Corporate Taxation Outline

The C Corporation as a Taxable Entity
The Corporate Income Tax
             I.      “C Corporations”
a.      Aggregate versus entity theory
b.      One level of tax under Subchapter K
c.       Double taxation of C Corporations
                                                              i.      Two levels of tax
1.      One at the corporate level and one at the individual level
 
          II.      Example of the Corporate Income Tax Calculation
a.      Emil and Betty – individuals
b.      Boots, Inc. – corporation
c.       Boots, Inc. experiences the following items of income and loss during the taxable year:
 
Gross Income
Inventory Sales
$2,500,000
Dividends (own < 1%) 100,000 Capital Gains 200,000 Gross Income $2,800,000   Deductions Operating Expenses § 162(a) $730,000 Depreciation § 167(a) 875,000 Net Capital losses § 1211(a) 200,000 Dividends Received Deductions § 243 70,000 Total Deductions $1,875,000   Taxable Income Gross Income $2,800,000 Deductions 1,875,000 § 63(a) Taxable Income $925,000   § 11(b) Corporate Tax Liability 15% x $50,000 $7,500 § 11(b)(1)(A) 25% x $25,000 6,250 § 11(b)(1)(B) 34% x $25,000 34% x $825,000 $950,000 8,500 11(b) Flush 280,500 § 11(b)(1)(C) $314,000 Total Liability $302,750 Note: after $10 million, tax bracket is 35%   After Tax Income Net Income $925,000 Tax Liability 302,750 After Tax Income $622,250     d.      What result if Boots distributes $622,250 (1/2 each) to Emil and Betty as dividends?                                                               i.      Emil and Betty each will have a $311,125 dividend which is includible in gross income                                                             ii.      The combined corporate rate of approximately 34% and shareholder level taxes on dividends at lower capital gain rates (15%) results in a combined tax rate of approximately 49% on the income                                                           iii.      Note: if had been a partnership, not called a dividend 1.      Not tax consequence for distribution if not in excess of outside basis (reason to form a partnership instead of a corporation) e.       What result if instead of paying dividends Boots pays Emil and Betty salaries of $462,500 (e.g. all $925,000 net corporate income) each during the year?                                                               i.      Net income of corporation goes to zero                                                             ii.      No earnings and profits; therefore, no taxes                                                           iii.      Key: call distribution a salary instead of a dividend                                                           iv.      Issue: whether salary is reasonable?          III.      Classification: Corporations v. Partnerships – “Check the Box” a.      Reg. § 301-7701-2(b)(1): A business entity organized under a federal or state statute, or under a statute of a federally recognized Indian tribe, if the statute describes or refers to the entity as incorporated or as a corporation, body corporate or body politic… b.      Note: 301-7701-2(b)(8): foreign entities in general                                                               i.      Use to determine if corporate entity                                                             ii.      “SA” indicates foreign corporation   Recognition of the Corporate Entity              I.      Commissioner v. Bollinger a.      Facts                                                               i.      Bollinger (B), respondent, developed individually or in partnership with other respondents 8 apartment complexes                                                             ii.      B initiated development by engaging Bank to provide financing for the land                                                           iii.      Bank agreed to provide financing to “the corporate nominee of Jesse C. Bollinger, Jr.”                                                           iv.      The loan commitment was structured this way because Kentucky usury laws allowed for a higher rate of interest where there is a corporate versus an individual borrower                                                             v.      B incorporated Creekside, Inc. and entered into a written agreement which provided that Creekside, Inc. would hold title to the apartment complex as B’s agent for the sole purpose of securing financing                                                           vi.      Upon completion of construction, B hired a manager to rent and maintain the properties                                                         vii.      Manager deposited all receipts into a paid operating expenses from an operating account, which was first opened in the name of Creekside, Inc., but later changed to Creekside Apartment, a partnership                                                       viii.      The operation of Creekside Apartments generated losses for the first 4 years and ordinary income for the next 4 years b.      Issue: whether can set up this corporation as an agency and avoid the taxes or whether for tax purposes the corporation should be disregarded as and agency c.       Title to the land and building is held by the corporation d.      G/R: when own property, the owner of the property would get the income e.       Moline v. Commissioner                                                               i.      Even with one shareholder with total control over the corporation, could still be a separate entity f.       Commissioner: argued not a principle/agency relationship – it was a corporation and the corporation should be taxed on the income g.      Bollinger: argued even though title was by corporation, the purpose was to get the loan – therefore, partnership receiving income and losses (which would avoid double taxation if corporation) h.      Holding: corporation is an agency (partnership)