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Step Transaction Doctrine – Paul Gaulkin CPA


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

Earnings & Profits for Dividend Distributions – Paul Gaulkin CPA

chairs in board room

Although earnings and profits (E&P) have a significant impact in determining the tax status of dividend distributions, the term is not defined inside the Internal Revenue Code. Code Section 312 does provide an indication of how certain transactions will affect E&P, but it does not specifically define what E&P actually is. Defining Earnings and Profits Earnings and profits is basically a tax term. It has some similarities to retained earnings, but it is not equal to it. E&P is a … Read more

Calculate Net Operating Loss – Paul Gaulkin CPA

chart showing losses

The term “net operating loss” is defined as the “excess of deductions over gross income”. This excess of deductions over gross income is subject to modifications which limit the net operating loss to only business losses. Reporting Loss A loss reported on a tax return by an individual taxpayer with business income is modified in the following ways in order to determine a net operating loss deduction: Start with taxable income or loss + Any NOL deduction from another year … Read more

Distribution of Section 306 Stock – Paul Gaulkin CPA

hands raised trading stocks

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

plane with sign departures

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

Stock for Stock Exchanges Non-recognition – Paul Gaulkin CPA


No gain or loss will need to be recognized in the event a taxpayer exchanges common stock in a corporation solely for common stock in the same corporation, or if preferred stock is exchanged solely for preferred stock in the same corporation. It is important to note that voting rights are not a factor when determining non recognition. Non recognition will apply even though voting stock is exchanged for nonvoting stock or nonvoting stock is exchanged for voting stock. How … Read more

Personal Holding Company Defined – Paul Gaulkin CPA

capital stocks together

To be classified as a personal holding company, a corporation must meet the following two tests for the tax year in question: 1. Five or fewer individuals must own more than 50 percent of the value of the outstanding stock, actually or constructively, at any time during the second half of the taxable year. 2. At least 60 percent of the corporation’s adjusted ordinary gross income for the tax year must be personal holding company income. It is possible for … Read more

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

people with question marks

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

Section 332 Nonrecognition Liquidation of Subsidiaries – Paul Gaulkin CPA

person looking outside window

Under Code Section 332, no gain or loss is recognized by a parent corporation on the receipt of property distributed in complete liquidation of a subsidiary. Basically, the subsidiary’s basis for assets carries over to the parent corporation so that any deferred gain or loss at time of liquidation is recognized if the parent subsequently sells the liquidated subsidiary’s former assets. In order to qualify for Nonrecognition under Section 332, three requirements must be met. These requirements are listed below. … Read more