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Corporate Taxation
Temple University School of Law
Ting, Jan C.

CORPORATE TAXATION

I. INTRODUCTION
A. Theories of Corporate Tax Law
1. Tax income earned at the corporate level two times
2. Interfere as little as possible with corporate transactions
B. Regular Corporate Income Tax
1. Two Levels of Tax
i. Corporate level – tax income when its earned by the corporation
ii. Shareholder level – tax income distributed to SH’s as dividends or in liquidation
2. C-Corporation: corporations which do not make an election under subchapter S (majority of corps)
3. S-Corp: corporation making election under subchapter S – pass through entities that are treated like partnerships
4. Rate Structure: § 11
i. Dividend treatment – §1(h)(11)
a. Dividends are ordinary income but taxed at capital gains rates (can’t use to offset capital losses but you get the preferential rate of tax – max rate is 15%)
5. Determining Corporate Tax
i. Similar to taxing individuals, but no itemized deductions b/c premise under §162(a) and §165(a) deductions is that all corps are engaged in trade or business
ii. Dividends Received Deduction – §243 – for inter-corporate dividends
iii. §1212(a) → capital losses allowed only to extent of capital gains with a 5 year carryover
iv. §1032 → corporation does not realize income upon the issuance or sale of its own shares for money, property or services
C. Corporate AMT
1. Doesn’t apply to S-Corps or small business corps
2. §55(a) provides for AMT
i. Corporation generally required to pay greater of regular tax or AMT
D. What is a Corporation?
1. Treas Reg §301.77-(b): any business organized as a corporation under state or federal law is automatically a corporation for federal income tax purposes
2. An entity classified as a partnership can elect to be taxes as a corporation – election required, otherwise default classification is partnership
3. §7701(a)(2) – defines partnership
4. §7701(a)(3) – defines corporation
5. Check the Box Regulations
i. Federal tax treatment doesn’t affect entity’s identity or obligations under local law
ii. Any business entity not required to be treated as a corporation for federal tax purposes (a.k.a. eligible entity) can choose its classification under Rules of Reg. §301.7701-3
a. If you’re incorporated or publicly traded you’re a corporation for federal tax purposes
b. Otherwise you can elect your classification (default is partnerhip)
c. LLC classification is taxpayer choice under check the box regs
§ Disregarded Entity: LLC with one owner, despite the status of the owner

II. FORMATION OF THE CORPORATION
A. §351: permits incorporation without recognizing gain and prevents the recognition of loss (policy: tax law should be neutral toward corporate transactions)
1. transfer of property to corporation must be exchanged solely for stock and the transferor must own 80% of the stock immediately after the transfer → §351(a)
2. §351(b) Boot Provision → if other property is transferred in addition to stock, gain is recognized to recipient to extent of amount of cash received plus fair market value of property received
i. loss is not recognized to recipient
B. Basis With Regard to Incorporation
1. §358 (shareholder’s basis)→ basis of stock received in exchange for property under §351 is equal to transferor’s basis in property
2. §358(d) → liabilities are treated as money for basis purposes (transferor’s basis decreased for stock received in the exchange)
i. However the assignment of liabilities is not boot and will not take a transaction out of §351 (unless tax avoidance purpose or liabilities assumed exceed basis of property transferred)
3. §362(a)(1) (corporation’s basis) → basis of transferred property in the hands of the transferee corporation equals the basis in the hand of the transferor (carry over basis)
i. §1032 – corporation does not recognize gain or loss on receipt of money or property in exchange for its own stock
C. Summary
1. Incorporation for the Individual (transferor)
i. Non recognition → §351 (gain to extent of boot)
ii. Basis → §358
2. Incorporation for the Corporation (transferee)
i. Non recognition → §1032
ii. Basis → §362 (increased by any gain realized by SH as a result of boot)
D. Effect of Boot
1. Cash Boot
i. Corporate Level: carry over basis from transferor plus gain recognized by the transferor
ii. SH Level: gain to extent of boot, basis in stock remains unchanged
2. Property Boot
i. SH Level: run transaction through §358
ii. Corporate Level: §362 carry over basis plus gain of the SH (what they get from SH plus the cost to get it)
3. Encumbered Property Boot
i. §357 excludes this boot from income (SH not totally discharged b/c liable via ownership in corporation – essentially the same economic pocketbook)
ii. SH’s basis i

right to the subsequent transfer of the stock
§ Placing shares in escrow following 351 exchange indicates complete ownership
b. Primary goal – organize new corporation
iv. Factual case by case determination of control
2. D’Angelo Association Inc. v. Commissioner – p. 111
i. FACTS: (trans1) Dr. transfers $15k cash to new corp. in exchange for 60 shares of stock – 10 shares to wife and 10 shares to each of 5 children (trans2) Dr. and Wife transfer property to corporation in exchange for $15k cash and assumption of Dr’s liability on a note
ii. ISSUE: basis of the transferred property – depends on whether §351 applies, which turns on the control requirement
iii. HOLDING: look to economic substance of the transaction, not the form
a. Corporation couldn’t exist without the transfer of property, so that transfer is part of the incorporation transaction
b. Corporation had not reason to issue to stock to the children except at the request of the Dr. → Dr. had immediate control and then made gifts to the children
3. Mojonnier and Sons v. Commissioner – note, p. 115
i. FACTS: father promises son and foreman stock when he incorporates, work for a few years and then incorporates the business, shares issued directly to son and foreman
ii. HOLDING: father had no immediate control, stock was not a gift but instead a reward for past service and transferred directly as a result of a past agreement
4. May Broadcasting Co. v. US – note, p. 116
i. Not a §351 exchange since sale of stock post incorporation was done pursuant to an existing contract (no immediate control)
5. National Bella Hess – note, p. 116
i. Unexercised option held by employees of transferee corp. to purchase stock from transferors did not prevent transferors from having control
6. Federal Grain v. Commissioner – note, p. 116
i. Control relates to ownership of stock rather than exercise of control via voting rights