CORPORATE TAXATION
CORPORATE INCOME TAX 11: imposes IT on CORP; 15% on F$50K, 25% on N$25K ($75K), 34% on N$25K ($100K), 39% on N$235K ($335K), 34% on N$9.665M ($10M), 35% on N$5M ($15M), 38% on N$3,333,333 ($18.333M), 35% above $18,333,333M; 35% if personal SVC CORP. Dividends 1(h)(11): for 2003 to 2012, taxed to IND as LTCG (15%; 0% if OTA 10%/15%). Subchapter S 1361 to 1379: permits certain CORP to elect treatment as PTE with G/L reported on SH IND TR; S-CORP if elect, C-CORP if not. Corporation v. Individual: for DED, all CORP engaged in T/B; certain provisions apply only to CORP (e.g., 243 DIVRDED for inter-CORP DIV); 1212 CL carryover; 1201 LTCG MAX rate; 199 DED for T/B engaged in DOM MANU ACT; 469 non-applicability of passive ACT loss rules; rules govern choice of accounting method and TY.
TAXABLE CORPORATE ENTITIES Business Entity 301.7701-2(a): defined broadly as any ENT REC for FTP (not ordinary trust or subject to special IRC treatment); if 2M+, CORP or PART; if 1M, CORP or disregarded. Corporation 7701(a)(3) & 301.7701-2(b): inc. BEN ORG under FL/SL, INS COMP, banks, ASSN, joint-stock COMP. Partnership 301.7701-2(c)(1): non-CORP BEN with 2M+; may elect to be taxed as ASSN (thus CORP) under 301.7701-3(a). Limited Liability Company: if 2M+, S&D from members, CORP or PART under 301.7701-2(a); if no election, PART under 301.7701-3(b)(1)(i); if disregarded under 301.7701-3(b)(1)(ii), its assets, liabilities, INC items, and DED items treated as owned/owed/received/incurred directly by its owner. Publicly Traded Partnership 7704: treated as CORP; publicly traded depends on existence of established SEC MKT or secondary MKT; exception treats as PART (1) PTLP with > 90% of GI from certain passive sources, (2) PTP in existence on 12.31.87 so long as do not add substantial new line of BUS.
2.1.1 A/B plan to form LLC, ID 35 to 50 potential investors to contribute cash for membership INT totaling 75 to 85% of profits/losses. Under SL, LLC may be member/manager-managed, INT may be freely/non-transferable, LLC may/not be dissolved by death/bankruptcy/retirement/expulsion of members. A/B want to manage LLC, with investors having only minimal rights REQ by SL. Only A/B will have authority to act on behalf of LLC; think it best that investors be permitted to sell/assign their membership INT, though think actual OPP for resale will be limited by MKT forces; want BUS to be uninterrupted by death/bankruptcy/etc. of investor-members. Will LLC be taxed as CORP if ORG in this manner? No; likely taxed as PART under 301.7701-2(c) but could still make 301.7701-3 CORP election. Even if A/B permit investors to sell their INT, for 7704 to treat LLC as PTP (thus CORP), INT must be readily tradable on secondary MKT or substantial equivalent. Here, A/B think actual OPP for resale limited by MKT forces.
2.1.2(a) CORP formed 2 WOS LLC Cadmium and Mercury. Effect on CORP TI if Cadmium has NL of $2M this year and Mercury has NINC of $3M? Under 301.7701-2(c)(1)(i) and 301.7701-3(b)(1)(ii), both LLC are not ENT separate from owner CORP; thus, INC from CORP takes LLC $2M losses and $3M INC into account for NINC of $1M. (b) CORP has WOS Cadmium. CORP owns 8/10 membership units in Mercury, in which Cadmium owns other 2. Effect on CORP TI if Cadmium has NL of $2M this year and Mercury has NINC of $3M? As a WOS, Cadmium's NL may not be used to offset CORP profits for FITP unless they file consolidated TR. Mercury is not a single-member LLC (thus disregarded), as Cadmium (as WOS of CORP) qualifies as separate owner, meaning Mercury is S&D from its members and treated as CORP or PART under 301.7701-2(a).
CORPORATION FORMATION
RECEIPT OF STOCK FOR PROPERTY 351: G/L not REC on TOP to CORP solely IEF stock of CORP if TOR owns ≥ 80% of stock of TEE CORP immediately after TRANS; permits tax-free INC of proprietorship/PART/new BUS, creation of SUB by CORP, TOP to existing CORP (either where existing CORP is controlled by IND or CORP). Control 368(c): REQ TOR own ≥ 80% of stock of TEE CORP immediately after exchange. Property RR69-357: inc. cash, PN, AR, 453 installment notes; 351 DNA since not realization events (significant for determining control group). Exception 351(e): DNA to TOP to INV COMP. Corporate Transferee 1032: provides for NONREC to CORP issuing stock regardless of whether TOR accorded NONREC under 351. Holding Period 1223(1) & (2): give SH and CORP HP of assets transferred to CORP; stock obtains such HP only if property was CA or could obtain 1231 CG treatment; if only some assets qualify under (1), assign tacked HP to proportionate number of shares (by value), with remaining shares taking HP beginning with exchange.
BASIS Stockholder 358(a)(1) basis of stock received in 351 TRANS same as basis of property transferred to CORP; adjusted to reflect receipt/taxation of boot. Allocation (b)(1) & 1.358-2(b)(2): SH basis in stock must be allocated among stock of different classes in proportion to FMV of stock in each class; stock ACQD IEF PN takes 1012 cost basis equal to principal amount of PN. If SH contributes asset and receives nothing in exchange, no G/L realized and adds basis of contributed property to his basis in stock (CORP uses 362(a) TOR basis). Boot (a)(2): basis of other property received is its FMV. Liabilities (d): for basis purposes, treated as money (decrease TOR basis for stock received). Corporation: 1.1032-1(d): if 351, via 362(a); if not 351, via 1012. 362(a): CORP has basis in property equal to TOR basis, increased by gain REC to TOR. Assets 362(e)(2): if FMV < AAB of property transferred, CORP basis in property cannot exceed FMV; if multiple properties, aggregate, then allocate among built-in-loss properties; election option whereby SH takes reduced basis instead. Note: can preserve NONREC loss at either SH or CORP level but not both.
STOCK CLASSES Preferred: hybrid of CS and DINST; preferred to CS; priority over CS in payment of DIV and upon LIQ; usually limited in AR (less risky than CS but CS receive surplus); usually no VOT rights. Common: form of CORP EQ ownership; CS SH cannot be paid DIV until all PS DIV (inc. payments in arrears) are paid in full.
BOOT 351(b): allows for receipt of cash or other property; TOR realized gain is REC to extent of money/property received as boot (note: RR68-55 allocation may limit amount); loss never REC. 357: AOL or ACQ of property subject to liability does not constitute boot for 351 (unless tax avoidance scheme involved or liabilities assumed > basis of property transferred; but note AOL affect SH basis).
3.1A.1 A/B plan to ORG X CORP. A will contribute Truck ($50K AB, $150K FMV) and Shovel ($125K AB, $100K FMV) IEF 20 VCS; B will contribute $100K Cash and Land ($20K AB, $150K FMV; held as INV) for 100 $1K PV NVPS with 8% DIV preference ($100K FMV) and 12 VCS. ITC to A/B/X? Recognition: A: for Truck, $100K unrealized gain; for Shovel, $25K unrealized loss. B: for Land, $130K unrealized gain. 351(a) satisfied; together, A/B own 100% of VOT and NVS, thus in control. Thus, A does not REC $100K gain or $25K loss; B does not REC $130K gain. SH Basis: A: assume AR for VCS is FMV of transferred property ($150K + $100K), thus $250K; aggregate bases in property transferred to calculate basis in stock of $175K under 358(a); check: if A sold stock for $250K FMV, REC $75K gain (equal to deferred, non-REC G/L). B: PS worth $100K, thus CS worth $150K ($100K FMV Cash + $150K FMV Land – $100K); aggregate bases in property transferred to calculate basis in all stock of $120K under 358(a), then allocate $120K AB between CS/PS under 358(b)(1) and 1.358-2(b)(2), so 60% ($72K) is CS AB and 40% ($48K) is PS AB. CORP Basis: under 1032, CORP does not REC G/L upon exchange of property for its stock; under 362(a), $50K for Truck, $125K for Shovel (note: no reduction to FMV since $0 aggregated reduction); check: if CORP sold Truck for $150K FMV and Shovel for $100K FMV, would REC NG of $75K (equal to deferred, NONREC G/L). For cash, basis is equal to its face amount ($100K). For Land, equal to TOR B basis of $20K.
3.1A.2(a) C/D formed Y CORP. C contributed Truck ($150K AB, $100K FMV) for 10 VCS; D contributed Land ($30K AB, $100K FMV) for 10 VCS. ITC to C/D/Y? Recognition: C does not REC $50K unrealized loss; D does not REC $70K unrealized gain under 351. Basis: C: under 358, AB in stock is $150K. D: AB in stock is $30K. Y: under 362(e)(2)(a), 362(a) DNA here, and CORP basis cannot exceed $100K FMV (thus, C has potential loss if sells stock, but CORP does not have potential loss). Note: if C/D elect application of 362(e)(2)(C), could preserve loss at CORP level instead of SH level (there, TOR basis in stock could not exceed FMV, thus basis in stock is $100K instead of $150K); under 362(a), $30K basis in Land. (b) C contributed Truck 1 ($150K AB, $100K FMV) and Truck 2 ($60K Basis, $100K FMV) for 20 VCS; D contributed Land ($30K AB, $200K FMV) for 20 VCS. ITC to C/D/Y? Basis: Y: C properties, AAB to determine whether 362(e)(2)(A) applies; thus, $210K AAB, $200K AFMV; under 362(e)(2)(B), allocate $10K reduction in basis to Truck 1 with built-in loss, so AB is $140K, AB in Truck 2 is $60K. For Land, CORP takes D AB of $30K, preserving built-in gain. Note: if C/D elect application of 362(e)(2)(C), would give CORP $150K AB in Truck 1, $60K AB in Truck 2 but C would have to reduce her basis in stock for $10K net built-in loss (thus, $200K basis in stock). C: via 358, $210K basis in stock. D: via 358, $30K basis in stock.
2.1.3 E/F/G formed Z CORP. E transferred 1K Stock A ($150K Basis, $100K FMV); F transferred 500 Stock A ($20K Basis, $100K FMV); G transferred 2K Stock C ($5K Basis, $100K FMV). E/F/G received 10 Stock Z. A/B/C all traded on NYSE. ITC to E/F/G/Z? 351(e): 351 DNA to TOP to INV COMP; thus, not a NONREC TRANS under 351. Thus, E REC $50K loss, F REC $80K gain, G REC $95K gain. For CORP, need not REC G/L as to issuance of own stock under 1032, but since 351 DNA to TOR, take cost basis via 1012 in property received (FMV); same for SH (basis = FMV).
RECEIPT OF OTHER PROPERTY Sale: treated as sale only if property transferred IEF NQPS or property other than stock; may be preferable to treat TRANS as sale rather than exchange (e.g., REC loss on DEP assets since if TRANS under 351, even if boot received, no loss can be REC). Debt Obligations: if TOR receives stock and DOBL, DINST is ‘other property’ (boot), ITC governed by 351; if TOR receives only cash/property (inc. DOBL) and no stock, TRANS is S/E (G/L REC accordingly), so TOR can get S/E treatment by transferring property for SEC (DINST) rather than stock unless purported DINST is actually EQ and TOR is in control of CORP (351 governs). If SH receives NQPS IEF DEP property, SH may REC loss (notwithstanding that for other purposes, PS may REP EQ).
RR68-55 CORP Y ORG by CORP X and A (IND who owned no stock in X); A transferred $20K to Y IEF Y Stock ($20K FMV); X transferred 3 Assets to Y IEF Y Stock ($100K FMV) plus $10K Cash. If X had sold Assets at FMV: A1 [CA Held > 6M; $22K FMV, $40K AB, $18K LTCL], A2 [CA Held ≤ 6M, $33K FMV, $20K AB, $13K STCG], A3 [1245 Property, $55K FMV, $25K AB, $30K OI]. How to determine amount of gain REC under 351(b): general rule that each asset transferred must be considered to have been separately exchanged (not proper to total bases and subtract from FMV of total consideration received). How to allocate cash and stock received to AR as to each asset transferred in exchange: FMV of each category of consideration received must be separately allocated to transferred assets in proportion to relative FMV of transferred assets. Thus: Total [$110K Asset FMV, $100K Y Stock FMV + $10K Cash = $110K AR], A1 [$22K FMV, 20% of Total FMV, $20K FMV of Y Stock + $2K Cash = $22K AR, $40K AB, $18K Loss], A2 [$33K FMV, 30% of Total FMV, $30K FMV of Y Stock + $3K Cash = $33K AR, $20K AB, $13K Gain], A3 [$55K FMV, 50% of Total FMV, $50K FMV of Y Stock + $5K Cash = $55K AR, $25K AB, $30K Gain]. Under 351(b), A1 $18K loss not REC, A2 $3K STCG REC, A3 $5K OI REC (1245). Note: CORP basis is TOR basis plus gain REC; thus, bases are $40K for A1, $23K for A2, $30K for A3.
INSTALLMENT SALES 453: if sell property and receive installment OBL of TEE, can report gain as installments are received rather than immediately; DNA to property held as inventory; DNA to recaptured gain. Policy: ensure liquidity to pay tax.
NONQUALIFIED PREFERRED STOCK Preferred Stock 351(g)(3)(A): limited/preferred as to DIV; does not participate in CORP growth. Nonqualified 351(g)(2): issuer/RP, within 20Y of issue, (1) may be REQ by holder to RED stock, (2) is REQ to RED stock, or (3) has RTR stock and more likely RTR will be exercised; or if DIV rate determined in whole/part by reference to IR, commodity prices, similar indices.
3.1C.1 C/D/E plan to ORG CORP. ITC to C/D/E/CORP? (a) C contribute Supplies (previously held for sale to customers in OCB; $300K AB, $450K FMV) for 20 CS and PN for $200K due in 10Y, INT payable semi-annually. Recognition: PN worth $200K, so stock worth $250K; $150K realized gain ($450K AR – $300 AB). Because PN is treated as ‘other property,’ 351(b) applies; thus, TOR realized gain is REC to extent of FMV of property received as boot ($200K), so she REC $150K CG. Installment method DNA since Supplies held as inventory. C Basis: 358(a)(1) for stock basis is $250K (AB Supplies $300K – Other Property PN $200K + Gain REC $150K. 358(a)(2): basis in other property is its FMV, so basis in PN is $200K. CORP Basis: no REC under 1032; under 362(a), basis in Supplies is equal to basis of property transferred ($300K), increased by gain REC by C ($150K); thus, $450K. (b) D contribute Bulldozer ($300K AB, $180K FMV) and Truck ($150K AB, $270K FMV) for 20 CS and PN for $200K due in 10Y, INT payable semi-annually. All gain inherent in Truck subject to 1245 recapture. Recognition: Bulldozer unrealized loss of $120K (not REC under 351(b)(2)); Truck unrealized gain of $120K; total value of property transferred is $450K. PN worth $200K, so stock worth $250K. RR68-55 applies. Bulldozer is 40% of Total FMV; Truck is 60%; thus, 40% of stock ($100K) and PN ($80K) received for Bulldozer, 60% of stock ($150K) and PN ($120K) received for Truck. Thus, question is how much realized gain of Truck REC? Since, under 351(b), realized gain is REC to extent of FMV of boot ($120K PN), D REC entire $120K. Installment method DNA under 453(i) since 1245 recapture gain. D Basis: 358(a)(1) for Stock: basis is $370K, equal to basis of Bulldozer and Truck ($450K) less value of PN ($200K) plus gain REC ($120K). 358(a)(2) for PN: basis is equal to its FMV of $200K. Note: if there is basis to preserve, it is preserved by reference to the
of CORP2.
RR70-140 If 2 steps of TRANS are parts of prearranged plan, may not be considered independently of each other for FITP. RR77-449 CORP transferred assets to WOS, which transferred (as part of same plan) same assets to its own WOS. Transfers should be viewed separately for 351. Since each transfer satisfies 351 REQS, no G/L REC by TOR. RR84-111 PART transferred all assets to newly formed CORP for all OUT stock of CORP and AOL; PART TERM by distributing all CORP stock to partners in proportion to PART INT. Steps were parts of plan to transfer PART OPS to CORP ORG for valid BUS reasons IEF stock, not devices to avoid/evade REC of gain. Thus, under 351, PART REC no G/L on transfer, regardless of PART subsequent DIST of CORP stock to partners and consequent loss of control within 368(c).
3.3.2(a) D owned Land ($1M FMV, $100K AB), BLDG ($19M FMV, $8M AB, $22M Cost). January: Hotel CORP offered to purchase Land/BLDG for $20M; offer open until 04.15. 02:15: D transferred Land/BLDG to newly formed A CORP for all stock. 03.01: D counter-offered Hotel all A Stock for $19M. 04.01: Hotel accepted offer; deal closed. Was INC of A CORP tax-free under 351? If D sold for $20M, taxed 15% on $900K gain on Land, 25% on $11M gain on BLDG (via 1(h)), does not want 25% tax, so counteroffer. If 351 applies to plan, D has $8.1M AAB, $19M AAR, gain taxed at 15%. Unlike INTERMOUNTAIN LUMBER, D was not under binding commitment to transfer shares but maintained freedom of action; thus, could qualify as 351 TRANS. (b) After transferring Land/BLDG to A for all its stock, pursuant to pre-arranged plan, D transferred all A Stock to B CORP for 100 stock. Simultaneously, J (who owned all 200 B Shares) transferred to B BLDG2 ($4M FMV, $500K AB) for 20 additional stock. ITC to D? Via RR70-140, D may not apply 351 to initial transfer since not really in control immediately afterwards. But, under RR2003-51, initial transfer qualifies under 351 if not inconsistent with purposes of 351 (i.e., changing form of INV instead of selling it off; D could have achieved transfer by transferring Land/BLDG to B CORP and Cash to B CORP, then B CORP could have transferred all assets to A CORP).
RECEIPT OF STOCK FOR SERVICES 351(d)(1): stock issued for SVC is not issued for property. 83: applies to SVC stock; SH who receives stock for SVC realizes OI equal to FMV of stock; if stock subject to SRF (or other restrictions preventing full vestment), 83 rules determine year value of stock INT must be included in INC; under (h), CORP may DED FMV of stock if SVC provided by TOR not capital in nature (otherwise, CORP CAP value of stock). Hybrid: if single TOR transfer property and SVC for stock, must bifurcate TRANS and treat as receipt of stock for property of equivalent value and receipt of stock for SVC (so, may get 351 NONREC and 61/83 taxable OI). Corporation: 1032 NONREC; entitled to 162 DED or to CAP value of stock as cost of asset to which SVC exchanged are related; IRS has ruled that transfer of APP/newly-issued stock to EEE as CFS is fully DED under 162 (1032 NONREC has no effect on 162 BE DED).
CONTROL Transfer of SVC to CORP for stock will not defeat 351 TRANS as to OP unless TOR of SVC receives > 20% of stock since TOR of property would still be in control of CORP; TOR of SVC who receives > 20% of stock for SVC and who also transfers property to CORP for stock qualifies as ‘TOR of property’ (both SVC stock and property stock count to determine whether control test met), but if primary purpose of property transfer is to qualify SVC stock and property transferred constitutes only relatively small value compared to value of SVC stock, SVC stock not counted in determining control group (1.351-1(a)(1)(ii)); for advance ruling purposes, property transferred not considered of relatively small value if FMV ≥ 10% of value of SVC stock received by person providing SVC (RP77-37). Note: not total value but value of stock received for SVC.
3.4.1(a) A/B/C OP BUS as PART for several years, plan to expand so want to INC. To induce EEE D to remain with BUS, A/B/C offered her 25% of CS of new CORP, to which BUS will be transferred. Advise parties regarding ITC of INC TRANS. Not advisable since will have OI as CFS upon receipt of stock for SVC (CORP may have DED); A/B/C will not meet control REQ, so not 351 TRANS but taxable exchange; CORP NONREC via 1032, 1012 cost basis. (b) D’s stock must be sold back to CORP for $10/share if EMPT TERM any time in next 4Y? Under 83, D realizes OI equal to FMV of stock but since subject to SRF, 83 rules determine when included in INC. Then, could argue if D does not make 83(b) election, SRF means rights not vested in D, so A/B/C meet control REQ. If makes 83(b) election, appears as if D owns, but make same argument. (c) D doesn’t receive any stock in CORP immediately upon INC; receives option to purchase any time in next 5Y amount equal to # shares received by each A/B/C. Matter if option price is at FMV of shares on date option granted, or may option price be at deep discount without impairing tax-free status? Option does not constitute stock, so may not violate control REQ. Note 1.351-1(a)(1)(ii) if receives some stock IEF cash (10% RP77-37 rule).
3.4.3 E/F/G/H to form X. E/F/G contribute property; H contributes only SVC. (a)(1) E/F/G got 80 A VPS; H got 20 B VCS. Under 368(c), meets control REQ, so 351 applies. (2) B NVS? Does not meet control REQ since do not own ≥ 80% of NV classes of stock. (4) E/F/G got 80 VCS; H got $20K bond convertible in next 4Y into 40 VCS. Option is not stock, so E/F/G maintain control. (b) E/F/G got 80 A VCS and 80 B NVCS; H got 20 A and 20 C NVPS. Under RR59-259, TOR SH must also own ≥ 80% of each class of NVS. (c) E/F/G got 75 A VCS; H got 25 B VCS; only difference is number of DIR elected by each class. Argue significance of VS is ability to elect DIR, so could argue control REQ met.
