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Corporate Taxation
Temple University School of Law
Abreu, Alice G.

Corporate Tax – Constitutionality
–          Held constitutional by the Supreme Court in 1909 on the basis of indirect or excise tax
–          The corporation is itself treated as a taxpayer
o       Files its own tax return
o       Cannot deduct any dividends it pays
–          SHs are taxed only
o       upon the receipt of a dividend distribution
o       disposition of their stock
 
Who pays the corporate tax?
–          for federal tax purposes a corporation means any entity incorporated under the laws of any state
–          §7704 states that if you are a publicly traded partnership you will be taxed as a corporation no matter what your legal entity is
 
Double Tax
–          taxed once when earned and reported by the corporation
–          taxed a second time when distributed to the SH and reported as income on the SH return
–          §243 corporate SHs are usually entitled to a dividends received deduction [avoids triple taxation] o       can deduct 70%
o       100% if it is a qualifying dividend
§         Corporation is a member of the same affiliated group – this means same family – same parent corporation has to own at least 80% of the voting stock and 80% of the actual stock of the includible corporations
o       80% if the receiving corporation owns at least 20% of the stock of the distributing corporation 
 
Corporate Tax imposed by §11
–          the effective rate once you are over $100K is 35% [tables on page xiv] –          spikes in the tax rates insure this
–          if you have lower than 100K in income you get the benefit of the lower rates
–          for purposes of this class assume flat rate of 35%
 
Funding of Corporations
–          equity investment
o       §118(a) states that in the case of a corporation, gross income does not include any contribution to the capital of the taxpayer
§         Contributions must be made in the capacity of an investor and not as a current or future customer
§         Applies in situations where there is no promise given in return
§         Does not have to be the SH that makes the gift
o       §1032 provides that a corporation does not have income upon the receipt of payment for its own stock whether the stock is newly issued or treasury
§         Before 1954 a distinction was made and the corporation would have been taxed on the gain from treasury stock
§         Basis to corporation
·         Determined under §362
·         Carryover basis for appreciated property
·         If SH paid cash the basis for the stock purchased
–          debt investment
o       money or other property received in exchange for a corporation’s debt instrument is not income
o       corporation would have income from a discharge of indebtedness US v. Kirby Lumber [page

argument wasn’t made at board of tax appeals
–          If the sale was made by the corporation cannot then issue a liquidating distribution and have the SHs sell so as to avoid tax consequences  Commissioner v. Court Holding
–          If the SHs start the negotiations to sell for themselves and not for the corporation than this will work  US v. Cumberland
–          Congress enacted old §337 which stated you had a 1 year plan of liquidation if more than a year you would have to worry about the distinctions between Court Holding and Cumberland
o       This was repealed in 1986 – now the general rule is recognition at the corporate level
Taxability of Corporations on Distributions
–          -§311
o       (a) codified General Utilities in stating that no gain or loss shall be recognized to a corporation on the distribution (not in complete liquidation) with respect to its stock of
§         Its stock
§         Property
o       (b) states that if the property is appreciated than the gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its FMV