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Corporate Taxation
South Texas College of Law Houston
Yamamoto, Kevin M.

Corporate Tax

Fall 2013 Yamamoto

This is an outline for Professor Yamamoto’s Corporate Tax Class that will give you only general information as needed for the test. To get answers to the problems, you can finds slides for the textbook online at the University of Houston Website under Professor Streng and Professor Wells page as they post all their slides online unlike Yamamoto. I used this for the Exam and got a B+.

I. Formation of a Corporation

1. Corporations

a. C-Corporation: Normal Corporation

1. Taxed like an individual 2. Has income and deductions 3. Corp pays tax on income

4. Shareholders taxed on dividends n5. Double tax regime b/c Corp taxed on income

and shareholder is taxed on dividendsn.6. All publicly traded companies are C-Corps.

2. Transfers to Corporation: Transferring Property into Corp in Exchange for Shares.

a. §351(a) Nonrecognition for shareholder: No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control of the corporation.

1. Requirements:

a. One or more persons (including individuals, corporations, partnerships, and other entities) must transfer “property to the corporation; [services is not property, you can’t get stock in exchange for services and be under 351, and this can screw up everyone for the control part. Rev Ruling 77-37 if you get stock for services you have to put up cash = to at least 10% of the value of the stock i.e. get $150,000 worth of stock then you have to put up $15,000]

b. The Transfer must be solely in exchange for stock of the corporation; [nonqualified preferred stock treated as boot §351(g)] and

c. The transferor or transferors, as a group must be in “control” of the corporation “immediately after the exchange.”

2. §368(c) Control Defined: The ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. [transferors of property as a group own 80% of stock]

b. §358(a)(1) Basis of Stock for Shareholder: The basis of the property permitted to be received under such section §351 without the recognition of gain or loss shall be the same as that of the property exchanged. *Stock basis is the same as the basis of what they gave

c. §1032(a) Nonrecognition for Corp: No gain or loss shall be recognized by a corporation on the receipt of money or other property in exchange for stock of such corporation.

d. §362(a) Basis of Property received by Corp: For basis of property acquired by corporation in connection with a §351 exchange, the basis shall be the same as it would be in the hands of the transferor. *Basis is the same as what shareholder had. *look at each thing the corp gets separately. Each asset will have a basis, same as shareholders basis + gain recognized

e. §1223 Holding Period of Property: The taxpayer’s holding period for property received in an exchange shall include the period for which he held the property exchanged. *Corp will take over the holding period for property exchanged under §351.

3. Treatment of Boot

a. §351(b): If an exchange otherwise would have qualified under §351(a) but for the fact that transferor received “other property or money (boot)” in addition to stock, then the transferor’s realized gain must be recognized to the extent of the boot received.

b. §351(b)(2): No loss to recipient shall be recognized.

c. §358(a)(1) Basis for Shareholder: Basis will be the same as that of property exchanged increased by the recognized gain on the transfer and decreased by the fair market value of the boot.

d. §362(a) Basis for Corp: For basis of property acquired by corporation in connection with a §351 exchange, the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer. *If shareholder gets boot later, then corp’s basis is increased later (when shareholder recognizes gain)

e. If boot is given over time, then divide total amount of gain recognized over total amount of boot

f. If you get boot and there is more than one asset, divide shareholder and each asset is a separate shareholder. Example Use this Way

Ø B gets $15,000 in stock and $15,000 in cash. Take B and slice him into “two people.” When you receive boot and transfer more than 1 asset then follow rev ruling 68-55. Treat each asset individually, then allocate what b gets in exchange. 2/3 of the value is in the inventory, 1/3 in the land.

B1 inv.

B2 land

Total

Asset I (Inventory)

Asset II (Land)

Fair market Value of Asset Transferred

$30,000

$20,000

$10,000

% Of Total FMV

2/3

1/3

Fair market value of X stock received in exchange

$15,000

$10,000

$5,000

Cash received in exchange

$15,000

$10,000

$5,000

dend- If you’re just getting back your own money it is a return of capital.

· Dividend is when the Corporation is distributing its profits

· When a Corporation is distributing its profits then it is taxed as a dividend (15%)

· If a Corporation is just returning capital then there is no tax, just a reduction in the shareholder’s basis

1. Dividends

a. §316 Dividend defined: The term dividend means any distribution of property made by a corporation to its shareholders

1. out of its earnings and profits accumulated after February 28, 1913, or

2. out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.

3. Regulation 1.316-2(a): In determining the source of a distribution, considerations should be given first, to the earnings and profits of the taxable year; and second, to the earnings and profits accumulated since February 28, 1913.

b. §301(c)(1) Amount constituting dividend: That portion of the distribution which is a dividend is included in gross income.

c. §301(c)(2) Amount applied against basis: That portion of the distribution which is not a dividend shall be applied against and reduce the adjusted basis of the stock.

d. §301(c)(3) Amount in excess of basis: That portion which is not a dividend, to the extent that it exceeds the adjusted basis of the stock, shall be treated as gain from the sale of or exchange of property

2. Earnings and Profits: Measuring devise used to determine the extent to which a distribution is made from a corporation’s economic income as opposed to its taxable income or paid in capital.

Layman’s Definition: Net real profit the corporation has made

a. §312 Effect on Earnings and Profits: On the distribution of property by a corporation with respect to its stock, the earnings and profits of the corporation shall be decreased by the sum of-

(a)(1) The amount of money

(a)(2) The principal amount of the obligations of such corporation, or

(a)(3) The adjusted basis of the other property