Friday, June 24, 2011

Basic Capital Accounting Rules for Partnerships

Basic Capital Accounting Rules for Partnerships

Several basic transactions that occur in the everyday operations of partnerships will affect capital accounts. The same principles can be applied to the operations of an LLC. The follow are the most important:

Partnership Contributions - A partner's capital account is increased by the amount of money plus the FMV of any property (net of liabilities) contributed by that partner.

  1. Contributing partner's tax basis in the property is not relevant for this purpose. 
  2. Liabilities are separately on the balance sheet, adjustments to the capital account is net of any liabilities on the property. 
Partnership Operations- A partner's capital account is increased by their share of the partnership's total income for the year, and is decreased by the partner's share of the partnership's losses for the year.

  1. The character of income does not matter.  For example, Tax- Exempt Income is added into the partner's capital accounts. 
  2. Each year, the amount of book depreciation reduces both the book value of the depreciable asset and the balance in the partners' capital accounts. 
Partnership Distributions -A partner's capital account is decreased by the amount of money plus the FMV of any property (minus liabilities) distributed to that partner.

Partnership Liabilities – On the balance sheet, liabilities are listed separately in the capital accounts.

Wednesday, June 22, 2011

Tax Litigation and Tax Law

 Sources of Tax Law in the United States

The Constitution is the highest authority of law on all taxation issues. The Internal Revenue Code is subject to any constraints imposed by the U.S. Constitution. Common Law Doctrine = Judicial Interpretation of Vague Statutes

Treasury Regulations have the force of law under the IRC unless they are inconsistent with the statute. Although courts invalidate regulations more often than they find constitutional violations in the statute, judicial invalidation of regulations is not common. Congress has delegated to the IRS department the task of establishing substantive rules rather than merely interpreting the statute.

These rules are Legislative Regulations. Because the grants of authority are so broad, legislative regulations are seldom invalidated. Harder to convince a court that a legislative regulation is wrong.
Interpretive regulations are interpreting current law. Easier to overturn.

Revenue Rulings and Revenue Procedures published by the Internal Revenue Service are next on the level of hierarchy.  A revenue ruling sets forth the Service’s view as to how the Code applies to a hypothetical set of facts.  Unlike a regulation, a ruling does not have a presumption of validity or correctness, however a taxpayer may rely on it. A revenue procedure has the same legal status as revenue ruling in tax litigation with the IRS, but they resemble regulations in format, in contrast with the use of hypothetical facts typical of rulings.

General Counsel Memoranda and Private Letter Rulings are private opinions issued to a private taxpayer that they may rely on for a substantial fee. It has the effect of a revenue ruling.  Another taxpayer may not rely on the binding authority of the letter.  It shows how the IRS is thinking about specific facts. Better to withdraw a ruling requests. General Counsel Memoranda, they have much more detail about the law and can be useful in tax litigation.

Legislative History can show what was congress thinking as it wrote tax law. In tax law, it is very common to use legislative history to prove points. Tax laws are often enacted in response to specific societal problems and trends and there is usually lots of information on the reasons

Friday, June 10, 2011

How is licensing a good way to do international business?

Licensing provides a lower risk technique than FDI for firms wishing to enter foreign markets.  One advantage with this export strategy is that it requires less capital commitment than FDI.  Many different types of products/services/techniques can be licensed.

For example, Patents, trademarks, know-how, and copyrights are all examples of things that can be licensed. International franchising is a form of licensing that gives firms advantages in foreign markets.

Tuesday, June 7, 2011

Difference between normal and abnormal spoilage?

Accountants often face difficulty situations when dealing with spoilage and job order costing systems. 

Generally, normal spoilage is part of a particular production process used by the company and arises when the process is operated in an efficient manner. There is nothing that the company can really do to prevent normal spoilage and this must add this to the cost of product.

In contrast, abnormal spoilage is not considered a normal part of  a particular production process employed by a company and does not arise under the normal efficient operations of the manufacturing process. A company should try to avoid abnormal spoilage at all costs in order to have the most efficient production system possible and to compete on the market with competitors.

Popular Accounting Problems

The information on this site is for informational purposes only and should not be used as a substitute for the professional advice of an accountant, tax advisor, attorney, or other professional.