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Federal Income Taxation of Corporations
Rutgers University, Newark School of Law
Blank, Joshua D.

TAX OUTLINE
· UNIT IA – Why tax corp income?
o Classical taxation- 2 layers of tax
§ Treat corp like separate person
o Integration- rest of world has done this- not classical tax but things like VAT
o How is tax efficient?
§ Neutrality- does not change behavior
§ Is it going to cause a distortion/
o Will you change behavior to escape double taxation? Ways to do so:
§ Change corp form
§ Legit tax shelter
§ Illegit tax shelter
§ Disguised dividend
§ Debt Bias
o Dividend and the classical tax system
§ Tradition view- two layers of tax- Corp wont pay a dividend to SH unless there are market signals to do so- like the 15 percent tax rate
§ New view- this is irrelevant
§ – SH factor this in when they buy the stock
o Incidence- burden- who bears the burden of this tax?
§ Real-what we are concerned with- person who bears the cost- if corp taxed-pass it to consumer via higher prices- they bear the cost
§ Nominal- the person (corp) who cuts the check
o Why do we have Corp Income Tax?
§ Power, use it to regulate (Avi-Yoni)
§ They create problems, use tax to have them pay for it
§ $$, broader tax base
§ Benefits- they use courts roads make them pay for it
§ If we didn’t have it- corps would just hold onto money- this makes them give it up- solves Corp lock in problem
§ Tax expenditures- it furthers social goals!
· UNIT IB – CHOICE OF Form and Identity Classification
o CODE
§ Section 1 A-E and I Page 1 and 2- just gives rates
· 1 H- BIG THING HERE IS QDI laid out on page 7!!!!!
§ Section 11- Corp tax imposed page 11
· imposes an additional five percent tax on taxable income in excess of 100k up to a maximum increase of 11,750 which is that amount of tax savings from the lower rates on the first 75k of taxable income. This creates a BUBBLE effect of a 39 percent marginal bracket on taxable income between 100,000 and 335,000.
· PLUS- corps with taxable income over 15m must increase their tax by the lesser of three percent of the excess or 100k. Resulting in a second bubble with a TI over 18,333,333 being taxed at the flat rate of 35 percent.
· 11b2-deneies the benefit of those rates to any qualified personal service corp as defined in 448d2. Thus subjecting them to a 35 percent flat tax rate on all their TI
§ 63a applies however since not a individual person, corp can’t take personal expenses like dependency exemptions and gets no standard deduction. Doesn’t worry about above the line and below the line, 67 2 percent floor doesn’t apply either. No 212, 213, 215. Other limitations DON’T APPLY!!!! 165(c) limits of non business losses, 166(d) and 183 (a) don’t apply.
§ 1201 page 547- didn’t go over this
§ 1211 (a)-Limits on capital losses-page 553- Corps, unlike people, are limited to using Capital loses to only offset CG (can’t use CL to offset OI for corps)
§ 1212- Capital losses- carry backs and overs- page 553- can cary a CL back 3 years as long as doesn’t create NOL and carry forward 5 years
§ 1361- S corp defined –page 613
· A- S corps are corps that made an election under 1362- C corp is any corp that’s not an S corp
· B- S corps can not have more than 100 SH, only people are SH, no aliens as SH and only class of stock!!!
§ 1363 a- Effect of election of Corp- 622- S corps not subject to taxes in this chap?
§ 1366 a- Pass Thru to SH- page 623- for S corp SH- flow thru
§ 7701- definitions- page 716:
· Defines: Person, Partnership, Corp, Domestic, Foreign
§ 7704- partnerships treated like a corp- page 721, 722
· B- defined a publicly traded corp
· F- what happens when it becomes a corp
o REGS
§ 301.7701 Back of book page 1932
· -2- BE with 2 or more members is either pship or a corp- 1- corp or disregard
o B1- What is a corp?
§ BE organized under fed or state law and referred to as a corp- is a corp
§ Association, Joint stock or joint venture, insuranace co, bank
o C- partnership is not a corp and 2 or more members
· 3- A election occurs under this part if the people running it want to be something other than the default (see class notes)
o B 3- Existing Entities- existing E retains the same classification that it claimed under the prior regulations unless it elects otherwise. EXECPTION- an BE with a single owner that claimed to be a Pship under the earlier regs but which is disregarded as an BE separate from its owner under the current vision
o C 1 i- how to make election
§ ii how to notify of election
§ iii- effective 75 days before or 12 months after the election is filed- 301.77013c1iii
· Must be signed by:
o Each member of the electing entity, OR
o An officer manager or member authorized to make election
§ IV- cant change form after election for 5 years
§ V C- S corp election
o Class notes
§ Corp V. Other entities
· C Corp: Limit liability, Issue stock/ debt, Delaware, 2 LEVELS OF TAX
· S Corp: Section 1361: ONE LEVE OF TAX )SH LEVEL, limited number of SH, all SH have to be individuals, ones class of stock
· Pship/ LLC: limited liability, Flow thru- one level of tax, limited # of partners, shaky legal precedent, tax rules are complicated
§ TAX RATES
· Corp : for this class assume always 35 percent for corps although it is actually progressive- doesn’t matter if CG or OI for corps- rate wise- character matters for other things thought
· SH- can get 15 percent on QDI Section 1 h 11
o This is from 03-10 only!
o Why sunset provision for this?
§ Budget rules in Senate make SS provisions easier to pass
§ Makes it look less expensive
§ THEY ALMOST NEVER SUNSET!!!!!
§ QUALIFIED DIVIDEND!!! 1 h 11
· Paid by domestic corp or “Qualified foreign corp”
· AND IND. SH. MUST MEET HOLDING REQUIRMENT! (MUST HOLD FOR MORE THAN for more than 60 days during 121 day period beginning 60 days before ex dividend date and ending 60 days after ex dividend date)
· If you meet this get 15 percent rate
o Why do this? To make corps share pro

Net to H and W

552,550

850k

392600

Total tax rate

44.75%

15%

60.7%

o Problem 3
§ What if B corp were listed in UK stock exchange? Is the D QDI? Yes since England is covered by IRS notice 2006 101 we just need to know the length of time the stock was held.
· UNIT IIA – Money Distributions
o CODE
§ § 385- Treatment of Certain interests in corp as stock or indebtness. Page 343
· a- says look at REGS BUT THERE ARE NO REGS!!
· b- 5 factors used to determine Debt or equity-
o Form of obligation- sum certain? Fix date? Debt!
o Debt/ equity ratio- higher debt- likely stock (why lend?)
o Subordination- does debt subordinate SH? (who gets paid first?)
o Convertibility- if you can convert to CS, it isn’t CS
o Intent- does creditor reasonably expect to be repaid
· C- character made by issuer is binding on issuer and holder BUT NOT IRS!
§ § 243 (a)- DIVIDENDS RECEIVED DEDUCTION!!! DRD page 237
· If the SH is a corp:
o 100% DRD à if gets a D from same affiliated group – owns more than 80 percent of its stock
o 80% DRDà if it owns between 20 percent and 80% of the stock
o 70% DRDà if it owns less than 20 percent of the paying corps stock
§ § 301- Distribution of Property- effects on SH page 278
· A- distribution of property (defined in 317) with respect to stock (as a SH) shall be treated in the manner provided in subsection c
· B1- Amount- money received plus the FMV of property received.
o B2- amount laid out in b1 shall be reduced by:
o (b)- (Cash distributed + FMV of any other property distributed) MINUS liabilities assumed by share holder AND MINUS any liability to which the property distributed is subject.
o FMV IS DETERMINED AS OF THE DATE OF DISTRIBUTION!
· C- how to treat a 301 distribution