CORPORATE TAXATION; BEALE, WINTER 2017
DO NOT TAKE THIS COURSE, DROP OUT NOW!
Key
CG= capital gains
G= gain
L= loss
G/L= gain or loss
/ = or
G&L= gain and loss
BIL= built in loss
BIG= built in gain
Corp.= corporation
GAAP= Generally accepted accounting principles
E&P= earnings and profits
CEP= current earnings and profits
AEP= Accumulated earnings and profits
SH= shareholder
Div= dividend
Prop.= property
Distro.= distribution
FAR= Family Attribution Rule
PoV= point of view
FMV= fair market value
Liq= liquidation/liquidating
Liqs= liquidations
AB= adjusted basis
NQPS= nonqualified preferred stock
DRD= Dividends-received deduction
HP= holding period
§= section
NOL= net operating loss
Sub= Subsidiary
SubCo= subsidiary company
Diff= different
Econ= economic
Reorganizations= reorg
NOLs = net operating losses
CLs =capital losses
Recapitalization= recap
AR= amount realized
Certificate of deposit= CD
Ded.= deduction
Reg.= regulation
Q= question
Amt.= amount
Orig.= original
T=Target
S= seller
Biz= business
P= purchaser
ADSP= aggregate deemed sales price
AGUB= adjusted grossed-up basis
BP= business purpose
QPS= qualified stock purchase
Jur.= jurisdiction
LP= limited partnership
How the code is set out (TOC):
Section §
Subsection (a)
Paragraph (1)
Sub-paragraph (A)
Clause (i)
Sub-clause (I)
______ Flush-language ____
I. Introduction to Corporate Tax
A. Overview of Entity Taxation and the Corporate Tax Rate Structure
What is income tax?
income minus deductions & exclusions = GI
net income (not gross income tax) = taking away some things
Q of what things we can take away, how is that determined? == The code & regulations
A lot of what we leaned was for individuals, but here we are talking about corps. === they are different, they have subsidiaries, etc.
S-corps= NOT COVERED
Consolidated groups= NOT COVERED extensively
Corps are subject to the classic regime of corp taxation
=the potential for tax at the corp tax rate on corp earnings and tax at the individual’s rate on dividend distributions
1. The Classical Corporate Tax Regime and the Integrationist Alternative*
Integrationist Argument
There should only be one level of tax coming in when income comes in
When make distributions, then the TP is taxed also, the integrationist theory says that this is double-taxation= shareholders and corp pays taxes on the money coming out of the corp to the shareholders (this money is taxed twice)
Note: in the Beale book they do not use the term double taxation because it presupposes that this is bad
Note: Distribution is a mutual term; dividend is a technical tax term—it is only when the corp makes distributions out of earnings and profits, earnings and profits are also technical tax terms
E.g. when you have a nanny, you pay them out of your money, so you are taxed twice, they can choose to give them the money, yet they don’t complain about this double taxation
Integration ideas to stop the double taxation:
Tax corp more and no tax to shareholder + some deduction to the corp for dividend
Credit to shareholder and no tax to the corp—higher tax for the shareholder
Methods: deductions, credits, exclusions
In the Bush administration: the dividends were treated as net capital gains
Classical view
We started out w/ a corp tax and want a corp. tax
rights/privilege perspective under the constitution
Distribution distributive justice
Benefit received
E.g. you get roads
Corps are one of the heaviest receivers of the things that the gov provides with taxes
Double taxation is in many ways nonexistent
1 level is rare
e.g. doesn’t pay tax in another country, pretends pays tax there, then gets away with paying no taxes
Corps are regarded for most part as entirely separate legal entities, subject to tax on income, and shareholders are considered to be receiving income fully subject to tax when they receive distributions from corps out of corp. earnings*
They are separate
Sub. C sets out the rules for implementing this classical regime **
This is where all the rules for corp.s specifically is ****
Subchapter A is for individuals/married individuals/heads of household/etc.—–some things in here apply to corps., but the Sub-C is for corps specifically
Applies to entities that have charters as “corps” and certain other entities that are treated as corps for tax purposes.
Integrationist v. Classical
Schwartz discusses this
The Republican party for a long time said that only ppl can be TPs= the entity should not be taxed because that results in double taxation, therefore u should have an integrated system, and have only 1 layer of tax
That could be taxed in the next 5 minutes
Very hard to determine for sure
Impact on the choice of legal form
Ppl will just move to another form
Is that convincing
Integrationist: you have transitioning so they won’t do it that readily
Classical: so what, there are reasons u want to do one or the other, the code says u choose, that doesn’t argue why u should or shouldn’t have a tax
Impacts the form u use money
If u have debt, on a bond, you have interest, it was an expense of the biz, so then u get to deduct them!
Dividends from earnings are not deductible, but interest IS deductible
Integrationist: Pushes corps to borrow more money
Classical: there are ways u can take care of that, u can limit interest deductibility
Whether distribute $ or not
à you can say all these things call for integration, or u can fix one of the issues
Pass through: owners of interests in pass through entities report their share of the pass-through entity’s earnings on their individual tax returns
Include LPs, LLLP, LLC
Pass through treatment not available if a market exists in their interest, except in certain partnerships w/ mostly passive income §7704 (publically traded partnership rules)
All gains
billionaires should pay more b/c $1 to them is penny to us
Yes our tax system is progressive, but it is not
When it first came in, the top bracket was taxed at 70%, and now they are taxed at much, much less, and the poor were not taxed—much less progressive system than what we had in the 60s or 70s
Horizontal equity
Similarly situated TPs
There is no such thing as ‘same’
We are at a meta-linguistics problem and a meta-social justice problem
Do we mean someone who is feeding 5 people under the age of 5 or feeding just myself?
à all these things do is try to shift what is fair to another category
—so there is even less fairness for corps…..
how do u talk about corp. fairness
corp tax used to raise 40% GDP, but now it only raises 2%… so now that burden is taken on by individuals
(2) administrability (“simplicity”)
social justice issue
the complications with the code come when ppl try to avoid taxes, then Cong. writes a provision to cover that point, then they try to go through another hole
the way the tax code gets complicated is that ppl do things
you have to account for different things
we don’t audit enough—there should be more ppl audited, huge cuts
who should this be simple for?? Low income individuals! They can’t hire tax lawyer, and they probably don’t have enough education
institutional justice
(3) efficiency
economics concept (economic justice?)
want to avoid tax distortions….is that possible??
Deadweight loss tax
E.g. tax on soda
One outcome is get revenue because ppl drink soda
Other outcome is ppl drink less soda because it is bad for you, so this will have good outcomes for health and in the future less costs for the gov= good long-term plan
If u believe either outcome then NOT deadweight loss
Is this a reasonable tax?
Workable?
Studies after enact law
We also want corps to be competitive
Tax classification of biz enterprises
Corporation defined – §7701: “includes associations, joint-stock companies, and insurance companies”
Corps v. partnerships
Check-the-box regulations §7701 [12, Schwarz]* [p.721 of IRC book]
Most new unincorporated entities will automatically be classified as partnership’s unless the entity elects to be an association taxable as a Sub-C corp.
How do we determine if it’s an corp or partnership?
There used to be a factor test
