Free SEE-2 flashcards

Under the half-year convention, how do you find the first-year MACRS deduction on 7-year property, and what does the table rate already include?

MACRS percentage tables fold the 200 percent declining balance method, the recovery period and the convention into one rate. For 7-year property under the half-year convention the first-year rate is 14.29 percent, applied straight to basis. The half year is already built into that rate, so no extra halving is needed.

Take the 14.29 percent 7-year rate and halve it again because the asset was only held part of the year.

Halving the table percentage is tempting if you think the half-year convention must be applied on top of the rate. But the published 14.29 percent rate already builds in the half-year convention, so applying a second half is double-counting.

In a Section 351 transfer where the shareholder receives stock plus cash boot, how much gain must the transferor recognise?

Section 351 gives nonrecognition only for property exchanged solely for stock of a controlled corporation. When the transferor also receives boot such as cash, Section 351(b) requires recognition of gain equal to the lesser of the boot received or the realised gain. The boot does not turn the whole exchange taxable, and no loss may be recognised.

A transfer of property solely to a controlled corporation under Section 351 is fully tax-free regardless of any cash received.

It is tempting to treat Section 351 as completely tax-free, but nonrecognition does not extend to boot. Cash received is boot that triggers recognised gain, so the answer is not zero.

Which application does a charity file to obtain IRS recognition of exemption under Section 501(c)(3), and when may it use the streamlined version?

It applies for a determination letter on Form 1023. The streamlined Form 1023-EZ may be used only by organisations that pass an eligibility worksheet, one condition being that projected annual gross receipts do not exceed 50,000 dollars. An organisation expecting more must file the full Form 1023.

A charity seeking 501(c)(3) status applies on Form 1024.

Tempting as another recognition form, but Form 1024 is used by organisations seeking exemption under most other paragraphs of Section 501(c), such as 501(c)(4) or 501(c)(6), not by 501(c)(3) charities, so naming it applies the wrong application form.