modify a portion of the statutory formula, they may do so in their agreement and the Court is required to enforce their provision under a 2017 amendment to the Statute.
Impact of Divorce on Children
Under the best of circumstances and in the most amicable of situations, divorce takes its toll on children. In her landmark 25-year study, The Unexpected Legacy of Divorce, researcher Judith Wallerstein disproves the myth that children will "bounce back" after divorce. By re-interviewing subjects she first studied 25 years ago, she found that the ill effects of divorce followed children into adulthood. Wallerstein and her co-authors found that although children do learn to cope with divorce, in adulthood they often feel that their relationships are doomed. They seek to avoid conflict and fear commitment.
A brief but invaluable resources is a one-page list published by the Academy of Matrimonial Lawyers entitled Ten Tips for Divorcing Parents . Print it, put it in your medicine cabinet and read it every day. There are other articles concerning divorce and children you can access using the pull-down menus on this site.
Elements of legal and physical custody
There are two components to custody: legal custody and physical custody . Legal custody relates to decision-making and physical custody has to do with where the child lives. Sole legal custody means that one parent will make all the major non-emergency decisions for the child, including schooling, medical issues, religious education, and the like. Joint legal custody, the most common arrangement, means that the parents make all those decisions jointly. Primary physical custody means that the child resides with one parent primarily and the other parent has co-parenting rights and responsibilities. Shared physical custody means that the child resides with each parent approximately (but not necessarily) half the time. Split physical custody means that children are split up among the parents, i. e. one child to the mother and the other child to the father.
In issuing its orders, the Court shall be guided by the best interests of the child . giving consideration to the wishes of the child if the child is of sufficient age and capable of forming an intelligent preference. The Court may also take into consideration the causes for divorce, if they are relevant to a determination of the best interests of the child. Most often, however, the judges will differentiate and treat differently the issues between the adults and children.
Connecticut has no set age upon which a child can state a preference as to which parent she/he would like to live with. A court will consider a child's preference and take into consideration the child's age and the overall circumstances. The child's preference is not binding upon the court. Parents should never make demands on children to make a choice or talk to them about which parent they would prefer living with. Such conversations are emotionally disturbing to a child. A child's input should be obtained very carefully. It is usually best for such discussions to take place in a safe environment for the child in a session conducted by a professional. Parents should also be aware that children tend to tell the parent asking the questions what that parent wants to hear.
Participation in a parenting education program is required under Conn. Gen. Stats. §46b-69b. Parenting education involves attending a program of classes by a provider approved by the Court. Brochures and forms are available in the clerk's office of the J. D. (county) courthouses and are also available on line at the Judicial Website . The course costs $125 per parent and consists of six hours of classes at the office of the approved provider. The parties must bring the signed certificates of completion with them to court on the day that they request the court grant the divorce. Most parents report that the classes are very beneficial and are especially helpful if taken at the beginning of the divorce. If you have children, take a minute to read Ten Tips for Divorcing Parents . A court has the authority to order parenting education at anytime if the court deems that it is in the best interests of the children.
Visitation by Grandparents and Other Third Parties
Under Connecticut law, persons with significant ties to children have visitation rights. Recently, the Connecticut Supreme Court ruled that grandparents and others must demonstrate that they have a "parent-like" relationship with the child and that the child will suffer harm if visitation is denied. This is a heavy burden of proof and it will have a significant impact on the ability of third-parties to obtain visitation orders. Connecticut courts have increasingly made it more difficult for grandparents and others to intervene or obtain visitation rights against
Connecticut's Child Support Guidelines . Child support is calculated using the Guidelines, Conn. Gen. Stat. §46b-84 (July 1, 2017). Under the guidelines, the amount of total support is calculated and then each parent's portion of the total support is calculated pro rata according to their respective incomes. The Guidelines provide that judges have the discretion to deviate from the guideline amounts in certain specified situations. For instance, the Court may take into consideration a) the educational needs of the parents; b) the needs of other children supported by the non-custodial parent; c) extraordinary visitation expenses; and d) whether a deviation should be allowed due to shared or split custody situations.
Types of Child Support . The Guidelines provide for several types of child support. The following modes of support are mandatory:
The basic support obligation. The fixed weekly amount of support calculated under the Guidelines.
It is appropriate to include average bonus and commission income when calculating support, or, to determine a fixed percentage of bonuses that will be paid when bonuses are received if they are not capable of being averaged. Any bonus income agreement should take into account the declining percentage nature of the Guidelines schedule when income increases. Maturo v. Maturo . 296 Conn. 80 (2010) .
A percentage of out-of-pocket health-related expenses not covered by insurance, including medical, dental, psychological, orthodontic, and vision expenses. These expenses are shared pro rata according to the parties' combined income (the "income shares model").
The same percentage is applied to the sharing of work-related child care expenses.
There are additional support types that are not mandatory, but are commonly included in agreements by couples, depending on their incomes and resources and the needs of their children:
Agreed-upon "extra-curricular expenses" beyond the scope of child support, for example, lessons, tutoring, sports activities, expensive clothing and accessories for sports, expensive school trips, computer, cell phones, driving lessons, car insurance, senior expenses and college application and trip expenses, and the like.
"Primary Custody" is when one parent is the primary residential parent for the child or children, and the other parent has designated co-parenting rights and responsibilities.
"Shared Custody" is a type of physical custody when each parent has co-parenting and residential responsibility for the children approximately, but not necessarily, 50% of the time. (Joint Custody is a type of legal, not physical, custody and is not synonymous with Shared Custody.)
"Split Custody" is a type of physical custody where each parent is the primary residential parent for a different child. In other words, when the children are split up. (Yes, even though it is not the norm, sometimes there are good reasons to split children up at certain developmental periods or when one child is experiencing a difficult time with issues.
Child Support and Shared Custody
"Shared custody" is one of the deviation criteria recognized by the Child Support Guidelines. The guidelines provide that deviation is warranted only when (1) the arrangement substantially reduces the custodial parent's expenses or substantially increases the non-custodial parent's expenses for the child and (2) sufficient funds remain for the parent receiving support to meet the basic needs of the child after deviation. "Shared physical custody" is defined as a situation where the non-custodial parent exercises care and control of the child "for periods substantially in excess of a normal visitation schedule." This is usually deemed to be one-half or close to one-half of the time.
A common misunderstanding is that parents do not have to pay child support in shared parenting situations. Shared custody means that both parents share all parenting responsibilities, including financial responsibilities. Each parent is therefore required to provide a portion of all the housing, food, clothing, education, medical, and social expenses of the child. This can be accomplished, for example, by setting out specifically the terms of the shared financial responsibilities in the Judgment (decree) or by pegging one parent's share of the expenses to the Child Support Guidelines. The Guidelines allow a discount on fixed child support when in shared custody cases if the financial situation of the parents' warrants a discount. Whether the shared financial arrangement between the parties is flexible or fixed will depend on the particular circumstances of the parties and how well they work together on parenting and financial issues.
New Spouse or Domestic Partner's Income.
The guidelines provide that the court cannot consider a new partner's income, but can consider a new spouse's contributions or gifts as a deviation criteria, "if it is found that the parent has reduced his or her income or has experienced an extraordinary reduction of his or her living expenses as a direct result of such contributions or gifts." The authors of the Guidelines intended to incorporate the holding of the Supreme Court's March 1998 decision in Unkelbach v. McNary . 244 Conn. 350, 710 A.2d 717 (1998). In Unkelbach . the court ruled that a spouse or domestic partner's contributions toward living expenses could be taken into consideration by the court. Under the Unkelbach approach, the domestic partner's income is therefore not included in the calculations, but the partner's contributions to living expenses would be treated as gifts.
Other Reasons to Deviate from the Guidelines. The court must articulate a specific basis for deviation based upon the guidelines; for example, other assets available to a parent, earning capacity, extraordinary expenses for the care of a child, extraordinary parental expenses (significant visitation, job or medical medical expenses), needs of a parents other dependents, coordination of total family support (division of assets, alimony and tax planning considerations).
Conn. Gen. Stats. 52-362(b) makes wage executions (an automatic deduction from wages by the person's employer) mandatory in every case in which the court makes financial orders. The provision may be waived if the parties agree in writing that the court may order a "contingent" wage execution. With a contingent order, the person receiving support can get a wage execution if the person paying support fails to pay or to make payments on time.
In making a determination as to alimony and child support, a court has the discretion to make its orders based upon the "earning capacity" as opposed to the actual earnings of a party. This prevents persons involved in divorce or child support actions from becoming deliberately unemployed or under-employed in order to affect the outcome of the court decision.
There was a time when State courts did not have the authority to make orders for support for children who reached their age of majority which is 18 in Connecticut. Because parents were making "post majority" agreements, the legislature granted Connecticut family the authority to enforce or modify any post-majority agreements that were contained in written settlement agreements. In 2002, the legislature gave Connecticut judges the authority to make post-majority "Education Support Orders" with some limitations. The key limitations is that Judges are limited to making orders based on the "UConn Equivalency" (see below) and that parents are allowed to waive application of the Education Support Order Statute.
Prior to October 1, 2002: The court has no authority to order child support past the age of 19. If the parties provide for post-majority support (i. e. college expenses) in their written separation agreement, the court will enforce that agreement. For orders entered after October 1, 2001, Judges have the authority to modify post-majority support agreements like any other order of child support.
On or After October 1, 2002: The new law, "The Educational Support Order Statute," gives Judges the authority to order that parents pay as child support, college education costs. The statute, Conn. Gen. Stats. § 46b-56c, would apply to orders entered by the court on or after October 1. The Bill
requires that the court make a determination that but for the divorce, the family would most likely have supported the college education of the child,
requires that the court take in consideration all the circumstances of the parents and the child before making an order,
requires that the amount to be paid is capped at the "UConn equivalency"; namely, tuition, room and board and costs of a Connecticut resident at the University of Connecticut (the child is not required to attend UConn but the order cannot exceed the amount it would cost to go to UConn),
requires the order shall terminate on the child's 23rd birthday,
requires that the child meet requirements in terms of choice of study, academic standing and cooperation with parents,
allows for payments to be made directly to the school, parent, or child
allows for modification
provides that the child does not have the right to sue his parents for educational support based upon the statute,
does not provide for graduate or post-graduate degrees
applies to cases in which an initial order for child support is entered after Oct. 1, 2002
Other Types of Post-Majority Support
Given the economic realities for teenagers and college students and their parents, it is becoming more common for Agreements submitted in court to contain other types of support for older and adult children. In practice, adult children are commonly receiving partial support (of more) from their parents. These agreements are designed to allow parents to know that the burden will be shared in the event that, when despite best efforts to support themselves, adult children need assistance. Parents can design a fractional arrangement and limitations that suit them as to any type of post-majority support.
Agreements for parents to share ancillary expenses for college, for example: car, car insurance, computer, cell phone, health insurance when a college plan is inadequate, education-related travel, and the like.
Agreements for parents to contribute to graduate school tuition or living expenses.
Agreements for parents to share contributions to living expenses for adult boomerang children who need help living on their own, or need to move in with a parent.
The Court always retains jurisdiction over issues relating to the custody and well-being of minor children. Any orders relating to child support can be modified upon a showing of a "substantial change in circumstances." Conn. Gen. Stat. §46b-86. When reviewing child support orders, the courts use a benchmark of a 15% deviation from the guidelines to determine whether a change in circumstances qualifies as "substantial".
There is no requirement that the parties show a substantial change in circumstances to modify custody. The only requirements is that the court "be guided by the best interests of the child." Conn. Gen. Stats. § 46b-56(b).
As to alimony, the parties can restrict the right of the Court to awards by making them "non-modifiable" as to either amount or duration of payments (or both). Kelly v. Kelly, 54 Conn. App. 50, 57 (1999), Balaska v. Balaska . Conn. App. (July 25, 2011). Judges in Connecticut are increasingly taking into account all the current finances of parties who are in court for modifications.
Once marital property is distributed, it is very difficult to modify an agreement or order and obtain a redistribution. Property settlements between parties are usually final as of the date of the divorce and can only be revisited if there are specific special circumstances (i. e. fraud, duress, mutual mistake) that are brought to the court's attention within a specific time period.
Important Note: Tax issues are complex and difficult to generalize. I. R.S. regulations change frequently. The information in this article is provided as a starting point. Please read the linked publications to make sure that the general statements apply to your tax situation. Please discuss the tax impact of your divorce issues with a tax professional.
Link to IRS PDF File Publication 504 "Divorced or Separated Individuals."
Unless the parties are married on the last day of the tax year (i. e. December 31st), they are not eligible to file a joint tax return for that tax year. If the parties are married on the last day of the tax year, they are eligible to file married (jointly) or married (singly).
Alimony is treated as taxable income for the receiving spouse and is a deductible expense for the payor spouse. Link to IRC Section 71 .
Exemptions and Deductions for Children .
The dependent child exemption is assignable from the primary custodian of the child if the custodial parent signs a Form 8332 (release of exemption). Link to IRS Publication 501: Dependent Child Exemption. The child care (i. e. day care) credit is not usually assignable and must stay with the parent with whom the child primarily resides. A separate tax credit is the Child Tax Credit, which can be claimed by anyone who is entitled to "claim a child as a dependent."
Property Transfers. Transfers of property (including the marital residence) from one spouse to the other "incident to a divorce" are generally non-taxable events. Spousal transfers incident to divorce are treated like gifts so the spouse receiving the property receives the "adjusted basis" (baseline valuation) of the spouse transferring the property for the purpose of figuring gains and losses in the future. IRC Section 1041 . Link to IRS Publication 504: Transfers Between Spouses.
Sale of Principal Residence . Pursuant to the Tax Reform Act of 1997, there is a $250,000 exclusion of capital gain per spouse ($500,000 per couple) on a principal residence sold after May 6, 1997 provided that you resided for the residence for 2 out of the last 5 years (or less if you rolled in the gain from a prior principal residence). This is not a "one time" exclusion as was provided under prior law; you may apply the exclusion to one home sale in a two-year time period. Link to IRS Publication 523 Sale of Your Home .
Refunds . Spouses have individual, not joint, interest in tax refunds . Unless otherwise agreed to, the overpayment is allocated according to the amount of tax paid by each spouse. IRS Revenue Ruling 74-611.
& Quot; Innocent Spouse " rules allow spouses to apply to the IRS to disengage from joint tax returns obtain protection from joint liability (civil and criminal) if they suspect the other spouse has not been honest in filing in joint returns. The Innocent Spouse Rule of the IRS Restructuring and Revision Act of 1998 provides that where:
The parties have filed a joint return;
That as a result of the gross misstatements of one spouse, there is an understatement of tax due;
The innocent spouse can demonstrate that he or she signed the return not knowing about the understatement;
It would be inequitable to hold the innocent spouse liable for the deficiency taking all the circumstances into consideration.
There are more detailed explanations as to what types of misrepresentations and what constitutes an understatement contained in the rules. There are time limitations for filing with the IRS for innocent spouse protection. Link to IRS Publication 971: Guidelines (Acrobat pdf file) .
Contempt . A party can be found to be "in contempt" for willfully failing to comply with an order of the court. A Motion for Contempt is the mechanism by which a party raises the other party's non-compliance to the court and the mechanism by which the family court enforces its orders. A party found to be in contempt can be required to pay the other party's attorneys' fees. On occasion, parties are jailed for contempt when a party willfully fails to comply with a court order.
"Self Help" In Eldridge v. Eldridge . 244 Conn. 523 (1998) the Supreme Court (Justice Katz) demonstrated the degree to which it disfavors "self help". In Eldridge the husband discovered years after the fact that his wife was earning income that entitled him to an offset from his alimony payments. Figuring that he had actually overpaid his wife, he stopped making payments. His wife filed a motion for contempt. Even though he was entitled to a $10,000 credit, the Supreme Court found that it was appropriate to find him in contempt because he did not receive an order from the court before reducing or suspending payments. In Sablosky v. Sablosky . 258 Conn. 8 (2001), the Supreme Court ruled that a party who fails to comply with a judgment, even though a provision may be deemed ambiguous, can be held in contempt of court.
Mastering Charitable Contribution Deduction Rules and Completing Form 8283
Navigating Substantiation and Appraisal Requirements, Leveraging Carry-Forwards, and Avoiding AAOI
Recording of a 110-minute EA webinar with Q&A
Conducted on Thursday, July 30, 2017 Recorded event now available
This webinar will provide comprehensive guidance on the substantiation, valuation, timing rules and reporting of charitable contribution deductions. The panel will detail the language necessary to qualify as a valid acknowledgment under Section 170, and will discuss valuation and appraisal requirements. The experts will also define anticipatory assignment of income and provide best practices for avoidance of ordinary income in the gifting of stock in closely-held corporations or partnerships. The panel will also provide line-by-line instructions on some of the more challenging sections of Form 8283.
Descripción
For most taxpayers, claiming a tax deduction for charitable contributions is a fairly straightforward process: taxpayer makes a donation, receives a letter thanking them for their contribution, and they provide the acknowledgments to their accountant and claim the deduction.
However, for many taxpayers, the process is more complicated: What if the taxpayer doesn’t receive a qualifying acknowledgment from the charity? The IRS utilizes a mechanical test: taxpayers must be able to prove they made the claimed contribution and they must provide qualifying substantiation for the deduction to withstand audit scrutiny. There are a number of tax court cases where the IRS has audited a taxpayer and because the acknowledgment did not have the required language, the IRS disallowed the deduction, even though the taxpayer made the contribution.
There are also separate rules and thresholds for valuation and appraisal requirements. The IRS can disallow a charitable deduction claim, even if the taxpayer contributed goods to a charity, if the taxpayer fails to provide a qualified appraisal, for example.
Taxpayers who own stock in partnerships or closely-held corporations and wish to contribute the stock to an exempt organization in advance of a sale event must also be careful of the timing of any gift. Under the anticipatory assignment of income doctrine (AAOI), a taxpayer who donates shares when a sale is already mostly completed must recognize and pay tax on sale gain prior to receiving a charitable contribution deduction.
Our expert panel will discuss the various substantiation and timing requirements, and provide detailed guidance in completing some of the more challenging sections of IRS Form 8283.
Outline
Substantiation of charitable contributions for deduction
Required language in acknowledgment
Appraisal standards and requirements
Valuation challenges for closely-held corporation stock
Special Rules for Vehicles
Charitable contribution carry-forward amounts
Anticipatory assignment of income
Examination of Form 8283
Beneficios
The panel will discuss these and other key issues:
Specific substantiation language required by Section 170 and its regulations
What will—and will not—satisfy the appraisal requirements on Form 8283
Valuation challenges and questions
Timing of contributions of closely-held stock to avoid AAOI claims
Line-by-line examination of more problematic parts of Form 8283
Special rules for vehicles
Special rules for partial interests and restricted use property
After completing this course, you will be able to identify the specific language required by Treasury Regulation to avoid disallowance of a charitable contribution deduction. You will know the guidelines and requirements for valuation and appraisal, and what appraisals must contain in order to withstand IRS scrutiny. You will understand anticipatory assignment of income, and you will be able to advise clients to properly structure any planned contribution of closely-held stock to avoid ordinary income recognition and tax prior to the donation. Last, you will be able to navigate the more challenging parts of Form 8283.
Faculty
Thomas T. Brooks, CPA/ABV, ASA. Senior Manager - Valuation Services Cherry Bekaert, Atlanta
With 19 years of experience handling valuation and litigation support matters, Mr. Brooks specializes in guiding clients with the valuation of their businesses, business interests, and intangible assets for M&As; gift and estate planning; financial and tax reporting; charitable giving; strategic planning; shareholder disputes; commercial litigation; and creditor/collateral analysis.
David C. Hogan. Managing Director Ronald Blue & Co. CPAs and Consultants, Atlanta
Mr. Hogan provides tax and business services to the firm’s closely-held business and high-net-worth clients. These services include tax consulting, tax return preparation, accounting system design, bookkeeping, and general business consulting for small to medium size companies. Along with a staff of CPAs and other professionals, his division provides comprehensive tax and business planning services nationwide.
Joseph K. Beach, Esq. Merritt Watson, Atlanta
Mr. Beach focuses his practice in the areas of estate planning with a focus on philanthropic bequests and has written and published on estate planning and business succession topics.
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Wage and Hour Division (WHD)
This is in response to your letter requesting an opinion regarding whether your client may deduct from the salaries of exempt employees or require them to reimburse the company for damage to or loss of company equipment without jeopardizing the employees’ exempt status under the Fair Labor Standards Act (FLSA) exemption for executive, administrative, or professional employees. It is our opinion that such deductions or reimbursements would violate the salary basis requirements of FLSA section 13(a)(1) (copy enclosed).
Your client would like to impose a fine on its exempt employees who damage equipment they use in performing their jobs, such as cellular telephones and laptop computers. You ask whether the fine may be imposed as a deduction from an employee’s salary for the replacement or repair cost and, if not, whether the employer can require the employee to pay for the damage out of the employee’s pocket. The employer currently has a policy that requires deductions from the wages of its non-exempt employees for the cost of lost or damaged tools or equipment, which has never brought a non-exempt employee’s net pay below the minimum wage for any given pay period. You stipulate that for the purposes of rendering an opinion, we are to assume that the employees in question are otherwise exempt under the FLSA. Thus, our response expresses no view as to whether the employees in question meet the duties test for the section 13(a)(1) exemptions.
Section 13(a)(1) of the FLSA provides a complete exemption from the minimum wage and overtime pay requirements for any employee employed in a bona fide executive, administrative, or professional capacity, as those terms are defined in 29 C. F.R. part 541. An employee may qualify for exemption if all of the pertinent tests are met relating to duties, salary level, and compensation “on a salary basis,” as discussed in the regulations. Please note that the Department issued revisions to the Part 541 regulations exempting certain executive, administrative, and professional employees, and these revisions were published as a final rule in the Federal Register on April 23, 2004 (69 Fed. Reg. 22,122). The revised Part 541 regulations went into effect on August 23, 2004.
To qualify for exemption, an employee must generally be paid at a rate of at least $455 per week on a salary or fee basis. Under 29 C. F.R. § 541.602 (copy enclosed), in order for employees to be considered paid on a “salary basis” they must be paid “a predetermined amount. not subject to reduction because of variations in the quality or quantity of the work performed.” 29 C. F.R. § 541.602(a). Furthermore, “ subject to the exceptions provided in [section 541.602(b)], an exempt employee must receive the full salary for any week in which the employee performs any work.” Id. Section 541.602(b) lists the permissible exceptions to the above rule. None of the exceptions listed contemplates charging employees a fine for damage to or loss of company equipment. The Wage and Hour Division (WHD) interprets these regulatory provisions to mean that if a particular type of deduction is not specifically listed in section 541.602(b) (formerly section 541.118(a)), then that deduction would result in a violation of the “salary basis” rule.
The WHD takes the position in its enforcement of the FLSA that deductions from the salaries of otherwise exempt employees for the loss, damage, or destruction of the employer’s funds or property due to the employees’ failure to properly carry out their managerial duties (including where signed “agreements” were used) would defeat the exemption because the salaries would not be “guaranteed” or paid “free and clear” as required by the regulations. Such impermissible deductions violate the regulation’s prohibition against reductions in compensation due to the quality of the work performed by the employee. Consequently, any deductions made to reimburse the employer for lost or damaged equipment would violate the salary basis rule.
It is WHD’s long-standing position that an exempt employee must actually receive the full predetermined salary amount for any week in which the employee performs any work unless one of the specific regulatory exceptions is met. In this regard, see Field Operations Handbook § 22b14 (deductions from otherwise exempt employee’s salary may not be made for cash register shortages; deductions may be made only for the reasons stated in the regulations); WH Opinion Letter November 4, 1981 (deductions from salary of exempt restaurant manager of amount reflecting unacceptably high charge for unauthorized use of restaurant’s business telephone would result in loss of exemption) (copies enclosed). As the preamble to the final rule explains, the final rule retained the salary basis requirement “virtually unchanged from the [now prior] regulation,” and but for “a few identified exceptions” an employee must receive the full salary for any week in which the employee performs any work. 69 Fed. Reg. at 22,176. Moreover, the Department specifically rejected suggestions from several commenters that we add an additional exception for payments in the nature of restitution, fines, settlements, or judgments an employer might make based on the misconduct of an employee. 69 Fed. Reg. at 22,178. The commenter identified in the preamble gave as one example of its suggested change allowing an employer to make a deduction for costs arising out of an execution of an order to buy/sell securities for a client if the employee mistakenly orders 1000 shares of stock instead of 100 shares. We believe the commenter’s suggestion is similar to the issue your client has raised, and the final rule does not authorize such a deduction from salary.
Accordingly, any employer policy that requires deductions from the salaries of its exempt employees to pay for the cost of lost or damaged tools or equipment issued to them would violate the salary basis requirement, thereby necessitating an evaluation under 29 C. F.R. § 541.603 to determine the effect of the improper deduction. It would not matter whether an employer implements such a policy by making periodic deductions from employee salaries, or by requiring employees to make out-of-pocket reimbursements from compensation already received. Either approach would result in employees not receiving their predetermined salaries when due on a “guaranteed” basis or “free and clear” and would produce impermissible reductions in compensation because of the quality of the work performed under the terms of the employer’s policies, contrary to 29 C. F.R. § 541.602(a).
By way of background, you also mentioned that your client has adopted a policy requiring its nonexempt employees to sign a statement that they will be responsible for the costs of loss or damage to the employer’s tools and equipment that the employer provides for the employees to perform their jobs, and that the policy requires deductions from the employees’ wages for such costs. With respect to nonexempt employees, an employer may not lawfully require an employee to pay for an expense of the employer’s business if doing so reduces the employee’s pay below any statutorily-required minimum wage or overtime premium that is due, because employers must pay all statutorily-required minimum wage and overtime premium finally and unconditionally, or “free and clear.” 29 C. F.R. § 531.35 (copy enclosed) 1. For example, “tools of the trade” and other materials or equipment incidental to carrying on the employer’s business are considered business expenses of the employer that may not be transferred to employees if doing so cuts into their statutory minimum wage or overtime premium pay entitlements. 29 C. F.R. §§ 531.3(d), 531.32(c) (copies enclosed). Violations occur in two ways: (1) directly, when an employer deducts the cost of furnishing the employee with tools or equipment used in the employer’s business from an employee’s pay; or (2) indirectly, when the employee must incur out-of-pocket expenses to buy the item and the employer fails to reimburse the employee for the outlay. See 29 C. F.R. § 531.35; WH Opinion Letter February 16, 2001 (copy enclosed).
This opinion is based exclusively on the facts and circumstances described in your request and is given based on your representation, express or implied, that you have provided a full and fair description of all the facts and circumstances that would be pertinent to our consideration of the question presented. Existence of any other factual or historical background not contained in your letter might require a conclusion different from the one expressed herein. You have represented that this opinion is not sought by a party to pending private litigation concerning the issue addressed herein. You have also represented that this opinion is not sought in connection with an investigation or litigation between a client or firm and the Wage and Hour Division or the Department of Labor. This opinion is issued as an official ruling of the Wage and Hour Division for purposes of the Portal-to-Portal Act, 29 U. S.C. § 259. See 29 C. F.R. §§ 790.17(d), 790.19; Hultgren v. County of Lancaster, 913 F.2d 498, 507 (8th Cir. 1990).
We trust that the above is responsive to your inquiry.
Alfred B. Robinson, Jr. Acting Administrator
Enclosures: FLSA §§ 13(a)(1), 18(a) 29 C. F.R. § 541.602 29 C. F.R. §§ 531.3,-.26,-.32,-.35, and-.37 WH Opinion Letters Dated November 4, 1981 and February 16, 2001 Field Operations Handbook § 22b14
Note: * The actual name(s) was removed to preserve privacy in accordance with 5 U. S.C. § 552(b)(7)
1 While you indicated that these deductions have never brought a nonexempt employee’s net pay below the minimum wage for any given pay period, you did not indicate whether such deductions may have reduced any of the time-and-one-half overtime premium pay that would be due when such employees worked over 40 hours in a single workweek. Under the FLSA, an employer must pay overtime compensation, at not less than one and one-half times the employee’s full regular rate of pay, for each hour worked in the workweek in excess of the applicable maximum hours standard, and no impermissible deductions may reduce any such statutorily-required overtime pay (in addition to the FLSA’s protection of minimum wage earnings in a non-overtime workweek). 29 C. F.R. § 531.37 (copy enclosed). Furthermore, various other federal, state, and local laws regulate payment of wages, prohibit or restrict payment of wages in services or facilities, outlaw “kickbacks,” restrain assignments, and otherwise govern the calculation of wages and the frequency and manner of paying them. Nothing in the FLSA or its regulations or interpretations overrides or nullifies any higher standards or more stringent provisions of such other laws. See 29 U. S.C. § 218(a); 29 C. F.R. § 531.26 (copies enclosed).
ERISA Fiduciary Duties Relating To Company Stock Options
With all the red flags being raised by plummeting company stock involved in retirement plan investments, it may be time to take a closer look at your company's stock. In fact, the Employee Retirement Income Security Act (ERISA) has special rules for companies that offer company stock options as a retirement plan investment.
Case in point: A group of employees sued their employer and several of its officers and directors for an alleged breach of fiduciary duties under the company's ERISA-governed retirement plan.
The employees claimed that those officers and directors, as plan administrators: 1) continued to offer company stock as an investment option even though they knew it was suffering a decline, and 2) failed to give complete and accurate information regarding that stock and the reliability of it as a retirement plan option.
The company argued that plan documents expressly prohibited the administra. (register to read more)
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Federal budget makes no change to stock options tax despite campaign promise
OTTAWA — The federal government dropped a controversial campaign promise Tuesday to change the way stock options are taxed as they promised billions to help support innovation in the budget.
During the election, the Liberals suggested they would look to put a cap of $100,000 a year on how much could be claimed through the deduction that reduces the tax charged on stock option gains.
But Finance Minister Bill Morneau said Tuesday he has no plans to make any changes to the way stock options are taxed.
"As I was out on pre-budget consultations I heard from many small firms and innovators that they use stock options as a legitimate form of compensation for their employees, so we decided not to put that in the budget," Morneau said.
Craig Alexander, vice-president of economic analysis at the C. D. Howe Institute, said the government initially was approaching stock options as a source of income for high-income Canadians, but that changed.
"It became clear that stock options are actually an important part of compensation for particular sectors in the economy and often it isn't the highest income individual that's earning some money off of stock options," he said.
"It was somewhat inconsistent for the government to say on one hand that we want to invest in the innovation, high-tech economy, and simultaneously say, 'Oh, but we're going to tax stock options significantly more.'"
The technology sector cheered the decision.
"We are thrilled that the government will engage in further consultations with industry and we look forward to being a part of that conversation," Shopify chief executive Tobi Lutke said.
Before the budget, Lutke had suggested stock options, which can yield big windfalls, are a key incentive used by startup firms to entice staff to leave bigger companies and give up big salaries to join them.
"We look forward to working in collaboration with the government to design policies that help promising Canadian entrepreneurs commercialize their ideas globally," said Jim Balsillie, chairman of the Council of Canadian Innovators and co-founder of BlackBerry.
Helping support innovation was a key theme in the budget as the federal government committed billions in spending for science and research.
The budget included $2 billion over three years for a new Post-Secondary Institutions Strategic Investment Fund that aims to improve and modernize research facilities.
The spending plan also included an additional $95 million per year to the research granting councils and an investment of $800 million over four years, starting in 2017-18, to help innovation networks and clusters designed to increase collaboration.
"We believe that businesses, post-secondary institutions, governments and other stakeholders can work together to accelerate economic growth," Morneau said.
"We need to connect people and their ideas. These clusters are where innovation will happen — innovation that will ensure Canada is at the forefront of technological advancement in the 21st century."
Craig Wong, The Canadian Press
©2017 The Canadian Press
Who Can Claim an Ordinary Loss on Section 1244 Stock?
Only individuals who originally purchased the stock may claim an ordinary loss on Section 1244 stock rather than a capital loss.
If you received the stock by gift, inheritance, or purchased it from an original purchaser, you cannot claim an ordinary loss deduction on Section 1244 stock.
A capital loss has an annual deduction limit of $3,000 . while up to $50,000 of the loss on Section 1244 stock may be claimed all at once by unmarried individuals as an ordinary loss. Any excess loss over $50,000 is treated as a capital loss and must comply with the rules for capital losses.
Up to $100,000 of the loss on Section 1244 stock may be claimed as an ordinary loss by married individuals filing a joint return even if only one spouse owns the stock.
Asociaciones
If a partnership purchases Section 1244 stock of another company, and later disposes of the stock at a loss, the partnership entity may pass the loss through to its partners.
For a partner to be allowed to claim the loss as an ordinary loss instead of a capital loss, the partner must have been a partner when the stock was issued and have remained so until the time of the loss.
Caution! If the partnership entity owns Section 1244 stock and distributes the stock to its partners, they may not claim an ordinary loss on their disposition (i. e. sale) of the stock, instead, capital loss treatment applies
S corporations
Although S corporations and partnerships are pass-through entities, the owners of these entities (shareholders and partners) are treated differently when it comes to deducting a loss on Section 1244 stock that is passed through the entity to its owners.
As mentioned earlier, when the partnership entity owns Section 1244 stock and passes a loss on the stock to its partners, they generally get to deduct the loss as an ordinary loss on their individual income tax returns.
However, this is not the case for S corporation shareholders. If an S corporation owns Section 1244 stock and passes a loss on the stock to its shareholders, they may not deduct the loss as an ordinary loss. Instead, they must deduct the loss as a capital loss.
This tax treatment of Section 1244 stock losses . where partners in a partnership get to deduct the loss as an ordinary loss, while S corporation shareholders must deduct the loss as a capital loss, is an important distinction between the two types of entities.
Where to Claim a Section 1244 Loss
Form 4797, Sales of Business Property, is used to report an ordinary loss on the sale of Section 1244 stock or a loss resulting from the stock becoming worthless. Attach Form 4797 to Form 1040.
Related Content
See the Tax Basics for Startups table of contents and scroll down to the Section 1244 Stock link for more information.
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IRS Audit Red Flags: The Dirty Dozen
By Kiplinger. March 14, 2017, 08:10:27 AM EDT
Ever wonder why some tax returns are eyeballed by the Internal Revenue Service while most are ignored?
Ever wonder why some tax returns are eyeballed by the Internal Revenue Service while most are ignored? The IRS audits only slightly more than 1% of all individual tax returns annually. The agency doesn't have enough personnel and resources to examine each and every tax return filed during a year. And its resources are shrinking. the number of enforcement staff dropped nearly 6% last year, partly due to budget cuts. So the odds are pretty low that your return will be picked for review. And, of course, the only reason filers should worry about an audit is if they are fudging on their taxes.
However, the chances of being audited or otherwise hearing from the IRS increase depending upon various factors, including your income level, whether you omitted income, the types of deductions or losses you claimed, the business in which you're engaged and whether you own foreign assets. Math errors may draw IRS inquiry, but they'll rarely lead to a full-blown exam. Although there's no sure way to avoid an IRS audit, you should be aware of red flags that could increase your chances of drawing unwanted attention from the IRS.
1. Making too much money
Although the overall individual audit rate is about 1.03%, the odds increase dramatically for higher-income filers. 2012 IRS statistics show that people with incomes of $200,000 or higher had an audit rate of 3.70%, or one out of every 27 returns. Report $1 million or more of income? There's a one-in-eight chance your return will be audited. The audit rate drops significantly for filers making less than $200,000: Less than 1% (0.94%) of such returns was audited during 2012, and the vast majority of these exams were conducted by mail. We're not saying you should try to make less money -- everyone wants to be a millionaire. Just understand that the more income shown on your return, the more likely it is that you'll be hearing from the IRS.
2. Failing to report all taxable income
The IRS gets copies of all 1099s and W-2s you receive, so make sure you report all required income on your return. IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a 1099 showing income that isn't yours or listing incorrect income, get the issuer to file a correct form with the IRS.
3. Taking large charitable deductions
We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag. That's because IRS computers know what the average charitable donation is for folks at your income level. Also, if you don't get an appraisal for donations of valuable property, or if you fail to file Form 8283 for donations over $500, the chances of audit increase. And if you've donated a conservation easement to a charity, chances are good that you'll hear from the IRS. Be sure to keep all your supporting documents, including receipts for cash and property contributions made during the year, and abide by the documentation rules. And attach Form 8283 if required.
4. Claiming the home office deduction
Like Willie Sutton robbing banks (because that's where the money is), the IRS is drawn to returns that claim home office write-offs because it has found great success knocking down the deduction and driving up the amount of tax collected for the government. If you qualify, you can deduct a percentage of your rent, real estate taxes, utilities, phone bills, insurance and other costs that are properly allocated to the home office. That's a great deal. And beginning with 2017 returns, which will be filed in 2017, you have a simplified option for claiming this deduction. The write-off can be based on a standard rate of $5 per square foot of space used for business, with a maximum deduction of $1,500. To take advantage of this tax benefit, you must use the space exclusively and regularly as your principal place of business. That makes it difficult to successfully claim a guest bedroom or children's playroom as a home office, even if you also use the space to do your work. "Exclusive use" means that a specific area of the home is used only for trade or business, not also for the family to watch TV at night. Don't be afraid to take the home office deduction if you're entitled to it. Risk of audit should not keep you from taking legitimate deductions. If you have it and can prove it, then use it.
5. Claiming rental losses
Normally, the passive loss rules prevent the deduction of rental real estate losses. But there are two important exceptions. If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. But this $25,000 allowance phases out as adjusted gross income exceeds $100,000 and disappears entirely once your AGI reaches $150,000. A second exception applies to real estate professionals who spend more than 50% of their working hours and 750 or more hours each year materially participating in real estate as developers, brokers, landlords or the like. They can write off losses without limitation. But the IRS is scrutinizing rental real estate losses, especially those written off by taxpayers claiming to be real estate pros. The agency will check to see whether they worked the necessary hours, especially in cases of landlords whose day jobs are not in the real estate business.
6. Deducting business meals, travel and entertainment
Schedule C is a treasure trove of tax deductions for self-employeds. But it's also a gold mine for IRS agents, who know from experience that self-employeds sometimes claim excessive deductions. History shows that most underreporting of income and overstating of deductions are done by those who are self-employed. And the IRS looks at both higher-grossing sole proprietorships and smaller ones.
Big deductions for meals, travel and entertainment are always ripe for audit. A large write-off here will set off alarm bells, especially if the amount seems too high for the business. Agents are on the lookout for personal meals or claims that don't satisfy the strict substantiation rules. To qualify for meal or entertainment deductions, you must keep detailed records that document for each expense the amount, the place, the people attending, the business purpose and the nature of the discussion or meeting. Also, you must keep receipts for expenditures over $75 or for any expense for lodging while traveling away from home. Without proper documentation, your deduction is toast.
7. Claiming 100% business use of a vehicle
Another area ripe for IRS review is use of a business vehicle. When you depreciate a car, you have to list on Form 4562 what percentage of its use during the year was for business. Claiming 100% business use of an automobile is red meat for IRS agents. They know that it's extremely rare for an individual to actually use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use. IRS agents are trained to focus on this issue and will scrutinize your records. Make sure you keep detailed mileage logs and precise calendar entries for the purpose of every road trip. Sloppy recordkeeping makes it easy for the revenue agent to disallow your deduction. As a reminder, if you use the IRS' standard mileage rate, you can't also claim actual expenses for maintenance, insurance and other out-of-pocket costs. The IRS has seen such shenanigans and is on the lookout for more.
8. Writing off a loss for a hobby activity
Your chances of "winning" the audit lottery increase if you have wage income and file a Schedule C with large losses. And if the loss-generating activity sounds like a hobby -- horse breeding, car racing and such -- the IRS pays even more attention. Agents are specially trained to sniff out those who improperly deduct hobby losses. Large Schedule C losses are always audit bait, but reporting losses from activities in which it looks like you're having a good time all but guarantees IRS scrutiny.
You must report any income you earn from a hobby, and you can deduct expenses up to the level of that income. But the law bans writing off losses from a hobby. For you to claim a loss, your activity must be entered into and conducted with the reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you're in business to make a profit, unless IRS establishes otherwise. If you're audited, the IRS is going to make you prove you have a legitimate business and not a hobby. So make sure you run your activity in a businesslike manner and can provide supporting documents for all expenses.
9. Running a cash business
Small business owners, especially those in cash-intensive businesses -- think taxis, car washes, bars, hair salons, restaurants and the like -- are a tempting target for IRS auditors. Experience shows that those who receive primarily cash are less likely to accurately report all of their taxable income. The IRS has a guide for agents to use when auditing cash-intensive businesses, telling how to interview owners and noting various indicators of unreported income.
10. Failing to report a foreign bank account
The IRS is intensely interested in people with offshore accounts, especially those in tax havens, and tax authorities have had success getting foreign banks to disclose account information. The IRS has also used voluntary compliance programs to encourage folks with undisclosed foreign accounts to come clean -- in exchange for reduced penalties. The IRS has learned a lot from these programs and has collected a boatload of money (we're talking billions of dollars).
Failure to report a foreign bank account can lead to severe penalties, and the IRS has made this issue a top priority. Make sure that if you have any such accounts, you properly report them. This means filing Treasury Department Form 90-22.1 by June 30 to report foreign accounts that total over $10,000 at any time during the prior year. And those with lots more financial assets abroad may also have to attach IRS Form 8938 to their timely filed tax returns.
11. Engaging in currency transactions
The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious-activity reports from banks and disclosures of foreign accounts. A report by Treasury inspectors concluded that these currency transaction reports are a valuable source of audit leads for sniffing out unreported income. The IRS agrees, and it will make greater use of these forms in its audit process. So if you make large cash purchases or deposits, be prepared for IRS scrutiny. Also, be aware that banks and other institutions file reports on suspicious activities that appear to avoid the currency transaction rules (such as persons depositing $9,500 in cash one day and an additional $9,500 in cash two days later).
12. Taking higher-than-average deductions
If deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. But if you have the proper documentation for your deduction, don't be afraid to claim it. There's no reason to ever pay the IRS more tax than you actually owe.
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Is CLH a Buy, Hold or Sell?
Dentro de cada puntaje, las acciones se clasifican en cinco grupos: A, B, C, D y F. Como puede recordar de sus días escolares, un A, es mejor que un B; Un B es mejor que un C; Un C es mejor que un D; Y un D es mejor que un F.
Como inversor, usted quiere comprar acciones con la mayor probabilidad de éxito. Eso significa que usted quiere comprar acciones con una Zacks Rango # 1 o # 2, Strong Buy o Buy, que también tiene una puntuación de A o B en su estilo de negociación personal.
Zacks Scorecard Education - Aprenda más sobre el Zacks Scorecard
Las puntuaciones de estilo son un conjunto complementario de indicadores para usar junto con el rango de Zacks. Permite al usuario centrarse mejor en las poblaciones que son el mejor ajuste para su estilo de negociación personal.
Las puntuaciones se basan en los estilos comerciales de Valor, Crecimiento y Momentum. También hay una puntuación VGM ( 'V' para el valor, 'G' para el crecimiento y 'M' para el impulso), que combina el promedio ponderado de las puntuaciones individuales de estilo en una puntuación.
Dentro de cada puntaje, las acciones se clasifican en cinco grupos: A, B, C, D y F. Como puede recordar de sus días escolares, un A, es mejor que un B; Un B es mejor que un C; Un C es mejor que un D; Y un D es mejor que un F.
Como inversor, usted quiere comprar acciones con la mayor probabilidad de éxito. Eso significa que usted quiere comprar acciones con un rango de Zacks # 1 o # 2, compra fuerte o comprar, que también tiene una puntuación de un A o un B en su estilo de negociación personal.
Zacks Style Scores Education - Aprende más sobre las puntuaciones de estilos de Zacks
Este es nuestro sistema de calificación a corto plazo que sirve como un indicador de oportunidad para las acciones durante los próximos 1 a 3 meses. ¿Qué tan bueno es? Consulte los rankings y el rendimiento relacionado a continuación.
Zacks Rank Home - Zacks clasifica los recursos en un solo lugar
Zacks Premium - La forma de acceder a la Rango Zacks
Los informes de Zacks Equity Research. O ZER para el cortocircuito, son nuestros informes de investigación internos producidos independientemente.
Los siempre populares informes de una página de instantáneas se generan para casi todas las acciones de Zacks. Está lleno de todas las estadísticas clave de la empresa y la información más relevante para la toma de decisiones. Incluyendo el rango de Zacks, el ranking de la industria de Zacks, las puntuaciones de estilo, el precio, el consenso y el gráfico de sorpresa, el análisis de estimación gráfica y cómo las existencias se apilan a sus pares.
El detallado informe de varias páginas del analista hace una inmersión aún más profunda en las estadísticas vitales de la compañía. Además de todo el análisis propio en la instantánea, el informe también muestra visualmente los cuatro componentes del rango Zacks (Acuerdo, magnitud, alza y sorpresa); Proporciona una visión general completa de los conductores de negocios de la empresa, con gráficos de ganancias y ventas; Una recapitulación de su último reporte de ganancias; Y una lista de razones para comprar o vender la acción. También incluye una tabla de comparación de la industria para ver cómo su acción se compara con su industria ampliada, y el S & amp; P 500.
Investigar acciones nunca ha sido tan fácil o perspicaz como con los informes de ZER Analyst y Snapshot.
Option Chain
Las puntuaciones de estilo son un conjunto complementario de indicadores para usar junto con el rango de Zacks. Permite al usuario centrarse mejor en las poblaciones que son el mejor ajuste para su estilo de negociación personal.
Las puntuaciones se basan en los estilos comerciales de Valor, Crecimiento y Momentum. También hay una puntuación VGM ( 'V' para el valor, 'G' para el crecimiento y 'M' para el impulso), que combina el promedio ponderado de las puntuaciones individuales de estilo en una puntuación.
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En el centro de todo lo que hacemos es un fuerte compromiso con la investigación independiente y compartir sus descubrimientos provechosos con los inversores. Esta dedicación a dar a los inversores una ventaja comercial llevó a la creación de nuestro probado Zacks Rank sistema de clasificación de valores. Desde 1986 casi triplicó el S & amp; P 500 con una ganancia media de + 26% por año. Estos rendimientos cubren un período de 1986-2011 y fueron examinados y atestiguados por Baker Tilly, una firma de contabilidad independiente.
Visite el rendimiento para obtener información sobre los números de rendimiento mostrados anteriormente.
Visite www. zacksdata. com para obtener nuestros datos y contenido para su aplicación móvil o sitio web.
Precios en tiempo real de BATS. Citas diferidas de Sungard.
Los datos de NYSE y AMEX tienen al menos 20 minutos de retraso. Los datos de NASDAQ tienen al menos 15 minutos de retraso.
Archive for the ‘Coffee Can Investing’ Categoría
Monday, August 11th, 2017
How to Pick the Best Mutual Fund for Your IRA or 401(K)
If you are a participant in a typical 401(k) plan, you face a list of 18 mutual funds to choose from. If you set up your own IRA plan, the list grows to over 4000 funds in the universe. Most people don’t have the foggiest notion of which fund choice is the best for them. The answer is actually quite simple, if you understand a few essential truths.
Before you get to the mutual fund choice, you may have an even more important decision to make. It involves the kind of IRA you pick. The Roth IRA is an infinitely better choice than the traditional IRA. You forego a tax deduction in year one but you avoid paying ordinary income taxes every year you withdraw money during your retirement years when the amounts you withdraw are greater and the tax rate you pay is likely to be higher than during that first year (the government ultimately will be forced to raise rates to pay for social security and the interest on the federal debt).
The Roth IRA is such a good deal for you and such a bad deal for the government that they severely limit how much you can contribute ($5500 a year or $6500 if you are over 50), and if you make over $127,000 as a single or $188,000 as a couple, you can’t contribute at all. If you qualify, choosing a Roth IRA over a traditional IRA is a no-brainer. After five years and you reach 59 ½, there are no restrictions when (and if) you withdraw money while your nest egg continues to grow tax-free, including the dividends.
Astonishingly, in spite of the considerable advantages of Roth IRA’s, only 2% of all IRA investments are in Roth IRAs. That is an unbelievable number to me. I just don’t understand how so many millions of Americans have made the absolutely wrong choice for themselves. Of course, they also drop millions of dollars every day at the casinos, knowing full well that the house will win every time over the long run. So I guess we should not expect them to be very smart about their IRA choice, either. But it is a sad fact for me.
If your company’s 401(k) plan does not offer a Roth IRA alternative, speak to HR and ask them to get it in there. Your fellow employees, and you, deserve it.
Once you have selected the Roth IRA alternative (if it indeed is a choice for you), you face the mutual fund choice challenge. Why do you suppose that the average 401(k) plan has 18 choices? That seems to be a fairly large number to choose from. Surely, your company could figure out the three or four best choices out there and restrict your choices to those. That would be offering a real service to anyone who lacks the financial education or experience to make that kind of important choice for their future livelihood.
Sadly, apparently the biggest reason that many companies offer a large number of mutual fund choices in their 401(k) plan is to avoid a lawsuit. Class action suits have (successfully) been brought by employees of many companies against their employees because mutual fund choices were more beneficial to the mutual fund companies and just awful for the employees. The courts have sided with the companies when a large number of mutual fund choices were offered (“it was the employees who decided to pick those bad ones – they had a better choice but did not take it” was the reasoning).
In a perfectly just world, the companies would also be required to provide more information to employees as to which the best choices would be for their employees. But as we all know, our world is far from perfect.
Fortunately, there is a best choice, and it is definitely not the most popular one. The most popular choice is the target-date funds. They make intuitively good sense. You know the approximate year when you expect to retire, and you just select that date fund. More than 40% of 401(k) participants make that choice (and that number is projected to grow to 50% by 2020).
The sad fact is that there is not a single 5-year period ever when target-date funds have outperformed a low-cost broad-based index fund. The only time when they have come close is when the stock market has crashed (since some of the target-date money is in fixed-income instruments, they do not fall quite as much as the overall market in market-crash years). Over the last 5 years, target-date funds have lagged behind the market by 22% – 47% depending on the target date – truly monumental losses for all target-date fund owners.
Target-date funds underperform for two important reasons. First, expense ratios (management fees) are higher, usually about three times as much as most index funds. It doesn’t take a smart Wall Street MBA to pick the stocks in an index fund (rather, a fixed selection of stocks is blindly followed). Consequently, the management fee can be much less for the index fund.
Second, trading costs are usually two or three times as great in equity funds (especially target-date funds) compared to passive index funds. The turnover rate can be 50% to 100% for many equity funds, running up considerable commission and trading costs that are passed on to participants (and generally not revealed to them).
Even worse, this excessive turnover is subject to the completely hidden costs of high frequency trading which skims off millions of dollars for Wall Street every single trading day. The big losers from high frequency trading are the owners of non-index equity mutual funds.
I have written a Kindle book that explores this entire issue in far more detail and tells you specifically exactly which fund you should choose for your 401(k) plan. It is designed to be read in an hour (although two hours is probably a better time to allot). I have immodestly called the book The Best Little Book on investing in an IRA or 401(k), Period! It is yours for only $5.99. It could change everything you ever knew or were told about retirement investing. If you have a single target-date or other non-index mutual fund in your investment portfolio, this small investment of your time and money could save you thousands of dollars over your lifetime. Get it now, here.
The book includes one suggestion that is highly unlikely to have been disclosed to you by HR and is almost guaranteed to save you thousands in tax savings when you retire. Why would any rational 401(k) participant not plunk down $5.99 to discover it? Maybe because they are at the casino where they think they are more likely to come home with more money than they started out with.
Making 36% — A Duffer's Guide to Breaking Par in the Market Every Year in Good Years and Bad
This book may not improve your golf game, but it might change your financial situation so that you will have more time for the greens and fairways (and sometimes the woods).
Averigüe por qué el Dr. Allen cree que la Estrategia 10K es menos riesgosa que poseer acciones o fondos mutuos, y por qué es especialmente apropiado para su IRA.
Success Stories
I have been trading the equity markets with many different strategies for over 40 years. Terry Allen's strategies have been the most consistent money makers for me. I used them during the 2008 melt-down, to earn over 50% annualized return, while all my neighbors were crying about their losses.
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Stock Option Counsel - Legal Services for Individuals. Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock. Please see this FAQ about her services or contact her at (650) 326-3412 or by email .
QUORA QUESTION: Is there a generic formula I can apply to determine fair pre-IPO stock option grants based on the company's size and # of fully diluted shares?
I am a tech worker who has spent all of my career with post-IPO companies and am negotiating an offer with a well-established startup of approximately 250 employees. I am not taking on a senior role.
This is a simplified version of part of the process I follow with my Stock Option Counsel clients who are evaluating private company equity offers. It works best with a mid-stage startup which has had a recent funding round from a well-known VC (a. k.a. someone whose investment decision you would trust).
Recent VC Company Valuation / Fully Diluted Shares = Current "Value" per Share
Current Value per Share - Exercise Price per Option = Intrinsic Value per Option
Intrinsic Value per Option * Number of Options = Intrinsic Value of Equity Offer
Intrinsic Value of Equity Offer / Number of Years of Vesting = Annual Value of Equity Offer
Annual Value of Equity Offer + Value of Benefits + Salary + Bonus/Commission = Total Annual Compensation
Use Total Annual Compensation to evaluate the offer or compare to market opportunities.
Certain legal terms may change the risk and, therefore, the appropriate number of shares. For more on ownership limitations, see Ownership - Can the Company Take Back My Vested Shares? For more on how companies decide the right offer for startup employees, see Bull’s Eye: Negotiating the Right Job Offer .
Stock Option Counsel - Legal Services for Individuals. Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock. Please see this FAQ about her services or contact her at (650) 326-3412 or by email .
Stock Option Counsel - Legal Services for Individuals. Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock. Please see this FAQ about her services or contact her at (650) 326-3412 or by email .
QUORA Question: Do recent markdowns by mutual funds of private tech company valuations impact the strike price for options granted to new employees?
MARY RUSSELL Answer:
Yes, I am seeing this in my practice. Companies that issue stock options generally set the strike price at the fair market value on the date of grant, with such value determined with an outside valuation performed every year or six months. These are known as "409A valuations." Some companies which have seen markdowns in their stock, and some other companies in the startup world, are showing their 409A valuations decreasing in their most recent outside valuations.
This is relevant for new hires and existing employee optionholders. For new hires, it may make sense to agree to delay an option grant until a new valuation if the company expects the next 409A valuation to come in at a lower price than the current 409A valuation.
For existing employee option holders, a lower 409A valuation may cause outstanding options to be "underwater." An underwater option is an option with a strike price that is higher than the current value of the shares. In the case of underwater options, it may make sense to ask the company to reprice the options so employees can take advantage of the lower valuations.
Stock Option Counsel - Legal Services for Individuals. Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock. Please see this FAQ about her services or contact her at (650) 326-3412 or by email .
Stock Option Counsel - Legal Services for Individuals. Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock. Please see this FAQ about her services or contact her at (650) 326-3412 or by email .
Quora Question: Why are companies more willing to pay you with stock options and other benefits rather than straight up cash/salary increase?
Mary Russell: Thanks for asking me to answer this. Public companies emphasize equity because it matches pay with overall company performance. If the stockholders are doing well, employee stockholders do well.
Silicon Valley-type private companies emphasize equity because -- historically, anyway -- they were strapped for cash. They can offer employees options to purchase common stock at a discount from the price investors are paying for preferred stock. So employees receive a discount on an unusual investment in exchange for lower salaries.
But in today's marketplace for talent at these private companies, employees are negotiating for higher cash salaries than in the past. I see two reasons for this. First, private companies are having a much easier time raising cash than in years past because of the wider world of investor economics. When equity is expensive, cash becomes cheap. So these companies can and do offer higher salaries. Second, private companies are having to compete with hugely successful local public companies who are aggressively recruiting and retaining talent with impressive cash and equity offers.
Stock Option Counsel - Legal Services for Individuals. Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock. Please see this FAQ about her services or contact her at (650) 326-3412 or by email .
Stock Option Counsel - Legal Services for Individuals. Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock. Please see this FAQ about her services or contact her at (650) 326-3412 or by email .
Frederic Kerrest, Chief Operating Officer and Co-Founder of Okta lists recruitment as one of a few factors that influenced their choice to delay their IPO.
“ There’s a few reasons specifically that we thought about when we went through the calculation [of taking another private financing rather than having an IPO]. Five or ten years ago, companies like us would have gone public at this point instead of doing this financing round, because it’s about the same amount of money you would raise in a typical IPO.
First of all, it’s interesting for potential employees who want to come join the company. The opportunity to join a pre-IPO company is something that’s interesting to them, even if it’s just 6 or 9 months before. ” & Mdash; Frederic Kerrest, Chief Operating Officer & Co-Founder, Okta
“ Do you think it’s harder to hire certain folks if you were public as opposed to being pre-public? ” & Mdash; Dan Primack, Fortune
“ I think it’s a slightly different kind of person who wants to join a pre-public versus a. public company. They have different profiles, they’re looking for different things. They’re looking for different things in terms of the company, in terms of the job, in terms of other things. ” & Mdash; Frederic Kerrest, Chief Operating Officer & Co-Founder, Okta
Stock Option Counsel - Legal Services for Individuals. Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock. Please see this FAQ about her services or contact her at (650) 326-3412 or by email .
Stock Option Counsel - Legal Services for Individuals. Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock. Please see this FAQ about her services or contact her at (650) 326-3412 or by email .
“ Ellen Pao, the interim CEO of Reddit, has seen women struggle with salary negotiations. So she’s eliminating money talk from the company’s hiring process.
In her first interview since losing the landmark Silicon Valley trial, Pao told The Wall Street Journal that she has eliminated salary negotiations from the hiring process at Reddit, where she currently serves as interim CEO. ” & Mdash; Mashable http://mashable. com/2017/04/06/ellen-pao-reddit-salary/
“ Men negotiate harder than women do and sometimes women get penalized when they do negotiate. So as part of our recruiting process, we don’t negotiate with candidates. We come up with an offer that we think is fair. If you want more equity, we’ll let you swap a little bit of your cash salary for equity, but we aren’t going to reward people who are better negotiators with more compensation. ” & Mdash; Ellen Pao, as quoted in the Wall Street Journal
“ I appreciate. that it actually puts a substantial burden on Reddit to pay what they think someone is worth, not what they think they can get away with. This is not an easy way out for them - far from it. ” & Mdash; Gayle Laakmann McDowell @gayle via @quora http://qr. ae/LNR0U
Stock Option Counsel - Legal Services for Individuals. Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock. Please see this FAQ about her services or contact her at (650) 326-3412 or by email .
Stock Option Counsel - Legal Services for Individuals. Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock. Please see this FAQ about her services or contact her at (650) 326-3412 or by email .
Thanks to the 300 people who joined Chris Zaharias, @SearchQuant, and Mary Russell, Attorney Counsel to Individuals @StockOptionCnsl, for this event in Palo Alto on March 14, 2017!
We had a great discussion of how to define and improve startup equity. For Mary Russell's current suggestions on the topic, please see Startup Equity Standards: A Guide for Employees .
Here's what we discussed at the event:
Right to Know. Company information on capitalization and valuation, being necessary to the employee’s negotiation of a fair compensation package, shall be provided to the employee with his or her equity offer and after each dilution and valuation event.
Right to Value. The right of the employee to earn the full value of his or her grant shall not be limited by unreasonable vesting terms.
Right to Hold Earned Equity. The right of the employee to hold vested equity up to an acquisition or public offering shall not be violated, and no forfeiture, repurchase or other provisions shall allow the company to seize vested equity of current or former employees.
Right to Tax Benefits. The employee shall enjoy the right to all tax benefits available from state and federal governments, and shall not be subjected to tax penalties due to company negligence, at grant, at vesting or settlement and at company acquisition or sale of stock.
Right to Ask. The right to evaluate equity shall not be violated by company limits on access to information or legal counsel.
Chris Zaharias, SearchQuant LLC
Chris is a startup veteran and advocate for startup employee equity rights. chris@searchquant. net (415) 832-0089.
Stock Option Counsel - Legal Services for Individuals. Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock. Please see this FAQ about her services or contact her at (650) 326-3412 or by email .
Stock Option Counsel - Legal Services for Individuals. Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock. Please see this FAQ about her services or contact her at (650) 326-3412 or by email .
A: Startup would not likely offer accelerated vesting upon change of control without you asking for it. But acceleration is usually a negotiable term for anyone in mid to senior roles.
If you frame this negotiation as a discussion of your role and what you are being brought on to accomplish, it will get to the truth of the matter - What vesting makes sense for your position in the enterprise's future? All compensation - and especially vesting schedules - should make sense for what you are there to do. But startups might not take the time to look at it in that way.
For example, a senior engineer was brought into a Series A startup to make a big push toward efficient operations. He was so successful at his job that the startup was "finished" with him after 6 months when the operations could be managed by junior engineers. He was on a four year vesting schedule with a one year cliff. Did it make sense that he would receive zero equity for doing an amazing job at exactly the job he was hired to do? No.
If the comapny wont agree to acceleration, ask for more shares to make up for the fact that you don't expect to earn the full number of shares in your grant.
Buena suerte. And watch out for the precise terms of your acceleration language to be sure they make sense as well.
Stock Option Counsel - Legal Services for Individuals. Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock. Please see this FAQ about her services or contact her at (650) 326-3412 or by email .
Stock Option Counsel
Legal Services for Individuals
Stock Option Counsel - Legal Services for Individuals. Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock. Please see this FAQ about her services or contact her at (650) 326-3412 or by email .
Thanks for a great year with Stock Option Counsel.
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Please keep us in mind as a resource for yourself and your friends and colleagues for guidance on:
Job offers, equity grants and employment agreements
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Stock Option Counsel - Legal Services for Individuals. Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock. Please see this FAQ about her services or contact her at (650) 326-3412 or by email .
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Blocher - chapter 20 #62 difficulty: medium learning
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Blocher - Chapter 20 #62 Difficulty: Medium Learning Objective: 20-3 63. There is a current tax deduction for the firm for which of the following types of compensation? A. Qualified stock options. B. Nonqualified stock options. C. Deferred bonus. D. Current bonus. E. Performance shares. Blocher - Chapter 20 #63 Difficulty: Medium Learning Objective: 20-4 64. There is a current tax for the manager when which of the following types of compensation is received? A. Qualified stock options B. Nonqualified stock options C. Deferred bonus D. Current bonus E. Performance shares Blocher - Chapter 20 #64 Difficulty: Medium Learning Objective: 20-4 65. Which of the following types of compensation does not provide a deduction to the firm for tax purposes? A. Perks
Only Sullivan was a CFO $4,750,000/[($350,000 + 400,000)/2] = 12.7 B. Qualified stock options C. Retirement plans D. Current bonus E. Performance shares Blocher - Chapter 20 #65 Difficulty: Medium Learning Objective: 20-4 66. Bonus payment options include all of the following except: A. Perks. B. Current bonus. C. Deferred bonus. D. Stock options. E. Performance shares. Blocher - Chapter 20 #66 Difficulty: Medium Learning Objective: 20-4 67. A CFO whose compensation plan may have had the effect of creating an incentive for unethical actions includes: A. Kenneth Lay B. Scott Sullivan C. Bernie Madoff D. Dennis Kozlowski Blocher - Chapter 20 #67 Difficulty: Easy Learning Objective: 20-2 68. The King Mattress Company had the following operating results for 2009-2010. In addition, the company paid dividends in both 2009 and 2010 of $60,000 per year and made capital expenditures in both years of $30,000 per year. The company's stock price in 2009 was $8 and $7 in 2010. The industry average earnings multiple for the mattress industry was 9 in 2010 and the free cash flow and sales multiples were 18 and 1.5, respectively. The company is publicly owned and has 1,200,000 shares of outstanding stock at the end of 2010. The accounts receivable turnover ratio for 2010 is: A. 11.2 B. 12.7 C. 13.7 D. 14.9 Blocher - Chapter 20 #68 Difficulty: Easy Learning Objective: 20-6 69. The King Mattress Company had the following operating results for 2009-2010. In addition, the company paid dividends in both 2009 and 2010 of $60,000 per year and made capital expenditures in both years of $30,000 per year. The company's stock price in 2009 was $8 and $7 in 2010. The industry average earnings multiple for the mattress industry was 9 in 2010 and the free cash flow and sales multiples were 18 and 1.5, respectively. The company is publicly owned and has 1,200,000 shares of outstanding stock at the end of 2010.
$4,100,000/[($300,000 + 250,000)/2] = 14.9 $940,000/$200,000 = 4.7 The inventory turnover ratio for 2010 is (rounded): A. 11.2 B. 12.7 C. 13.7 D. 14.9 Blocher - Chapter 20 #69 Difficulty: Easy Learning Objective: 20-6 70. The King Mattress Company had the following operating results for 2009-2010. In addition, the company paid dividends in both 2009 and
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Federal Tax Coordinator
Designed to provide complete and thorough answers to all your clients' federal tax questions, the Federal Tax Coordinator 2d offers a detailed and comprehensive analysis of all Federal tax laws, regulations, relevant court cases, and IRS rulings and releases. The expert analysis is supported by extensive and detailed citations to controlling authorities. With Federal Tax Coordinator 2d you'll receive:
Thorough coverage of all federal income, estate, gift, excise, FICA, FUTA and international (U. S. based) taxes - all organized by subject matter for easy access
New developments that are integrated continuously into the analysis, so they are not just appended at the end of existing paragraphs
Expert commentary in the form of recommendations, illustrations, cautions, and observations, which provide professional value-added insight above and beyond analysis of the law
Implementation guidelines with references to forms, elections, and compliance statements
Proven practice tools, sample client letters, checklists of tax-saving opportunities, and other practice aids to help you better serve your clients while generating revenue
Analysis of U. S. income tax treaties currently in force.
Available online and in print (more than 45 volumes), Federal Tax Coordinator 2d is the premier federal tax analytical research product.
List of Content (Click any title to expand the list) Federal Tax Coordinator 2d
Chapter A Individuals and Self-Employment Tax
A-1000 How Tax on Individuals Is Computed.
A-1100 Tax Rate Schedules Used to Determine Tax.
A-1180 Tax Tables Used to Determine Tax
A-1200 Tax Rates for Single Individuals.
A-1300 Tax Computation of Children Subject to Kiddie Tax.
A-1325 Parent's Election to Report Income of Children Subject to Kiddie Tax On Parents' Own Return.
A-1400 Head of Household Tax Computation.
A-1500 Tax Computation of Married Persons.
A-1600 Determination of Marital Status for Tax Purposes.
A-1610 Certain Married Individuals Living Apart Treated as Unmarried.
A-1700 Tax Computation of “Surviving Spouses,” Widows, and Widowers.
A-1800 Election by U. S. Citizen or Resident and Nonresident Alien Spouse to be Taxed as U. S. Citizens or Residents.
A-2500 Calculating Taxable Income of individuals.
A-2600 Computing Adjusted Gross Income.
A-2700 Claiming Itemized Deductions.
A-2710 2%-of-AGI Floor on Miscellaneous Itemized Deductions
A-2730 Overall Limitation on Itemized Deductions.
A-2800 The Standard Deduction.
A-3500 Deduction for Personal Exemptions.
A-3600 Deduction for Dependents.
A-3700 Support Requirements for Dependents.
A-3850 Custodial Parent's Release of Claim to Child's Dependency Exemption
A-4000 Credits Available to Individuals.
A-4050 Child Tax Credit.
A-4100 Credit for the Elderly or the Permanently and Totally Disabled.
A-4200 Earned Income Credit for Low-Income Individual Taxpayers.
A-4230 Health Coverage Tax Credit.
A-4240 Premium Tax Credit—after 2017.
A-4250 First-Time Homebuyer Credit for D. C. Before 2012
A-4270 First-Time Homebuyer Credit for Purchases in 2008–2011
A-4280 Recapture of First-Time Homebuyer Credit
A-4290 Making Work Pay Credit for 2009 and 2010
A-4300 Credit for Child and Dependent Care Expenses.
A-4400 Adoption expense credit.
A-4450 Saver's Credit for Qualified Retirement Savings Contributions.
A-4470 Higher Education Expense Deduction For Tuition and Fees Before 2017.
A-4500 Credit for Higher Education Expenses—Hope Credit/American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit.
A-4600 Coverdell Education Savings Accounts
A-4700 Qualified Tuition Programs (QTPs, or 529 Plans).
A-4750 Nonbusiness Energy Property Credit for Pre-2017 Energy-Efficient Improvements to Principal Residence.
A-4780 Residential Energy Efficient Property Credit for Solar Electric, Solar Hot Water, Fuel Cell, Residential Wind, and Geothermal Heat Pump Property Installed Before 2017.
A-4900 Limitation on Aggregate Amount of Nonrefundable Personal Tax Credits.
A-5000 Community Property and Community Income.
A-5020 Exceptions to Community Income Rules for Certain Marrieds Who Don't File Joint Returns.
A-5100 Arizona Community Property.
A-5200 California Community Property.
A-5300 Idaho Community Property.
A-5400 Louisiana Community Property.
A-5500 Nevada Community Property.
A-5600 New Mexico Community Property.
A-5700 Texas Community Property.
A-5800 Washington Community Property.
A-5900 Wisconsin Community Property.
A-6000 Self-Employment Tax.
A-6030 Self-Employment Income Subject to the Self-Employment Tax.
A-6050 Self-Employment Income from Foreign Sources.
A-6080 “Trade or Business” for Self-Employment Tax Purposes.
A-6100 Net Earnings from Self-Employment.
A-6150 Self-Employment Income of Partners.
A-6200 Farmers' Net Earnings from Self-Employment.
A-6250 Income Earned by Fiduciaries as Self-Employment Income.
A-6300 Self-Employment Tax for Ministers and Members of Certain Religious Groups.
A-6350 Church Employees Subject to Self-Employment Tax.
A-6360 3.8% Tax on Net Investment Income of Individuals.
A-6400 Post-2017 Requirement That Individuals Maintain Health Insurance Coverage (“Individual Mandate”).
Chapter A-7000 Alternative Minimum Tax
A-8100 The Alternative Minimum Tax (AMT).
A-8130 Who Is Subject to the Alternative Minimum Tax
A-8140 Small Corporation Exemption From the AMT
A-8160 Alternative Minimum Tax Exemptions
A-8180 Alternative Minimum Tax Foreign Tax Credit.
A-8190 AMT Preferences and Adjustments—An Overview
A-8200 Alternative Minimum Tax Preferences and Adjustments Which Apply to All Taxpayers.
A-8300 Alternative Minimum Tax (AMT) Preferences and Adjustments Which Apply to Individuals and Other Noncorporate Taxpayers Only.
A-8400 Adjusted Current Earnings (ACE) Adjustment for Corporations.
A-8800 Minimum Tax Credit
Chapter B Partnerships
B-1000 What is a Partnership?
B-1100 Who May Be a Partner in a Partnership?
B-1200 Election Not To Be Taxed As a Partnership.
B-1250 Partnerships Formed or Used For Abusive Purposes.
B-1300 Partnership Organizational and Syndication Expenses.
B-1400 Contributions to Partnerships.
B-1500 Computing Partner's Basis and Holding Period in Partnership Interest.
B-1600 Effects of Liabilities of Partnerships and Partners.
B-1650 Determining Partners' Shares of Partnership Liabilities
B-1700 When Partnership Income and Deductions Are Reported.
B-1800 Consistent Treatment on Partner's Return and Partnership's Return.
B-1900 Partnership Income and Deductions.
B-2000 Partner's Dealings With Partnership.
B-2100 Recharacterizing Transactions With Partnership.
B-2200 Partners' and Partnerships' Payments of Each Other's Expenses.
B-2300 “Outside” Compensation of Partners.
B-2400 Partnership Allocations.
B-2500 Economic Effect Test for Partnership Allocations.
B-2600 Capital Account Maintenance Rules.
B-2700 Substantiality Tests.
B-2800 Allocations According to Partners' Interests in Their Partnerships.
B-2900 Allocations of Certain Items That Do Not Have Any Economic Effect.
B-3000 Allocation of Nonrecourse Deductions.
B-3100 Built-In Gain or Loss on Contributed Property.
B-3140 Partnership Distributions of Property Contributed to a Partnership
B-3170 Partnership Distributions to Partner Who Contributed Built-in Gain Property
B-3200 Allocations When Partners' Interests Change.
B-3400 Family Partnerships.
B-3500 Limitations on a Partner's Deductible Loss.
B-3600 Distributions by a Partnership.
B-3700 Partner's Basis in Property Distributed by the Partnership.
B-3800 Sales, Exchanges and Other Transfers of Partnership Interests.
B-3850 Treatment of Gain or Loss on Sale or Exchange of Partnership Interests as Capital Gain or Loss.
B-3900 Sales of Interests in Partnerships Holding Unrealized Receivables and Inventory, and Disproportionate Distributions Involving Unrealized Receivables and Substantially Appreciated Inventory.
B-4000 Basis Adjustments to Partnership Property.
B-4050 Allocation of Basis Adjustment To Partnership Property to Reduce the Difference Between Basis and Value.
B-4100 Partnership Payments to a Retired Partner or Deceased Partner's Successor in Liquidation of the Partnership Interest.
B-4200 Death of a Partner.
B-4300 Termination of Partnership.
B-4400 Electing Large Partnerships.
Chapter C Income Taxation of Trusts, Estates, Beneficiaries and Decedents
C-1000 Income Taxation of Trusts.
C-2000 Pre-Aug. 6, '97 Tax on Built-In, “Includible” Gain from Property Sold Within Two Years of Receipt from Living Transferor—Sec. 644 Tax.
C-2100 Gross Income of Trusts.
C-2150 Distributions by Trust of Property in Kind—Election to Recognize Gain or Loss.
C-2200 Deductions and Credits of Trusts.
C-2300 Charitable Deduction of Complex Trusts.
C-2500 Trust's Deduction for Distributions to Beneficiaries.
C-2600 The Maximum Deductible as Distribution by a Simple Trust.
C-2700 The Maximum Deductible as Distribution by a Complex Trust.
C-3000 Income Taxable to Trust Beneficiaries.
C-3030 Deductions and Credits of Trust Beneficiaries; Transfer of Unused Deductions on Termination.
C-3050 Beneficiaries of Charitable Remainder Trusts (CRTs).
C-3080 Requirement That Beneficiary Treat Items Consistent With Trust's Treatment.
C-4000 Throwback Rules for Foreign Trusts and Pre-Aug. 6, '97 Years of Domestic Trusts.
C-4100 Computation of Beneficiary's Tax Under Throwback Rules.
C-5000 What Are Trusts For Tax Purposes?
C-5100 Requirement that Trust Satisfy Both State Law and Tax Law.
C-5150 Multiple Trusts.
C-5200 Taxing Trust Income to Grantor or Other “Owner”.
C-5250 Grantor as Owner of Family Trust.
C-5300 Grantor as Owner of a Trust That He May Revoke.
C-5400 Grantor as Owner of a Trust From Which He May Derive Income Benefits.
C-5450 Reversionary Trusts.
C-5500 Pre-Mar. 2, '86 Short-Term Trusts.
C-5530 Grantor as Owner of a Trust Where Beneficial Enjoyment Is Under His Control.
C-5550 Grantor as Owner of a Trust Where Administrative Control is Exercisable For Grantor's Benefit.
C-5570 Person Other Than Grantor as Owner of Trust.
C-5600 U. S. Transferor Taxed as Owner of Foreign Trust With U. S. Beneficiary.
C-5700 Taxation of Electing Small Business Trusts
C-5800 3.8% Tax on Net Investment Income of Trusts.
C-7000 Income Taxation of Estates.
C-7100 Gross Income of Estates.
C-7150 Distributions by Estate of Property in Kind—Election to Recognize Gain or Loss.
C-7200 Estate's Deductions and Credits.
C-7300 Charitable Contribution Deduction (Including Amounts Set Aside for Charity).
C-8000 Estate's Deduction for Distributions to Beneficiaries.
C-8100 The Maximum Deductible as Distribution by a Decedent's Estate.
C-9000 Income Taxable to Estate Beneficiaries.
C-9050 Deductions and Credits of Estate Beneficiaries; Transfer of Unused Deductions on Termination.
C-9080 Requirement That Beneficiary Treat Items Consistent With Estate's Treatment.
C-9500 Income in Respect of a Decedent.
C-9550 Deductions and Credits in Respect of a Decedent.
C-9580 3.8% Tax on Net Investment Income of Estates.
C-9600 Final Return of a Decedent.
C-9650 Cancellation of Income Taxes of Members of the U. S. Armed Forces and Military or Civilian Employees of the U. S. Dying as a Result of Service in a Combat Zone or a Terrorist or Military Action.
C-9700 Income Taxation of Bankruptcy Estate of Bankrupt Individuals.
C-9800 Income Taxation of Individual Debtors in Bankruptcy.
C-9850 Income Taxation of Partnerships and Corporations in Bankruptcy.
Chapter D How Corporations Are Taxed.
D-1000 How Corporations Are Taxed.
D-1030 Pre-'96 Environmental Tax.
D-1100 What is a Corporation for Tax Purposes?
D-1150 Check-the-Box Tax Classification for Unincorporated Eligible Entities.
D-1200 When Corporate Entity is Ignored.
D-1320 Publicly Traded Partnerships (Master Limited Partnerships) as Corporations.
D-1420 Avoiding Double Taxation of Corporate Income—Electing to be Taxed as an S Corporation.
D-1430 Eligibility to be an S Corporation.
D-1440 An S corporation cannot have more than 100 shareholders.
D-1455 Who is eligible to be an S corporation shareholder.
D-1495 S corporations permitted only one class of stock.
D-1530 S corporations may have qualified subchapter S subsidiaries (QSubs) that are not treated as separate corporation.
D-1550 Electing to Be Taxed as an S Corporation.
D-1580 LIFO Recapture on Conversion from C Corporation to S Corporation.
D-1590 Computing Taxable Income of S Corporations.
D-1620 Deductions for Fringe Benefits for Shareholder-Employees of S Corporation.
D-1630 Earnings and Profits of an S Corporation.
D-1640 Taxation of S Corporations.
D-1690 Tax on Excess Net Passive Investment Income.
D-1760 How Shareholders are Taxed on an S Corporation's Income.
D-1800 Consistent Treatment on Shareholder's Return and S Corporation's Return.
D-1810 Tax Treatment of Distributions to an S Corporation's Shareholders.
D-1860 Determining an S Corporation's Shareholder's Basis in Stock and Debt.
D-1900 Termination of the Election to Be an S Corporation.
D-1950 Making a New S Election After Termination of Earlier Election.
D-2000 Special Corporate Deductions.
D-2200 Deductions for Dividends Received.
D-2300 Dividends-Paid Deduction for Certain Public Utilities.
Chapter D-2500 Accumulated Earnings Tax; Personal Holding Company Tax
D-2600 Accumulated Earnings Tax on Corporations.
D-2700 Tax Avoidance Purpose.
D-2770 “Reasonable Business Needs” for Accumulation.
D-2840 Working Capital Needs—The Bardahl Operating Cycle Formula.
D-2880 RIA Worksheet to Estimate Working Capital Needs by Operating Cycle Method.
D-2900 Accumulated Taxable Income.
D-3000 Burden of Proving Reasonableness of Earnings Accumulations.
D-3200 Personal Holding Companies.
D-3300 Corporations Exempt from Personal Holding Company Tax.
D-3400 Stock Ownership Test of Personal Holding Company.
D-3500 “Adjusted Ordinary Gross Income” Test—The 60% Test.
D-3600 Computing Personal Holding Company Tax.
D-3700 “Deficiency Dividend” Deduction for Personal Holding Companies.
D-3800 Dividends-Paid Deduction for Personal Holding Companies, Regulated Investment Companies, REITs, and Corporations Subject to the Accumulated Earnings Tax.
Chapter D-3900 Exempt Organizations, Private Foundations
D-4000 Exempt Organization Status.
D-4100 Charitable, Religious, Educational, Literary, or Scientific Organizations.
D-4200 Social Clubs.
D-4300 Fraternal Beneficiary Societies and Domestic Fraternal Societies.
D-4400 Voluntary Employees' Beneficiary Associations.
D-4500 Supplemental Unemployment Benefit Trusts.
D-4600 Labor Organizations.
D-4700 Agricultural and Horticultural Organizations.
D-4800 Business Leagues.
D-4900 Credit Unions and Mutual Deposit Insurance Organizations.
D-5000 Political Organizations.
D-5100 Civic Leagues Operated for Social Welfare and Local Employees' Organizations.
D-5200 Veterans' Organizations.
D-5300 Pension Trusts.
D-5400 Pre-June 25, '59 Pension Trusts Funded by Employee Contributions.
D-5500 Teachers' Retirement Fund Associations.
D-5600 Religious or Apostolic Associations or Corporations.
D-5700 Homeowners Associations.
D-5800 Title–Holding Companies.
D-5850 Pooled Real Estate Investment Funds.
D-5900 Insurance Associations and Companies.
D-5950 Qualified Charitable Risk Pools.
D-6000 Cemetery Companies.
D-6100 Local Benevolent Life Insurance Associations, Mutual Ditch, Irrigation and Telephone Companies, and Like Organizations.
D-6200 Black Lung Benefit Trusts.
D-6300 U. S. Instrumentalities.
D-6320 State-Sponsored Organizations Providing Health Coverage For High-Risk Individuals.
D-6345 State-Sponsored Workmen's Compensation Insurance Organizations
D-6350 CO-OP Health Insurance Issuers
D-6355 “Applicable reinsurance entities.”
D-6400 Legislative and Political Activities.
D-6500 Lobbying Expenditures Election.
D-6600 Discriminatory Activities.
D-6650 Excise Taxes on Excess Benefit Transactions.
D-6700 Prohibited Transactions.
D-6800 Unrelated Business Income.
D-6900 Computation of Unrelated Business Taxable Income.
D-7000 Unrelated Debt-Financed Income.
D-7100 Feeder Organizations.
D-7200 Private Foundations.
D-7300 Taxable Trusts Subject to Private Foundation Rules.
D-7400 Foreign Private Foundations Subject to Private Foundation Rules.
D-7500 Excise Tax on Investment Income.
D-7600 Self-Dealing Taxes.
D-7700 Tax on Failure to Distribute Income.
D-7800 Excess Business Holdings.
D-7900 Investments That Jeopardize Charitable Purposes.
D-8000 Taxes on Taxable Expenditures.
D-8100 Disqualified Persons.
D-8150 Donor Advised Funds.
D-8200 Abatement of Excise Taxes on Taxable Events of Tax-Exempt Organizations.
D-8300 Excise Taxes on Tax-Exempt Entities and Entity Managers Involved in Prohibited Tax Shelter Transactions
Chapter E Special Corporations and Organizations: Consolidated Returns
E-1000 Cooperatives.
E-1050 Cooperative Housing Corporations.
E-1100 Patronage Dividends and Other Distributions by Cooperatives.
E-2000 Terminal Railroad Corporations.
E-3000 Income of Banks and Trust Companies.
E-3100 Banks and Trust Companies Entitled to Ordinary and Special Deductions.
E-3200 Bad Debt Deductions of Banks and Trust Companies.
E-3300 Taxation of Mutual Savings Banks, Mutual Stock Associations, Domestic Savings Associations, and Cooperative Banks.
E-3400 Pre-'96 Bad Debt Reserves of Mutual Savings Banks, Mutual Stock Associations, Domestic Savings Associations and Cooperative Banks.
E-3500 Qualification as a Mutual Savings Bank, Mutual Stock Association, Domestic Savings Association, or Cooperative Bank.
E-3600 Common Trust Funds.
E-3700 Insolvent Banks.
E-3800 Federal Financial Assistance to Banks and Building and Loan Associations.
E-4800 Taxation of Life Insurance Companies.
E-4950 Life Insurance Company Reserves.
E-4990 Modified Guaranteed Contracts (MGCs) Subject to Mark-to-Market Rule.
E-5050 Variable Contracts.
E-5100 Amortization of Policy Acquisition Expenses.
E-5200 Reduction of Certain Deductions of Mutual Life Insurance Company—2004 Only.
E-5215 Amortization of Policy Acquisition Expenses in Reinsurance Transactions.
E-5300 Taxation Of Amounts From Pre-'84 Policyholders' Surplus Account.
E-5400 Qualification as a Life Insurance Company.
E-5500 Taxation of Nonlife Insurance Companies.
E-5650 Requirements for Issuers of Qualified Long-Term Care Insurance Contracts.
E-5700 Qualification As A Nonlife Insurance Company.
E-6000 Regulated Investment Companies.
E-6050 Periodic Payment Plans Unit Investment Trusts.
E-6100 How Regulated Investment Companies and Shareholders are Taxed.
E-6150 Character of Regulated Investment Company (RIC) Dividends.
E-6200 Dividends Paid After Year-end.
E-6250 Excise Tax On Regulated Investment Company (RIC) Spillover Dividends.
E-6300 Deficiency Dividend Procedure.
E-6500 Real Estate Investment Trusts (REITs).
E-6520 REIT gross income and asset tests.
E-6600 How Real Estate Investment Trusts and Beneficiaries Are Taxed.
E-6700 Dividends Paid After Year-end.
E-6800 Excise Tax on Spillover REIT Dividends.
E-6850 Recognition of Built-in Gain on Corporate Assets Transferred to RIC or REIT.
E-6900 Real Estate Mortgage Investment Conduits (REMICs).
E-7000 Treatment of REMIC Interests.
E-7100 Excess Inclusions.
E-7200 Taxable Mortgage Pools.
E-7300 Financial Asset Securitization Investment Trusts (FASITs)—pre-Jan. 1, 2005 rules.
E-7325 Taxation of Financial Asset Securitization Investment Trusts (FASITs)—pre-Jan. 1, 2005 rules
E-7350 Taxation of Ownership Interest in a Financial Asset Securitization Investment Trust (FASIT)—pre-Jan. 1, 2005 rules
E-7375 Taxation of Regular Interests in Financial Asset Securitization Investment Trusts (FASITs)—pre-Jan. 1, 2005 rules
E-7400 Taxation of Transfers to Financial Asset Securitization Investment Trusts (FASITs)—pre-Jan. 1, 2005 rules
Chapter E-7490 Special Corporate Taxes and Taxpayers: Consolidated Returns
E-7500 Consolidated Corporate Income Tax Returns.
E-7550 Law and Regs Applicable to Consolidated Returns.
E-7600 Affiliated Corporations Includible in Consolidated Returns.
E-7700 Life-Nonlife Consolidated Returns.
E-7750 Electing to File Consolidated Returns.
E-7800 Agent For the Consolidated Group.
E-7820 Termination of Agent for the Group and Designation of Substitute Agent.
E-7850 Fiduciary As Agent of Loss Group That Includes Insolvent Financial Institution.
E-7900 Taxable Years for Consolidated Group.
E-7950 Consolidated and Separate Return Years, Short Year Returns, and Items Included.
E-8000 Separate Return Year Apportionments.
E-8050 Computing Consolidated Taxable Income.
E-8060 Discharge of Indebtedness Income.
E-8100 Accounting Methods and Changes.
E-8150 Depreciation Conventions.
E-8250 Intercompany Transactions.
E-8300 Additional Rules for Distributions and Transactions Involving Members' Stock.
E-8350 Basis of Property Acquired from Group Member.
E-8400 Intercompany Transactions Rules for Group Members' Debt Obligations Owed to Each Other.
E-8500 Investment Adjustment to Basis of Stock in Subsidiary.
E-8550 Regs Bar More Than One Tax Benefit From Single Loss On Disposition or Deconsolidation of Subsidiary Stock.
E-8574 Unified Loss Rule
E-8600 Excess Loss Account.
E-8640 Subsidiary Stock Loss Disallowance or Basis Reduction-Dispositions and Deconsolidations After Mar. 6, 2002 and Not Subject to Post-Sep. 16, 2008 Unified Loss Rule.
E-8800 Earnings and Profits.
E-8900 Consolidated Charitable Contributions Deduction, Consolidated Dividends-Received and Dividends-Paid Deductions, and Consolidated Percentage Depletion Limitation.
E-8950 Consolidated Capital Gain Net Income, Consolidated Code Sec. 1231 Net Loss, and Consolidated Net Capital Loss Carryovers.
E-9000 At-Risk and Passive Activity Loss Limitation Rules.
E-9050 Consolidated Net Operating Loss Deduction.
E-9060 Coordination of Net Operating Loss Carryover and Built-In Loss Rules With Code Sec. 382 Limitation.
E-9100 Dual Consolidated Losses: Tax Years Beginning Before Apr. 18, 2007.
E-9200 Dual Consolidated Losses
E-9300 Code Sec. 269 Acquisitions Made to Evade or Avoid Income Tax.
E-9320 CERT Loss-Carryback Rules For Consolidated Groups–Proposed Regs
E-9350 Unrelated Business Income of Tax-Exempt Group.
E-9450 Consolidated Tax Liability and Computation.
E-9500 Consolidated Estimated Tax.
E-9550 Consolidated Personal Holding Company Tax.
E-9600 Consolidated Accumulated Earnings Tax.
E-9650 Consolidated Alternative Minimum Tax.
E-9700 Credits Against Consolidated Return Tax.
E-9750 Foreign Tax Credit.
E-9800 Limits on Use of Group Losses and Credits to Offset Sub's Income.
E-9850 Separate Return Limitation Years (SRLYs).
E-9900 Consolidated Return Change of Ownership (CRCO) Rules.
E-9950 Continuation and Termination of Affiliated Groups.
E-10000 Discontinuing Consolidated Returns.
E-10100 Multiple Corporate Business Operations.
E-10200 Disallowance of Certain Tax Benefits of Controlled Transferee Corporations.
E-10300 Limitations on Certain Tax Benefits of Controlled Groups of Corporations.
E-10400 Limitation on Benefit of Graduated Corporate Tax Rates.
E-10500 Limitation on Minimum Accumulated Earnings Credit.
E-10600 “Controlled Group” Defined.
E-10700 Constructive Ownership Rules in Determining Controlled Groups.
E-10800 Electing to Treat Distributions and Sales of Stock of Affiliated Corporations as Asset Transfers.
Chapter F Corporate Formation, Redemptions, Reorganizations, Liquidations
F-1000 Transfers to Controlled Corporations.
F-1100 Property for Purposes of Transfers to Controlled Corporations.
F-1200 Control Requirement for Purposes of Transfers to Controlled Corporations.
F-1300 Exceptions from Tax-Free Transfer Rules: Property Transferred to Investment Company and Transfers by Debtor in Bankruptcy.
F-1400 Overlap of Code Sec. 351 Rules With Other Code Rules.
F-1500 When Gain is Taxable to a Transferor.
F-1600 Making Property Transfers to Controlled Corporations Taxable.
F-1700 Records and Information Requirements for Purposes of Transfer to Controlled Corporations.
F-1800 Transferor's Carryover Basis for Stock Received in Code Sec. 351 Transfer to Controlled Corporation.
F-1850 Transferee Corporation's Carryover Basis for Property in Code Sec. 351 Transfer to Controlled Corporation.
F-1900 Contributions to Capital.
F-2000 Corporate Reorganizations.
F-2100 Reorganizations Involving Investment Companies.
F-2200 Type A Reorganizations—Mergers and Consolidations.
F-2300 Forward Triangular (Subsidiary) Mergers.
F-2400 Reverse Triangular (Subsidiary) Mergers.
F-2500 Type B Reorganizations—Stock for Stock Acquisitions.
F-2550 Triangular (Subsidiary) B Reorganizations.
F-2600 Type C Reorganizations—Stock for Asset Acquisitions.
F-2650 Triangular (Subsidiary) Type C Reorganizations.
F-2700 Nondivisive D Reorganizations—Transfer of Assets to Controlled Corporation Followed by Distribution.
F-2800 Liquidation-Reincorporation.
F-3000 Recapitalizations—Type E Reorganizations.
F-3100 Type F Reorganizations—Changes in Identity, Place of Organization.
F-3200 Type G Reorganizations—Transfer of Assets in Bankruptcy or Insolvency Cases Followed by Distribution of Stock or Securities by Acquiring Corporation.
F-3250 Transfer of Assets or Stock Acquired in a Reorganization.
F-3500 Nonstatutory Rules Affecting Reorganizations—In General.
F-3600 Continuity of Interest Requirement.
F-3700 Continuity of Business Enterprise Requirement.
F-3800 Business Purpose Requirement.
F-3900 Step Transactions: Separate Steps Combined in Applying Reorganization and Other Corporate Provisions
F-3950 Rescission of Corporate Transactions.
F-4000 Taxation of Shareholders and Security Holders in Reorganizations.
F-4100 How Corporate Parties to a Reorganization are Taxed.
F-4200 Assumption of Target's Liabilities in Corporate Reorganizations.
F-4300 Basis of Property Received by Corporate Parties to Reorganizations.
F-4500 Divisive D Reorganizations—Transfer of Assets to Controlled Corporation Followed by Code Sec. 355 Distribution.
F-4600 Dividing a Corporation—Spin-Off; Split-Off; Split-Up.
F-4630 Distributions Within an Affiliated Group.
F-4700 Device to Distribute Earnings and Profits.
F-4800 Active Trade or Business Requirement for Tax-Free Corporate Divisions.
F-4900 Corporate Business Purpose in Tax-Free Separations.
F-5000 Corporate Divisions—Taxation of the Shareholder.
F-5100 Corporate Separations—Taxation of the Distributing Corporation.
F-5200 Gain Recognition By Distributing Corporation On Disqualified Code Sec. 355 Distribution.
F-5300 Gain Recognition on Distribution in Connection With an Acquisition.
F-5400 Distributions that Don't Qualify When Distributing Corporation or Controlled Corporation Is Disqualified Investment Corporation
F-5500 Control Defined for Purposes of Code Sec. 351 and Corporate Reorganization Rules.
F-5600 Voting Stock and Voting Power.
F-5700 Corporate Expatriation Transactions.
F-5730 Excise Tax on Specified Stock Compensation of Certain Insiders in Expatriated Corporations.
F-6000 Transfers of Property To Foreign Corporations.
F-6100 Transfers of Active Foreign Business.
F-6200 Transfers of Stock and Securities to Foreign Corporations.
F-6300 Gain Recognition Agreements.
F-6400 Transfers of U. S. Depreciated Property.
F-6450 Transfers to Foreign Sales Corporations.
F-6500 Transfers of Intangibles to Foreign Corporations.
F-6600 Code Sec. 367(b) Transfers.
F-6800 Outbound Distributions of Stock or Securities in a Controlled Corporation
F-6900 Distributions in Complete Liquidation by Domestic Corporations to Foreign Corporation.
Chapter F-6990 Carryovers, Loss Corporations, Stock/Asset Purchases, E&P, Redemptions, Liquidations
F-7000 Carryover of Tax Items in Liquidations and Reorganizations.
F-7200 Trafficking in Loss and Other Carryovers.
F-7250 Calculating the Amount of the Section 382 Limitation.
F-7300 Value of Old Loss Corporation and Tax-Exempt Rate.
F-7340 Increase in Code Sec. 382 Limitation for Built-in Gains and Code Sec. 338 Gains.
F-7360 Order for Absorption of Losses Subject to Section 382 Limitation.
F-7400 Section 383 Credit Limitation.
F-7420 Carryover of Section 382 Limitation and Section 383 Credit Limitation.
F-7440 Ownership Change Defined for Section 382 Limitation Purposes.
F-7500 Determining Five-Percent Shareholders.
F-7600 Ownership of Stock for Purposes of Section 382 Limitation.
F-7700 Applicability of Section 382 Limitation to Ownership Changes in Bankruptcy Matters.
F-7850 Offset Prohibition Rules Limit Use of Preacquisition Losses of One Corporation to Offset Built-in Gains of Another Corporation.
F-7900 Tax Avoidance Acquisitions. “Shell” or “Loss” Corporation Rule.
F-8000 Election to Treat Stock Purchase as Asset Purchase—The Code Sec. 338 Election.
F-8100 Qualified Stock Purchase.
F-8200 Effect of Code Sec. 338 Election.
F-8300 Reporting Gain or Loss on Code Sec. 338 Deemed Sale of Old Target's Assets.
F-8400 Multiple Levels of Gain or Loss.
F-8500 Determining Aggregate Basis (Adjusted Grossed-up Basis) of Target's (New Target's) Assets After Code Sec. 338 Election.
F-8600 Allocating Adjusted Gross-up Basis Among Target's Assets.
F-8640 Effect of Code Sec. 338 election on target insurance company.
F-8700 Making theCode Sec. 338 Election.
F-8800 Code Sec. 338(h)(10) Election to have Seller Recognize Gain or Loss on Deemed Sale of Target's Assets.
F-8900 Code Sec. 338 consistency Rules.
F-9000 International Aspects of Code Sec. 338 Election.
F-10000 Earnings and Profits.
F-10100 Effect of Income Items and Other Receipts on Earnings and Profits.
F-10200 Expense Items—Effect on Earnings and Profits.
F-10300 Depreciation—Effect on Earnings and Profits.
F-10400 Sales or Other Dispositions—Effect on Earnings and Profits.
F-10500 Distributions to Shareholders—Adjustments to Earnings and Profits of the Distributing Corporation.
F-10600 Distributions to 20% Shareholders—Effect on Earnings and Profits.
F-10700 Redemptions, Partial Liquidations, and Liquidations—Effect on Earnings and Profits.
F-10800 Reorganization Distributions—Effect on Earnings and Profits.
F-11000 Nonliquidating Distributions in Redemption of Stock.
F-11100 Tax Consequences to Shareholders Whose Stock is Redeemed.
F-11200 Substantially Disproportionate Redemptions of Stock.
F-11300 Redemptions of All of Shareholder's Stock.
F-11400 Redemptions Not Essentially Equivalent to a Dividend.
F-11500 Partial Liquidation Redemptions from Noncorporate Shareholders.
F-11600 Redemption of Stock to Pay Death Taxes and Estate Expenses.
F-11700 Transfer of Stock to a Related Corporation May Be Treated as a Redemption.
F-11800 Constructive Ownership Rules.
F-11900 Excise Tax on Greenmail Gains.
F-12000 Redemptions Used for Benefit of Remaining Shareholder—“Bail-outs” (Other than Preferred Stock) and “Buy-outs.”
F-12100 Sec. 306 “Preferred Stock Bail-Out” Gives Ordinary Income.
F-13000 Complete Corporate Liquidations.
F-13100 Shareholder's Gain or Loss on Liquidation.
F-13200 Liquidation of 80% Subsidiaries.
F-14000 Gain or Loss to Distributing Corporation on Nonliquidating Distributions of Property.
F-14400 Gain or Loss to Corporation on its Liquidation.
F-14500 Recognition of Gain or Loss by Liquidating 80% Subsidiary.
F-14600 Preventing the Recognition of Certain Losses and the Avoidance of Gain Recognition Rules.
F-15000 Collapsible Corporations.
Chapter G Tax Accounting: Periods, Methods, Inventories.
G-1000 Tax Accounting Periods—the Tax Year.
G-1050 Adopting a Tax Year.
G-1100 Tax Year of 52-53 Weeks.
G-1150 Short Taxable Year.
G-1200 Tax Year of Partnerships and Partners.
G-1250 Tax Year of S Corporations.
G-1300 Tax Year of a Personal Service Corporation.
G-1400 Taxable Year of Trusts.
G-1450 Tax Year of Common Trust Funds.
G-1500 “Section 444 Election” of Fiscal Tax Year by a Partnership, S Corporation, or Personal Service Corporation.
G-1550 Tax Payment Requirements by Partnerships and S Corporations Under a Sec. 444 Election.
G-1600 Deduction Limitation of Personal Service Corporations for Amounts Paid or Incurred to its Employee-Owners.
G-1650 Tier Structure Partnership, S Corporation, or Personal Service Corporation Under a Section 444 Election.
G-1700 Changing a Taxpayer's Tax Year.
G-1725 Automatic Approval for Fiscal Year Individuals to Change to a Calendar Tax Year.
G-1750 Automatic Approval to Adopt, Change, or Retain Tax Year of Partnerships, S Corporations, Electing S Corporations, Trusts, and Personal Service Corporations.
G-1780 Automatic Approval for Tax-Exempt Organizations Changing Their Tax Year.
G-1800 Automatic Approval to Change Tax Year of a Corporation.
G-1850 Changing Tax Years With Prior IRS Approval.
G-2000 Tax Accounting Methods.
G-2050 Adoption of Accounting Methods.
G-2100 Changes in Accounting Methods.
G-2150 When IRS May Require a Change of Accounting Method.
G-2160 IRS Procedures for Involuntary Changes by IRS in Taxpayer's Method of Accounting.
G-2200 Voluntary Accounting Method Changes—Automatic Consent Procedures.
G-2220 Voluntary Accounting Method Changes—Non-Automatic Consent Procedures.
G-2290 Adjustments Required Because of Changes of Accounting Method.
G-2400 Taxpayer Relief Provisions When Accounting Method Change Increases Taxable Income By More Than $3,000.
G-2410 When is Income Includible or Deductions Allowable Under The Cash Method of Accounting.
G-2450 Prepaid Expenses of Cash-Basis Taxpayers.
G-2470 When is Income Reported Under the Accrual Basis Method of Accounting.
G-2540 Advance Payments Received by Accrual Basis Taxpayers.
G-2620 When Expenses Are Deductible by Accrual Basis Taxpayers.
G-2700 Accrued Expenses Payable to Related Cash Basis Taxpayers.
G-2730 Accrual of Reserves for Expenses.
G-2900 Methods of Reconstructing Income.
G-3000 Repayment of Previously Reported Income.
G-3100 Tax Accounting Rules for Long-Term Contracts.
G-3250 Long-Term Construction, Installation, or Manufacturing Contracts—Pre-Mar. 1, '86 Contracts.
G-3450 Special Accrual Rules for Deferred Payments for Services.
G-4000 Allocation of Income and Deductions—Code Sec. 482.
G-4150 Code Sec. 482 Allocations Involving Non-Arm's-Length Loans Between Controlled Entities.
G-4200 Code Sec. 482 Allocations for Services Performed Between Controlled Entities.
G-4300 Code Sec. 482 Allocations for Use or Transfers of Tangible Property Between Controlled Entities.
G-4400 Code Sec. 482 Allocations on Sales of Tangible Property.
G-4500 Code Sec. 482 Allocations for Transfers or Use of Intangible Property.
G-4600 Cost Sharing Arrangements
G-4670 Pre Jan 5. 2009 Code Sec. 482 Cost Sharing Regs.
G-4700 Allocation of Income and Deductions. for Global Dealing Operations—Proposed Regs
G-4730 Allocations Between U. S. Firms and Puerto Rican Affiliates.
G-4740 U. S. and Foreign Allocations Under Code Sec. 482.
G-4760 Allocation of Income and Deductions of Certain Personal ServiceCorporations.
G-4800 Business Split-Ups Involving Unincorporated Taxpayers.
G-5000 Inventories.
G-5100 Valuation of Inventory.
G-5150 Valuation Methods That Reduce Inventory to Reflect Market Value and Saleability of Goods.
G-5200 Last-In-First-Out Method.
G-5350 Retail Inventory Method.
G-5400 Full Absorption Method—Tax Years Beginning before '87.
G-5450 Uniform Capitalization Rules.
G-5600 Simplified Service Cost Method.
G-5650 Simplified Production Method.
G-5700 Simplified Resale Method.
G-5750 U. S. Ratio Method for Foreign Taxpayers.
G-5800 Qualified Creative Expenses.
G-5850 Procedural Rules for Adopting or Changing Methods of Accounting for Costs Subject to the Uniform Capitalization (UNICAP) Rules.
G-5900 Automatic Consent Procedures for Certain Changes to and from Uniform Capitalization Methods by Small Resellers, Formerly Small Resellers, Reseller-Producers and Other Resellers.
G-5950 Revaluation of Inventory and Non-Inventory Property in Connection with a Change in the Method of Accounting for Costs Subject to the Uniform Capitalization Rules.
Chapter G-5990 Installment Sales, Repossessions, Foreign Currency
G-6000 Installment Method For Certain Sales of Real and Personal Property.
G-6050 Calculating the Amount of Any Installment Payment Which Is Treated as Income.
G-6150 Determining Amount Treated as Payment.
G-6200 Installment Sales of Depreciable Property to Related Persons.
G-6250 Contingent Payment Sales.
G-6300 Pledge and Interest Rules for Installment Sales by Nondealer.
G-6350 Election Not to Use Installment Method of Reporting Income.
G-6400 Second disposition of property by a related person.
G-6450 Disposition of Installment Obligations.
G-6550 Deferred Payment Sales Not Reported on the Installment Method.
G-6600 Dealers in Property.
G-6700 Proportionate Disallowance Rule—Pre-'88 Installment Sales
G-6800 Repossession of Personal Property Sold on Deferred Payment Plan and Not Qualified for Installment Method.
G-6850 Repossession of Real Property.
G-6900 Transactions Involving Foreign Currency.
G-7200 Nonstatutory Foreign Currency Transactions .
G-7300 Blocked Currency.
Chapter H Compensation—Part I
H-1000 Compensation Received for Personal Services.
H-1050 Fringe Benefits as Compensation.
H-1100 Accident and Health Insurance Benefits.
H-1170 Shared Responsibility Health Coverage Rules for Large Employers—after 2017
H-1200 Payments for Certain Permanent Disabilities or Disfigurement.
H-1225 Excise Tax on High-Cost Employer-Sponsored Health Coverage—After 2017.
H-1250 “COBRA”—Obligation under Employer-Provided Group Health Plans To Offer Continuation of Coverage.
H-1270 Qualified Beneficiaries Who May Elect COBRA Coverage.
H-1275 Continuation Coverage Required under Employer-Provided Group Health Plans Subject to COBRA.
H-1285 Premiums for Cost of COBRA Coverage under Employer-Provided Group Health Plans.
H-1295 Election of COBRA Coverage under Employer-Provided Group Health Plans.
H-1300 Duration of Periods of COBRA Coverage under Employer-Provided Group Health Plans.
H-1305 Qualifying Events Triggering COBRA Coverage under Employer-Provided Group Health Plans.
H-1310 Notice Requirements for COBRA Coverage under Employer-Provided Group Health Plans.
H-1315 Excise Tax for Failure of Employer-Provided Group Health Plans to Meet COBRA.
H-1325 Group Health Plan Requirements.
H-1326 Archer Medical Savings Accounts.
H-1348 Medicare Advantage Medical Savings Accounts.
H-1349 Health reimbursement arrangements (HRAs).
H-1350 Health savings accounts (HSAs).
H-1351 Workers' Compensation.
H-1400 Employer-Provided Benefits under a Dependent Care Assistance Program.
H-1450 Employer-Provided Benefits Under an Adoption Assistance Program.
H-1500 Employer-Funded Life Insurance as Compensation.
H-1600 Split-Dollar Life Insurance Arrangements.
H-1650 Survivor Annuity Attributable to Public Safety Officer Killed in the Line of Duty.
H-1700 Exclusion for Working Condition Fringes.
H-1750 Meals and Lodging Furnished to Employees.
H-1800 Exclusion for De Minimis Fringes.
H-1820 Exclusion for Meals at Employer-Operated Eating Facilities.
H-1870 Exclusion for No-Additional-Cost Services Provided by Employers to Employees.
H-1900 Exclusion for Qualified Employee Discounts.
H-1930 Nondiscrimination Rules for the Excludability of No-Additional-Cost Services, Qualified Employee Discounts, and Meals at Employer-Operated Eating Facilities.
H-1950 On-Premises Athletic Facilities.
H-1970 Qualified Moving Expense Reimbursement.
H-1980 Employer-Provided Retirement Advice Excludable As Fringe Benefit.
H-2000 Below-Market, Compensation-Related Loans.
H-2050 Employer's Payment of Educational Expenses of Employee.
H-2100 Employer Provided Legal Services.
H-2150 Employee Debts and Expenses Paid by the Employer.
H-2200 Treatment of Employees Who Receive Employer-Provided Transportation.
H-2230 Methods for Valuing the Use of Employer-Provided Vehicles.
H-2300 Methods for Valuing Employer-Provided Airplane Flights.
H-2350 Employer-Provided Transportation Excludable as a Working Condition Fringe.
H-2400 Cafeteria Plans.
H-2500 Property Received in Connection with the Performance of Services.
H-2700 Compensatory Options to Buy Stock or Other Property.
H-2750 Incentive Stock Options (ISOs).
H-2850 Nonstatutory Options.
H-2950 Employee Stock Purchase Plans.
H-3000 Severance Pay, Unemployment Benefits, Strike Benefits, and Other Payments Where Services Are Not Rendered.
H-3050 Exclusions for Volunteer Firefighters and Emergency Medical Responders Before 2011.
H-3100 Compensation of Armed Forces and Government Employees.
H-3150 Compensation of Clergy.
H-3180 Compensation of Minors.
H-3200 Nonqualified Deferred Compensation Plan Failure Rules.
H-3201 Taxation of Deferred Compensation.
H-3300 Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations (Section 457 Plans).
H-3400 Nonqualified deferred compensation from tax-indifferent corporations and partnerships.
H-3500 Time for Reporting Compensation Income.
Chapter H-3590 Compensation—Part II
H-3600 Deductibility of Compensation for Personal Services.
H-3650 Deduction for Compensation Paid in Property.
H-3670 Deduction for Nonqualified Deferred Compensation.
H-3700 Reasonable Compensation.
H-3775 $1 Million Limit on Publicly-held Corporation's Compensation Deduction.
H-3810 $500,000 Limit on Compensation Deduction of Health Insurers
H-3825 Golden Parachute Payments.
H-3900 Time for Deducting Compensation.
H-4000 Employer's Deduction for Providing Fringe Benefits.
H-4030 Employer's Deduction for Providing Employee Life Insurance.
H-4050 Employer's Deduction for Employee Death Benefits.
H-4070 Employer's Deduction for Employee Health and Other Welfare Benefits.
H-4100 Employer's Deduction for Contributions to Funded Welfare Benefit Plans.
H-4220 Income Tax Withholding From Wages Paid by Employers to Employees.
H-4250 Who's an Employee for Wage Withholding Purposes.
H-4300 Avoidance of Employment Tax Requirements by Compliance with Certain Statutory Requirements—“Section 530 Relief.”
H-4325 Wages Subject to Income Tax Withholding.
H-4400 Employee Fringe Benefits Subject to Income Tax Withholding.
H-4425 Wages Exempt from Income Tax Withholding.
H-4475 Additional Wage Withholding and Voluntary Nonwage Income Tax Withholding.
H-4485 Computation of Withheld Income Tax.
H-4530 Withholding on Supplemental Wage Payments.
H-4545 Federal Insurance Contributions Act (FICA) Taxes.
H-4550 Employer Defined for FICA Withholding Purposes.
H-4555 Employees for FICA Tax Purposes.
H-4570 Covered Employment—General Rules.
H-4585 Services That Aren't Considered Employment for FICA Purposes.
H-4620 Wages For FICA Tax Purposes.
H-4635 Amounts Deferred Under Nonqualified Deferred Compensation Plans.
H-4640 Compensation That Isn't Wages for FICA Purposes.
H-4670 Electing FICA Coverage.
H-4680 FICA Tax Exemptions for Employees Covered by Foreign Social Security Laws and for Members of Religious Sects.
H-4685 Computing FICA Taxes.
H-4700 Liability for and Collection of Employee FICA Tax.
H-4725 FUTA Taxes—Introduction.
H-4730 Employers and Employees.
H-4750 Covered Employment—General Rules.
H-4760 Services That Aren't Considered Employment.
H-4780 Wages—General Rules.
H-4790 Compensation That Isn't Wages for FUTA Purposes.
H-4800 Computing FUTA Taxes.
H-4850 Employer's Notice to Employees of Earned Income Credit.
H-4855 Advance Payment of Earned Income Credit Before 2011.
H-4870 Advance Payment of Health Coverage Tax Credit—the monthly HCTC
H-4880 Reduced Cost-sharing for Low-income Individuals Enrolled in Qualified Health Plans—After 2017
H-4890 Determining and Paying Premium Tax Credits in Advance—after 2017
H-4900 Excise Tax on Nonconforming Group Health Plans.
H-4950 Annual fee on branded prescription drug sales.
Chapter H-5001 Pension and Profit-Sharing Plans—Part I
H-5100 Introduction to Qualified Retirement Plans.
H-5200 Types of Qualified Plans.
H-5300 General Qualification Requirements.
H-5400 Minimum Coverage Requirements.
H-5500 Separate Lines of Business Treated as Separate Employers.
H-5600 Employee Leasing.
H-5700 Minimum Participation Requirements.
H-5800 Age and Service Requirements.
H-5900 Overall Limits on Benefits and Contributions (Section 415 Limits).
H-5950 Defined Benefit Plan Limitations on Benefit Accruals.
H-6000 Limitations Upon Annual Contributions to Defined Contribution Plan Accounts.
H-6050 Combined Limitation on Benefits and Contributions Before 2000—and Effects of Repeal After '99.
H-6100 Nondiscrimination Requirements—Overview.
H-6150 Nondiscrimination Requirements for Defined Contribution Plans.
H-6200 Testing Defined Benefit Plans for Nondiscrimination in Amount of Benefits.
H-6300 Cross-Testing Defined Benefit Plans and Defined Contribution Plans for Discrimination.
H-6350 Nondiscrimination in Ancillary Benefits, Other Rights, and Features Under a Plan.
H-6400 Optional Forms of Benefits Before '94.
H-6450 Nondiscrimination Testing, Plan Aggregation, and Plan Restructuring.
H-6550 401(m) Nondiscrimination Rules for Employee and Matching Contributions
H-6600 Compensation Defined.
H-6650 Annual Compensation Limitation for Determination of Plan Benefits and for Applying Nondiscrimination Rules.
H-6700 Highly Compensated Employees.
H-7000 Permitted Disparity—Integration with Social Security.
H-7100 Permitted Disparity Rules for Railroad Retirement Plans.
H-7200 Accrued Benefit Rules.
H-7300 Anti-Cutback Rules.
H-7360 Notice Requirements for Significant Reductions in the Rate of Future Benefit Accruals—“Section 204(h) Notice.”
H-7400 Vesting Requirement for Qualified Plans.
H-7500 Forfeitures.
Chapter H-7580 Pension and Profit-Sharing Plans—Part II
H-7600 Minimum Funding Requirements.
H-7730 Funding-Based Limits on Benefits and Benefit Accruals Under Single-Employer Defined Benefit Plans
H-7750 Required Contributions to Single-Employer Defined Benefit Plans
H-7800 Suspension of Assessment, Collection and Filing Periods.
H-7850 Excise Taxes on Underfunding.
H-7900 Plans Maintained by Commonly Controlled Employers.
H-7950 Affiliated Service Groups and Management Service Organizations.
H-7970 New Target and Old Target For Which The Code Sec. 338 Election is Made Treated as the Same Corporation.
H-8000 Top-Heavy Plans.
H-8050 Handling and Investing Qualified Employee Plan Funds.
H-8100 Life and Health Insurance and Survivorship Benefits as Incidental Benefits Under a Qualified Plan.
H-8120 Prohibition on Benefit Increases When Employer is in Bankruptcy.
H-8150 Diversions and Reversions of Plan Assets.
H-8200 Assignment or Alienation of Benefits.
H-8250 Trustee-to-Trustee Transfers (Direct Rollovers).
H-8270 Commencement of Distribution of Benefits.
H-8275 Required minimum distribution rules.
H-8500 Excise Tax for Failure to Make Required Minimum Distributions.
H-8550 Restrictions on Distributions from Pension Plans.
H-8600 Qualified Survivor Annuities for Married Participants.
H-8700 Cash-Out of Benefits in Lieu of Survivor Annuity.
H-8750 Retroactive “Remedial” Amendments of Plans With Disqualifying Provisions.
H-8800 Mergers and Consolidations of Plans and Transfers of Plan Assets and Liabilities.
H-8850 Termination of a Plan.
H-8900 Excise Tax on Employer Reversions.
H-8975 Cash or Deferred Arrangements (CODAs)—the 401(k) Plan Rules.
H-9050 Coverage and Nondiscrimination Requirements for 401(k) Plans (“CODAs”).
H-9100 Handling Excess Contributions to Meet the 401(k) Nondiscrimination Rules.
H-9150 Limitations on the Amount of an Employee's Elective Contributions to a Cash or Deferred Arrangement (CODA).
H-9200 Distribution Limitations for 401(k) Plans.
H-9240 Catch-Up Contributions—Elective Deferrals in Excess of Applicable Limits That Plans Can Allow Participants Aged 50 and Over
H-9250 Eligible Combined Defined Benefit Plans and Qualified CODAs—Rules for Treatment.
Chapter H-9270 Pension and Profit-Sharing Plans—Part III
H-9300 Employee Stock Ownership Plans (ESOPs).
H-9400 Qualified Retirement Plans for Citizens or Residents of the U. S. Employed Abroad.
H-9450 Qualified Foreign Plans for Nonresident Alien Employees.
H-9500 Plans Covering Self-Employed Individuals—Keogh Plans.
H-9550 Governmental Plans, Church Plans, Fraternal Society Plans, and Certain Other Plans.
H-9600 Multiple Employer Plans
H-9700 Collectively Bargained Plans and Multiemployer Plans.
H-9800 Maritime Industry Plans.
H-9900 Consequences of Disqualification.
H-9950 Pension Rights of Veterans and Active Military Service Members.
H-10000 Deduction for Employer Contributions.
H-10100 Limits on Deduction of Pension and Annuity Plan Contributions.
H-10200 Deduction Limitations and Carryovers—Profit-Sharing and Stock Bonus Plans.
H-10300 Excise Tax on Nondeductible Contributions.
H-10400 Excise Tax on Excess Contributions and Excess Aggregate Contributions.
H-10500 Taxation of Employer Contributions for Retirement Benefits and Life Insurance Premiums.
H-11000 Taxation of Distributions from Qualified Plans.
H-11100 Additional Tax on Early Distributions from Qualified Plans.
H-11200 Elective Methods for Taxation of Lump-Sum Distributions Received by Employees Born Before '36.
H-11350 Penalty on Benefits Exceeding Plan Formula Received by Five-Percent Owners
H-11400 Rollovers from Qualified Plans and Individual Retirement Accounts (IRAs).
H-11500 Tax Treatment of Distributions of Employer's Securities from Qualified Plans.
H-11600 Distribution of Life Insurance Contracts and Benefits.
H-12000 Rules for Distributions to U. S. Citizens or Residents Employed Abroad.
H-12100 Tax Treatment of ESOPs and EWOCs.
H-12200 Individual Retirement Savings Plans (IRAs).
H-12290 Roth IRAs.
H-12295 Optional Roth contribution treatment of elective deferrals by 401(k) plan and 403(b) annuity plan participants.
H-12300 Simplified Employee Pensions (SEPs).
H-12350 Savings Incentive Match Plans for Employees of Small Employers—“SIMPLE” IRA Plans.
H-12400 403(b) Annuities for Employees of Tax-Exempt Organizations or Public Schools—Before 2009.
H-12450 403(b) Annuities for Employees of Tax-Exempt Organizations or Public Schools.
H-12500 Excise Taxes on Prohibited Transactions.
Chapter I Sales and Exchanges, Capital Gains and Losses, Cost Recovery Recapture, Depreciation Recapture
I-1000 Sales or Exchanges of Property.
I-1050 Modification of Debt Instruments.
I-1100 Closed Sale or Exchange for Tax Purposes.
I-1200 Sale or Exchange Must Be Bona Fide.
I-1300 Sale or Secured Loan.
I-1400 Payments For Release of Obligations Under Leases, Distributorships and Other Contracts.
I-1500 Property Given in Payment of Debt and Other Obligations.
I-1600 What Was Sold—Effect on Tax Result.
I-1800 Retirement of Debt Instruments not Issued by Corporations or Governments.
I-1900 Debt Instruments Retired or Converted.
I-2000 Patents and Know-how.
I-2100 Copyrights.
I-2500 Amount of Gain or Loss on Sale or Exchange.
I-2600 When to Report Gain or Loss.
I-2900 Who Made Sale or Exchange.
I-3000 “Realized” and “Recognized” Gains and Losses Distinguished.
I-3050 Like-Kind Exchanges.
I-3160 Receipt of Money or Non-Like-Kind Property (Boot) in Like-Kind Exchanges.
I-3175 Basis of Property Received in Like-Kind Exchanges.
I-3185 Computing Gain and Basis in Like-Kind Exchanges Involving Multiple Properties.
I-3195 Exchange of Long-Term Care Insurance for Qualified Long-Term Insurance Before '98.
I-3200 Sale or Exchange of Corporation's Capital Stock or Property.
I-3300 Tax-free Exchanges of Stock in the Same Corporation.
I-3400 Tax-free Exchanges of Certain U. S. Obligations.
I-3430 Elective Rollover of Gain from Qualified Empowerment Zone Assets to Other Qualified Empowerment Zone Assets.
I-3500 Losses Resulting from Sales and Exchanges Between Related Taxpayers.
I-3600 Transfers Between Husband and Wife or Incident to Divorce.
I-3700 Tax-Deferral on Gain from Involuntary Conversions.
I-3790 Tax-Free Rollover of Publicly Traded Securities Gain Into “Specialized Small Business Investment Companies.”
I-3800 Other Specially Treated Transactions: Transfers of Special Use Valuation Property, Securities Loans to Brokers, Vessel Sales or Loss Indemnifications, Property Divestitures by Certain Government Employees.
I-3825 Sales or Exchanges To Implement Reallocation of Airwaves by FCC Treated as Involuntary Conversions.
I-3850 Nonrecognition of Gain on Pre-Jan. 17, '95 Sales or Exchanges Required by FCC Policies.
I-3900 Wash Sale Losses Not Recognized.
I-4000 Sales, Exchanges, and Redemptions of Tax Exempt Bonds.
I-4100 International Transactions Involving Transfers of Rights in Connection With Computer Programs.
I-4500 Gain or Loss Treatment on Sale of Residential Property.
I-4520 Exclusion of Gain on the Sale or Exchange of a Principal Residence.
I-4600 Replacement of Old Principal Residence with New Residence—Sales and Exchanges Before May 7, '97.
I-4700 Exclusion of Gain on Sale of Residence by Taxpayers 55 Years or Older—Sales and Exchanges Before May 7, '97.
I-4900 Recapture of Federal Subsidy Upon Dispositions of Residences Financed with Proceeds of Qualified Mortgage Bonds and Mortgage Credit Certificates.
I-5000 Which Transactions Do and Which Do Not Result in Capital Gains and Losses.
I-5100 How Capital Gains and Losses Are Taxed.
I-6000 Capital Assets.
I-6100 Stock in Trade, Inventories, Accounts Receivable and Business Supplies.
I-6190 Derivatives.
I-6200 Stock and Other Securities.
I-6230 Hedging Transactions.
I-6270 Commodity Futures.
I-6280 Gains and Losses on Securities Futures Contracts.
I-6290 Gains and Losses on the Disposition of Commodities Derivative Financial Instruments Held by Commodities Derivatives Dealers.
I-6300 Gains and Losses on the Disposition of Real Property.
I-6400 Real Property Subdivided for Sale Can Qualify for Capital Gain under a Special Five-Year Rule.
I-6500 Options, “Puts” and “Calls.”
I-6600 Copyrights and Literary, Musical or Artistic Compositions, Letters, Memoranda, etc.
I-6700 Patents Sold, Etc. by Persons Other Than Individual Inventors and Their Financial Backers; Know-how.
I-6800 Franchise, Agency, and Other Contractual Rights.
I-6900 Leases, Distributorships and Other Contracts.
I-7000 Sales of Other Property.
I-7500 Tax Straddles.
I-7600 Section 1256 Contracts—Mark-to-Market Rules.
I-7650 Mark-to-Market Rules for Securities Dealers and Electing Commodities Dealers, Securities Traders, and Commodities Traders.
I-7700 Short Sales of Stock and Securities.
I-7730 Constructive Sales of Appreciated Financial Positions.
I-7800 Gains and Losses on Sale, Exchange, or Redemption of Bonds and Other Debt Obligations.
I-7900 Gain on Disposition of Registration-Required Obligations not in Registered Form.
I-8000 Sales and Exchanges of Debt Instruments Issued or Bought at a Discount.
I-8100 Sales or Exchanges of Purchased Stripped Bonds and Coupons.
I-8200 Gain on Investments That Are Similar to Loans.
I-8250 Constructive Ownership Transactions.
I-8300 Patents Transferred by Inventors or Their Financial Backers.
I-8400 Transfers of Franchises, Trademarks and Trade Names.
I-8500 Sale of Businesses and Groups of Assets.
I-8600 Goodwill and Covenants Not to Compete.
I-8700 Gain on Sales or Exchanges of Depreciable Property Between Related Persons.
I-8750 Capital Gains Rates for D. C. Zone Assets
I-8775 Special Tax Incentives Available for Activities Within Renewal Communities.
I-8800 Income Exclusion for Gain from Sales or Exchanges of Certain Renewal Community Assets.
I-8850 Income Exclusion for 25% of Gain from Conservation Sales of Qualifying Mineral or Geothermal Interests
I-8900 Holding Period.
I-9000 Capital Gain—Ordinary Loss Rule for Real and Depreciable Property and Compulsory or Involuntary Conversion of Capital Assets.
I-9100 Exclusion for Certain Gain from Qualified Small Business Stock.
I-9200 Elective Rollover of Capital Gain from Certain Small Business Stock.
I-9500 Small Business Corporation Section 1244 Stock Losses, SBICs, Etc.
I-10000 Recapture of Depreciation on Sale or Other Disposition of Certain Property.
I-10100 Types of Property Subject to the Depreciation Recapture Rules.
I-10200 Calculation of Sec. 1245 Recapture.
I-10300 Application of Sec. 1245 Recapture Rules to Particular Transactions.
I-10400 Calculation of Sec. 1250 Recapture.
I-10500 Application of Sec. 1250 Recapture Rules to Particular Transactions.
I-11000 Recapture of Debt Discharge Amounts.
Chapter J Income: Taxable and Exempt
J-1000 Gross Income Defined.
J-1010 Barter Income
J-1050 Employee's Reimbursed Expenses Under Accountable and Nonaccountable Plans.
J-1200 Prizes and Awards.
J-1230 Qualified Scholarships and Tuition Reductions.
J-1290 Exclusion from Gross Income of Qualified Disaster Relief Payments, Qualified Disaster Mitigation Payments, and Payments for Individual Specified Disasters.
J-1300 Medical Insurance Benefits.
J-1310 Insurance Reimbursements for Living Expenses Due to the Loss of the Use of a Principal Residence
J-1320 Taxation of Insureds Who Receive Payment of Non–Life Insurance Premiums.
J-1325 Cemeteries and Mausoleums.
J-1335 Income Deposited in a Merchant Marine Capital Construction Fund.
J-1370 Trust Funds and Other Receipts for Restricted Purposes.
J-1380 Political contributions.
J-1390 Rebates and Discounts.
J-1395 Reimbursement of Personal Expenses.
J-1400 Energy Conservation Subsidies Provided by Public Utilities.
J-1405 Financing Orders Issued to Public Utility Companies.
J-1410 Miscellaneous Income Items.
J-1435 Advance Payments, Security Deposits and Payments Treated as Deposits.
J-1440 Gross Income of State and Local Governments.
J-1455 Social Security and Railroad Retirement Act Benefits.
J-1475 Restitution Payments Received by Human Trafficking Victims, Holocaust Survivors, Japanese and Aleut Internees, Et Al.
J-1480 Taxability of Miscellaneous Governmental Payments.
J-1500 Qualified Foster Care Payments Received.
J-1520 American Indians.
J-1600 Income from Illegal Activities.
J-1650 Income from Gambling, Lotteries, and Other Similar Transactions.
J-2000 Income from Rents and Royalties.
J-2200 Rental Income.
J-2250 Improvements to Leased Property by Lessee.
J-2260 Lessee's Exclusion from Income of Construction Allowances Received for Improvements to Qualified Long-Term Real Property Under a Short-Term Lease of Retail Space.
J-2275 When and by Whom Rent Is Includible in Gross Income.
J-2300 Royalty Income.
J-2350 Taxation of Dividends.
J-2400 To Whom Dividends Are Taxable.
J-2450 When Dividends Become Taxable.
J-2475 Dividends in Kind (Other Than Stock or Rights).
J-2500 Stock and Rights Distributions.
J-2600 Special Types of Dividends.
J-2700 Constructive Dividends.
J-2800 Taxable Interest.
J-2850 Partial Interest Exclusion for Lenders Making ESOP Loans—Loans Made Before Aug. 21, '96.
J-2900 Below-Market Interest Rate Loans.
J-3000 Tax-Exempt and Taxable Interest on Government Obligations.
J-3047 Qualified Scholarship Funding Bonds.
J-3050 Interest Exclusion for U. S. Savings Bonds Redeemed to pay Qualified Higher Education Expenses.
J-3100 Private Activity Bonds and Industrial Development Bonds.
J-3150 Tax-Exempt Qualified Bonds.
J-3200 Exempt Facility Bonds.
J-3250 Qualified Mortgage Bonds and Mortgage Credit Certificates.
J-3270 Qualified Veterans' Mortgage Bonds.
J-3275 Qualified Small Issue Bonds.
J-3290 Qualified Student Loan Bonds
J-3295 Qualified Redevelopment Bonds.
J-3300 Qualified 501(c)(3) Bonds.
J-3315 Qualified Bonds for Disaster Area Financing.
J-3325 Tax-Exempt Bond Financing for the New York Liberty Zone.
J-3330 Recovery Zone Facility Bonds and Recovery Zone Economic Development Bonds.
J-3350 Enterprise Zone Facility Bonds for Empowerment Zones and Enterprise Communities.
J-3375 Empowerment Zones and Enterprise Communities.
J-3395 Designation of DC Enterprise Zone as an Empowerment Zone.
J-3400 Arbitrage Bonds Issued After June 30, '93.
J-3554 Arbitrage Rebate Requirements.
J-3600 Arbitrage Bonds Issued Before July 1, '93.
J-3650 Technical Requirements of Tax-Exempt Bonds.
J-3700 Time for Reporting Interest Income.
J-3750 Unstated Interest on Deferred Payment Sales.
J-3800 Payments Subject to Unstated Interest Rules.
J-3900 Exceptions to Application of Unstated Interest Rules.
J-3950 Allocating Total Unstated Interest Among Payments.
J-4000 Current Inclusion of Original Issue Discount as Interest Income.
J-4050 Debt Instruments to which Current Inclusion of Original Issue Discount Rules Apply.
J-4100 Determining whether a Debt Instrument Is Issued with Original Issue Discount—OID Defined.
J-4300 Determining Amount of Original Issue Discount Currently Includible in Holder's Income.
J-4360 Determining Amount of Original Issue Discount Under Contingent Payment Debt Instruments.
J-4365 Noncontingent Bond Method
J-4370 Tax-Exempt Contingent Payment Obligations.
J-4375 Method For Determining Original Issue Discount On Contingent Payment Debt Instruments Not Subject To The Noncontingent Bond Method.
J-4379 Inflation-Indexed Debt Instruments.
J-4380 Integration of Qualifying Debt Instruments and Hedges.
J-4400 Holders and Strippers of Stripped Preferred Stock Required to Accrue Income.
J-4450 Applicability of OID Current Inclusion Rules to Stripped Bonds and Coupons.
J-4500 Discount on Short-Term Obligations.
J-4550 Market Discount as Interest Income.
J-4600 U. S. Savings Bonds, Inherited Discount Obligations, and Installment Obligations Bought at a Discount.
J-4650 Issuer's Inclusion of Bond Premium as Income—Debt Instruments Issued Before March 2, '98.
Chapter J-4690 Income: Taxable and Exempt, Non-Wage Withholding
J-4700 Taxation of Life Insurance Proceeds.
J-4750 Accelerated Death Benefits and Viatical Settlements.
J-4800 Life Insurance Contract Defined.
J-4900 Contracts that Don't Qualify As Life Insurance Contracts.
J-4950 Life Insurance Contract Defined—Contracts Issued Before '85.
J-5000 Taxation of Annuity Income and Lifetime Payments under Life Insurance and Endowment Contracts.
J-5050 Taxation of Amounts Not Received as an Annuity.
J-5100 Taxation of Amounts Received as an Annuity.
J-5200 Taxation of Combined Life Insurance and Annuity Contracts.
J-5230 Gain or Loss on Annuity Contracts Received in Exchange for Property Other than Money—Proposed Regs.
J-5250 Taxation of Private Annuities (Annuities Not Purchased from an Insurance Company).
J-5300 Dispositions of Life Insurance, Endowment, Annuity and Long-Term Care Contracts.
J-5500 Recoveries and Refunds—the Tax Benefit Rule.
J-5600 Recoveries of Bad Debts as Income.
J-5700 Recoveries of Overpaid or Unlawfully Collected Deductible Taxes Under Tax Benefit Rule.
J-5800 Recovery of Damages and Lost Profits.
J-5900 Foreign Expropriation Loss Recoveries of Domestic Corporations
J-6000 Gifts and Bequests.
J-7000 When is Income Realized on the Discharge or Cancellation of Indebtedness.
J-7200 Amount of Debt Cancellation Income.
J-7300 Debt Cancellation Transactions Between Shareholders and Corporations.
J-7400 Exceptions to Recognition of Income on Discharge of Indebtedness—Bankruptcy, Insolvency, Qualified Farm Debt, Qualified Real Property Business Debt, and Home Mortgage Debt.
J-7500 Debt Cancellations as Gifts, Purchase Price Reductions, Forgiveness of Tax-Favored Items, Student Loans, and Other Exceptions to Income Recognition.
J-7550 The Effects of Debt Cancellation on the Creditor.
J-8000 Income Which May Have to be Repaid—Claim of Right Doctrine.
J-8100 Income from Jointly Owned Property.
J-8150 Assignment of Income.
J-8300 Recharacterizing Financing Arrangements Involving Fast-pay Stock
J-8500 Withholding on Pensions, Annuities, and Other Deferred Income.
J-8575 Mandatory 20% Withholding on Eligible Rollover Distributions
J-8600 Income Tax Withholding From Certain Gambling Winnings, Sweepstakes and Lotteries.
J-9000 Backup Withholding.
J-9100 Payments Subject to Backup Withholding—Reportable Payments.
J-9200 Backup Withholding On Readily Tradable Instruments.
J-9300 Notification Rules Regarding an Incorrect TIN and Notified Payee Underreporting.
J-9400 Payee Certification to Avoid Backup Withholding.
J-9500 Period for Which Backup Withholding is in Effect.
J-9600 IRS Determination to Stop, or Not Require, Backup Withholding.
Chapter K Deductions: Taxes, Interest, Charitable, Medical, Others
K-1000 Deductions Allowed by Law.
K-1100 Personal Expenses.
K-2000 Medical Expenses—General Rules.
K-2100 Expenditures That Qualify as Medical Expenses—Other Than Travel and Transportation Expenses.
K-2180 Capital Expenditures May Qualify as Medical Expenses.
K-2200 Transportation, Meals, Lodging and Other Travel Costs as Medical Expenses.
K-2300 Whose Medical Expenses May Be Deducted.
K-2400 When Medical Expenses Are Deductible.
K-2600 Reimbursement of Medical Expenses.
K-2800 Charitable Contributions Deduction.
K-2850 Qualified Donee Charitable Organizations.
K-2965 Deductibility of Designated Contributions
K-2975 Contributions to Donor Advised Funds (DAFs).
K-3000 Contribution Must Be a Charitable Gift.
K-3125 Charity's Disclosure Requirement for Quid Pro Quo Contributions.
K-3150 Contributions of Property to a Charitable, Etc. Organization.
K-3200 Qualified Contributions of Inventory for the Care of the Ill, Needy, or Infants.
K-3220 Corporate Contributions of Scientific Property.
K-3240 Corporate Contributions of Computer Technology or Equipment to Schools and Libraries Before 2012.
K-3250 Contribution of Partial Interests in Property—Contributions in Trust.
K-3363 Contributions of Partial Interests in Property—Pooled Income Funds
K-3440 Contribution of Partial Interests in Property—Contributions Not in Trust.
K-3500 Qualified Conservation Contributions.
K-3550 Services Performed for Charitable Organizations.
K-3600 Expenses Incurred in Performing Services for Charitable Organizations.
K-3650 Charitable Contribution for Hosting a Student at Home.
K-3660 No Charitable Contribution Deduction for Personal Benefit Contract (Charitable Split-Dollar Insurance) Transactions
K-3670 Limitations on Individual's Charitable Deduction.
K-3700 Five-Year Carryover for Excess Charitable Contributions of Individuals.
K-3720 “50% Charity” Defined.
K-3830 Limitations on Corporation's Charitable Deduction.
K-3850 When Charitable Contribution Is Deducted.
K-3900 Proving Right to Charitable Contribution Deduction.
K-4000 Deduction for Nonbusiness Taxes.
K-4100 Who May Deduct Taxes.
K-4200 When are Taxes Deductible by a Cash Basis Taxpayer.
K-4300 When Are Taxes Deductible by a Taxpayer Using the Accrual Method of Accounting.
K-4400 Federal Taxes Deductible Whether or Not Incurred in Trade or Business.
K-4500 Deduction of State And Local Taxes.
K-4600 Local Benefit Assessments.
K-4700 Foreign Taxes.
K-5000 Deduction for Interest.
K-5010 What is Interest.
K-5020 Interest as Payment for the Use or Forbearance of Money.
K-5060 Interest Requires a Valid Debt.
K-5120 Who May Deduct Interest.
K-5150 Determining the Amount of Interest—Special Rules.
K-5170 Interest Deduction Timing Rules Applicable to Cash Basis Taxpayers
K-5200 Interest Deduction Timing Rules Applicable to Accrual Basis Taxpayers
K-5220 Interest Deduction Timing Rules Applicable to Both Cash and Accrual Basis Taxpayers
K-5230 Allocating Interest Expense Under Passive Loss, Investment Interest, and Personal Interest Limitations.
K-5280 Unstated Interest in a Deferred Payment Arrangement.
K-5305 Interest Deduction Limitations.
K-5310 Investment Interest Deduction May Be Limited for Noncorporate Taxpayers.
K-5335 Passive Activity Interest.
K-5340 Net Direct Interest Expense on Market Discount Bonds and Short-Term Obligations.
K-5350 Interest on Life Insurance Policies, Annuity and Endowment Contracts.
K-5360 Interest Paid by Certain Corporations to Related Persons—Earnings Stripping.
K-5400 Conduit Arrangements and Similar Transactions.
K-5405 Interest on Corporate Acquisition Indebtedness.
K-5470 Qualified Residence Interest.
K-5500 Student Loan Interest Deduction.
K-5505 Interest Deduction Prohibited.
K-5510 No Deduction for Personal Interest.
K-5520 No Deduction For Interest Incurred to Buy or Carry Tax-Exempt Obligations.
K-5545 Deduction Prohibited For Interest On Debt For Regulated Investment Company Stock Generating Exempt-Interest Dividends.
K-5550 Interest Deduction Denied on Long Term Corporate and Other Obligations Not Issued in Registered Form; Excise Tax on Issuer.
K-5570 Interest on Debt Incurred to Acquire Single Premium Life Insurance, Annuity and Endowment Contracts.
K-5580 Interest on Planned Loans Against Insurance Policies (“Plans of Purchase”).
K-5600 Interest Allocable to Unborrowed Policy Cash Values (“Inside Buildup”) on Life Insurance, Annuity and Endowment Contracts.
K-5610 Amortization of Bond Premium by Holder.
K-5650 Amortization of Bond Premium by Dealers in Tax-exempt Bonds.
K-5675 Premium Paid to Repurchase Debt.
K-5690 Bond Issuance Premium—Amortization by Issuer as Offset Against Interest Deduction.
K-5700 Current Deduction of Original Issue Discount as Interest Expense.
K-5790 Debt v. Equity — Code Sec. 385 Rules for Treating Corporate Interests as Debt or Stock.
K-5800 Debt v. Equity—Determining Whether Corporate Obligations Are Debt or Stock Under Rules Other Than Code Sec. 385.
K-5880 Computing the Deduction for Penalties on Premature Withdrawals from Time Savings Accounts or Similar Deposits.
K-5900 Tenant-Stockholders of Cooperative Apartments—Interest, Taxes, And Depreciation.
K-6000 Deductibility of Alimony and Child Support Payments
K-6100 Alimony and Child Support Payments Under Pre-'85 Decrees.
K-7000 Deduction for Qualified Clean Fuel Vehicles and Qualified Refueling Property Placed in Service Before Jan. 1, 2006.
K-8500 Deduction from certain business damage recoveries.
K-9000 Expenses in Connection with Exempt Income.
Chapter L Deductions: Business and Investment Expenses, Travel & Entretenimiento
L-1000 Trade or Business Expenses.
L-1100 What is a Trade or Business?
L-1200 Business Expenses Must be Ordinary and Necessary.
L-1300 Deductions for Home Office Expenses.
L-1400 Expenses for Production of Income.
L-1500 Residence Converted to Investment Property.
L-1600 Local Transportation Costs.
L-1630 Local Lodging Expenses.
L-1700 Travel Away from Home.
L-1800 “Home” for Travel Expense Purposes.
L-1900 Automobile Expenses.
L-2000 Travel Expense Problems of Particular Occupations.
L-2100 Deduction for Meal and Entertainment Expenses.
L-2180 Dues Paid For Membership In A Club Organized For Business, Pleasure, Recreation, or Other Social Purpose.
L-2200 Advertising, Promotion and Circulation Costs.
L-2300 Limitations on Business Gift Deductions.
L-2350 Taxes Deductible as a Business or Investment-Related Expense.
L-2400 Lobbying and Political Expenditures.
L-2500 Payment of Civil Judgments and Settlements.
L-2600 Kickbacks, Bribes and Other Illegal Payments.
L-2630 Expenses of Illegal Businesses.
L-2700 Fines, Penalties, Antitrust Treble Damages and Similar Payments.
L-2800 Expenses of Sham Transactions.
L-2900 Legal and Accounting Expenses.
L-3000 Expenses Related to Taxes.
L-3100 Research or Experimental Expenditures.
L-3140 Expensing Election for Certain Costs of Qualified Film and Television Productions.
L-3150 Removing Barriers to the Disabled and the Elderly.
L-3155 Expensing Election for Costs of “Qualified Refinery Property.”
L-3160 Small Refiners' Deduction for Portion of Costs of Complying With EPA Diesel Fuel Sulfur Control Requirements.
L-3170 Energy Efficient Commercial Building Property Deduction.
L-3200 Royalty Payments.
L-3300 Trademark and Trade Name Expenses.
L-3400 Life Insurance Premiums.
L-3500 Deductibility of Premiums for Insurance Other than Life Insurance.
L-3600 Moving Expenses of Employees and Self-Employed Individuals.
L-3700 Education Expenses of Individuals As Deductible Trade or Business Expenses.
L-3800 Employees' Uniforms and Work Clothes.
L-3850 Job-Hunting Expenses.
L-3900 Employees' Special Expenses.
L-4000 Investors and Dealers in Securities.
L-4100 Applications of the Trade or Business Expense Rules.
L-4200 Miscellaneous Expenses.
L-4300 Membership Organizations' Expense Limitation.
L-4325 Domestic Production Activities Deduction
Chapter L-4400A Deductions: Business and Investment Expenses, Travel & Entretenimiento
L-4400 Which Taxpayer Is Entitled to Deduct Business and Investment Expenses?
L-4500 Proving Deductibility of Expenses.
L-4600 Substantiating Travel, Entertainment, Gift and Listed Property Deductions.
L-4700 Reimbursed Employee Expenses Under Accountable and Nonaccountable Plans—Per Diem, etc. Allowances.
L-5000 Start-Up Expenses for a Trade or Business.
L-5100 Expanding an Existing Business.
L-5200 Organizational Expenses of a Corporation.
L-5300 Expenses of Issuing Corporate Stock.
L-5400 Treatment of Expenses Incurred in Connection With Reorganizations.
L-5500 Dissolution and Liquidation Expenses.
L-5600 Capital Expenditures.
L-5700 Cost of Acquiring and Protecting Rights in Property.
L-5750 Expenditures to Acquire or Create Intangible Assets or Benefits
L-5800 Capital Expenditures for Construction Costs.
L-5900 Capitalization of Interest, Taxes and Carrying Charges.
L-6000 Deductibility of Borrowing and Financing Costs.
L-6100 Repair, Maintenance, Rehabilitation and Improvement Expenditures.
L-6150 Environmental Cleanup Costs.
L-6200 Lease or Purchase—Purchase Option Leases and Terminal Rental Adjustment Clauses.
L-6300 Transfer and Leaseback.
L-6400 Lessor's Leasehold Costs.
L-6500 Tenant's Leasehold Costs.
L-6600 Rental Payments.
L-6700 Reasonable Rent.
L-6800 Rules for Leases Under Code Sec. 467.
L-6900 Limit on Deductions Connected to Leases and Other Arrangements Involving Tax-Exempt Use Property.
Chapter L-7400 Cost Recovery System, Depreciation, Amortization
L-7500 What is The Depreciation Allowance.
L-7600 Beginning of The Depreciation Allowance—The “Placed in Service” Rule.
L-7700 End of the Depreciation Allowance.
L-7800 Who is Entitled to The Depreciation Allowance.
L-7900 Property Qualifying for the Depreciation Allowance.
L-7950 Purchased Goodwill and Other Intangibles Subject to 15-Year Amortization.
L-8000 Intangibles (Depreciable and Non-Depreciable) Acquired with Purchase of Businesses or Professions.
L-8100 The Modified Accelerated Cost Recovery System (MACRS).
L-8200 Property Eligible for MACRS.
L-8300 Anti-Churning Rules Denying MACRS Benefits for Certain Property.
L-8400 Property Acquired by Reason of Death or by Gift As Recovery Property Under the MACRS Anti-Churning Rule.
L-8500 Cost Recovery Depreciation Factors Under MACRS.
L-8600 “Depreciable” Basis for MACRS Property.
L-8700 Depreciation Conventions Under MACRS.
L-8800 Depreciation Periods for MACRS Property.
L-8900 Cost Recovery Methods and Rates Under MACRS.
L-9000 MACRS Deductions for Short Tax Years.
L-9100 Real Property Depreciation Methods and Rates Under MACRS.
L-9120 MACRS Depreciation After a Change in Use Causes a Change in the Period or Method of Depreciation.
L-9200 MACRS Deduction in Early Disposition or Reacquisition Years.
L-9300 MACRS Depreciation for Public Utility Property.
L-9310 Additional First-Year (“Bonus”) Depreciation is Allowed for “Qualified Property”
L-9320 30% Additional First-Year Depreciation for Certain Pre-May 6, 2003 Tangible Property and Computer Software.
L-9335 50% Additional First-Year Depreciation for Certain Property in the Gulf Opportunity Zone (GO Zone) and Kansas Disaster Area.
L-9340 30% Additional First-Year Depreciation for Certain Pre-2007 and Pre-2010 Property in the New York Liberty Zone.
L-9355 50% Additional First-Year Depreciation for Qualified Second Generation Biofuel Plant Property.
L-9360 50% Additional First-Year Depreciation for Qualified Reuse and Recycling Property.
L-9365 50% Additional First-Year Depreciation for Qualified Disaster Assistance Property.
L-9400 The Alternative Depreciation System (“ADS”) of MACRS.
L-9500 Straight-line Depreciation for MACRS Property Financed with Tax-Exempt Bonds.
L-9600 MACRS Deductions for Property Leased to “Tax-Exempt” Entities or Leased to or Owned by Certain Pass-Through Entities.
L-9700 Straight-line Cost Recovery Deduction Method for ACRS Property Financed with Tax-Exempt Bonds.
L-9800 ACRS Deductions for Pre-'87 Property Leased to (or Used by) Tax-Exempt Entities.
L-9900 Code Sec. 179 Election to Expense Certain MACRS Property by Small Businesses.
L-9940 Expensing Election for the Cost of Qualified Advanced Mine Safety Equipment Property.
L-9950 Code Sec. 179 Expense Election for Enterprise Zone Businesses.
L-9970 Increased Code Sec. 179 Expense Election for Qualified Zone Property of a DC Zone Business.
L-9985 Additional Code Sec. 179 Expensing for Qualified Renewal Property of a Renewal Community Business.
L-9990 AdditionalCode Sec. 179 Expensing for Qualified New York Liberty Zone Property.
L-9995 Additional Code Sec. 179 Expensing for the Gulf Opportunity Zone (GO Zone) and Kansas Disaster Area.
L-10000 Limitations for MACRS “Luxury” Automobiles and “Listed Property.”
L-10100 Limitations for ACRS “Luxury” Automobiles and “Listed Property.”
L-10200 Lessees Under the MACRS Business Autos and Listed Property Rules.
L-10300 Lessees Under the ACRS Business Autos and Listed Property Rules.
L-10400 Depreciation Deductions for MACRS or ACRS Property Acquired or Disposed of in Nontaxable Transactions.
L-10500 Depreciation Deductions for MACRS or ACRS Property Deemed Purchased When Code Sec. 338 Election is Made.
L-10600 Depreciation of MACRS Property Involved in a Like-kind Exchange or Involuntary Conversion.
L-10610 Dispositions of MACRS Property.
L-10700 Special Depreciation Methods for Certain Property.
L-10800 The Pre-'87 Accelerated Cost Recovery System (ACRS).
L-10900 Property Eligible for Pre-'87 ACRS—Recovery Property.
L-11000 Pre-'87 Anti-churning Rules Denying ACRS Depreciation for Certain Property.
L-11100 Property Acquired from a Decedent or by Gift Before '87 as Recovery Property Under ACRS Anti-Churning Rule.
L-11200 Depreciable Basis, Depreciation Periods and Conventions Under Pre-'87 ACRS.
L-11300 Cost Recovery Methods and Rates Under Pre-'87 ACRS.
L-11400 ACRS Deduction in Early Disposition or Reacquisition Years.
L-11500 Periods and Methods for Pre-'87 ACRS Property Used Predominantly Outside the U. S.
L-11600 ACRS Depreciation for Pre-'87 Public Utility Property and Railroads' “RRB-Replacement” Property.
L-11700 Depreciation Factors for Property Depreciable Under the Useful Life Rules.
L-11800 The Depreciation Period Under the Useful Life System.
L-11900 Available Depreciation Methods for Useful Life Property.
L-12000 Straight-Line, Declining Balance, Sum-of-the-Years-Digits Methods Under the Useful-Life Depreciation System.
L-12100 Multiple Asset Account Useful-Life Depreciation.
L-12200 Retirement of Useful-Life Depreciable Property.
L-12300 Class Life Asset Depreciation Range (ADR) System and Property.
L-12400 Post-'70 Guideline Class Life Depreciation for Pre-'71 Assets.
L-12500 Special Amortization or Depreciation Periods and Rules for Certain Properties.
L-12600 60-Month Amortization for Pollution Control Facilities Added to Pre-Jan. 1, '76 Plants (84-Month Amortization for Air Pollution Control Facilities Added to Post-Dec. 31, '75 Plants).
L-12700 50% Expensing or 120-Month Amortization Allowed Under the Commercial Revitalization Deduction.
Chapter L-15000 Special Incentive Credits
L-15100 Credits that Reduce Tax.
L-15200 General Business Credit.
L-15300 Research Credit for Amounts Paid or Incurred Before Jan. 1, 2017.
L-15400 Expenses Eligible for the Research Expense Credit.
L-15500 Corporations' “University Basic Research Credit” for Payments Before Jan. 1, 2017
L-15530 Credits for Qualified Tax Credit Bonds.
L-15550 Qualified Forestry Conservation Bonds.
L-15560 New Clean Renewable Energy Bonds (New CREBs).
L-15570 Qualified Energy Conservation Bonds.
L-15580 Qualified Zone Academy Bonds.
L-15590 Qualified School Construction Bonds Issued Before 2011.
L-15600 Build America Bonds.
L-15615 Clinical Testing Expense Credit for Drugs for Rare Diseases or Conditions (Orphan Drug Credit).
L-15625 Qualifying Therapeutic Discovery Project (QTDP) Credit or Grant for 2009 and 2010.
L-15630 Empowerment Zone Employment Credit.
L-15640 District of Columbia Zone Wage Credit.
L-15645 Credit For Qualified Zone Academy Bonds Issued Before Oct. 4, 2008.
L-15650 Credit for Contributions to Community Development Corporations (CDCs).
L-15660 Renewal Community Employment Credit Available to Employers.
L-15665 New York Liberty Zone Business Employee Credit for Wages Paid or Incurred in Calendar Year 2002 or 2003.
L-15670 Credit for Employing Members of Indian Tribes on Indian Reservations Before 2017.
L-15675 Differential Wage Payment Credit Allowed to Small Businesses for Eligible Wages Paid Before Jan. 1, 2017 to Active Duty Military Personnel.
L-15680 Small Employer Health Insurance Credit.
L-15690 Credit for Pension Plan Startup Costs of Small Employers.
L-15700 Low-Income Housing Credit.
L-15800 Qualifying Low-Income Housing Projects.
L-15900 Qualified Basis and Eligible Basis of Low-Income Housing Buildings.
L-16000 Buildings Subject to Credit Allocations from State Credit Agencies.
L-16050 Recapture of Low-Income Housing Credit.
L-16100 Rehabilitation Credit for Business Buildings and Certified HistoricStructures.
L-16200 Elective Rehabilitation Credit for Progress Expenditure Buildings.
L-16300 Rehabilitations of Certified Historic Structures and Buildings in Registered Historic Districts.
L-16400 Business Energy Credit for Solar, Geothermal, CHP, Geothermal Heat Pump Systems, Fuel Cell, Microturbine, and Transition Energy Property.
L-16450 Qualifying Advanced Coal Project Credit.
L-16460 Qualifying Energy Project Credit.
L-16470 Qualifying Gasification Project Credit.
L-16480 Credit For Holders Of Clean Renewable Energy Bonds—“Old” CREBs.
L-16500 The Business Investment Credit.
L-16600 Pre-'86 Investment Tax Credit: Availability, Credit Rates, Tax Ceiling Limitations, and Carryback-Carryovers of Unused Credits.
L-16700 When is Investment Tax Credit Allowed for Property Placed in Service Before '91.
L-16800 Taxpayers Qualifying for the Investment Credit.
L-16900 Investment Credit for Mutual and Cooperative Organizations, Regulated Investment Companies, “Public Utilities,” and Films.
L-17000 Investment Credit of Lessors and Lessees.
L-17100 What is “New” or “Used” Investment Credit Property—and When Qualified Progress Expenditures Qualify as New Investment Credit Property.
L-17200 Investment Credit Property and Disqualifying Uses.
L-17300 Recapture of Investment Credit.
L-17400 Business Form Changes Under the Recapture Rule.
L-17500 Alcohol Fuels Credit (Credit for Alcohol Used as Fuel).
L-17550 Low Sulfur Diesel Fuel Production Credit for Small Business Refiners.
L-17570 Biodiesel Fuels Credit.
L-17585 Renewable Diesel Fuel Credit.
L-17600 15% (EOR) Credit for Costs in Connection with Enhanced Oil Recovery Projects.
L-17690 Advanced Nuclear Power Facility Production Credit for Facilities Placed in Service after Aug. 8, 2005 and before Jan. 1, 2021.
L-17700 Nonconventional Source Production Credit For Qualified Fuels.
L-17720 Marginal Well Production Credit.
L-17750 Credit for Producing Electricity from Certain Renewable Resources.
L-17775 Work Opportunity Credit.
L-17795 Employer Credit for Lodging Provided Between Jan. 1, 2006 and July 1, 2006 to Employees Affected by Hurricane Katrina.
L-17800 Targeted Jobs Credit for Employees Who Began Work Before '95.
L-17835 Welfare-to-Work Credit for Individuals Beginning Work Before Jan. 1, 2007.
L-17860 Employer Social Security Credit.
L-17870 Employer's Child Care Assistance Credit.
L-17880 Gulf Tax-Credit Bonds.
L-17890 Employee Retention Credit for Employers Affected by Hurricanes Katrina, Rita, and Wilma, and Kansas Disaster Area
L-17900 Disabled Access Credit.
L-17910 Distilled Spirits Credit for Eligible Wholesalers, Distillers, and Importers of Distilled Spirits.
L-17920 New Markets Tax Credit for Investment in Qualified Community Development Entity.
L-17940 New Energy Efficient Home Credit for Qualified Homes Acquired after Dec. 31, 2005 and before Jan. 1, 2017.
L-17950 Energy Efficient Appliance Credit for Manufacturers of Energy Efficient Dishwashers, Clothes Washers, and Refrigerators.
L-18000 Carryover of Pre-'87 ESOP Credit—Tax Credit Employee Stock Ownership Plans for Corporate Employers.
L-18010 Credit for Qualified Electric Vehicles Placed in Service before Jan. 1, 2007.
L-18020 Alternative Motor Vehicle Credit
L-18030 Credit for New Qualified Plug-in Electric Drive Motor Vehicles.
L-18035 Credit for Low-Speed or Two - or Three-Wheeled Plug-in Electric Vehicles Acquired Before Jan. 1, 2012.
L-18040 Credit for Qualified 2- or 3-Wheeled Plug-in Electric Vehicles Acquired Before Jan. 1, 2017.
L-18045 Credit for QAFV Refueling Property.
L-18050 50% Credit for Qualified Railroad Track Maintenance Expenditures—Tax Years Beginning Before Jan. 1, 2017.
L-18200 Credit for Mine Rescue Team Training Expenses.
L-18300 Credit for Qualified Chemicals Security Expenditures.
L-18400 Credit for Carbon Dioxide Sequestration.
Chapter M Deductions: Losses, Bad Debts
M-1000 Ordinary Losses.
M-1100 Completed Transaction.
M-1200 Who May Deduct Loss.
M-1300 When Losses are Deductible.
M-1400 Determining Amount of Loss Deduction.
M-1500 Losses of Individuals.
M-1600 Casualty Loss Deduction.
M-1700 What is a Casualty?
M-1760 Losses in Insolvent Financial Institutions.
M-1800 Amount of Casualty Loss.
M-1900 Limitations on Casualty and Theft Loss Deduction for Personal Use Property.
M-2000 Disaster Losses—Election to Deduct in Preceding Year.
M-2100 Theft Losses.
M-2200 Loss on Demolition of Buildings.
M-2300 Loss Deduction for Abandonment of Property.
M-2400 Bad Debt Deduction.
M-2500 Deductible Bad Debts.
M-2600 Advances Between Related Persons as Debts.
M-2700 When Debt is Wholly Worthless.
M-2800 Deducting Partially Worthless Business Debts.
M-2900 Nonbusiness Debts of Noncorporate Taxpayers.
M-3200 Bad Debts of Guarantors and Other Secondary Obligors.
M-3300 Loss from Worthless Securities.
M-3400 When Worthless Securities are Deductible.
M-3500 Losses on Transfers, Forfeitures, Surrenders, Assessments, or Exchanges of Stock.
M-3600 Losses on Registration-Required Obligations Not in Registered Form.
M-3700 Lender's Deduction on Mortgage Foreclosure, Compromise, or Surrender.
M-3800 Owner's Gain or Loss on Foreclosure, Surrender, or Tax Sale.
M-3900 Loss from Government Confiscation.
M-4000 Net Operating Losses.
M-4100 Determining Amount of Net Operating Loss.
M-4200 “Intervening Year” Computations Limit Net Operating Loss Carried to Other Years.
M-4300 Carryback and Carryover Periods and Other NOL Rules.
M-4349 Extended Carryback Periods for Specific Disaster-Related Losses.
M-4366 Election of Three-, Four-, or Five-Year Carryback Period for 2008 and 2009 Net Operating Losses.
M-4400 Net Operating Loss Deduction.
M-4500 At-Risk Rules May Limit Taxpayer Loss Deductions.
M-4510 Taxpayers Subject to the At-Risk Rules
M-4520 Activities Covered by the At-Risk Rules
M-4540 Determining Amounts “At Risk.”
M-4600 Treatment of Passive Activities.
M-4700 Who is Subject to the Passive Activity Rules?
M-4800 Identifying Passive Activities.
M-4900 Material Participation.
M-5000 Material Participation Through an Entity for Passive Activity Loss Purposes.
M-5100 Rental Activities As Passive Activities.
M-5130 $25,000 Deduction for Active Participants in Rental Real Estate Activities.
M-5160 Rental Real Estate Activities of Real Estate Professionals Not Automatically Treated As Passive Activities.
M-5200 Computing Passive Activity Limitations.
M-5300 Income from Passive Activities.
M-5350 Self-Charged Interest Income
M-5400 Passive Activity Deductions.
M-5500 Computing and Allocating Passive Activity Losses.
M-5600 Computing and Allocating Passive Activity Credits.
M-5700 Disposition of an Activity.
M-5800 Activities Not Engaged in for Profit—Hobby Losses.
M-5900 Codification of the economic substance doctrine in Code Sec. 7701(o).
M-5930 Pre-Mar. 31, 2010 Economic Substance Doctrine (Sham Transactions).
M-5940 Pre-Mar. 31, 2010 Variations on the Economic Substance Test (including the Generic Tax Shelter Test).
M-5950 Pre-Mar. 31, 2010 Tax Shelter Transactions.
M-5975 IRS Tax Shelter Programs
M-6000 Rental of Vacation Homes and Other Dwelling Units.
M-6100 Gambling Losses.
M-6200 Losses from Illegal Transactions.
Chapter N Farming, Natural Resources, Depletion
N-1000 “Farmers” for Tax Purposes.
N-1010 Accounting Methods of Farmers.
N-1070 Uniform Capitalization (UNICAP) Rules Applicable to Farmers.
N-1100 Inventories of Farmers.
N-1150 Farmer's Income.
N-1180 Cost-Sharing Payments Received From the Government.
N-1200 Capital Gain-Ordinary Loss Rule for Livestock and Unharvested Crops.
N-1300 Farm Business Expense Deductions.
N-1330 Disallowance of Excess Farm Losses.
N-1350 Depreciation of Livestock Under MACRS, Pre-'87 ACRS and the Useful-Life Rules.
N-1360 Depreciation of Farm Equipment and Machinery under MACRS.
N-1400 Soil and Water Conservation, Erosion Prevention and Endangered Species Recovery Costs.
N-1500 Income Averaging for Farmers and Fishermen.
N-2000 Natural Resources: Tax Benefits, Depletion, and Depletable property.
N-2050 Economic Interests in Depletable Property.
N-2100 Depletable Gross Income for Percentage Depletion.
N-2200 Depreciation of Improvements to Natural Resource Properties.
N-2250 Cost Depletion.
N-2300 Percentage Depletion for Minerals—Allowance, Computation, and Rates.
N-2400 Percentage Depletion for “Domestic” Oil and Gas of Independent Producers and Royalty Owners—The Small-Producer Exemption.
N-2500 Percentage Depletion Bar For Production From “Proven Oil or Gas Property” Transferred Before Oct. 12, '90.
N-2600 “Mining,” Treatment Processes, and Transportation Qualifying for Percentage Depletion.
N-2700 Taxable Income Ceiling on Percentage Depletion.
N-2900 Aggregation and Division of Mineral Interests.
N-3000 Basis of Mineral Property for Cost Depletion.
N-3100 Exploration, Development, and Other Special Costs of Hard Minerals.
N-3200 Exploration, Drilling and Development Costs of Oil, Gas and Geothermal Deposits.
N-3300 Recapture of Mine Exploration and Development Costs and Depletion Deductions.
N-3400 Recapture of Oil, Gas or Geothermal Well Intangible Cost Deductions.
N-3600 Recapture of Deductions for Mineral Exploration Expenditures Taken Under Code Sec. 617 Election.
N-3700 Deduction of Tertiary Injectant Expenditures.
N-4000 Drilling and Development Financing.
N-4100 Operating or Working Interests, Pools, and Other Operating Arrangements.
N-4200 Royalties and Other Nonoperating Mineral Interests.
N-4300 Bonuses and Miscellaneous Cash Payments.
N-4400 Production Payments for Oil and Other Mineral Properties.
N-4500 Leases and Mining Contracts.
N-4600 Natural Resource Transactions—Sales of Mineral Property.
N-6000 Timber Income and Deductions.
N-6100 Timber Depletion Deduction.
N-6200 Timber Cutting Election.
N-6300 Expensing and Amortization of Reforestation Expenditures.
N-7000 Timber, Coal or Domestic Iron Ore Sold With a Retained Economic Interest and Outright Sales of Timber.
N-8000 Worthless Mineral Property.
Chapter O Foreign Income
O-1000 Taxation of Foreign Income of U. S. Taxpayers.
O-1050 Determination of U. S. Residency.
O-1100 Foreign Earned Income Exclusion.
O-1160 Foreign Housing Cost Amount Exclusion and Deduction.
O-1200 Qualified Individuals Under the Bona Fide Foreign Residence and the Foreign Physical Presence Tests.
O-1250 Bona Fide Foreign Residence Test for U. S. Citizens (and Certain U. S. Resident Aliens) Having Foreign Earned Income.
O-1300 Foreign Physical Presence Test for U. S. Citizens or Residents Having Foreign Earned Income.
O-1350 Election to Claim the Foreign Earned Income Exclusion and the Foreign Housing Cost Amount Exclusion.
O-1400 Income from Guam and Commonwealth of the Northern Mariana Islands (CNMI); Guam and CNMI Residents.
O-1430 Income from American Samoa; American Samoa Residents.
O-1450 Income from Sources Within Puerto Rico; Puerto Rico Residents.
O-1470 U. S. Taxation of Individuals With Virgin Islands Source Income.
O-1490 Taxation of U. S. Citizens in the Former Panama Canal Zone.
O-1495 Competent Authority Assistance under Agreements between IRS and Possessions.
O-1500 Possessions Tax Credit.
O-1517 Limitation on Code Sec. 936 Credit During Phaseout Period.
O-1520 Determination of Active Possession Trade or Business Income That Qualifies for the Code Sec. 936 Credit.
O-1530 General Pricing Method.
O-1560 Cost Sharing Method.
O-1580 Profit Split Method.
O-1590 Separate Export Sales Election.
O-1600 Making and Revoking the Cost Sharing or Profit Split Election.
O-1605 Adjusted Base Period Income Limit.
O-1610 Qualified Possession Source Investment Income (“QPSII”) Earned Before July 1, '96.
O-1650 Puerto Rico Economic Activity Tax Credit.
O-1652 Exclusion of extraterritorial income from gross income-transactions before Jan. 1, 2005 and transition rules.
O-1660 Foreign Sales Corporations: transactions before Oct. 1, 2000.
O-2020 Interest Charge DISCs.
O-2200 Passive Foreign Investment Companies (PFICs).
O-2300 Controlled Foreign Corporations.
O-2400 Taxation of U. S. Shareholders of Controlled Foreign Corporations.
O-2470 Subpart F Income Defined.
O-2500 Insurance Income as Subpart F income.
O-2520 Foreign Base Company Income Includable in Subpart F Income
O-2530 Foreign Personal Holding Company Income
O-2620 Foreign Base Company Sales Income
O-2650 Foreign Base Company Services Income
O-2660 Foreign Base Company Oil Related Income.
O-2670 De Minimis, Full Inclusion and High Foreign Tax Rules.
O-2690 Recharacterization of Hybrid Branch Income Under CFC Proposed Regs.
O-2710 Foreign Base Company Shipping Income of CFCs–tax years of foreign corporations beginning before Jan. 1, 2005.
O-2730 Other Subpart F Income Amounts.
O-2740 CFC Withdrawals from Qualified Shipping Investments or Export Trade Investments.
O-2760 Investments in U. S. Property Included in U. S. Shareholder's Income.
O-2780 Reporting and Recordkeeping Requirements for CFC Shareholders.
O-2800 Sale or Exchange of Stock of Foreign Corporation.
O-2900 Sales of Patents, Copyrights, Etc. to Foreign Corporation by its Majority U. S. Shareholder.
O-2950 Temporary Elective 85% Dividends Received Deduction Allowed for Distributions From Controlled Foreign Corporations to U. S. Corporate Shareholder For One Year Only
O-3000 Sales of Stock in Foreign Investment Companies—Pre-2005 Tax Years.
O-3100 Stapled Foreign Entities.
O-3200 Related Person Factoring Income.
O-3300 Foreign Insurance Corporation Election to be Treated as Domestic Corporation.
O-3500 Tax Sanctions for Unsanctioned International Boycott Operations.
O-3600 Foreign Personal Holding Company Income—Pre-2005 Tax Years.
Chapter O-3900 Foreign Tax Credit.
O-4000 Credit for Foreign Taxes.
O-4100 Who Can Claim the Credit.
O-4200 When a Foreign Levy is Creditable.
O-4300 Foreign Tax Credit Limitations for Separate Income Categories.
O-4400 Limitation on the Amount of the Foreign Tax Credit.
O-4500 Source of Income Rules for U. S.-Owned Foreign Corporations.
O-4600 Carryback and Carryover of Excess Foreign Tax.
O-4700 Recapture of Overall Foreign Losses and Recharacterization of Overall Domestic Losses.
O-4800 Credit for Foreign Affiliate's Deemed-Paid Tax.
O-4900 Deemed-Paid Credit for CFC's Foreign Tax.
O-5000 Computation of the Deemed-Paid Tax Credit.
O-5100 Foreign Tax Credit Rules Applicable to Foreign Mineral Income.
O-5200 Foreign Tax Credit Rules Applicable to Foreign Oil and Gas Income.
O-5300 Exchange Rates for Foreign Tax Credit.
O-5400 Redetermination of the Foreign Tax Credit.
O-5500 How to Claim the Foreign Tax Credit.
Chapter O-10000 Foreign Taxpayers
O-10100 Taxation of Nonresident Aliens—In General.
O-10200 Taxation of Nonresident Aliens—U. S. Source Income Not Connected With a U. S. Business.
O-10250 Conduit Arrangements and Similar Transactions.
O-10300 Taxation of Foreign Corporations—In General.
O-10400 Taxation of Foreign Corporations—U. S. Source Income Not Connected With a U. S. Business.
O-10500 Nonresident Aliens and Foreign Corporations Engaged in a Trade or Business in the U. S.
O-10600 Income Effectively Connected with the Conduct of a U. S. Trade or Business.
O-10700 Dispositions of Foreign Investments in U. S. Real Property.
O-10900 Income from U. S. Sources and from Foreign Sources.
O-11000 Attribution of Deductions Other Than Interest.
O-11100 Attribution of Interest Deductions.
O-11300 Branch Profits Tax.
O-11500 Tax on Gross Transportation Income of Nonresident Aliens and Foreign Corporations.
O-11550 Alternative Tonnage Tax Regime for International Shipping Activities.
O-11600 Additional Tax on Citizens, Residents, and Corporations of Countries That Discriminate Against or Impose Burdensome Taxes on U. S. Persons.
O-11650 Giving Up U. S. Citizenship or Terminating Long-Term U. S. Residency.
O-11700 Giving Up U. S. Citizenship or Terminating Long-Term U. S. Residency After June 3, 2004 and Before June 17, 2008.
O-11800 Foreign Governments, International Organizations, and Their Respective Employees.
O-11900 Withholding Tax on Certain Payments to Foreigners.
O-12100 Code Sec. 1446 Withholding on Foreign Partner's Share of Effectively Connected Income
O-12700 Qualified Intermediary Status for Purposes of Code Sec. 1441 Withholding.
O-12770 Withholding foreign partnership's agreement with IRS.
O-12820 Withholding foreign trust's agreement with IRS.
O-13000 Withholding on Transfers of U. S. Real Property Interests.
O-13070 Withholding to enforce reporting of U. S.-owned offshore accounts (FATCA).
O-13120 FFIs, Participating FFIs and FFI Agreements under FATCA.
O-13140 How a Withholding Agent Identifies the Payee and Determines the Payee's Chapter 4 (FATCA) Status.
O-13200 Chapter 4 Account Due Diligence by Participating FFIs (FATCA).
O-13230 Chapter 4 (FATCA) Account Reporting by Participating FFIs.
O-13250 Payments of Tax Withheld under Chapter 4 (FATCA) and Payment Reporting.
O-13350 Excise tax on certain procurement payments made by federal government to foreign persons.
Chapter O-14000 Tax Treaties
O-15000 International Tax Treaties.
O-15050 Tax Treaties Not In Effect.
O-15100 Competent Authority.
O-15500 U. S. Model Income Tax Treaty (2006)
O-15600 Armenia–Income Tax Treaty.
O-16500 Australia—Income Tax Treaty.
O-16900 Austria—Income Tax Treaty.
O-17100 Azerbaijan–Income Tax Treaty.
O-17200 Bangladesh Income Tax Treaty.
O-17500 Barbados—Income Tax Treaty.
O-17750 Belarus–Income Tax Treaty.
O-17900 Belgium—Income Tax Treaty.
O-18000 Former Belgium—Income Tax Treaty.
O-18500 Bermuda—Insurance Profits and Mutual Assistance Tax Treaty.
O-18750 Bulgaria Income Tax Treaty.
O-19000 Canada—Income Tax Treaty.
O-19500 China (People's Republic)—Income Tax Treaty.
O-19700 China (People's Republic)—Ship and Aircraft Transportation Income Tax Treaty.
O-20000 Cyprus—Income Tax Treaty.
O-20300 Czech Republic—Income Tax Treaty.
O-20400 Denmark—Income Tax Treaty.
O-21000 Egypt—Income Tax Treaty.
O-21200 Estonia—Income Tax Treaty.
O-21500 Finland—Income Tax Treaty.
O-21900 France--Income Tax Treaty.
O-22300 Georgia–Income Tax Treaty.
O-22500 Germany (Federal Republic)—Income Tax Treaty.
O-23000 Greece—Income Tax Treaty.
O-24000 Hungary—Income Tax Treaty.
O-24200 Iceland–Income Tax treaty.
O-24500 Iceland—Former Income Tax Treaty.
O-25000 India—Income Tax Treaty.
O-25500 Indonesia—Income Tax Treaty.
O-25900 Ireland—Income Tax Treaty.
O-26100 Israel—Income Tax Treaty.
O-26450 Italy—Income Tax Treaty
O-26500 Italy—Former Income Tax Treaty.
O-27000 Jamaica—Income Tax Treaty.
O-27400 Japan—Income Tax Treaty.
O-27500 Japan—Former Income Tax Treaty.
O-27600 Kazakhstan—Income Tax Treaty.
O-28000 Korea (South Korea)—Income Tax Treaty.
O-28070 Kyrgyzstan Income Tax Treaty.
O-28100 Latvia—Income Tax Treaty.
O-28200 Lithuania—Income Tax Treaty.
O-28400 Luxembourg—Income Tax Treaty.
O-28500 Luxembourg — Former Income Tax Treaty.
O-28600 Malta—Income Tax Treaty.
O-29300 Mexico—Income Tax Treaty.
O-29410 Moldova Income Tax Treaty
O-29500 Morocco—Income Tax Treaty.
O-29900 Netherlands—Income Tax Treaty.
O-30500 New Zealand—Income Tax Treaty.
O-31000 Norway—Income Tax Treaty.
O-31500 Pakistan—Income Tax Treaty.
O-32000 Philippines—Income Tax Treaty.
O-32500 Poland—Income Tax Treaty.
O-32700 Portugal—Income Tax Treaty.
O-33000 Romania—Income Tax Treaty.
O-33200 Russian Federation—Income Tax Treaty.
O-33300 Slovak Republic—Income Tax Treaty.
O-33350 Slovenia—Income Tax Treaty.
O-33400 South Africa—Income Tax Treaty.
O-33500 Spain—Income Tax Treaty.
O-33700 Sri Lanka—Income Tax Treaty.
O-33900 Sweden—Income Tax Treaty.
O-34400 Switzerland—Income Tax Treaty.
O-34520 Tajikistan Income Tax Treaty.
O-34600 Thailand—Income Tax Treaty.
O-35000 Trinidad and Tobago—Income Tax Treaty.
O-35500 Tunisia—Income Tax Treaty.
O-35700 Turkey—Income Tax Treaty.
O-35770 Turkmenistan Income Tax Treaty.
O-35800 Ukraine—Income Tax Treaty.
O-36000 Former Union of Soviet Socialist Republics (U. S.S. R.)—Income Tax Treaty.
O-36400 U. K. Great Britain and Northern Ireland—Income Tax Treaty.
O-36500 United Kingdom of Great Britain and Northern Ireland—Former Income Tax Treaty.
O-36750 Uzbekistan Income Tax Treaty.
O-37000 Venezuela—Income Tax Treaty.
Chapter P Basis and Valuation of Property
P-1000 What is Basis.
P-1100 Cost as Basis.
P-1200 Value as Basis.
P-1300 Cost Allocation.
P-1400 Allocation Requirements in Lump Sum Purchase of Assets Constituting a Trade or Business.
P-1500 Cost Allocation in Transactions Involving Realty.
P-1600 “Credit Basis” for Investment Credit.
P-1700 Adjustments to Basis.
P-1800 Basis Adjustments for Capital Additions and Return of Capital.
P-1900 Basis Adjustments for Depreciation, Amortization, and Depletion.
P-2000 Basis Adjustments for Investment Credit Property.
P-3000 Basis Adjustments Due to Cancellation, Reduction, or Discharge of Indebtedness In or Out of Bankruptcy or Similar Proceeding.
P-3100 Basis of Property Acquired by Gift or Transfer in Trust.
P-4000 Basis of Property Acquired from a Decedent.
P-4100 What is Property Acquired from a Decedent under the Basis Determination Rules.
P-5000 Basis Rules for Stock and Securities.
P-5100 Stock Basis Adjustments and Gain Recognition for Extraordinary Dividends Received by Corporate Shareholders.
P-5200 Identifying Securities Sold for Purposes of Determining Their Bases.
P-5300 Basis of Stock Received in Nontaxable Corporate Distribution.
P-5400 Basis of Property Received in Taxable Dividend Distribution.
P-6000 Valuation of Property.
P-6100 Valuation of Real Property.
P-6200 Valuation of Stock.
P-6300 Valuation of Closely-Held Corporation Stock.
P-6400 Valuing Stock or Other Business Interests Subject to Buy-Sell or Restrictive Agreements.
P-6450 Valuation of Bonds, Notes and Mortgages.
P-6500 Valuation of Business Interests and Goodwill.
P-6600 Valuation of Life Insurance, Annuities, and Trust Interests.
P-6700 Valuation of Miscellaneous Properties.
Chapter Q Gift Tax
Q-1000 How the Gift Tax Works.
Q-1200 Determining Amount of Taxable Gift.
Q-1400 Net Gifts—Payment of Gift Tax by Donee.
Q-1600 Spreading Gifts to Minimize Gift Tax.
Q-1900 Taxable Transfers.
Q-2000 Transfers Between Spouses to Settle Marital Rights.
Q-2100 Transfers to Children and Other Dependents.
Q-2125 Family Partnerships and LLCs.
Q-2150 Below-Market Gift Loans.
Q-2250 Pre-June 7, '84 Below-Market Family Loans.
Q-2300 Indirect Gifts.
Q-2350 Disclaimers.
Q-2400 Transfers By and To Corporations, or Among Shareholders.
Q-2500 Court-Ordered Transfers.
Q-2600 Compromises and Settlements.
Q-2700 Tax-Exempt Bonds, Other Property and Property Interests as Gifts.
Q-2800 Life Insurance.
Q-2900 Property Owned Jointly or in Common. Community Property.
Q-3000 Gifts in Trust.
Q-3100 Powers of Appointment.
Q-3200 Transfers to Political Organizations.
Q-3350 Gift Tax on “Estate Freeze” Transfers (Chapter 14 Rules).
Q-3400 Transfers of Interests in a Corporation or Partnership to a Member of the Transferor's Family Where the Transferor Retains an Interest.
Q-3500 Transfers of Interests in Trusts to a Member of the Transferor's Family Where the Transferor Retains an Interest.
Q-3600 Effect of Buy-Sell Agreements and Options on Transfer Tax Value of Property Under the Chapter 14 Rules.
Q-4000 Gifts by Nonresident Aliens and Residents of U. S. Possessions.
Q-4100 Treaties with Foreign Countries.
Q-5000 Annual Exclusion from Taxable Gifts.
Q-5100 Present and Future Interests.
Q-5200 Code Sec. 2503(c) Exclusion for Gifts to Minors.
Q-5250 Certain Transfers for Medical and Tuition Expenses.
Q-5280 Waivers of Surviving Spouses' Rights under Qualified Retirement Plans.
Q-5290 Treatment of Loans of Qualified Works of Art.
Q-6000 Charitable and Other Deductible Gifts.
Q-6100 Marital Deduction for Gifts Between Husband and Wife.
Q-6200 Marital Deduction for Gift of Life Estate Plus Power of Appointment.
Q-6300 Marital Deduction for Gift of Life Estate.
Q-7000 Gift Splitting by Married Persons.
Q-8000 Gift Tax Computation and Unified Credit.
Chapter R Estate Tax
R-1000 How the Estate Tax Works.
R-1100 Election to Not Apply the Estate Tax and Step-up Basis Rules to Deaths in 2010.
R-2000 Property in Which Decedent Had an Interest at His Death.
R-2100 Transfers during Decedent's Lifetime may be Subject to Estate Tax.
R-2200 Lifetime Gifts Within Three Years of Death—“Three-Year Rule.”
R-2400 Retaining Income From (or Use of) Property for Life.
R-2500 Transfers Taking Effect at Death.
R-2600 Power to Revoke or Change Disposition.
R-2700 Jointly Held Property.
R-2800 Community Property.
R-2900 Qualified Terminable Interest Property.
R-3000 Property Subject to a Power of Appointment.
R-3100 How Post-Oct. 21, '42 Powers of Appointment are Taxed.
R-3200 How Pre-Oct. 22, '42 Powers of Appointment are Taxed.
R-4000 Life Insurance Includible in Gross Estate.
R-4100 Life Insurance Trusts.
R-4400 Annuities and Pensions.
R-4500 Pre-2004 Deduction for Qualified Family-Owned Business Interests (QFOBI).
R-4600 Recapture of Estate Tax Benefit of Pre-2004 Qualified Family-Owned Business Interest (QFOBI) Deduction.
R-4700 Qualified Conservation Easement Exclusion
R-5000 Alternate Valuation. Election to Value Estate Six Months After Death.
R-5200 Special Use Valuation—Election to Value Farm or Closely Held Business Real Property Based on Actual Use.
R-5300 Recapture of Estate Tax Attributable to Special Use Valuation.
R-5400 Deductible Expenses, Claims, Debts, and Losses.
R-5600 Code Sec. 2053 Protective Refund Claims
R-5700 Deduction for Charitable Bequests.
R-6000 Marital Deduction Allowed for Property Passing to the Surviving Spouse.
R-6200 Marital Deduction Where Surviving Spouse is Not a U. S. Citizen—Qualified Domestic Trusts (QDOTs).
R-6300 Terminable Interest Rule.
R-6600 Amount of the Marital Deduction.
R-6900 Deduction of State Inheritance, Legacy, Succession and Estate Taxes.
R-7000 Estate Tax Computation and Rates.
R-7020 Estate Tax Adjustments Involving Interests Previously Valued Under the Chapter 14 Rules.
R-7080 Estate Tax on Qualified Domestic Trusts (QDOTs).
R-7100 Unified Credit Against Estate Tax.
R-7200 Pre-2005 State Death Tax Credit.
R-7300 Credit for Tax on Prior Transfers.
R-7400 Foreign Death Tax Credit.
R-7450 Credit for Gift Tax on Pre-Jan. 28, '92 Transfers to which the Chapter 14 Rules Applied.
R-7500 Credit for Gift Tax Paid on Pre-'77 Transfers by Decedent.
R-8000 Nonresident Aliens' Estates.
R-8100 Transfer Tax on Gifts and Bequests from Expatriates
R-9100 United Kingdom Estate and Gift Tax Treaty.
R-9200 France Estate and Gift Tax Treaty.
R-9300 Other Estate Tax Treaties.
R-9500 Generation-Skipping Transfer (GST) Tax.
R-9550 Exemption from Generation-Skipping Transfer (GST) Tax.
R-9570 Computation and Payment of Generation-Skipping Transfer Tax.
Chapter S Tax Returns
S-1000 General Return Requirements.
S-1100 Preparation of Returns by Preparers.
S-1200 Forms.
S-1300 Magnetic Media and Electronic Filing of Information Returns.
S-1400 What is a Valid Return.
S-1500 Taxpayers' Identification Numbers.
S-1530 Responsibilities Regarding Other Persons' Taxpayer Identification Numbers.
S-1550 Determining Which ID Number To Use.
S-1580 Obtaining or Changing Identification Numbers.
S-1600 Electronic and Other Alternative Filing Methods for Individual Returns.
S-1630 Magnetic Media and Electronic Filing of Fiduciary and Nonresident Alien Returns.
S-1670 Filing of Employment Tax Returns in Media Other Than Paper.
S-1680 Responsibilities of Participants in Electronic and On-line Filing Programs.
S-1700 Individual Income Tax Returns—U. S. Citizens and Residents.
S-1750 Individual Income Tax Returns—Nonresident Aliens.
S-1800 Joint Returns and Separate Returns of Married Individuals.
S-1900 Income Tax Returns of Corporations and Certain Other Entities.
S-2000 Fiduciary Income Tax Returns.
S-2100 Exempt Organization Income Tax Returns.
S-2200 Gift Tax Returns.
S-2300 Estate Tax Returns.
S-2400 Generation-Skipping Transfer Tax Returns.
S-2500 Penalty-Type Excise Tax Returns. Excise Tax Returns.
S-2600 Withheld and Unemployment Tax Returns.
S-2700 Partnership Returns.
S-2800 Information Returns and Notices of Exempt Organizations, Non-Exempt Private Foundations and Non-Exempt Charitable Trusts.
S-2900 Dividend Reporting.
S-2950 Reporting Patronage Dividends and Department of Agriculture Payments.
S-3000 Interest Reporting Requirements by Payors.
S-3150 Employment Information Returns.
S-3245 Employer-Owned Life Insurance Contract Information Reporting
S-3250 Tip Reporting of Large Food and Beverage Establishments.
S-3310 Employer Reporting of Employee Health Coverage.
S-3350 Pension and Other Employee Benefit Plans.
S-3420 Returns of Qualified Tuition Programs.
S-3425 Returns for Coverdell ESAs.
S-3430 Returns for Qualified Tuition and Related Expenses and Interest on Qualified Higher Education Loans.
S-3440 Returns by Payors of Long-Term Care Benefits.
S-3441 Returns for Charges for Qualified Long-Term Care Insurance Contracts Combined with Annuity or Life Insurance Contracts.
S-3445 Returns Reporting Advance Payment of Health Coverage Tax Credit Received by Eligible Individuals.
S-3448 Information Reporting by Exchanges to Support Premium Tax Credit—After 2017.
S-3450 Returns for Low-Income Housing Credit.
S-3465 Expatriate Information Statement and Annual Return.
S-3470 Returns for Payments to Nonresidents, Foreign Real Property Investors, and Foreign Corporations Engaged in U. S. Business Under Chapter 3 and Foreign Entities Under Chapter 4.
S-3509 Foreign-Owned Domestic Corporation's Information Returns and Record Maintenance Requirements.
S-3584.1 Other Information Returns With Respect to Foreign Individuals and Entities.
S-3655 Returns of Trade or Business Payments Made or Received.
S-3700 Returns by Brokers and Barter Exchanges for Sale or Exchange of Securities and Personal Property.
S-3740 Brokers Must Report Customer's Adjusted Basis and Character of Gain or Loss for Sales of Certain Securities
S-3760 Broker to Broker Reporting Required for Transfers of Covered Securities.
S-3780 Information Reporting of Organizational Actions Affecting Basis by Issuers of Specified Securities.
S-3800 Reporting Gross Proceeds from Real Estate Transactions.
S-3830 Reporting Income of Qualified Escrow Accounts and Trusts, Pre-closing Escrows, and Contingent At-closing Escrows.
S-3850 Reporting Trade or Business Payments to Attorneys.
S-3900 Returns of Mortgage Interest Received.
S-4000 Returns for Cash Receipts of More Than $10,000.
S-4100 Notice Requirements for Fiduciaries.
S-4200 Returns for Acquisition or Abandonment of Secured Property and for Mortgage Credit Certificates.
S-4250 Reporting Discharges of Indebtedness.
S-4300 Reporting Applicable-Asset-Acquisitions, Changes in Control, Recapitalizations or Terminations of Corporations, Loss Corporation Ownership Changes, or Taxable Acquisitions of Another Corporation's Stock.
S-4400 Disclosure of Tax Shelter Reportable Transactions, List Maintenance and Other Tax Shelter Requirements.
S-4450 Reporting Look-Back Interest for Long-Term Contracts.
S-4460 Reports With Respect to Exclusion of Gain From Qualified Small Business Stock (QSBS).
S-4462 Reporting Uncertain Tax Positions–Schedule UTP.
S-4465 Information Reporting With Respect to Tax Benefits Claimed for Alcohol, Biodiesel, Renewable Diesel and Alternative Fuels, and Specified Uses of Gasoline and Special Fuels
S-4470 Civil Damages For Fraudulent Filing of Information Returns.
S-4480 Taxpayer Can Challenge Validity of Information Returns.
S-4500 Signing and Verifying Returns.
S-4600 Preparers' Signing and Verifying Returns.
S-4700 Time for Filing Income Tax Returns.
S-4800 Time for Filing Tax Elections.
S-4900 Time for Filing Returns Other Than Income Tax Returns.
S-5000 Extensions of Time for Filing Tax and Information Returns.
S-5100 Place for Filing Returns.
S-5150 Amended Returns.
Chapter S-5200 Payment of Tax, Disclosure Rules, Relief for Armed Forces Members and Disaster Victims
S-5200 Individual's Estimated Tax.
S-5300 Trusts' and Estates' Estimated Income Tax.
S-5320 Corporate Estimated Income Tax.
S-5400 S Corporation Estimated Income Taxes.
S-5420 Estimated Taxes of Tax-Exempt Organizations and Private Foundations.
S-5450 Time and Method of Paying Taxes Other Than Tax Deposits, Withheld Taxes and Estimated Taxes.
S-5500 Payment of FICA, Withheld Income and Unemployment Taxes by Employers.
S-5580 Payment of Withheld Income Taxes Attributable to “Nonpayroll Payments.”
S-5600 Tax Deposits—General Rules.
S-5620 Deposit of Taxes by Electronic Funds Transfer.
S-5650 Depositing Taxes Withheld From Foreign Taxpayers.
S-5700 Paying Excise Taxes.
S-5750 Media That May Be Used to Make Tax Payments.
S-5800 Treatment of Tax Remittances.
S-5850 Extension of Time for Payment of Taxes or Installment.
S-5900 Extension of Time for Payment of Estate Tax.
S-6000 Estate Tax Deferral Election on Closely Held Businesses.
S-6100 Acceleration of Estate Tax Installment Payments.
S-6200 Rules Limiting Disclosure of Returns and Return Information.
S-6300 Returns and Return Information—Exceptions to Nondisclosure Rule.
S-6400 Returns and Return Information—Procedural Matters When Disclosure Is Allowed.
S-6500 Taxpayer's Remedies Where There Is Unauthorized Inspection or Disclosure.
S-6600 Public Access to Exemption Applications and Annual Returns of Exempt Organizations.
S-6650 IRS's Letter Forwarding Program.
S-6660 Information that Administrators of Prisons Located in the U. S. Will Have to Provide to IRS.
S-8000 Soldiers' and Sailors' (Servicemembers') Tax Relief.
S-8500 Extension of Deadlines for Disaster Victims.
S-8550 Areas Affected by Hurricanes Katrina, Rita and Wilma That Are Eligible for Special Tax Benefits.
S-8560 Area of Kansas That Is Eligible for Temporary Tax Benefits Because of Severe Storms and Tornados in 2007.
S-8565 Area of Midwest That Is Eligible for Temporary Tax Relief Due to Severe Storms, Tornados and Flooding in 2008.
Chapter T Audits, Tax Deficiencies, Refunds, Settlements
T-1000 How IRS Finds Tax Deficiencies and Underpayments.
T-1030 Whistleblower Awards/Rewards to Informers of Tax Law Violations.
T-1040 Pre-Aug. 17, 2012 IRS Audit Tiers.
T-1060 Selection of Returns to be Audited.
T-1075 Financial Status and Economic Reality (“Life-style”) Audit Techniques.
T-1090 Audit Types, Timing, Locations, and Transfers.
T-1120 Taxpayer's Rights During Audits.
T-1139 Notice to Taxpayer of Third-Party Contacts.
T-1140 Power of Attorney.
T-1180 Powers and Liabilities of IRS Agents.
T-1200 IRS Authority to Issue Summonses.
T-1250 Third-Party Summons.
T-1290 Summonses For Tax-Related Computer Software and Protections For Computer Software.
T-1300 Privileges that May Block Summons Enforcement.
T-1350 Summons Procedures.
T-1400 Formal Document Request Procedure for Production of Documents Located Outside U. S.
T-1425 Unnecessary Examinations of Taxpayers.
T-1450 Church Tax Inquiries and Examinations.
T-1500 Determination of Deficiencies.
T-1550 Settlement of Proposed Deficiencies or Additional Assessments.
T-1600 Post-Examination Procedures.
T-1700 Appeals Office Conferences.
T-1800 Appeal Procedure in Excise and Employment Tax Cases.
T-1900 Post 90-Day Letter Settlement Opportunities.
T-1925 Prohibition on Certain Ex Parte Communications by Appeals Office
T-2000 Reopening of Closed Cases.
T-2100 Unified Audit and Review Procedure for Partnerships.
T-2200 Partnership Request For Administrative Adjustment.
T-2300 Unified Audit Procedure and Consistency Rules for Electing Large Partnerships.
T-2700 Statutory Notice of Deficiency.
T-2800 Mailing Requirements For 90-Day Letters.
T-2850 Determining A Taxpayer's “Last Known Address” for IRS Notification Purposes.
T-2900 Defects in 90-Day Letters.
T-3200 Taxpayer's Capacity to Test the Validity of or Waive Defects in 90-Day Letter.
T-3300 Rescission of 90-Day Letters.
T-3400 Waiving the 90-day Letter Restrictions on Assessment.
T-3550 Notices of Adjustment With Respect to Certain Returns of Partners.
T-3600 Assessment.
T-3670 Procedures in Employment Status Determination Cases
T-3700 Jeopardy and Termination Assessments.
T-3800 Immediate Assessment in Bankruptcy and Receivership Cases.
T-3900 Abatement of Assessment.
T-3950 Abatement of Interest
T-4000 Assessment Period.
T-4100 When Assessment Period Remains Open.
T-4200 Statutory Extensions of the Assessment Period.
T-4300 Suspension of Assessment Period.
T-4400 Agreements to Extend the Assessment Period.
T-4500 Prompt Assessments.
T-4600 Surety Bonds or Acceptable Security Required in Tax Matters.
T-5000 Statutory Relief For Barred Years.
T-5200 Equitable Recoupment.
T-5300 Estoppel.
T-5400 Doctrine of Election.
T-5450 Consistency Doctrine.
T-5500 How Overpayments Arise.
T-5600 How to Recover Overpayments.
T-5700 Who Can Recover an Overpayment.
T-5800 Recovery of Payment of Another's Tax.
T-5900 Assignments of Overpayments and of Refund Checks.
T-6000 Offsets of Tax Overpayments Against Other Amounts Owed by Taxpayer.
T-6500 Quick Carryback Refunds.
T-6600 Quick Refunds of Corporate Estimated Tax Overpayments.
T-6700 Form of a Refund Claim.
T-6800 Substance of a Refund Claim.
T-6900 Waiver of Defects in Refund Claims.
T-7500 Refund Claim Period; Time Limits on Refund Amount.
T-7600 Amending a Refund Claim.
T-8000 Interest on Overpayments.
T-9000 Refund Suits.
T-9100 Erroneous Refunds and Credits.
Chapter T-9490 Closing Agreements, IRS Determinations, Timely Filing, Practice before IRS
T-9500 Final Closing Agreements.
T-9600 Offers in Compromise.
T-9800 Determination Letters.
T-9850 IRS Private Letter Rulings and Revenue Rulings.
T-10000 Internal Revenue Service User Fees.
T-10050 Technical Advice and Field Service Advice Memoranda.
T-10080 Statements of Value for Items of Art.
T-10100 IRS Regs.
T-10150 Procedural Rules and Other IRS Guides.
T-10180 Small Entity's Right to Judicial Review of IRS Rulemaking.
T-10200 National Taxpayer Advocate, Local Taxpayer Advocates, and Taxpayer Assistance Orders and Directives.
T-10300 Freedom of Information Act and IRS Information.
T-10350 Taxpayer, Etc. Access to IRS Records Under the Privacy Act.
T-10400 Disclosure of IRS Determinations.
T-10430 Appeal of Adverse Return Examination Findings Relating to Employee Benefits Plans.
T-10450 Establishing Exempt Status.
T-10500 Determination Letter Applications for Qualification of Retirement Plans.
T-10590 EPCRS Programs Allow Correction of Retirement Plan Failures to Avoid Loss of Tax-Favored Status.
T-10630 Pre-Approval of Master and Prototype and Volume Submitter Plans in IRS Opinion and Advisory Letters.
T-10750 Timely Mailing Rules.
T-10780 Timely Mailing Rules Applicable to Designated Private Delivery Services.
T-10790 Where Due Date, Etc. Falls on Saturday, Sunday or Holiday.
T-10800 Hand Filing of Documents.
T-10810 Presumption that IRS Received Documents on Date It Stamped Them as Received.
T-10850 Organization of the Internal Revenue Service.
T-10900 Practice Before IRS.
T-10950 Covered Opinion Requirements for Practice Before IRS.
T-11000 Appraisers Who Aid and Abet Understatement May Be Barred From IRS Practice.
T-11010 Low Income Taxpayer Clinics.
T-11050 Repeal of the Sunset Provision in the Economic Growth and Tax Relief Reconciliation Act of 2001.
T-11060 Repeal of Sunset Provision in the Jobs and Growth Tax Relief Reconciliation Act of 2003.
Chapter U Tax Litigation, Tax Court Rules
U-1000 Tax Litigation.
U-1100 Bars to Successful Litigation—Res Judicata and Collateral Estoppel.
U-1150 Equitable Tolling of Limitations Periods.
U-1200 Should a tax dispute be litigated?
U-1230 General Rules for Litigation Cost Recovery by Taxpayers, Etc.
U-1240 Recovery of Administrative and Litigation Costs by Taxpayers, etc. Under the Internal Revenue Code.
U-1295 Attorney Liability for Excessive Tax Court Litigation Costs; Costs Imposed as Sanctions Against Taxpayers
U-1300 Requirements and Rules for Representing Taxpayers in Courts.
U-1330 Burden of Production on Penalties.
U-1350 Burden of Proof in Court Proceedings.
U-2000 What is the Tax Court.
U-2100 What the Tax Court Can and Cannot Do (Tax Court Jurisdiction).
U-2200 Parties Who Can Appeal to the Tax Court.
U-2300 Starting a Tax Court Proceeding.
U-2400 Form and Content of the Tax Court Petition.
U-2500 Commissioner's Answer.
U-2600 Taxpayer's Reply.
U-2700 Amendments and Motions.
U-2800 Pre-Trial Discovery Proceedings, Stipulation and Admission Requests and Subpoenas.
U-2900 Depositions to Perpetuate Testimony, Preserve Evidence, or for Discovery.
U-3000 Trial Calendar and Continuances.
U-3100 The Tax Court Trial.
U-3200 Evidence in the Tax Court.
U-3300 Briefs in the Tax Court.
U-3400 Decisions of the Tax Court.
U-3600 Tax Court Procedures for Small Tax Cases.
U-3650 Declaratory Judgment Procedure in the Tax Court.
U-3700 Declaratory Judgments on Retirement Plan Qualifications in the Tax Court.
U-3800 Tax Court Jurisdiction over Declaratory Judgments on Tax Status of Charities, Foundations, Farmers' Cooperatives, or Proposed State or Local Bond Issues.
U-3850 Other Declaratory Judgments. Declaratory Judgments With Respect to Adjustments to Income Tax Returns of Certain Partners.
U-4000 Tax Litigation in United States District Courts.
U-4100 What the District Courts Can and Cannot Do—Jurisdiction.
U-4200 Prerequisites to Refund Suit.
U-4600 Pleadings in District Court Refund Suit.
U-4700 Trial and Preparation for Trial in District Courts.
U-4800 Bankruptcy Court's Jurisdiction in Tax Claims.
U-5000 Appeals to the U. S. Courts of Appeal—Jurisdiction.
U-5100 Scope of Review of Tax Decisions by U. S. Courts of Appeals.
U-5200 Where and When to Appeal from a Tax Court Decision.
U-5300 How to Appeal from a Tax Court Decision.
U-5400 Appeals from the District Courts.
U-5500 Record on Appeal From Tax Court or District Court.
U-5600 Hearings and Briefs in U. S. Courts of Appeals.
U-5700 Decision of the Court of Appeals and Further Proceedings.
U-6000 Litigation in U. S. Court of Federal Claims.
U-7000 Supreme Court Review of Tax Cases.
Chapter V Interest on Taxes, Penalties, Tax Collection
V-1000 Interest on Late or Extended Payment of Taxes or Penalties.
V-1100 Interest Rate Charged on Underpayments.
V-1200 Period of Underpayment—Date Interest Begins Accruing.
V-1300 Period of Underpayment—Date Interest Stops Accruing.
V-1400 Suspension of Interest Due to IRS Failure to Notify Taxpayer of Tax Liability.
V-1600 Civil Penalties—General Rules.
V-1650 Failure to Deposit Taxes—Civil Penalty.
V-1670 Failure to Pay Tax or Deficiency—Civil Penalties.
V-1700 Trust Fund Recovery (100%) Penalty for Responsible Person's Failure to Collect, Account for, and Pay Over Tax.
V-1740 Penalties Relating to Withholding Information.
V-1750 Failure to File Tax Returns When Due—Delinquency Penalty.
V-1800 Failure to Comply With Information-Related Requirements With Respect to Certain Payments or Transfers.
V-1840 Information Penalties Relating to Stocks and Bonds.
V-1900 Failure to Comply With Foreign Entity Information-Related Requirements.
V-1930 Information Relating to 25% Foreign-Owned Companies
V-1950 Information Relating to Foreign Corporations Engaged in U. S. Business
V-1960 Information Penalties for U. S. Persons Controlling Foreign Corporations or Partnerships
V-1970 Information-Related Penalties for Deferred Compensation Plans.
V-1990 Information Penalty Relating to Transfers on Death of Decedents Dying in 2010, Where Executor Elects Out of Estate Tax
V-1995 Information Penalties Relating to Housing Subsidies.
V-2000 Accuracy-Related Penalty.
V-2050 Rules Common to the Accuracy-Related and Fraud Penalties.
V-2100 Accuracy-Related Penalty for Negligence or Disregard of Rules or Regulations.
V-2150 Accuracy-Related Penalty for Substantial Understatement of Income Tax.
V-2200 Accuracy-Related Penalty for Misstating Value or Basis of Property on Income Tax Returns.
V-2250 Accuracy-Related Penalty for Misstating Value or Basis of Property on Estate and Gift Tax Returns.
V-2260 Accuracy-Related Penalty for Substantial Overstatement of Pension Liabilities.
V-2270 Accuracy-Related Penalty for Understatements Attributable to Transactions Lacking Economic Substance
V-2275 Accuracy-Related Penalty for Undisclosed Foreign Financial Asset Understatements
V-2280 Accuracy-Related Penalty for Reportable Transaction Understatements.
V-2290 Penalty For Erroneous Refund Claims.
V-2300 Civil Fraud.
V-2350 $1,000 to $10,000 Civil Penalty for Aiding and Abetting an Understatement.
V-2400 Penalty for Promoting Abusive Tax Shelters or Similar Schemes.
V-2450 Injunctions Against Violators of Tax Shelter and Reportable Transaction Rules.
V-2500 Penalties for Failure by Material Advisor to Report Reportable or Listed Transactions.
V-2530 Penalties for Failure to Disclose Reportable Transactions.
V-2550 Penalty for Frivolous Returns.
V-2570 Penalty for Frivolous Submissions.
V-2600 Penalties for Improper Court Activities.
V-2630 Civil Penalties Imposed Against Return Preparers.
V-2690 Penalty for Misstatements Based on Appraisals
V-2700 Civil Penalties on Tax-Exempt Organizations.
V-2720 Civil Penalties Relating to Excise Taxes.
V-2750 Reasonable Cause Excuses Certain Civil Penalties.
V-2800 Willfulness Essential for Certain Civil Penalties.
V-3000 Failure to Pay Taxes and to File Returns.
V-3100 Felony False Documents Penalties.
V-3120 Furnishing False Information.
V-3200 Interference With Tax Collection or Administration.
V-3300 Unauthorized Use of Tax Information.
V-3400 Stamp Tax Crimes.
V-3500 Miscellaneous Tax Crimes.
V-3600 Criminal Prosecution for Tax Law Violations.
V-3700 Statute of Limitations for Criminal Prosecutions.
V-3800 Privilege Against Self-Incrimination and Other Defenses.
V-3900 Penalty for Failure to Maintain Health Insurance Coverage After 2017.
V-4000 Forfeitures—Seizure of Property.
V-4100 Willful Evasion of Tax Due.
V-4200 How Government Proves Tax Crime—Willfulness.
V-4300 How Tax Evasion is Discovered.
Chapter V-4900 Interest on Taxes, Penalties, Tax Collection
V-5000 IRS's Tax Collection Powers.
V-5050 IRS Procedures for Determining Taxpayer's Income Available to Pay Tax Liability.
V-5100 Levy and Distraint—Seizure and Sale of Taxpayer's Property.
V-5200 Property Subject to Levy and Distraint.
V-5250 Notice and Hearing before Levy
V-5300 Procedure in Seizing Property.
V-5400 Disposition of Seized Property—Redemption; IRS Required Release; Public Sale.
V-5500 Suits for Collection of Taxes.
V-5600 Time for Collecting Taxes.
V-5700 Injunctions Against Assessment or Collection of Tax.
V-5800 Damages for Unauthorized IRS Collection Actions.
V-5840 Actions Against IRS Employees for Violating Constitution.
V-5900 Liens for Federal Taxes.
V-5930 Concurrent Interests Subject to Liens.
V-5970 Filing and Recording Federal Tax Liens.
V-6000 Collection Due Process and Notice of Filing for Liens.
V-6041 Gift and Estate Tax Liens.
V-6070 Duration of Tax Liens.
V-6080 Enforcement of Tax Liens.
V-6100 Release, Discharge and Termination of Tax Liens and Withdrawal of Notices of Tax Liens.
V-6200 How Tax Lien is Extinguished.
V-6250 IRS Redemption of Real Property Sold at Nonjudicial Sale To Satisfy Senior Lien.
V-6300 Priority of Liens—In General.
V-6400 Priorities Based on Lien Recordings and Superpriorities.
V-7300 Collection of Tax in Bankruptcy Proceedings.
V-7500 Collection of Tax During Insolvency.
V-8500 Liability for Tax on Spouse's Return.
V-9000 Liability of Transferees.
V-9100 Transferee Liability for Fraudulent Transfers.
V-9200 Equitable Transferee Liability in Particular Situations.
V-9300 Statutory Transferee Liability.
V-9400 Contractual Transferee Liability.
V-9500 Amount of Transferee Liability.
V-9600 Fiduciary's Liability as a Transferee.
V-9700 IRS Procedure in Transferee and Fiduciary Cases.
V-9800 Assessment and Collection Periods for Transferees and Fiduciaries.
Chapter W Excise Taxes
W-1500 Gasoline, Diesel Fuel and Kerosene Removal-at-Terminal Tax.
W-1700 Retail tax on diesel fuel, kerosene, alternative fuels, and compressed natural gas.
W-2000 Excise Taxes on Manufacturers, Producers or Importers of Certain Articles.
W-2100 Sale, Lease, or Use of Taxable Article as Taxable Event for Manufacturers Excise Taxes.
W-2200 Nontaxable and Exempt Sales or Uses.
W-2300 Computing Manufacturers Excise Tax.
W-2400 Refunds and Credits of Manufacturers Excise Tax.
W-2500 Tax on “Gas Guzzler” Automobiles.
W-2600 Tax on Highway Vehicle Type Tires.
W-2700 Tax on Coal.
W-2750 Tax on Bows and Arrows.
W-2800 Tax on Sport Fishing Equipment, Etc.
W-2900 Manufacturers excise tax on firearms and ammunition.
W-2950 Tax on Certain Vaccines.
W-3000 Manufacturers Excise Tax on Medical Devices
W-3100 Retail Excise Tax on Trucks, Trailers and Tractors.
W-3200 Tax on Fuel Used in Commercial Transportation on Inland Waterways.
W-3300 Surtax on Fuels Used in Fractional Ownership Aircraft
W-4000 Oil Spill Liability Environmental Excise Tax
W-4300 Environmental Tax on Ozone-Depleting Chemicals (ODCs).
W-5000 Tax on Telephone and Other Communication Services.
W-5100 Taxes on Transportation of Persons by Air.
W-5200 Tax on Domestic Transportation of Property by Air.
W-6000 Foreign Insurance Policies Tax.
W-6050 Fees on Health Insurance Policies and Self-insured Health Plans—For Policy or Plan Years Ending Before Oct. 1, 2019.
W-6100 Taxes on Wagering.
W-6200 Harbor Maintenance Tax.
W-6300 Ship Passengers International Departure Tax.
W-6400 Heavy Highway Vehicles Use Tax.
W-6500 Indoor Tanning Services Excise Tax.
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Paycheck stub lesson plans >>
Understanding Your Paycheck Lesson Plan (pdf file - 39 KB) Students are to follow the directions from the lesson plan in order to complete the accompanying. Before teaching this lesson . bookmark all of the Web sites used in the lesson on each for retirement accounts and eligible medical and dental insurance plans . The deductions on the Pay Stub Example that are not excluded from federal. Lesson 4: Your Budget Plan Students work in pairs to participate in a "Track Star" game that illustrates positive and negative spending behaviors. Each pair of. lesson two making money. Prepare questions that you plan to ask. 4. Prepare. Answer the following questions using the attached pay stubs . 1. What is the. Lesson Plans for Year Two. The Project. Competency: Understand paychecks and payroll deductions. LESSON PLAN . Understanding Your Check Stub ANALYZING A PAY STUB AND TAX DEDUCTIONS. Academic Content Standards Addressed: Number, Number Sense, and Operations. Determine the percent. PBS LearningMedia Lesson Plan for Social Studies for 9-13+. Analyze a pay stub ; Identify pre-tax and after-tax deductions; Understand why people pay taxes. May 30, 2017 . We Are Teachers (WAT) recently developed 20 lesson plans . Understanding Paystubs – Reading a paystub ; how take-home pay is. May 20, 2007 . Math Lesson - Level C: Employment - Pay Stubs . 1. L. Rutmanis - 2008. Employment. Pay Stubs . CASAS Competencies: • 4.2.1 Interpret wages and activities that will encourage them to apply these lessons to their daily lives. medical insurance, vacation pay, holiday pay, profit sharing plans . stock options and. The additional form that's attached to the check is called the pay stub .
Paycheck stub lesson
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Summary:
Understanding Your Paycheck Lesson Plan (pdf file - 39 KB) Students are to follow the directions from the lesson plan in order to complete the accompanying. Before teaching this lesson . bookmark all of the Web sites used in the lesson on each for retirement accounts and eligible medical and dental insurance plans . The deductions on the Pay Stub Example that are not excluded from federal. Lesson 4: Your Budget Plan Students work in pairs to participate in a "Track Star" game that illustrates positive and negative spending behaviors. Each pair of. lesson two making money. Prepare questions that you plan to ask. 4. Prepare. Answer the following questions using the attached pay stubs . 1. What is the. Lesson Plans for Year Two. The Project. Competency: Understand paychecks and payroll deductions. LESSON PLAN . Understanding Your Check Stub ANALYZING A PAY STUB AND TAX DEDUCTIONS. Academic Content Standards Addressed: Number, Number Sense, and Operations. Determine the percent. PBS LearningMedia Lesson Plan for Social Studies for 9-13+. Analyze a pay stub ; Identify pre-tax and after-tax deductions; Understand why people pay taxes. May 30, 2017 . We Are Teachers (WAT) recently developed 20 lesson plans . Understanding Paystubs – Reading a paystub ; how take-home pay is. May 20, 2007 . Math Lesson - Level C: Employment - Pay Stubs . 1. L. Rutmanis - 2008. Employment. Pay Stubs . CASAS Competencies: • 4.2.1 Interpret wages and activities that will encourage them to apply these lessons to their daily lives. medical insurance, vacation pay, holiday pay, profit sharing plans . stock options and. The additional form that's attached to the check is called the pay stub .
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WOOTERS v. WOOTERS
No. 08-P-824.
Decided: August 18, 2009
Present: CYPHER, BROWN, & KATZMANN, JJ. Norman I. Jacobs, Boston (Mary M. Ferriter, Fitchburg, with him) for the husband. Alexander Furey, Boston, for the wife.
Can the exercise of stock options be considered as part of gross annual income under a divorce judgment? We consider this question in the context of an appeal from a contempt order. We conclude that the answer is in the affirmative, but that, in the circumstances here, a contempt judgment was not appropriate.
Fondo. We recite the facts from the judge's findings and the uncontradicted evidence before her, reserving recitation of certain facts as they become relevant in regard to the issues raised.
Thomas Wooters (husband) and Janet Wooters (wife) were divorced on June 2, 1994. 1 Paragraph one (1) of the divorce judgment provided, in relevant part:
“Alimony, Support and Maintenance: Until the earlier to occur of the death of either party, the [husband] shall pay to the [wife] an amount as alimony for her support and maintenance, which amount shall be equal to one-third (33 1/3%) of the [husband's] gross annual employment income. Such income amount shall be computed without any deduction for capital contributions, retirement contributions, medical insurance premiums, tax liability of any kind, any amount not distributed in cash, life insurance premiums or any other amount of income withheld prior to distribution.” (Emphasis supplied.)
At the time of the divorce in 1994, the husband was a partner in the law firm Peabody & Arnold, where he had a sevenyear average of earning about $220,000 per year. In 2003, the husband accepted a position as executive vice president and general counsel for LoJack Corporation (LoJack). The husband's compensation package included a base salary, annual bonus, shares of nonqualified stock options, and various other benefits.
In 2006, the husband exercised some of his stock options. 2 The husband's 2006 W-2 form listed his gross pay from LoJack as $1,171,208.38, which included the compensation from the exercised stock options. In June of 2007, the wife became aware that in January, 2006, the husband had exercised certain of his options. She demanded that the husband pay to her one-third of the pretax income realized from the exercise of the options. The husband responded that the divorce judgment did not encompass the income derived from the exercise of the options. On July 12, 2007, the wife filed a complaint for contempt, alleging that the husband had failed to pay the wife alimony as directed by the divorce judgment. Following the September 19, 2007, hearing, a Probate and Family Court judge found the husband guilty of contempt and ordered him to pay alimony in accordance with the divorce judgment. The husband now appeals from the judgment finding him in contempt and ordering him to pay the alimony arrearage.
Discusión. The judge determined that the husband's exercised stock options fell within the definition of “gross annual employment income” as provided in the divorce judgment and held the husband in contempt for failure to pay proper alimony. On appeal, the husband challenges the judge's order, claiming that (1) the employee stock options should not be considered part of his “gross annual employment income”; (2) the finding of contempt was improper; and (3) the judge erred in denying him an evidentiary hearing.
a. Employee stock options. A determination whether stock options and similar incentives are to be included in the annual income of a spouse who is obliged to pay alimony is complex. Véase, p. Seither v. Seither, 779 So.2d 331, 332-333 (Fla. Dist. Ct. App.1999). See also Kindregan and Kindregan, Unexercised Stock Options and Marital Dissolution, 34 Suffolk U. L.Rev. 227, 236-237 (2001). The Massachusetts courts have not addressed this precise issue in a published opinion; however, quite a few out-of-State decisions have dealt with it and inform our analysis.
Generally, employment stock options are issued as part of one's compensation; they allow “a corporate employee to buy shares of corporate stock at a fixed price or within a fixed period.” Black's Law Dictionary 1459 (8th ed.2004). “In their simplest form, stock options are another way for employers to compensate their employees. An option gives the employee the right to purchase the employer's stock at a predetermined price during a prescribed time period.” Baccanti v. Morton, 434 Mass. 787, 795, 752 N. E.2d 718 (2001). The challenge posed by stock options in divorce proceedings is that they have a dual nature: On the one hand, they could be characterized as “an asset in that they represent a right to purchase an ownership share in the underlying corporation's stock․ On the other hand, they have characteristics of income in that the whole purpose behind options is to allow the owner to capture the appreciation in value of the stock prior to its actual purchase.” Seither v. Seither, 779 So.2d at 332-333. See In re Marriage of Robinson & Thiel, 201 Ariz. 328, 332, 35 P.3d 89 (Ct. App.2001). Courts outside Massachusetts 3 have held that exercised stock options are to be considered part of one's income. See id. at 330, 35 P.3d 89 (vested employee stock options constituted income for purposes of calculating child support); Hiett v. Hiett, 86 Ark. App. 31, 36, 158 S. W.3d 720 (2004) (it was not error for trial court to base alimony award on percentage of net income including stock options that may be exercised by husband in future, given that all sources of income must be considered in determining alimony); In re Marriage of Kerr, 77 Cal. App.4th 87, 92, 91 Cal. Rptr.2d 374 (1999) (future grant of stock options is part of husband's over-all compensation package and is properly considered in setting both alimony and child support); Seither v. Seither, 779 So.2d at 333 (stock options determined to be income for purposes of child support); Geoghegan v. Geoghegan, 969 So.2d 482, 485-486 (Fla. Dist. Ct. App.2007) (certain stock options should have been included in income for purposes of alimony); In re Marriage of Colangelo, 355 Ill. App.3d 383, 392, 290 Ill. Dec. 986, 822 N. E.2d 571 (2005) (stock option distributions were “income” for purposes of child support); Matter of Dolan & Dolan, 147 N. H. 218, 221, 786 A.2d 820 (2001) (exercised stock options must be included as income for purposes of calculating child support); Murray v. Murray, 128 Ohio App.3d 662, 666-670, 716 N. E.2d 288 (1999) (stock options were to be included within definition of “income” in determining child support).
The fact that some of the cases involve child support rather than alimony and some deal with situations where stock options were also addressed in connection with property division between the parties is of no material consequence to our inquiry here. Regardless of the context, those cases primarily focus on the broad definition of “income” to ascertain whether stock options should be included in the definition. Analogously, in the present case, we are dealing with the definition of “gross annual employment income,” which is a broad and flexible term. See Murray v. Murray, 128 Ohio App.3d at 667, 716 N. E.2d 288. As such, the term can plausibly encompass the income obtained from the exercise of stock options, as long as the definition is not limited by the parties. In fact, here, the judge properly observed that there was ample opportunity for the parties to restrict the definition of “gross annual employment income,” and if the parties wished to do so, they should have done that at the time of divorce.
In addition to the supporting case law, common sense dictates that the income realized from the exercise of stock options should be treated as gross employment income: It is commonly defined as part of one's compensation package, and it is listed on W-2 forms and is taxable along with the other income. 4 Stock options are each customarily calculated with at least some reference to the others. We also note that this determination accords with policy considerations as well-if the exercised stock options were not deemed income for alimony purposes, a person could potentially avoid his or her obligations merely by choosing to be compensated in stock options instead of by a salary. See Matter of Dolan & Dolan, 147 N. H. at 221, 786 A.2d 820.
In sum, we conclude that the husband's exercised stock options are part of his “gross annual employment income.”
segundo. Finding of contempt. The husband next asserts that the judge erred in finding him in contempt for failure to pay a portion of alimony resulting from his stock option proceeds. “To constitute civil contempt there must be a clear and undoubted disobedience of a clear and unequivocal command.” Mahoney v. Mahoney, 65 Mass. App. Ct. 537, 540, 842 N. E.2d 461 (2006), quoting from Kraft v. Police Commr. of Boston, 417 Mass. 235, 239, 629 N. E.2d 995 (1994). See generally Pedersen v. Klare, 74 Mass. App. Ct. 692, 697-698, 910 N. E.2d 382 (2009). The party seeking contempt must prove his or her case by a preponderance of the evidence. Manchester v. Department of Envtl. Quality Engr. 381 Mass. 208, 212, 409 N. E.2d 176 (1980). Moreover,
“[i]ndefinite and uncertain language cannot support a complaint for contempt because of a lack of fair notice to the person subject to the order, and because ‘ambiguity carries with it the potential for becoming “an instrument of [judicial] severity.” ’ Consequently, we ordinarily resolve ambiguities in divorce decrees in favor of the person charged with contempt. While vague or ambiguous language in a judicial decree cannot constitute a ‘clear and unequivocal command,’ a party's self-serving characterization of a provision as ‘ambiguous' does not make it so.” (Citations omitted.)
Stabile v. Stabile, 55 Mass. App. Ct. 724, 726-727, 774 N. E.2d 673 (2002).
While we think that the order for the husband to pay the proceeds of his stock options-as part of his “gross annual employment income”-is proper, holding the husband in contempt for failure to pay was not appropriate here. The husband has been providing the wife with timely and correct payments of alimony for the past fifteen years. He claims that he, in good faith, did not think that the proceeds of the stock options constituted income as defined in the divorce judgment. In our view, the husband's disagreement or misunderstanding of the issue does not constitute clear and undoubted disobedience of a clear and unequivocal command. To a reasonable person, it may not be readily apparent that stock option proceeds constitute one's gross annual income, especially if it is not defined as such in the parties' divorce decree. Indeed, prior to our decision here, the question had not been resolved by a published Massachusetts opinion. In light of the totality of the circumstances, we conclude that a finding of contempt was not warranted.
In sum, we sustain the portion of the judgment compelling the husband to pay alimony arrearage to the wife based on his stock option proceeds. We determine that the wife has not satisfied her burden to support a contempt judgment, and accordingly we reverse the portion of the judgment finding the husband guilty of contempt. 5
1. The divorce judgment was subsequently affirmed. See Wooters v. Wooters, 42 Mass. App. Ct. 929, 677 N. E.2d 704 (1997).
2. The husband exercised 45,000 options and it is the exercise of these options that is the subject of this contempt and appeal. The rest of the options remained unexercised.
3. The two Massachusetts cases that are discussed in the parties' briefs did not reach the question before us here. In Braun v. Braun, 68 Mass. App. Ct. 846, 859-860, 865 N. E.2d 814 (2007), this court declined to address whether a judge is precluded from treating stock options as income in appropriate circumstances because the husband-appellant did not challenge the trial judge's decision to treat the proceeds from stock options as income. Furthermore, Braun appears to be substantially different, as the divorce judgment there expressly excluded stock options unless exercised and received as income. Carné de identidad. at 849 n. 4, 865 N. E.2d 814. The other case, Baccanti v. Morton, 434 Mass. 787, 794, 752 N. E.2d 718 (2001), examined the question whether unvested stock options were assets that could be included in the marital estate for purposes of property division in a divorce proceeding. While holding that the stock options were assets, the court did not, in any way, address the question whether they become income when exercised. See id. at 796-797, 752 N. E.2d 718.
4. The judge correctly found that “[s]tock options are often an important part of an employee's compensation package. The Husband argues that the nonqualified stock options offered to him by LoJack were simply to attract him to the Company. Regardless of whether the stock options are seen as an incentive, they are still part of the employment compensation package.”
5. In light of our disposition, we need not address the husband's claim that the judge erred in not holding an evidentiary hearing.
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SeaWorld stock spikes after plans to phase out orca breeding program - Canada Standard
SeaWorld stock spikes after plans to phase out orca breeding program
Business Journal Friday 18th March, 2017
It seems Wall Street is happy with SeaWorld's plan to no longer grow its stable of killer whales because the company's stock closed up more than 9 percent since the announcement.
On March 17, SeaWorld Entertainment Inc. (NYSE: SEAS) announced to end its orca breeding program and install a new natural orca encounters experience, rather than theatrical shows, that will continue to focus on education, marine science research and rescue of marine animals. The move begins the marine theme park operator's. Lee mas
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OTTAWA, Canada, March 22 (UNHCR) - Marking his first visit to Canada, the United Nations refugee chief congratulated Prime Minister Justin Trudeau for his humanitarian leadership over the global refugee crisis and conveyed a strong message of support calling for this to continue.
"I welcomed the Prime Minister's leadership not only in resettling over 25,000 Syrian refugees but also raising funding to UNHCR to record levels," United Nations High Commissioner for Refugees Filippo Grandi said after meeting the Prime Minister at the Canadian Parliament on Tuesday evening.
Canada is expected to resettle around 45,000 refugees in 2017, its largest number ever, while this year's financial support so far of C$150 million for UNHCR's lifesaving humanitarian work worldwide is already a record and almost 66 per cent more than the country donated last year.
"I called on Prime Minister Trudeau to continue to make Canada an example for other countries," said Grandi, adding that this had also been a message conveyed to him strongly in meetings with resettled refugees and Canadian civil society groups.
The High Commissioner began his four day mission to Canada on Saturday by meeting resettled Syrian refugee families, who had arrived as part of the 25,000 and had been welcomed in 261 communities across Canada.
"Right now, language is our main challenge. We can't understand everything that people say," said 33-year-old Malva Hasan Halo, who had arrived in Ottawa from Turkey just 12 days earlier with her husband Ferhan Halo and their four young children.
"But we are safe here and the kids are safe," she said through an interpreter, adding that they are very grateful to Canada for the opportunity to start a new life and also happy that they made it together as a family.
In a packed schedule, Grandi also met Canada's Governor General and five ministers - Foreign Affairs, Immigration, International Development, Public Safety, National Defence - as well as addressing audiences at Ottawa and Carleton Universities.
Speaking during a press conference on Parliament Hill, the High Commissioner stressed that despite the challenge of a world where war, conflict and persecution have forced a record 60 million people worldwide to flee for their lives, this year will also see a number of global conferences aimed at garnering more international support for solutions.
The World Humanitarian Summit will take place in Turkey in May, while in September there will be a UN summit on refugees and migrants, followed by a separate summit focused on refugees and hosted by President Obama.
Additionally, Grandi noted that on March 30, UNHCR will be hosting a high-level international conference in Geneva, calling on governments for a major increase in resettlement places and other legal pathways for admission of Syrians.
To date, some 170,000 such places have been pledged by governments around the world and UNHCR wants to increase that to roughly ten per cent of the registered refugee population, currently at 4.8 million people in the immediate surrounding region alone.
Coming on the heels of the fifth anniversary of Syria's war, the March 30 meeting will be an opportunity for governments and communities to boost their concrete support for Syrians.
By Brian Hansford and Gis - le Nyembwe in Ottawa, Canada
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21.03.16 | 17:38 Uhr | 1 mal gelesen | So gefunden auf adage. com Verizon and AOL are continuing to tick off boxes on the list of data sets to integrate since the telco giant acquired the digital company almost a year ago. The latest data set to become accessible for AOL advertisers is a significant one: Precision Market Insights. PMI, a division that Verizon has introduced gradually over the past few years, uses location data generated by Verizon Wireless-enabled devices to determine demographic and other information about people in certain locations and weiterlesen.
Mitteilung von washingtonpost. com: Consider this a missed opportunity — only one political hopeful is holding a fundraiser at the Rihanna concert at the Verizon center Tuesday night Rep. Reliable Source: Who’s fundraising at the Rihanna concert. Gwen Moore (D-Wis.) will be passing the hat for her congressional campaign during the Washington stop of Rihanna’s “Anti” world tour, according to the Sunlight Foundation, with suite tickets going for $1,500 for one person and $5,000 for four deep-pocketed RiRi fans. Perhaps the “Umbrella” singer and her famously scanty costumes are weiterlesen.
Dazu schreibt forbes. com: Investors in Time Warner Inc (NYSE: TWX) saw new options become available today, for the May 20th expiration. Interesting TWX Put And Call Options For May 20th. At Stock Options Channel, our YieldBoost formula has looked up and down the TWX options chain for the new May 20th contracts and identified one put and one call contract of particular interest. weiterlesen.
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CDR Yamaha Riders Take Conservative Approach at AORC Opener
CDR Yamaha Off Road's Chris Hollis and Tom McCormack both took a conservative approach at the opening rounds of the Australian Off Road Championship (AORC), held at Kilkivan in Queensland over the weekend. The sprint format used on the weekend saw both riders ensure they had a safe and smooth run on each day and can now look to build momentum as the championship moves on.
For Hollis, the hot, dusty and humid conditions didn’t suit the veteran off road rider and using his wealth of experience, he elected to get through the weekend unscathed and not risk injury at the very first round of the championship.
Hollis understands that it is a 12 round championship and he wasn’t going to do anything that would jeopardize his chance at the championship further down the track. He claimed sixth outright on Saturday, then improved one spot to take fifth on Sunday.
He sits in sixth place after two rounds but is lurking dangerously with only a handful of points separating several riders.
In E2 class standings, Hollis sits third on his WR450F after the opening weekend of racing.
“The conditions didn’t really suit me so I raced fairly conservatively all weekend with the aim of putting myself in contention, not knocking myself out of contention,” Hollis explains. “I also understand that I can’t do 12 rounds of that and expect to win a championship but now we are under way, I will pick things up and make my presence felt,” he warns.
For team mate, Tom McCormack, it was his first race back after 12 months on the sidelines with serious injury and getting through the weekend unscathed was at the top of his priority list. Add to the fact that McCormack has moved up to the E2 division for the first time, it was a toe in the water type weekend for McCormack and the CDR Yamaha team.
To his credit, McCormack improved as the weekend went on. He claimed 13th outright on Saturday, eighth in class but stepped it up on Sunday to take 11th outright and a very respectable fourth in class.
“It’s good to be back and even better to get through the weekend without any issues,” McCormack said with relief. “It wasn’t the fastest I have ever raced but it was good to get back out there and get a race under my belt at this level and I’m sure it will do me good.
“Saturday I rode pretty tight and was a bit nervous, Sunday was better and a step in the right direction. If I can continue to improve like that each round I will be happy so I will just focus on one round at a time and do the best I can,” he concludes.
Team Manager, Craig Dack, understands the conservative start to the season by his riders but knows both have plenty more to give in the coming rounds.
“Chris rode well within himself over the weekend and I’m sure he can unlock plenty more speed in the coming rounds. Tom just needed to get this weekend done and dusted with no dramas and get some confidence back in his body and racing, which is exactly what he did.
“I think you will see both guys really up the intensity at the next round and start to make some moves up the championship standings,” Dack said.
Rounds three and four of the championship will be conducted at Port Land in NSW on April 9 and 10.
For more information about the AORC; www. ma. org. au
To follow the CDR Yamaha team on social media; www. facebook. com/cdryamaha or @cdr_yamaha
For a full list of results from the opening rounds; http://www. mylaps. com/en/events/1242136
AORC Results – After Round 2 OUTRIGHT 1st Daniel Sanders 2nd Josh Green 3rd Lachlan Stanford 4th Tye Simmonds 5th Beau Ralston 6th Chris Hollis (CDR Yamaha)
11th Tom McCormack (CDR Yamaha)
E2 (450cc) 1st Josh Green 2nd Tye Simmonds 3rd Chris Hollis (WR450F) 4th Tom McCormack (WR450F)
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