Corporate Taxation Outline

Kahn corp tax fall2011
Corporate Tax
 
·       Introduction
o    Corp. treatment: (1) “entity” approach (C corporation), (2) “conduit” approach (partnership), or (3) (S corporation, trust or estate)
§  Corp. = foreign or domestic
o    C corporations
§  Advantages: ltd. liability, continuity of interest, centralization of mgmt., transferability of shareholder interests, diversification of ownership types, easier to sell interest to public, useful nonrecognition provisions, advantageous deferred comp. provisions, fringe benefits
§  General treatment: tax on every dollar of income not reduced by specific deduction
·           Many same deductions as individuals (e.g., § 212), although some sections apply only to corps. (e.g., § 219)
·           Some nonrecognition provisions (defer taxation)
§  Special tax rates (35% max nominal, but also surtaxes) ~ page 3 for table
·           EXCEPT: personal service corp. taxed at 35% on all income § 11
§  Inapplicable: itemized/nonitemized deductions, AGI, §§ 67-68 lims. on deductions, std. deduction, preferential capital gains treatment, election to use cash receipts & disbursements method of accounting § 448
§  No deduction for shareholder distributions on account of stock Þ double taxation
·           Effects can be reduced w/closely-held corporations
·           Harbenger shift: double tax on corps. Þ more capital into partnerships, increase price of corp. goods
·           Movement in Eur. to integrate corp. & ind. taxes (shareholders take credit), but not so much in USA (no corp. support)
§  Dividends: taxed at capital gains rates (until 2013) to encourage capital investment, reduce double tax
o    Corporation = “associations, joint stock companies, and insurance companies” § 7701(a)(3)
§  What is “association”? Much litigation (Morrissey (S. Ct. 1937) ~ “resemblance test”)
§  Since 1997 Þ “check the box” regs.
·           Eligible entity = (1) treated as bus. entity for fed. income tax, (2) not classified as corp. by § 301.7701-2
¨      Non-eligible: incorp. orgs., ins. cos., certain foreign entities, REITs, publicy-traded partnerships treated as corps. by § 7704
·           If 2+ members Þ corp. or partnership (default)
·           If 1 member Þ corp. or “tax nothing” (default)
·       § 301 Distributions to Shareholders
o    § 301 distribution = amt. of money + FMV of prop. in kind received by shareholder § 301(b)(1)
§  Reduced (but not below zero) by sum of liabilities assumed by shareholder pursuant to distribution § 301(b)(2)
·           Recourse liab. assumed only when transferee accepts obligation, nonrecourse automatically transfers § 1.301-1(g)
o    Dividend = distribution to shareholder out of e & p § 316(a)
§  Current e & p (for the given taxable yr.) first allocated pro rata to all distributions made that yr.
·           Allocated first to preferential-rights stock Rev. Rul. 69-440
·           If remainder Þ allocate accumulated (post-02/28/1913) e & p in chronological order of distribution
·           Std. only used to determine div., otherwise just use accumulated
§  Negative e & p: if accumulated Þ treat as 0 for div. purposes
·           If current Þ deduct from accumulated pro rata (up to that point in yr.) or actual loss if known
§  Tax at preferential rates (capital gains 15%), but otherwise treat as ordinary I (cannot deduct capital losses except up to $3K § 1211(b))
·           Only qualified div. from domestic corp. (except tax-exempt one or mutual savings bank) or lim. class of foreign corps.
§  Dividend-received deduction for corp. shareholders
·           Ordinarily 70% § 243(a)(1) Þ 30% of div. taxed to shareholder
¨      80% if corp. shareholder owns 20%+ of voting rights and value of outstanding stock § 243(c)
¨      Ltd. by § 246(b)
·           100% if divs. paid among members of “affiliated group” §§ 243(a)(2), (3)
·           Holding period lims. (generally 45 days) § 243(c)
·           § 246A limitation on deduction where portfolio stock debt-financed
o    Extraordinary div. (beyond certain basis threshold) to corp. shareholder holding stock < 2 yrs Þ reduce basis or recognize additional I § 1059 o    Disguised/constructive dividend = when closely held corp. confers benefit on shareholder §  Examples: bargain sale, loans w/no intent to repay, unreasonably large salary or bonus to shareholder-employee (no § 162 deduction for excess) ·           Fact-specific inquiries, but cts. should be wary of policing reasonability of salaries Exacto Spring Corp. v. Comm’r (Posner, J.) // KAHN: “zone of reasonableness” §  Rev. Proc. 67-14: waiver-of-divs. transaction legit. where bona fide bus. reason exists & relatives poised to benefit receive < 20% of total divs. distributed to nonwaiving shareholders o    Earnings & profits: not defined in IRC, guidelines under Rev. Proc. 75-17 §  Purpose: measure amts. available for distribution w/out impairing capital, use same accounting method as for taxable I §  If gain/loss recognized Þ increase/decrease e & p § 312(f)(1) ~ if deferred Þ no e & p when realized ·           If permanent exclusion from I Þ when realized ·           Deduction of NOL or capital loss carryover not reduce e & p §  If discharge of indebtedness Þ increase e & p, except to extent tax attributes reduced by § 108 § 312(b)(1) §  If § 301 distribution Þ reduce e & p but not below 0 § 312(a) ·           Distribution in excess of e & p Þ (1) reduce basis of stock (applied pro rata to all shares held in same class, Prop. § 1.301-2(a)), (2) treat remainder as capital gain from sale or exchange of prop. (applied individual to ea. share, not pro rata) § 301(c)(3) ·           Unappreciated prop. Þ reduce e & p by basis § 312(a)(3) ·           Appreciated prop. Þ increase current e & p by amt. of appreciation, then decrease accumulated e & p by FMV § 312(b) ·           Must account for reduction if prop. taken subject to liab. § 312(c) §  If stock distribution to which § 301 applies b/c of § 305(b) Þ reduce e & p by FMV § 1.312-1(d) ·           If § 301 not apply Þ no effect on e & p § 312(d) §  If installment sale Þ entire gain added to e & p in yr. of sale § 312(n)(5) §  Depreciating tangible prop. Þ for e & p purposes use alt. MACRS depreciation system in §§ 168(g)(2), (3) § 312(k)(3) Þ diff. basis for gain/loss §  20% corp. shareholder Þ §§ 312(k), (n) not apply when determining whether § 301 dist. is div. or return of capital § 301(e) ·           Distributing corp. must maintain 2 separate e & p accounts o    Recognizing gain/loss on distribution §  DEFUNCT General Utilities doctrine: recognize no gain or loss on making distribution in kind §  If appreciated prop. distribution Þ recognize gain as if sold for FMV § 311(b)(1) §  If depreciated prop. Þ recognize no loss § 311(a) §  No gain/loss for distribution of own stock or debt instrument §  If part-sale/part-distribution Þ allocate basis Honigman v. Comm’r (CA6 1972) ·           KAHN: wrongly decided, parallel w/part-gift/part-sale §§