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

 
Taxation of Business Enterprises
Professor Mazza
 
Review
 
·         Realization, Gains, Losses and Basis
o        61(a)(3) – GI includes gains from dealings in property
§         accession to wealth
o        Appreciation of Property does not = realization event
o        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
o        1011 – AB
§         shall be the basis adjusted as provided in 1016
o        1012 – Basis = Cost
§         1.1012-1(a) – cost includes amount paid in cash or other property
o        1016 – Adjustments to Basis
§         for Capitalization and Depreciation primarily
o        165 – Losses
§         (a) are deductible if not compensated for o/w
§         (b) basis for det. Loss is AB
§         (c) limitation on losses of ind’s to
·         trade/bus
·         tx’s for profit, not connected w/ trade/bus
·         losses of prop not connected w/ trade/bus or profit tx, if they arise from fire, storm, shipwreck, or other casualty, or theft
·         Characterization
o        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
 
Formula – § 1(h)(3)
1.       ANCG = NCG (w/o QDI) minus [unrec. § 1250 gain + 28% rate gain] + QDI
 
 
                          =NLTCG – NSTCL                                        [Coll’s Gain + 1202 Gain] – [Coll loss + NSTCL + NLTCL 1212]  
 
=LTCG – LTCL                                   =STCL – STCG
 
o        11 – Tax Imposed on Corporations
§         1 applies only to individuals
§         no special rates for corporate capital gains
o        165(f) – capital losses allowed only to extent in 1211 & 1212
o        199 – Income attributable to domestic production activities
o        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
o        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
·         CL excess for corps carry back for 3 yrs, but can’s create or increase a net operating loss, if not or can’t then carry 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
o        1221 – Definition 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 h

d ordinary losses can be beneficial b/c they offset against ordinary income and 1211 limitation is NA
o        1202 Gain – Stock in C corp w/ assets of 50 million or less; sold by an individual TP can exclude half of it; limited to small start up businesses; the remaining half is taxed at 28% under 1(h)(7)
§         not real important
o        2 types of CG in this course – sale of stock or share (ie, p’ship interest) in corporation
 
Overview of Business Enterprise Taxaxtion
 
First 2 are C Corp; dividends where one is taxed as ordinary income and the other as Qualified Dividend income
 
X                                                          Div taxed as OI          QDI                       Pass Thru Entity
Entity Earnings                                      1000                             1000                       1000
Tax (35%)                                            350                               350                         0               
Distr to Investors                                   650                               650                         1000
Ind Level tax                                         227.50 (35%)                197.50 (15%)          350 (35%)
Net to Investors            422.50 552.50 650