Friday, November 30, 2012

Section 108 Discharge of Debt

Section 108(a) states debtors who are insolvent should indeed not be taxed on income from favorable discharge of debt. §108 excludes discharge of indebtedness from gross income under certain specified conditions, such as when the discharge occurs in bankruptcy or when the taxpayer is insolvent. Under ordinary taxation principles, discharge of debt would clearly fall within the broad definition of gross income provided by the IRC.

§ 108 thus provides a measure of relief for certain taxpayers who find themselves facing serious financial difficulties. Converts the exclusion into a deferral.

COD= Cancellation Of Debt, may have to against tax attribute. Tax Attribute = A tax benefit, when a taxpayer goes bankrupt, they will have lots of tools at their disposal. It may have to reduce them by cancellation of debt income that they got during the year of bankruptcy. Start with NOLs, they use that COD income to reduce the NOLs, then general business credits, offset these credits.

The taxpayer who takes of advantage of § 108 loses other valuable tax perks as a result, such as the ability to carry over into future years net operating loses and tax credits in the current year.    Exception, for qualified real property indebtedness.

§ 108(a)(1)(e) – Subsidy for Home Mortgage Debt. Taxpayers can exclude from COD if its qualified property indebtedness. If you have debt you use to construct or improve residence, the residence secures that debt. Residence must be used as the principal abode. Lots of specific tax benefits available as subsidies for certain kinds of debt.

§ 108(f)(1) - Exception to COD exclusion rule for certain student debt indebtedness.  Gross income does not include any cancellation of debt income because the individual worked for certain professions. Discharge of debt for certain things. Must have broad provision about working for certain organizations, if not, you have COD. No strict geographic limits either. This term is mushy.

Tuesday, November 27, 2012

How to ensure safe internet transactions

What steps can a business take to ensure safe internet transactions?

Transacting on the internet increases the risks a company must face. Yet, there are many ways for companies to reduce this risk. Some popular safety measures that companies must take include using firewalls, encrypting data, using web-site monitoring tools, and abiding by privacy polices.

How important is a company’s privacy policy? 

A privacy policy is a very important part of any website. Consumers must be very careful about what information about them is available to companies online. To ensure customer satisfaction, any company gathering customer information should supply a privacy policy explaining how the company will use their information. This will aid consumers in their decision to give information to a company.

Saturday, November 17, 2012

Loss Sale Rules Section 1091

Under § 1091, if a taxpayer realizes a loss on the sale of stock, NO LOSS DEDUCTION is allowed if the taxpayer purchases “substantially identical stock” within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date.

Disallowed loss is preserved in the new stock, under § 1091(d)

Tax Loss Sale Rule Section 1091 Example:

Bob  purchased a share for $100 in 2011, which he sold January 20 for $80. On February 5, Bob purchased a share of the same corporation for $90. No loss from the sale is recognized under  § 1091. The basis of the new share is $110; that is, the basis of the old share ($100) increased by $10, the excess of the price at which the new share was acquired ($90) over the price at which the old share was sold ($80).

§ 267(a)(1) – Disallows any loss deduction on a sale or exchange of property between certain related parties, including a parent and child. These also must be considered along with tax loss sale rules.

§§267(b)(1)  and (c)(3) determine the relationship testb.    See 267(d). You can deduct gain by size of loss that Bob did not realize. Any gain on a subsequent resale is recognized only to the extent it exceeds the disallowed loss. Rule does not change basis of the property in the hands of the buying party. So if the buyer resells the property at a loss, the loss is not increased by the amount of the prior disallowed loss.

“Cherry Picking” and the Capital Loss Limitations of § 1211

Under § 1211(b) an individual may deduct capital losses only against capital gains and a piddling $3,000 of non-capital gain income. Under § 1212(b), losses disallowed may be carried forward.
 Congress is concerned that taxpayers might engage in “cherry picking”, which is selectively realizing losses in their investment portfolios while making a point of not realizing gains. This is how tax loss sale rules come into play frequently.

Wednesday, November 14, 2012

Like Kind Exchanges Section 1031

Like-Kind Exchanges - § 1031
          i.     Basic Rule and Elements:
1.     § 1031 provides Nonrecognition of gains and losses incurred on the transfer of property in exchange for other property of “like kind”
2.     SCOPE:  § 1031(a)(1): It is limited to property that is used in a business or held for investment.
a.     There must be sign of continuous investment. Stuff cannot just sit there.
b.     LITIGATED ISSUE: The cases often turn on this requirement.
3.     EXCEPTIONS: § 1031 (a)(2): Precludes applicability of this Nonrecognition rule to several categories or property, among which are stocks, bonds, and notes; partnership interest, and inventory property. Most types of financial instruments are excluded
4.  Party claiming like-kind exchange must not be dealer in type of property exchanged.
        ii.     Policy Justification
1.     The asset is not liquid, so the taxpayer might not have cash to pay the tax on gain.
2.    Is the real justification, then, that a taxpayer who receives like-kind property should not be taxed because he has not changed the fundamental nature of his investment?
a.     Congress probably considered:
                                                                i.     Difficulty of valuation
                                                              ii.     Lack of liquidity
                                                            iii.     Continuation of the basic nature of the taxpayer’s investment.
      iii.     What qualifies? The LIKE KIND concept- VERY BROAD
1.  Regulations say that the concept refers to the “nature and character” of the property, and not to its “grade of quality”. BROAD WITH REAL ESTATE AND MORE LIMITED WITH OTHER ASSETS
2.     “same asset class” STANDARD
a.     The properties must be in the same asset class.
b.     Allows people to trade stuff of many different values
c.   They can be more different than properties that lack the material difference requirement for realization. SIMILAR NATURE OR CHARACTER
3.     In determining if two properties are of like kind, look first to the characterization of the properties in question.
a.     If both are real property, the answer will almost be yes.
b.   All real property is considered “like kind” for purposes of the statute, even if one is improved and the other is not, or if they are in different states.
c.     Both properties must be in the US to qualify § 1031(h)

        iv.     What qualifies as an “exchange”?
1.     Three party exchanges are OK. Someone can buy real estate from a third party, then trade it or other real estate.
2.     The IRS acknowledges that a properly structured three-party transaction such as this can qualify for Nonrecognition under § 1031.
3.     If the law did not permit such three-party exchanges, the practical significance of § 1031 would be very limited.

          v.     Boot in § 1031 transactions – Gain only recognized up to the boot for taxes
1.     Boot = Equalizing the transaction by throwing in cash. Does that mean anything thrown into the boot will spoil the transaction for § 1031 purposes?
a.     § 1031(b) says that if the taxpayer has gain on the property she transfers and receives consideration both in the for of qualified (like-kind) property and nonqualified property or cash (generally referred to as “boot” in either case), then the gain realized on the transferred property will be recognized, but only up to the amount of the boot – the amount of cash or the fair market value of the nonqualified property.
                                                                i.     It is necessary, in order to apply the rule of § 1031(b), to determine the taxpayer’s gain realized, which in turn requires a determination of the taxpayer’s amount realized – including the fair market value of the property.
                                                              ii.     Is it really possible to defend § 1031 as a response to valuation difficulties?
b.     1031(c) says that if the taxpayer has experienced a loss on the transferred property of like kind, then none of the loss is to be recognized if the consideration received is a mix of qualified and nonqualified property or cash. COMPLETE NONRECOGNITION
c.     Taxpayers with losses that they are disposing prefer not to qualify under § 1031.
        vi.     Basis of the acquired property in Like Kind Exchange § 1031(d)
1.     The basis of the acquired property will be an “exchanged basis” meaning that the historic adjusted basis in the transferred property will become the basis in the acquired property. Three adjustments required:
a.    Decreased by the amount of any money received (BOOT) by the taxpayer in the transaction;  In order to reflect the allocation of basis to the cash received by the taxpayer.
b.  Increased by the amount of any gain recognized by the taxpayer on the transaction;. To ensure that he is not taxed twice. The total basis to which the taxpayer is entitled is his old basis in the transferred property, plus his gain recognized on the transfer.
c.  Decreased by the amount of any loss recognized by the taxpayer on the transaction.
d.     INCREASE BASIS BY MONEY PAID. Not specified in statute: It is that the basis in the acquired property must be increased by any money paid by the taxpayer as part of the like-kind exchange.
                                                                i.     The regulations state that when additional consideration is given in a § 1031 transaction, the basis of the acquired property is the basis of the transferred property, increased by the amount of the additional consideration.
2.     POLICY: Most recognize built in gain.

Tuesday, November 13, 2012

Taxing Non-Cash Benefits and Items

Section 61 requires an OBJECTIVE measure of fair market value. Purchasers may not adjust the retail prices of the goods and services received merely because they decide among themselves that such goods and services were overpriced. The fair market value of the goods and services received is the prices charged to retail customers.

Non-Cash economic benefits (other than imputed income and unrealized appreciation) are generally includable in gross income in the absence of an explicit exclusion provision.

Numerous exclusion provisions, most of these provisions require both a specified type of non-cash benefit and a specified source of the benefit. In the case of many of the exclusions for employer-provided benefits, however, taxpayer purchases of the same items are either not deductible at all or are deductible subject to severe restrictions.

Tuesday, November 6, 2012

Characteristics of Multinational Manager

Below is a list and description of five characteristics that some experts believe that the next generation of successful multinational managers must have:

i. The most important characteristic of a successful multinational manger is a global mindset. Managers must realize how international business is changing rapidly and know how to react to these changes. Their mindset must be to think globally yet act locally. This attitude contributes greatly to a firms success in international markets.

ii. Having a long-range perspective is also very important for managers. Predicting trends in advance and acting on them will give companies a significant competitive advantage. A Manger must ask themselves what will the situation be ten years down the road?

iii. Managing change is another important skill that separates good and bad managers. Realizing that change is occurring and what it means is essential to act quickly in diversified global markets.

iv. In a global environment, motivating all employees to achieve excellence is necessary for success of the firm. Challenges may arise when transcending national borders and it is important for the international manger to know how to act in these situations with a diversified work force.

v. A willingness to seek overseas assignments is also a must for successful management. There could be many situations where a manger is reluctant to transfer to a foreign country. This will adversely affect how they view their job and how much effort they will put into their work.

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.