Corporate Taxation Outline

Corporate Tax

Davis

Spring 2015

I. CHOICE OF BUSINESS FORM

(A) BUSINESS FORM OVERVIEW

i. Types

1. Sole proprietorship

2. Partnerships (GP, LP, LLP, LLLP, LLC)

3. Corporations (S-Corp, C-Corp)

ii. Non-Tax Factors in Choice of Form

1. Allocation of liability amongst members

2. Management structure – consider business type, owners’ objectives

(B) TAXING REGIMES

i. CENCEPTUAL MODELS

1. Aggregate – business organization not treated as an independent entity, but rather a PASS THROUGH ENTITY => all taxable income & deductions flow through to owners based on their distributive share – business does not file a return

2. Entity – business organization IS treated as an independent entity => business is taxed directly and must file its own return

3. Hybrid – business organization recognized as an independent entity only to extent of making certain tax elections, filing informational tax returns re. business results, and other limited purposes

ii. IRC MODELS

1. SUBCHAPTER K

a. Hybrid model

i. Business results – All income, deductions, losses and other items pass through to members

1. Limitation on deductibility of losses – members may only deduct losses to the extent of the respective member’s basis AND timing limitations may apply

ii. Elections – Business treated as independent entity for purposes of making elections regarding taxable year, computing and characterizing P/S income, filing informational returns, other elections

iii. Audits – business treated as independent entity for purposes of IRS audits

iv. Owners distributions – not recognized as a taxable event b/c owner has tax liability for their distributive share of business results regardless of whether distributions are made

2. SUBCHAPTER C

a. Entity model

i. Business results/elections/audits – all occur at entity level which is recognized as an independent entity

ii. Owners distributions (dividends/salary) – all distributions are taxable events for recipient owners

b. Policy Issue – Double Taxation

i. Applicable rate systems

1. §11 Tax rates apply at entity level to business results

2. Individual rates apply to all distributions and compensation paid to owners

ii. Issue – no deduction is allowed on entity level for distributions made to owners, thus income to entity is first taxed at entity level and then again at owner’s level if and when such income is distributed in form of income

1. Reality – corporations generally pay an effective rate lower than that of their respective statutory rate AND owners are taxed at a rate lower than their respective statutory rate for qualified dividends they receive

a. Qualified dividends taxed at capital gains rate

3. SUBCHAPTER S

a. Note – certain subchapter C provisions may still apply

b. Hybrid model

i. See subchapter K above

c. Special requirements – Qualifying as a “small business corporation”

i. Must have 100 or less shareholders

ii. No shareholders may be nonresident aliens, certain trusts, or estates

iii. May not have more than one class of stock

4. OTHER MODELS

a. Subchapter M – regulated investment companies & REITS

(C) IRC CLASSIFICATION OF BUSINESS FORMS

i. Subchapter C/S – Corporations (S-Corp, C-Corp)

1. Corporation defined – §7701(a)(3): “includes associations, joint-stock companies, and insurance companies”

a. Applies to any business entity organized under a federal or state statute which refers to the entity as “incorporated” or as a “corporation,” “body corporate,” or “body politic”

i. Specific application to publicly traded P/S per §7704

ii. Applies to unincorporated entities which elect to be treated as corporations und