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a.

When unrealized gains are recognized for tax purposes, limitation is increased in a like amount for year of recognition

b.

Increase may not exceed initial net unrealized gain, reduced by gains recognized in prior years

B.

Net unrealized built-in losses treated as “pre-change losses”—i.e. as part of the NOL c/f

a.

Thus, as these losses are realized, they can be deducted only to the extent of the limitation over the NOL c/f deducted in realization year.

b.

Limitation applies to losses realized within 5 years of the change in ownership. (382(h)(7))

C.

Sec. 382(h)(3)(B)—under a de minimis rule, built-in gains or losses are deemed to equal zero if they are less than 15% of the FMV of corporate assets or $10,000,000, whichever is less.

10/08/2009 – Basis Adjustments

XI.

Joint Venture Interest

A.

Sec. 722—Initial basis:

a.

Cash invested in joint venture

b.

Plus tax basis of property contributed

c.

Minus liabilities transferred to JV

d.

Plus share of JV debt

e.

Plus gain recognized (if any)

B.

Sec. 705—Effect of subsequent operations:

a.

Basis increased by share of income or gain, including nontaxable income

b.

Basis decreased, but not below zero, by share of expense or loss, including nondeductible expenditures

c.

Basis increased by subsequent contributions of cash or property, including increases in share of JV liabilities

d.

Basis decreased, but not below zero, by distributions received from JV, including decreases in share of liabilities

C.

Sec. 704(d)—Losses in excess of basis are not allowed, but may be carried forward until taxpayer has sufficient basis to absorb them

D.

Sec. 731—Distributions generally nontaxable unless they exceed basis (more discussion next week)

XII.

Parent investment in subsidiary stock in consolidated return

A.

Regs. §1.1502-32 provides a similar system for consolidated groups:

a.

Basis increased or decreased by subsidiary’s taxable income or loss

i.

Calculated by reference to subsidiary income or loss included in the calculation of consolidated taxable income

ii.

EXAMPLE

4

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