TAX LAW OUTLINE FALL 09
I. Tax Rates
A. Corporations – § 11 –
§ 11 (b)(1) Graduated Rate Scale, BUT as income rises benefit of graduated rate disappears. Turns into an effective flat rate at certain levels.
(A) 15% on taxable income up to $50,000,
(B) 25% of taxable income of $50,001 to $75,000,
(C) 34% of taxable income of $75,000 to $10,000,000, and
· In the case of a corporation which has taxable income in excess of $100,000 for any taxable year, the amount of tax for such taxable year shall be increased by the lesser of 5 percent of such excess, or $11,750.
· Creates a 39% bubble between $100,000 and $335,000
· Creates a flat tax of 34% over $335,000
(D) 35% of taxable income exceeding $10,000,000.
· In the case of a corporation which has taxable income in excess of $15,000,000, the amount of the tax determined under the foregoing provisions of this paragraph shall be increased by an additional amount equal to the lesser of 3 percent of such excess, or $100,000
· Creates a 38% bubble between $15,000,000 and $18,333,333
· Creates a flat tax of 35% over $18,333,333
§ 11(b)(2) Certain personal service corporations not eligible for graduated rates. The amount of the tax imposed on the taxable income of a qualified personal service corporation (as defined in section 448(d)(2)) shall be equal to 35 percent of the taxable income.
B. Individuals capital gains
Dividend rates are currently 15%
40% when rates go back up after2010
C. Penalties on Undistributed Corporate Income
Accumulate Earnings Tax
The accumulated earnings penalty tax is imposed upon a corporation that avoids double taxation to its shareholders, by permitting earnings and profits to accumulate rather distribute them. § 532
Requires a subjective finding of tax avoidance
Only applies when earnings and profits are allowed to accumulate beyond the reasonable needs of the business. §533
§ 537 discusses reasonable needs
If it is determined that the corporation has accumulated earnings and profits beyond its reasonable needs it will be taxed at 15% of the “accumulated taxable income”
Accumulated taxable income will be the amount retained over the reasonable needs of the business. § 535
Personal Holding Company Tax
A 15% penalty tax is imposed upon undistributed personal holding company income. § 541
The personal holding company tax applies to corporations in which 50% of the value is owned, directly or indirectly, by 5 or fewer individuals. § 542(a)(2)
Only applies if 60% of the corporation’s adjusted gross income constitutes “personal holding company income.” § 542(a)(1)
“Personal holding company income” is income consisting of personal service or personal asset income. §543
Formation of corporations
I. Transfers to a corporation for stock in the corporation
A. General rule for gain or loss on the part of the transferor – “Except as otherwise provided under this subtitle, the entire amount of gain or loss…on the sale shall be recognized.” § 1001(c)
Amount Realized – Adjusted Basis = Gain § 1001
What is amount realized – value of stock
Value of stock – General rule of arms length transaction or exchange of equivalency doctrine (i.e. assume value of property exchanged is the value of the stock)
B. Transfers to a corporation for stock – § 351(a) – NO Gain or Loss (to individual OR corporation) shall be recognized if
Property is
· The term “property” means money, securities, and any other property; but does not include stock in the corporation making the distribution (or rights to acquire such stock). § 317 (a)
o Services, certain indebtedness, and accrued interest are not treated as property. § 351(d)
· If more than 20% of any class of stock is issued to a service provider than the entire transaction fails
o If one party transfers services, but other parties transfer property the services could still take up
us transactions for multiple transferors, BUT ONLY that rights and obligations of parties be previously (before 1st transfer) defined. Does not have to be in writing BUT should be.
· § 1.351-1(a)(1)(ii) – Stock issued for prop. which is of relatively small value in comparison to the total value of stock already owned SHALL NOT be treated [as § 351 property for control purposes] IF the primary purpose of the transfer is to qualify under § 351. 10% is considered large enough. MAY be smaller if value is higher.
Policy – Do not want the tax law to impede business adjustments, while trying to prevent corporations from using stock instead of money
Avoidance of 351 – 351 is not elective. Taxpayers occasionally may wish to avoid § 351 to recognize a loss, step-up the basis of property or “freeze” appreciation as capital gain. Avoidance techniques include breaking control or structuring the transaction as a taxable sale.
C. Recognition for the transferor of the service under § 83
· Anytime you receive property for services act like service recipient paid cash and the provider turned around and purchased the property – ie taxable income
D. Treatment of Boot (receipt of something other than stock) § 351(b)
· If § 351(a) would apply but for the receipt of boot then:
1. GAIN – SHALL be recognized but not in excess of boot or cash received.
2. LOSS – NO loss shall be recognized.
· How to compute
· Realized gain = total amount of value received (stock and boot) – basis
· Recognize the amount of boot up to the amount of gain realized
