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

C = Corporation
TP = Taxpayer
SH = Shareholder

CORPORATE TAXATION

OUTLINE

I. FORMATION OF A CORPORATION

· Corporate Capital Structure

o The Corporation’s Income: Debt versus Equity
· Cs receive investment funds either by,
ú Equity; or
§ Investors purchase shares of stock in C.
o Different levels of shares: preferred, voting, non-voting.
o Not preferred to debt holders but SHs are entitled to residual assets after creditors take upon liquidation of C.
o Greater risk, which yields unlimited rate of return.
ú Debt.
§ Investment through bonds, lenders or liens on property.
o Considered preferred or senior to equity interest because C is obligated to pay lenders before SHs.
o Rate of return is fixed to the principal and rate of interest.
· To distinguish creditor-debtor relationships from corporation-shareholder relationships, see Finhay case in notes.

· Incorporation: Shareholder Level

o Shareholder Non-recognition: §351
· SHs that engage in an incorporation transaction, i.e. transfer of assets to C in exchange for C’s stock, will not recognize any gain or loss on the exchange.

¨ §351 requires,
1. Contribution of property;
2. Solely in exchange for stock; and
3. Contributors must have control in C immediately after the exchange.

· Contribution of property;
ú Items not considered property are identified in §351(d), which include,
§ Services
§ Indebtedness; and
o Under §351(g) Nonqualified stock (nonqualified preferred stock) that has redemption features will be considered BOOT.
§ Interest of indebtedness.
· Solely in exchange for stock; and
ú Certain types of preferred stock do not qualify, such as.
§ Redeemable preferred stock; or
§ Nonqualified preferred stock, per §351(g).
o Can be treated as BOOT, if received by SH in addition to other stock received from C.
ú SHs may receive something in addition to stock, but will realize G to the extent of BOOT. [§351(b)(1)].
· Contributors must control the C immediately after the exchange.
ú Control defined in §368(c) requires,
§ 80% total voting power of stock; and
§ 80% total number of shares of stock.
ú The term “immediately,” includes anything that is momentary after the exchange.
§ In American Bantam Car Co., the TP Corp argued that they did not have control because they entered into an integrated plan, i.e. Doctrine of Step Transaction, which cost them to lose control one year after the transaction.
o In the Doctrine of Step Transactions, evaluate,
· Intent of parties;
· Time element;
· Ultimate result
· Interdependence of steps
ú Legal relations created by one transaction would be fruitless without the completion of the others.
o In Bantam Car, the court found that the underwriting agreement entered into was not an integrated plan because the shares were contingent and ownership remained with the incorporators until K conditions were satisfied.
ú Members of the Control Group
§ Nominal contributors will not be counted toward meeting the control test if the primary purpose of the nominal contributions was to qualify the subsequent contributors or §351 nonrecognition treatment.
o T.R. §1.351, which was aff’d by Kamborian case, where transferors of C had SH Trust buy small amounts of stock to get over the 80% control requirement. Otherwise control group held only 77%. Court held primary purpose of stock transfer was to qualify under §351 so recognition.

· Incorporation: Corporate Level

o Corporate Nonrecognition: §1032, §118
· C does not recognize G or L on the receipt of money or other property in exchange for stock. [§1032(a)].
· §118 provides that money or other property received by the C without issuing stock will not be taxed, except,
ú In aid of construction; or
§ For example, contributions to public utilities by transferors who stand to benefit from the contribution.
ú Any other contribution by a customer or potential customer.
· C would argue against §351 nonrecognition, if they wanted to get a stepped up basis, i.e. the FMV basis in the property. Otherwise under §362(a) the C gets the basis that is in the hands of the transferor, i.e. carry-over basis. Creates a conflict btw SH and C – SH wants nonrecognition but C wants recognition to receive FMV basis.

SHAREHOLDER [§351]

CORPORATION [§1032]

1. Does SH qualify under §351?
a. Contributed property solely in
exchange for stock, and
immediately after exchange, SH
or control group has control of C.
b. If so, qualify for nonrecognition
I. under §351.
II.

1. C has no G for receipt of property or cash
Received. [§1032]

III.
2. Basis to SH [§358] a. SH stock received will equal basis
in property transferred.

lizes ordinary income equal to the FMV of the stock
o At corporate level 2 options
· Services that are not capital in nature → corp. can deduct the FMV of the stock (§83(h))
· Services that are capital in nature → corp. will capitalize the value of the stock
· Transferring both property and services for stock → must bifurcate the transaction
· §351 treatment for property, §83 treatment for services
o Effect of Stock for Service on other Transferors
· §351 not defeated as to other parties unless transferor of services receives more than 20% of stock (b/c transferors would be in control of corp.)
· Transferor of service and property receives more than 20%
· Qualifies as transferor of property and stock received for services and stock received for property is counted regarding the control determination.
· Corporate Level
ú Stock in exchange for services to corporation whether during incorporation or after gets non recognition at corporate level pursuant to §1032.

II. DISTRIBUTIONS: NONLIQUIDATING

· Dividend Defined [§316]

¨ Dividend is any distribution of property made by C to SH,

accumulated e&p; or
current e&p.

· Earnings & Profits (“E&P”): General Concepts

o When computing e&p, begin with the C’s
· Taxable income;
ú To compute taxable income subtract deductible expenses from gross receipts.
· Then make upward and downward adjustments, as follows:
ú Upward Adjustments:
§ Exempt income, i.e. interest on certain bonds.
§ Differences in timing for e&p
o Time related e&p adjustments upon the method of accounting for taxable income. Examples include,
· §312(n)(5) – compute e&p as if installment method had not been used.
ú TP must add back any gain from the sale that has been deferred through use of installment method.
· Depreciation
ú §312(k) requires the C to compute depreciation on a straight-line method for e&p purposes.
§ C must add back the excess of accelerated over straight-line deprecation.
ú Downward Adjustments