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Corporate and Partnership Tax
University of California, Hastings School of Law
Morse, Susan C.

AN OVERVIEW OF BUSINESS ENTERPRISE TAXATION
–          Legal Forms of Business Enterprise
o   Sole Proprietorship
§  A business owned and controlled by  single individual. Owners are personally liable for debts and claims against the business, and must report their business income and expenses on their individual tax returns
o   Partnership
§  An association of two or more persons to carry on as co-owners a business for profit.
§  Partnerships formed for a particular project or transaction à joint ventures
§  General partnership
·         General partners have a right to participate in partnership management
·         They are jointly and severally liable for all debts and obligations of the partnership
§  Limited partnership
·         Has both a general partner(s) and limited partners
·         Limited partners do not participate in management and are not personally liable for debts and obligations of the partnership
§  Limited Liability Partnership (LLP)
·         Operated as a general partnership, but all the partners obtain full or partial limited liability
o   Limited Liability Company (LLC)
§  Unincorporated entity in which the owners (“members”) have limited liability for the enterprise’s debts and claims even if they participate in management
o   Corporation
§  Legal entity formed under state law
§  Management authority à board of directors
§  Owners à shareholders don’t participate in management of enterprise, and are not personally liable for its debts
–          Business Enterprise Taxation Models
o   Conceptual Models
§  Pure aggregate
·         Business organization itself is not treated as a separate taxable entity; instead, each owner is taxed directly on his/her respective “distributive share” of the organization’s income and deductions
§  Aggregate/entity hybrid
·         Organization’s income is taxed under an aggregate theory but the entity is recognized for purposes of calculating the tax results of its operations, filing information tax returns, making tax elections, etc…
§  Entity
·         A business organization is a separate taxable person that must determine and pay tax on its annual taxable income
o   Taxing Regimes Under the Internal Revenue Code
§  Subchapter K (701-777)
·         General and limited partnerships, LLPs, LLLPs, and LLCs here
·         Partnerships are considered to be aggregates of their owners for some tax purposes and entities for others
o   Partnerships don’t pay federal income tax; the partners include their respective shares of partnership income, deductions, losses, and other items when determining their tax liability
o   Partnerships are treated as entities for purposes of selecting a taxable year, computing and characterizing partnership income, filling information returns, making elections, undergoing an audit by the IRS and in several substantive contexts, such as formation and termination, transactions between partners and partnerships, and sales of partnership interests
§  Subchapter C (301-385)
·         Corporations are treated as separate taxable entities
·         Subchapter C is a double tax regime
§  Subchapter S (1361-1378)
·         Certain closely held corporations may elect under Subchapter S of the IRC to be taxed under a conduit approach similar to the taxation of partnerships
o   The corporation’s income, losses, deductions, and credits pass through to its shareholders, but the character of those items is determined at the corporate level
·         Subject to a single, shareholder-level tax
§  Other Taxing Regimes
·         Subchapter M à investment companies and real estate investment trusts
·         Insurance
·         Banking
–          Tax Classification of Business Enterprises
o   In General
§  Section 7701 à A corporation includes an “association, joint-stocked companies, and insurance companies”
§  Thus, if an entity is an unincorporated “association,” it will be classified as a corporation
o

ade, business, financial operation, or venture and divide the profits therefrom.
·         Podell Case
o   Section 761(a) says that a joint venture is included within the definition of a “partnership” for purposes of IR laws
o   The fact that petitioner didn’t exercise as much managerial control over the day-to-day activities relating to the purchase, renovation, and sale of the real estate isn’t a sufficient reason for this Court to find against the existence of a joint venture; there was a “separate entity” (that was a partnership) and a profit motive, and therefore the income should be ordinary, not capital
·         Allison Case
o   Here, substance over form rules
§  Agreement said “Joint Venture Agreement”
§  However, there was a “lack of profit motive,” so the court found that there was no partnership
·         “No indication that the parties contemplated the subsequent joint sale of the lots or agreed to a procedure of dividing the possible profits”
–          The “Common Law” of Business Enterprise Taxation
o   Substance Over Form
§  The document used by the taxpayer may use one label, but the courts are not inhibited from examining the arrangement and restructuring it for tax purposes to comport with economic realities
o   Business Purpose
§  A transaction motivated by a business purpose usually is compared to one that has no substance, purpose, or utility apart from tax avoidance
o   Step Transaction Doctrine
§  Courts may sometimes combine (“step”) formally distinct transactions to determine the tax treatment of the single integrated series of events