2008 Corporate Tax Returns Videocourse

This course has been updated to include content on the Emergency Economic Stabilization Act of 2008

For a preview of course content click on:

• Table of Contents
• Excerpt

This video-based course, featuring Sidney Kess and an expert panel, reviews major developments affecting 1120 and 1120S return preparation for 2008 and useful tax-planning strategies.

With its video expanded to review more developments in greater detail as well as to provide more tax planning tips, the course provides coverage of recently enacted tax laws, including The Housing and Economic Recovery Act of 2008; The Heartland, Habitat, Harvest, and Horticulture Act of 2008 (the Farm Act); The Heroes Earnings Assistance and Tax Relief Act of 2008 (the HEART Act); The Economic Stimulus Act of 2008; and The Small Business and Work Opportunity Tax Act of 2007 – and more!

Objectives:

• Apply the latest changes when preparing corporate income tax returns
• Advise clients or employers on new developments and tax-saving ideas in corporate income taxation

Prerequisite: Knowledge of corporate income taxation and Forms 1120 and 1120S preparation.

Note: The Text contains advance preparation readings and exercises. The Manual contains outlines and review items on the video’s content.

View the video clip

In the video, Sidney Kess, CPA, J.D., LL.M., interviews Andrew J. Fair, Esq.; Vern B. Hoven, CPA, MTA; Sharon Kreider, CPA, EA; Sydney S. Traum, CPA, J.D., LL.M.; Paul K. Gibbs, CPA; Carolyn R. Turnbull, CPA, MST; Joseph W. Walloch, CPA; and Julie A. Welch, CPA, CFP.

(199-min. video) The DVD disk contains the video presentation and a viewable copy of the Text and the Manual.

The Additional Text and Manual are for group study training only. Unlike other formats, they have no exam answer sheet and cannot be used to earn self-study credit.

Summary of Major Developments

Chapter 2 - S Corporations
The increase in the application of the Kiddie Tax from children under age 18 to those under 19 and to full-time students between the ages of 18 and 24 whose earned income accounts for less than one-half of their support is reflected in a discussion regarding gifts of S corporation stock to children [~§~1(g)].

For taxable years beginning after December 31, 2006, restricted bank director stock is no longer treated as outstanding stock of an S corporation for purposes of (a) determining whether the S corporation has more than one class of stock; (b) determining the number of S corporation shareholders; and (c) allocating items of S corporation income, gain, loss and credit among the S corporation shareholders [Act 8232 of the Small Business and Work Opportunity Tax Act of 2007].

For years beginning after December 31, 2006, if a parent S corporation sells the stock of its QSub and the sale terminates the QSub election (which is usually the case), the sale is treated as a sale of an undivided interest in the assets of the QSub (based on the percentage of stock sold) followed by a deemed transfer of the sold QSub's assets and liabilities to a new corporation in a transaction that qualifies under ~§~351 [Act ~§~8234 of the Small Business and Work Opportunity Tax Act of 2007].

The IRS has issued final regulations that treat QSubs and other single-owner disregarded entities as separate entities for purposes of employment tax and excise tax reporting. The final regulations eliminate the disregarded entity status for federal employment tax purposes for wages paid on or after January 1, 2009. In addition, the final regulations eliminate the disregarded entity status for excise taxes where the liability is imposed or the action is first required or permitted in periods beginning on or after January 1, 2008 (Reg. ~§~301.7701-2, T.D. 9356, 8/15/2007).

The IRS has provided an additional simplified procedure for making a late S corporation election in Rev. Proc. 2007-62, 2007-41 I.R.B. 786. This revenue procedure allows an entity to make a late S corporation election by filing Form 2553 with a Form 1120S for the first taxable year the entity intended to be an S corporation, provided certain requirements are met. In addition, this revenue procedure provides simplified procedures for an entity to make a combined late S corporation and corporate entity classification election by filing Form 2553 with Form 1120S within 6 months after the due date of the return (excluding extensions).

For years beginning after May 25, 2007, capital gain from the sale of stock or securities is no longer treated as passive investment income for purposes of computing the tax on excessive passive investment income under ~§~1375 and the prohibition against an S corporation having excessive passive investment income for three consecutive years under 1362(d)(3) [~§~1362(d)(3)(C); Act ~§~8231 of the Small Business and Work Opportunity Tax Act of 2007].

The Tax Court has confirmed that an S corporation shareholder who gives his full recourse note to a bank in satisfaction of a prior loan by that bank to the S corporation has achieved basis for that note (Miller v. Comm., TC Memo 2006-125, 6/15/2006).

The Tax Court has not allowed S corporation shareholders to receive basis for indirect loans that were made by a general partnership also controlled by the shareholders. The fact that the funds had moved directly from the partnership to the S corporation prevented the shareholders from achieving basis for the loans (Ruckriegel v. Comm., TC Memo 2006-78, 4/18/2006).

The IRS has issued proposed regulations under Reg. ~§~1.1367-2 to limit an S corporation shareholder's open account indebtedness, net of repayments, to $10,000 at the close of any day during the S corporation's taxable year [NPRM REG-144859-04 (4/12/2007), corrected 5/8/2007].

Effective May 25, 2007, an S corporation may eliminate pre-1983 earnings and profits notwithstanding that it may not have been an S corporation for its first tax year beginning after December 31, 1996 [Act 8235 of the Small Business and Work Opportunity Tax Act of 2007].

Revenue Ruling 2008-42, addresses two issues involving (key person) employer-owned life insurance contracts. The first is whether premiums paid by an S corporation for this type of policy (when the S corporation is directly or indirectly a beneficiary) reduce the S corporation's AAA. The second is whether the death benefits meeting an exception under ~§~101(j)(2) increase AAA. The ruling concludes that premiums paid by the S corporation on an employer-owned life insurance contract (the S corporation is directly or indirectly a beneficiary) do not reduce the S corporation's AAA. It also holds that the benefits received by reason of the death from this type of policy that meets an exception under ~§~101(j)(2) do not increase the S corporation's AAA.

For tax years beginning in 2006 and 2007, an S corporation shareholder is required to reduce the basis in their S corporation stock by the shareholder's pro rata share of the S corporation's adjusted basis in any noncash donations the S corporation makes to charity [Act ~§~1203(b) of the Pension Protection Act of 2006].

Revenue Procedure 2008-18, 2008-10 IRB 573, details how a bank (including a bank QSub) that changes from the reserve method bad debts under ~§~585 for its first tax year with a ~§~1362(a) S election can elect under ~§~1361(g) to take the ~§~481(a) adjustment into taxable income for the preceding tax year.

The IRS recently released special rules providing that a two-percent shareholderemployee of an S corporation may deduct amounts paid for insurance under ~§~162(l) (the 100% deduction for self-employed health insurance premiums) if the insurance plan was established by the S corporation. A plan is considered established by the S corporation under these rules if either (1) the S corporation makes the premium payments in the current year or (2) the two-percent shareholder makes the premium payments and is then reimbursed by the S corporation in the current year. Either way, the payments are required to be included in the shareholder's wages and reported on the shareholder's W-2. The IRS does not consider payments of accident and health insurance premiums to be distributions for purposes of the single class of stock requirement of ~§~1361(b)(1)(D) [Notice 2008-1, I.R.B. 2007-2 (12/13/2007)].

For years beginning after December 31, 2006, an ESBT may not deduct interest paid or accrued in connection with the acquisition of stock in an S corporation [Act 8236 of the Small Business and Work Opportunity Tax Act of 2007, amending IRC ~§~642(c)(2)(C)].

The IRS has issued M-3, Net Income (Loss) Reconciliation for S Corporations With Total Assets of $10 Million or More, to be used for S corporations with $10 million or more of total assets on Schedule L of Form 1120S, effective for tax years ending on or after December 31, 2006. In addition, an S corporation subject to M-3 filing must notify any partnership in which it has a 50% or greater interest, to inform the partnership of its M-3 filing responsibility.

The Mortgage Forgiveness Debt Relief Act of 2007 imposes a new entity level penalty on S corporations that fail to meet any information filing obligation under IRC ~§~6037. The penalty is assessed at $85 per month (or portion thereof) times the number of persons who were shareholders in the S corporation at any time during the tax year for each month that the failure continues, up to a maximum of twelve months. The S corporation may have the penalty abated for reasonable cause. The provision applies to returns required to be filed after December 20, 2007. [Act ~§~9(j) of the Mortgage Forgiveness Debt Relief Act of 2007, P.L 110-142, adding IRC ~§~~§~6699(a) and (c).]

The Mortgage Forgiveness Debt Relief Act of 2007 enacted a new provision to protect the taxpayer identity information of an S corporation shareholder. In particular, new IRC ~§~6103(e)(10) now prohibits an S corporation from disclosing any supporting schedule, attachment or list that includes the taxpayer identity information of any person other than the person conducting the investigation.

Chapter 3 - Section 1244 Stock, Formation of a Corporation, Personal Service Corporations, and Limited Liability Companies
The Tax Court determined that a CPA practice operating as a C corporation was not a Personal Service Corporation (PSC) because about 20% of its payroll was allocable to employees doing financial services brokerage activities rather than rendering accounting or consulting services. As a result, the entity was not a PSC and avoided the flat 35% corporate tax rate (Ron Lykins, Inc. v. Comm., TC Memo 2006-35, 3/2/2006).

The Tax Court found that a Nevada firm that performed tax and bookkeeping services was a personal service corporation and subject to the flat 35% corporate rate despite the fact that it employed no CPAs. The court found that the taxpayer was attempting to define accounting services too narrowly and had failed to distinguish between public accounting services and the meaning of accounting services under ~§~448(d)(2) (Rainbow Tax Services, Inc. v. Comm., 128 T.C. 5 (2007)).

In a Tax Court summary opinion, the Tax Court ruled that a corporation that performed architectural services may not take treasury stock into account in determining whether employees who perform personal services own substantially all (i.e., at least 95%) of the outstanding stock of the corporation, as required under ~§~448(d)(2)(B) (Robertson Strong & Apgar Architects, PC v. Comm., TC Summary Opinion 2007-48).

Chapter 4 - Form 1120
In the instructions for the 2006 Schedule M-3, Net Income (Loss) Reconciliation for Corporations With Total Assets of $10 Million or More, the IRS imposed a new reporting requirement on corporations that are subject to M-3 filing and that own, directly or indirectly, a 50% or greater interest in a partnership on or after June 30, 2006. Those corporations must satisfy a reporting requirement to the partnership that will require the partnership to file its own Schedule M-3 (IRS News Release IR-2006-114, 7/20/2006).

Effective for transactions occurring on or after January 6, 2006, transactions that create a significant book-tax difference (i.e., a transaction in which the amount of any items of income, gain, expense or loss reported for tax purposes differs from the gross amount of the items reported for book purposes) are no longer required to be disclosed on Form 8886, Reportable Transaction Disclosure Statement [Notice 2006-6, IRB 2006-5, 385 (1/6/2006)].

Chapter 4 - Inventories
Rev. Proc. 2001-23 and Rev. Proc. 97-36 both require the use of separate pools for cars and light-duty trucks. Recognizing that the distinction between cars and light-duty trucks has diminished significantly in recent years, the IRS released Rev. Proc. 2008-23 on March 7, 2008. This revenue procedure allows a reseller of cars or light-duty trucks that is using the dollar value LIFO pooling rules under Reg. ~§~1.472-8(c)(1), Rev. Proc. 2001- 23, or Rev. Proc. 97-36 to automatically change its accounting method to adopt a new Vehicle-Pool Method.

The IRS has announced that pending the issuance of additional published guidance, it will not challenge a taxpayer's inclusion of negative amounts in computing additional ~§~263A costs under the simplified production or resale methods or whether a taxpayer's may aggregate negative additional ~§~263A costs under these methods. The IRS will also not pursue the issue if it has already been raised in examination or is currently under consideration before Appeals or the Tax Court. The IRS will not deny a taxpayer the right to change its accounting method because it includes negative amounts in the computation of additional ~§~263A costs or the use of a negative number for aggregate ~§~263A costs provided the taxpayer already treats the negative cost as a ~§~471 cost. The taxpayer will be required to conform to any rules provided in future published guidance, however [Notice 2007-29, IRB 2007-14 (3/12/2007)].

Revenue Procedure 2008-43, IRB 2008-30, provides safe harbors through which a taxpayer may use the rolling-average method of inventory. Historically, the Service has not felt that this method of inventory resulted in a clear reflection of income. This was particularly true in cases in which inventory had a long holding period, perhaps multiple years. It was also viewed as a problematic method if costs were subject to substantial fluctuations.

Chapter 4 - Accounting Methods
The IRS has revised its instructions to Form 3115, Application for Change in Accounting Method, to reflect earlier regulations allowing the use of automatic consent accounting method change procedures for C corporations required to convert to the accrual method of accounting by ~§~448. Under ~§~448, a C corporation is generally required to convert from the cash method to the accrual method if its average annual gross receipts exceed $5 million for the three prior years. Under automatic consent accounting method change procedures, the increase to income from converting to the accrual method may be spread over four tax years [Instructions to Form 3115; Reg. ~§~1.448-1(g)(2)(i)].

The Tax Court has ruled that computational errors by an auto dealership in its LIFO inventory over a ten-year period represented an accounting method error. As a result, the IRS was permitted to impose an accounting method correction that adjusted the LIFO inventory valuation from the inception of the error, not merely for the open period under the statute of limitations (Huffman v. Comm., 126 TC No. 17, 5/16/2006). The Sixth Circuit has now affirmed the decision of the Tax Court in 518 F3d 357 (6th, 2008).

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