Tax II
Professor Laro
Spring 2008
Introduction
· For tax purposes form does not always count. Substance is what matters. Substance trumps form.
o Every word in the code means something. Judges look at all the words and punctuation to figure out what the code means
· Taxes
o Rates
§ 0-50K = 15%
§ 50.001-75K = 25%
§ 75.001-10M = 34%
§ 10M+ = 35%
o Corporations with over 18,333,333 are taxed at a flat rate of 35% for all their income due to §11(b)’s bubble and 5% additional tax.
o §11(b)(2) denies the benefit of the lower rates to any qualified personal service corporation,
§ As a result incorporated service providers are taxed at a flat rate of 35% of all their taxable income.
§ A qualified personal service corporation is a corporation substantially engaged in the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing acts, or consulting, if substantially all of the corporation’s stock is held (directly or indirectly) by employees performing services for corporation, retired employees or the estates of employees or retirees.
o Virtually all of a corporations ordinary expenses in the pursuit of profit are deductible under Section 162.
§ To prevent multiple taxation as earnings bend their way through a chain of corporations, corporate shareholders generally are entitled to deduct 70% or in some cases 80 or 100% of the dividends they receive from other corporations
§ Publicly traded corporations may not deduct more than 1M per year for otherwise reasonable compensation paid to certain high level executives. IRC §162(m)
· Does not includes stock options and other types of performance based compensation
o Capital Gains/Losses
§ Corporations may deduct capital losses only to the extent of capital gains during the taxable year.
· Although the excess may be carried back for 3 years and carried forward for 5 years.
· In contrast individuals can deduct 3K of capital losses against ordinary income and can carry forward losses indefinitely.
o Domestic Production Activities
§ The 35% tax rate will be reduced by 3-9% when the §199 deduc
rom the desire to reduces US income taxes
§ Realization of income by tax-indifferent facilitators, such as foreign affiliates, domestic corporations with soon to expire loss carryovers and tax exempt organizations
§ Reliance of the literal language or ambiguities in the IRC to support a result that may be technically defensible but is inconsistent with the spirit of the law and well accepted tax principles
§ Marketing of transactions under a veil of secrecy by entrepreneurial accounting firms and investment banks in exchange of enormous fees
§ Inconsistent treatment for financial accounting and tax purposes of items resulting from the same transaction and
o Methods to combat the use of tax shelters
§ Disallowance of tax benefits derived in certain types of listed transactions
§ Heightened disclosure requirements
§ Enhanced under payment penalties
