TCP 2 Unit Outline

TCP 2
Unit Outline

Module 1—Utilizing NOLs and Capital Loss Limitations

Net Operating Losses (NOLs)
 NOLs arising before 2018 can be carried back two years and carried forward 20 years.
 NOLs arising in 2018, 2019, and 2020 can be carried back five years and carried forward indefinitely.
 NOLs arising in tax years after 2020 cannot be carried back but can be carried forward indefinitely.
 NOL carryforwards from pre-2018 tax years can offset 100 percent of a future year's taxable income.
Post-2017 NOLs that are carried forward to post-2020 tax years can only offset 80 percent of taxable
income after deducting any pre-2018 carryforwards.
 Limitation on deduction of NOL carryforwards from acquired loss corporation following Section 382
ownership change:
• Section 382 ownership change occurs when one or more 5-percent shareholders (owning at least
5 percent of the stock at any time during the testing period) increase their combined ownership of
the loss corporation's stock by more than 50 percent during the testing period (three-year period
prior to and including date of change in ownership).
• Deduction of pre-change NOL carryforwards against post-change taxable income each year is
limited to the annual Section 382 limitation amount (FMV of loss corporation's stock immediately
before Section 382 ownership change × federal long-term, tax-exempt rate).

Capital Losses
 Capital losses can only be offset against capital gains. There is no additional $3,000 net capital loss
deduction for C corporations.
 Excess net capital losses are carried back three years and then forward five years to offset net capital
gains within the carryback/carryforward period.

Module 2—Entity/Owner Transactions

Formation of C Corporations
 Corporation (General Rule)—No gain or loss is recognized. The corporation's basis in the property
contributed is the greater of the shareholder's basis in the property (plus any gain recognized by the
shareholder) or debt assumed by the corporation.
 Shareholder (General Rule)—No gain or loss is recognized if all shareholders contributing property
own at least 80 percent of the stock immediately after the exchange and no boot is involved.
 A shareholder who contributes services in exchange for stock recognizes ordinary income for the
FMV of the services provided.
 Shareholder's basis in stock equals the total cash contributed plus the adjusted basis (NBV) of
property transferred to the corporation (reduced by any debt on the property assumed by the
corporation) plus the fair market value (FMV) of any services provided plus any gain recognized by
the shareholder.
 Shareholder gain recognition:
• Gain recognized by a shareholder for FMV of any boot received in addition to the stock.
• Gain recognized by a shareholder to the extent that liabilities assumed by the corporation exceed
the shareholder's adjusted basis in total assets transferred to the corporation (to prevent a
negative basis in stock).

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Corporate Distributions
 Distributions are taxable if the distributions are classified as dividends.
 Distributions come out of current E&P first and then accumulated E&P as taxable dividend
income; then stock basis (nontaxable return of capital); then any excess over stock basis is
taxable capital gain.
 Constructive Dividends—Some transactions are treated as dividends to avoid giving a deduction to
the corporation and treating them as income to the recipients. Examples: excessive salaries to
shareholder-employees, sale of assets below fair value.
 Stock Dividends—Distributions by a corporation of its own stock to shareholders. Generally, not
taxable to the shareholder unless the shareholder has a choice of receiving cash or other property.
The taxpayer's basis is allocated among the shares of old stock and new stock.
 The taxable amount of a dividend to a shareholder is either the amount of cash received or the FMV
of property received.
 If a corporation distributes appreciated property to shareholders, the corporation recognizes a
gain as if the property were sold. The corporation does not recognize a loss on the distribution
of depreciated property.
 Stock Redemption—Occurs when a corporation buys back stock from shareholders. Tax treatment
depends on the type of stock redemption; if it qualifies for sale/exchange treatment, the shareholder
recognizes gain/loss; if not, it is treated as a dividend to the extent of corporate E&P.

Corporate Liquidation
 A corporation and its shareholders generally recognize gain or loss on a liquidation. A corporation
recognizes gain as if the assets distributed were sold, and the shareholder recognizes gain for the
difference between the FMV of the assets distributed and the shareholder's basis in the stock. The
shareholder's basis in the assets distributed is the FMV of the assets.
 There Are Several Types of Tax-free Reorganizations—Because these events are nontaxable,
neither the corporation nor the shareholder recognizes a gain. The shareholder's basis in the assets
distributed is the adjusted basis (NBV) of the assets.
 Section 1244 Small Business Stock—Allows for an ordinary loss, rather than a capital loss, of up to
$50,000 ($100,000 MFJ) for an original stockholder if the stock is sold or becomes worthless.
 Qualified Small Business Stock—A noncorporate shareholder who holds originally issued qualified
small business stock (QSBS) for more than five years may exclude 100 percent of the gain on the
sale or exchange of the stock. Exclusion is limited to the greater of $10 million or 10 times the
taxpayer's basis in the stock.

Loans Between C Corporations and Shareholders

 Imputed interest rules apply if the interest rate on the loan is below the applicable federal rate (AFR);
imputed interest is the difference between the market rate (AFR) and the actual rate on the below-
market loan.
• Imputed interest is typically treated as dividend income to a shareholder-borrower if a
shareholder-borrower is also an employee.
• Imputed interest may be treated as compensation if the loan was made solely in connection with
the performance of services.

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Module 3—Consolidated Tax Returns

Filing a Consolidated Tax Return
 Consolidated Returns—An affiliated group of corporations (where a common parent directly owns 80
percent or more of the voting power of all outstanding stock and 80 percent or more of the value of all
outstanding stock of each corporation) may elect to be taxed as a single unit, thereby eliminating
intercompany gains and losses. Brother-sister corporations may not file a consolidated return.
 Advantages of filing a consolidated return:
• Capital losses of one corporation can offset the capital gains of another.
• Operating losses of one company can offset the operating losses of another.
• Intercompany dividends are 100 percent eliminated.
• Certain tax deductions and tax credits may be better utilized (due to various limitations).
• NOL carryovers can be used against other income in the consolidated group.
• Income from intercompany transactions may be deferred.
 Disadvantages of filing a consolidated return:
• Mandatory compliance with complex regulations.
• Losses from intercompany transactions may be deferred.
• Tax years for all members must be the same.
• Tax credits may be limited by the operating losses of other members.
• Election to file consolidated returns is binding for future years.

Module 4—International Tax Issues

Affiliated Groups and Transfer Pricing
 An affiliated group of businesses having operations in several countries and conducting sales
between affiliates could have a pricing structure that intentionally or unintentionally understates
income in some or all of those countries, including the United States, and results in some countries
not receiving as much income tax.
 Be familiar with the following key definitions.
• "Controlled taxpayer" is any one of two or more taxpayers owned or controlled directly or
indirectly by the same interests; the definition includes a taxpayer that owns or controls the other
taxpayers.
• "Uncontrolled taxpayer" means any one of two or more taxpayers not owned or controlled directly
or indirectly by the same interests.
• "Controlled" includes any kind of control, direct or indirect, whether legally enforceable or not and
however exercisable or exercised, including control resulting from the actions of two or more
taxpayers acting in concert or with a common goal or purpose. A presumption of control arises if
income or deductions have been arbitrarily shifted.
• For purposes of the IRS's authority to make these adjustments with respect to controlled
transactions, "taxpayer" means any person, organization, or business, whether or not the entity is
subject to any tax imposed by the IRC.
• "Controlled transaction" or "controlled transfer" means any transaction or transfer between two or
more members of the same group of controlled taxpayers.

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• "Uncontrolled transaction" means any transaction between two or more taxpayers that are not
members of the same group of controlled taxpayers.
• "Uncontrolled comparable" means the uncontrolled transaction or uncontrolled taxpayer that is
compared, under any applicable pricing methodology, with a controlled transaction or with a
controlled taxpayer. (Example: Under the comparable profits method, an uncontrolled comparable
is any uncontrolled taxpayer from which data are used to establish a comparable operating profit.)
 The IRS adjustments necessary to determine "true taxable income" (as opposed to the taxable
income that the taxpayer reported on an income tax return) apply to controlled transactions and
controlled transfers. The purpose of these adjustments is to assure that reported prices (as adjusted
per this authority given to the IRS) that one affiliate ("controlled taxpayer") charges to another affiliate
yield results consistent with the results that would have been realized if uncontrolled taxpayers had
engaged in the same transaction under the same circumstances (the "arm's-length" standard).

Entity Classification and Sourcing of Income

 Concept of Permanent Establishment—Applies when a corporation:
• conducts business in a foreign country on a regular basis;
• has a permanent location in a foreign country; and
• operates the corporation's business through the foreign location.
• Permanent establishment may include a fixed place of business (foreign branch or foreign
subsidiary) or a situation where a corporation has a virtual economic presence in another country.
 Entity Classification—A foreign entity is generally classified as either a foreign branch or a foreign
subsidiary.
• Foreign Branch—An unincorporated entity that is viewed as an extension of the domestic
corporation; not a separate entity, but earnings are generally taxed by the foreign host
country as well.
• Foreign Subsidiary—Separate legal entity incorporated under the laws of the foreign host country;
profits are taxed by the host country.
 Sourcing of income rules (items identified in Internal Revenue Code):
• Interest—Income sourced to the location of the entity paying the interest.
• Dividends—Income sourced to the location of the entity paying the dividend.
• Personal Services—Compensation sourced to the location where services are performed
(exception for individuals temporarily performing services in the U.S. if certain requirements
are met).
• Rents and Royalties—Income sourced to where the property is located (tangible property) or
where the property is used (intangible property).
• Disposition of Real Property—Gains, profits, and income are sourced to the location of real
property.
• Sale or Exchange of Inventory Property—Gains, profits, and income from the sale or exchange of
inventory acquired outside the U.S. is sourced to where the inventory is sold or exchanged.
• Underwriting Income—Income from issuing insurance or annuity contracts is U.S.-sourced
income.
• Social Security Benefits—U.S.-sourced income.
• Guarantees—Amounts received for providing a guarantee of indebtedness is U.S.-sourced income.

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 TCP 2 Unit Outline

U.S. Taxation of Foreign Transactions

 Worldwide Tax System—Citizens and residents are generally subject to tax on their worldwide
income. Some provisions, however, allow for the exemption of certain foreign income, which instead
follows a territorial-style approach.
 Taxation of noncitizens and nonresidents generally requires a connection or nexus to the country
("substantial presence" within the country or income "effectively connected" to the country).

Foreign Tax Credit

 Foreign tax credit limitation = pre-credit U.S. tax on total taxable income × (Foreign source income /
Total taxable income)
 The foreign tax credit limitation must be applied separately to each of the following categories of income:
• Passive category income (dividends, interest, rents, royalties)
• General category income (active business income)
• Foreign branch income
• Global intangible low-taxed income

Participation Exemption or Dividends-Received Deduction

 Participation Exemption—Allows the taxpayer to exempt foreign income from taxation.
 Dividends-Received Deduction (DRD)—Allows the taxpayer to offset dividend income from foreign
sources with a deduction.
U.S. corporation is allowed a 100 percent DRD for foreign-source dividends if it owns 10 percent or
more of the dividend-paying foreign corporation (subject to certain limitations).

Foreign Activities of U.S. Persons (Outbound Transactions)

 When a U.S. person invests abroad, it is considered an outbound transaction. The income earned
outside U.S. borders is generally referred to as foreign-source income.
 U.S. persons can generally defer U.S. taxes on foreign-source income until such income is
repatriated to the United States (e.g., in the form of a dividend). The benefit of deferral usually applies
to income earned abroad through active operations.
 Two anti-deferral regimes that result in the current taxation of foreign-source income:
• Passive Foreign Investment Company (PFIC)—A foreign entity is a PFIC if it meets a gross
income test or an asset test.
• Controlled Foreign Corporation Rules/Subpart F Regime—The United States generally does not
tax foreign business profits earned through a foreign subsidiary until the subsidiary repatriates
those earnings as a dividend. The main purpose of Subpart F is to discourage taxpayers from
using foreign corporations to defer U.S. taxes by accumulating income in foreign "base"
companies located in low-tax jurisdictions.
— A CFC is a foreign corporation with more than 50 percent of stock owned by U.S.
shareholders.
— A U.S. shareholder is any U.S. person owning at least 10 percent of the foreign corporation's
stock.
— Subpart F only applies to a foreign corporation that qualifies as a CFC.
— When both PFIC and Subpart F rules apply, the Subpart F rules supersede the PFIC rules.

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 GILTI Tax—A minimum tax imposed on certain low-taxed income that is intended to reduce the
incentive to relocate CFCs to low-tax jurisdictions.
The GILTI inclusion is equal to the U.S. shareholder's share of the CFC's net income, reduced by the
excess of: (i) 10 percent of the CFC's aggregate adjusted basis in depreciable tangible property used
in its trade or business, over (ii) the CFC's net interest expense.
 Earnings Invested in U.S. Property—Each U.S. shareholder of a CFC must include in income their
pro rata share of Subpart F income and earnings invested in U.S. property.
 Previously Taxed Income—A U.S. shareholder can exclude distributions of a CFC's earnings and
profits that were previously taxed income (PTI) to U.S. shareholders as a result of a Subpart F
inclusion, GILTI inclusion, or an investment in U.S. property.
 Base Erosion and Anti-Abuse Tax (BEAT)—Imposes a minimum tax on large U.S. corporations
(annual gross receipts of $500 million or more) with a significant amount of deductible payments to
related foreign affiliates because such deductions reduce the U.S. tax base.
 Foreign-Derived Intangible Income Deduction—A U.S. corporation can get a deduction for a portion
of its foreign-derived intangible income (FDII). FDII is income from transactions involving non-U.S.
persons located outside the United States.
 Interest Charge Domestic International Sales Corporation (IC-DISC)—Enables domestic
manufacturing corporations that export goods to reduce their tax liability by permitting a tax-
deductible commission to an IC-DISC. Since the IC-DISC is tax-exempt, no income is recognized on
the commissions received, which reduces the tax liability of the corporation as a whole.

U.S. Activities of Foreign Persons (Inbound Transactions)

 A foreign person's investment in the United States is considered an inbound transaction. The United
States taxes foreign persons on income derived in the United States, which is referred to as U.S.-
source income.
 Foreign persons are usually only taxed on their U.S.-source income. However, a foreign individual
may be treated as a U.S. resident under either the green card test or the substantial presence test,
which means that the individual is subject to U.S. taxation on worldwide income. To meet the
substantial presence test, a foreign person must be substantially present in the U.S. for:
• at least 31 days in the current year; and
• at least 183 days for a three-year period, applying a weighted average: (Days in current year × 1)
+ (Days in preceding year × 1/3) + (Days in next preceding year × 1/6).

Expatriation
 The mark-to-market tax regime is imposed on covered expatriates who renounce their U.S.
citizenship and satisfy one of the following three tests: tax liability test, net worth test, or
compliance test.

Tax Treaties
 Tax treaties are bilateral income tax conventions entered into by the United States and a
foreign country.
 Tax treaties carry the same weight as domestic law and often modify otherwise applicable
U.S. tax rules.

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 TCP 2 Unit Outline

Module 5: Tax Planning for Corporations

Timing Strategies (When)
 Timing tax planning strategies deal with when income is recognized or when a loss, deduction, or tax
credit is taken; they rely heavily on the concept of the time value of money (present value). Effective
timing tax planning strategies involve:
• minimizing tax costs of income (increasing after-tax income); or
• maximizing tax savings from deductions (decreasing after-tax deductions).
 Formula for calculating the present value of tax costs or tax savings:
• Pretax income × marginal tax rate = tax costs × discount factor = present value of tax costs.
• Pretax deduction × marginal tax rate = tax savings × discount factor = present value of tax savings.
 Common applications of timing tax planning strategies involve:
• Utilization of net operating loss (NOL) and capital loss carryovers.
• Changes in legislation that create new limitations on deductions or change how certain income
items are taxed, or loss or deduction items are deducted.
• Changes in marginal tax rates.
 General rule when tax rates are constant or decreasing:
• Accelerate deductions into earlier years (increase tax savings sooner).
• Defer income into later years (increase tax costs later).

Income-Shifting Strategies (Who/Where)

 Income-shifting tax planning strategies involve:
• Where Income Is Recognized—Generally want to recognize income in jurisdictions with lower
tax rates.
• Who Recognizes Income—Generally want the taxpayer with the lowest marginal tax rate to
recognize income. Common income-shifting strategies between a corporation and its
shareholders involve:
— Salary paid by the corporation to shareholder-employees.
— Corporation rents property from shareholders.
— Shareholder loan to a corporation.
— Noncash property contributions from or distributions to shareholders.

Estimated Tax Payment Requirements and Underpayment Penalties

 Corporations with a tax liability of $500 or more are required to make quarterly estimated tax
payments equal to 25 percent of the corporation's annual required payment.
 Minimum annual required payment is 100 percent of the lower of:
• prior year tax liability (if the corporation has a tax liability in the prior year, large corporations can
only use prior year tax liability for first quarter payment);
• current year tax liability (equal quarterly payments); or
• current year tax liability using annualized quarterly taxable income.
 When income is not expected to be earned evenly across quarters, corporations use the annualized
method to calculate the amount of the remaining estimated tax payments. The annualization factor is
obtained by dividing 12 by the number of months of income.

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Limitations of Tax Planning Strategies

 General limitations and considerations
• Lack of opportunity (e.g., no NOL or capital loss carryovers)
• Whether tax planning strategy is a sound business decision (e.g., cash flow)
 Judicial doctrines
• Constructive receipt doctrine income must be recognized when it is received or "constructively
received,” which is when it is made available to the taxpayer.
• Assignment of Income Doctrine—Income must be recognized by a taxpayer who earned the
income or owned the property that produced the income.
• Substance Over Form Doctrine—Allows IRS to redetermine the substance of a transaction
regardless of the form, or tax treatment, used.

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