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Federal Income Tax
University of Missouri School of Law
Hood, Edwin T.

PROBLEM I

Choice of Entity

Hood: Chapter 1

1. Be prepared to discuss the tax and nontax advantages of a C corporation, a S corporation, a general partnership and a limited partnership.

See Hood, § 1:01-03, p. 1-13

TAX ASPECTS

ENTITY

ADVANTAGES

DISADVANTAGES

SOLE PROPRIETORSHIP

NO DOUBLE TAXATION

Tax attributes passed through to shareholders

– Capital assets (such as goodwill)

– Ordinary assets (such as personal property)

This pass through nature can also be a disadvantage (income must be recognized)

Can transfer assets in/ out of the business without too many problems

Fringe benefits can be similar to C corps’ (but they are not identical)

There are limitations on certain benefits (e.g., health insurance deduction limited for owners; other benefits only available to EEs)

GENERAL PARTNERSHIPS

A flow through entity

– Income, losses

– Note: losses only deductible to extent of basis

– Character of assets

Fringe benefits not deductible to partners because they aren’t deemed an EE (rather, thought of as self-employed)

Flexible transfers in/out of the partnership (provided pro rata (thus avoiding any tax consequences))

In determining partner’s basis, can add distributive share of partnership liabilities to tax basis

Special allocations

– Can allocate losses any way desire (must have substantial economic effect)

Sale of partnership interest is LTCG

LIMITED PARTNERSHIPS

For our purposes here, there are no significant tax differences between general and limited partnerships.

LIMITED LIABILITY CO.

Taxed as a partnership, so all benefits and drawbacks are applicable here also.

CORPORATIONS

DOUBLE TAXATION

– Profits to corporation

– Profits to owners

Mitigation:

– Salaries

– Fringe benefits

– Sale and lease-back

– Interest on shareholder held debt (interest is deductible to corp, but taxable to s/h: thus, only 1 tax

ld solve some of these problems)

Limited resources

– Financial

– Advice

GENERAL PARTNERSHIPS

Pooling of resources

– Financial

– Mental

Loss of exclusive control

Spreading of risk

Unlimited liability (for general partners)

Simplicity of operations

– No written agreement necessary

– No filings with sec’y of state

– No fictitious name statement if using surnames of partners

– Costs to set up are less than for a corporation

– Must have separate checking account

– Must file information return with IRS

No continuity of business upon death, discharge, disability or insolvency of partner without agreement to contrary

Limited transferability of interest (i.e. can transfer proprietary interest but no management interest unless partners agree)

LIMITED PARTNERSHIPS