Category Archives: Tax Law

Understanding the Kiddie Tax – Paul Gaulkin CPA

kids

If a dependent child is subject to the kiddie tax and has more than $1,900 of net unearned (investment) income for the year, his or her net unearned income is taxed to the child at the additional rate of tax that the parent would be required to pay if the child’s net unearned income were included in the parents’ taxable income. This applies regardless of the source of the assets creating the child’s unearned income as long as the child … Read more

Step Transaction Doctrine – Paul Gaulkin CPA

Trust

The step transaction doctrine means that two or more transactions are mutually dependent so that only the overall end result is significant for tax purposes. This means that, two or more steps, significant in themselves, if view in isolation, may be disregarded altogether or consolidated into one transaction. The Supreme Court has stated that “if one transaction is to be characterized as a ‘first step’, there must be a binding commitment to take the later steps.” The step transaction doctrine … Read more

United States Tax Court Basics – Paul Gaulkin CPA

picture of outside supreme court

A taxpayer may petition the Tax Court for redetermination of their deficiency within 90 days of the mailing of a notice of deficiency according to Code Section 6213(a). If the 90 day deficiency notice was used by the Appeals Office, it is possible to arrange for pretrial settlement with the Regional Counsel of the IRS. This can be accomplished even after the case has been docketed in the Tax Court. Small Tax Cases Taxpayers filing a petition with the Tax … Read more

Classifying Domestic Production Gross Receipts – Paul Gaulkin CPA

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Domestic production gross receipts are defined under Code Section 199(c)(4) to include gross receipts from the following sources: 1. Any sale, exchange or other disposition, or any lease, rental or license, of qualifying production property that was manufactured, produced, grown or extracted by the company in whole or in significant capacity within the United States. Usually qualifying production property includes tangible personal property, computer software, and sound recordings. 2. Any sale, exchange or disposition, or any lease, rental or license, … Read more

Distribution of Section 306 Stock – Paul Gaulkin CPA

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Basically, Section 306 stock is stock that is “tainted” when received in a nontaxable stock dividend and the sale of such stock produces ordinary income rather than capital gain. These proceeds from Section 306 stock are eligible for a reduced tax rate applicable to dividend income. Earnings and Profits Requirement The distributing corporation must have earnings and profits at the time of the distribution in order for the preferred stock to receive the taint of Section 306. The amount of … Read more

Section 125 Cafeteria Plan Benefits – Paul Gaulkin CPA

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A cafeteria plan is basically an employer sponsored benefit package that offers employees a choice between taking cash and qualified benefits (such as accident, health coverage and group term life insurance). It is important to note that participation in the benefits of a cafeteria plan will cause the taxpayer to not include any of those benefits in taxable income. However, if the taxpayer chooses to receive cash instead, the cash will be required to be included in taxable income. Defining … Read more

332 Liquidation Insolvent Subsidiary – Paul Gaulkin CPA

wallet with nothing inside

Sections 332 does not apply if the subsidiary is insolvent since the parent corporation does not receive any distribution in exchange for its subsidiary’s stock. A subsidiary is considered by the IRS to be insolvent if its liabilities exceed the fair market value of its assets. In this case, the parent corporation’s loss on its subsidiary’s securities is treated as a loss from worthless securities under Code Sec. 165(g). Ordinary Loss Treatment Although the resulting loss is generally a capital … Read more

Roth IRA Penalty for Early Distributions – Paul Gaulkin CPA

eggs that say roth IRA

In the event a premature distribution is made from a Roth IRA to a taxpayer, the distribution will be subject to a 10 percent penalty of the amount that must be reported as a taxable distribution. Explaining the Penalty If an individual had contributed $10,000 to a Roth IRA and the value of the account was $15,000, the difference between the two ($5,000) would be considered earnings. If the individual chose to withdraw all of the Roth IRA funds and … Read more

Definition of a Corporation for Tax Purposes Form 8832 – Paul Gaulkin CPA

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If a business owner chooses to incorporate there business under state law, it is important for them to also declare their corporation with the IRS for taxing purposes. A corporation is nothing more than a legal entity owing its existence to the laws of the state in which it is incorporated. Basically, state law defines all the legal relationships that a corporation can have. The state statutes however do not provide guidance on the taxation for federal purposes; this is … Read more

Basis of Inherited Property – Paul Gaulkin CPA

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Basis of an inherited capital asset is generally going to be the fair market value of the property on the date of death or alternative valuation date, if elected by the personal representative. With the exception of 2010 transfers electing modified carryover basis, a gain on inherited property is always long term. Step Up Basis A step up in basis occurs when the fair market value is greater than the decedent’s basis. It is important however to understand that the … Read more