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Taxation of Business Enterprises
University of Kansas School of Law
Mazza, Stephen W.

Taxation of Business Enterprises
Mazza Fall 2016
 
 
Introductory Review Unit
 
Codes:
§1(a), (h) – Tax Imposed: Married Individuals, Maximum Capital Gains Rate
§11 – Tax Imposed: Corporations
§61(a)(3) – Gross Income Defined
§165(a)-(c), (f) – Losses
§1001(a)-(c) – Determination of Gain or Loss
§1011 – Adjusted Basis for Determining Gain or Loss
§1012 – Basis of Property (Cost)
§1016, (a)(2) – Adjustments to Basis
§1031(a)-(d) – Exchange of Property Held for Productive Use
§1211 – Limitations on Capital Loss
§1212(a)(1), (b) – Capital Loss Carrybacks and Carryovers
§1221 – Capital Asset Defined
§1222 – Capital Gains and Losses
§1223(1), (2) – Holding Period of Property
§1231, (a)(1), (a)(2), (a)(3), (b) – Property Used in Trade or Business
§1245(a)-(d) – Gain from Dispositions of Certain Depreciable Property
§1250(a)-(d) – Gain from Dispositions of Certain Depreciable Property
 
Skim:
§199
 
Regs:
§1.1012-1(a)
§1.1031(a)-1(a)-(c)
§1.1245-1(b), (d)
 
 
Review
Realization, Gains, Losses and Basis
61(a)(3) – GI includes gains from dealings in property
accession to wealth
Appreciation of Property does not = realization event
1001 – determination of gain or loss from the sale or disposition of property
(a) – is excess of AR over/under AB
(b) – AR = money + fmv of property received
(c) – recognized all gains and losses except as provided
1011 – AB
shall be the basis adjusted as provided in 1016
1012 – Basis = Cost
1.1012-1(a) – cost includes amount paid in cash or other property
1016 – Adjustments to Basis
for Capitalization and Depreciation primarily
165 – Losses
(a) are deductible if not compensated for o/w
(b) basis for det. Loss is AB
(c) limitation on losses of individuals to
trade/bus
transactions for profit, not connected w/ trade/bus
losses of prop not connected w/ trade/bus or profit transaction, if they arise from fire, storm, shipwreck, or other casualty, or theft
Characterization
1(h) – Maximum Capital Gain Rate
5% for those in tax bracket less than 25%
15% for everyone else
25% of unrecaptured 1250 gain
28% of Collectibles and 1202 Gain
Qualified Dividends taxed as net capital gain
11 – Tax Imposed on Corporations
§1 applies only to individuals
Corporations do not have a capital gains preference!!
NOTE: Characterization of the assets is still important to determine losses (just not gains/income rate)
Max Corporate Tax Rate = 35%
165(f) – capital losses allowed only to extent in 1211 & 1212
DO NOT NEED TO WORRY ABOUT THIS!
199 – Income attributable to domestic production activities
1211 – limitation on capital losses
Corporations – only to the extent of gains from such sales and exchanges
Other TP’s – same as Corp. plus up to 3000 of the excess
1212 – Capital Loss Carryovers & Carrybacks
(a)(1) – Corporations – Corp w/ any NCL shall be treated as a STCL in each taxable year it is carryover or carryback
Capital Loss excess for corps carry back for 3 yrs. If you can’t use them – then the losses will carry forward (over) for 5 yrs
Carrybacks would require an amended tax return
(b) – Other Taxpayers – NSTCL and NLTCL excess over the NLTCG and NSTCG respectively shall be STCL and LTCL in succeeding years.  Carryovers indefinitely
1221 – Definitin of Capital Asset (defined by exclusion)
Capital asset = prop. acquired & held by taxpayer for > 1yr. whether or not connected w/his trade/business
Does include property held for investment
Does not include
(a)(1) inventory type property, prop held primarily for sale
(a)(2) Depreciable property or RE in trade/bus, but see § 1231
(a)(3) self created, literary, musical, or artistic composition or whose basis in prop was determined in whole/part by reference to the basis of the prop in the hands of a person who created it (no inter vivos gift, but bequest ok)
except musical § 1221 (b)(3)
(a)(4) Accounts/note receivable acquired in ordinary course of business or from the sale of prop in (1)
wuld not include promissory note for land purchased for investment
(a)(5) publication of US gov’t received other than by purchase
Gains are not important for Corporations, but losses are.
1222 – Definition of terms; Capital Gains and Losses
1223 – Holding Period of Property
(1) HP tacks for exchange basis property, either capital assets or 1231 property
(2) HP tacks if property acquired is the same as the transferor if basis is the same as the transferor.
1231 – Pro

nceptual Models
Aggregate – business itself is not treated as a separate taxable entity; each owner is taxed individual his distributive share of the org income and deductions
Entity – bus org is a separate taxable person
Subchapters
K – Taxation of P’ships; applies to GP, LP, LLP, LLLP, and LLC’s; uses both entity and aggregate model
P’ship = 2 or more owners
C – Corporations; follows entity model;
Double taxation regime – taxed when earned and distributed as dividends
Why?  Public Stock Exchange, Practical matters, Limited liability, federal regulation preserves this; Benefits Theory
Can reduce 2x tax impact by
Payout earnings in a deductible manner
Salaries, problematic b/c of 162 and reasonable compensation req’s
Fringe benefits
Health insurance, pension plans
SH leased prop to Corp
SH loans money to Corp, Int pmts are deductible
Corp could also hold on to the earnings and put them back into Corp
Fall into an S-Corp status
S – closely held corporations taxed under a conduit approach similar to tax on p’ships
Eligibility requirements are found under section 1361; strict req’s
One class of stock, not more than 100 s/h’s, all US residents
Not taxed double like a C Corp
Unincorporated = Sole Proprietorship, P’ship, LLC
LLC treated like a p’ship for tax purposes
Can alos make disproportionate distributions unlike an S corp
Mgmt can be by members or by a mgr/s
Disregarded entity – single member entity, taxed as a SP
Tax Classification of Business Enterprises
Check the box  – default is p’ship for unincorporated entities, unless it elects to be a C corp
apply only to entities that are separate from their owners
certain business entities are automatically corps
Single owner can still elect to be treated as a Corp