749Corporate Tax Outline New PDF

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Full outline for Corporate Taxation Law course. Use to study for exam. Contains all notes from lecture and reading. It's a pretty difficult course; a lot more difficult and time consuming than Federal Income Tax. You'll want a good outline to help you do well. ...

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Corporate Tax  Introduction o Corp. treatment: (1) “entity” approach (C corporation), (2) “conduit” approach (partnership), or (3) (S corporation, trust or estate)  Corp. = foreign or domestic o C corporations  Advantages: ltd. liability, continuity of interest, centralization of mgmt., transferability of shareholder interests, diversification of ownership types, easier to sell interest to public, useful nonrecognition provisions, advantageous deferred comp. provisions, fringe benefits  General treatment: tax on every dollar of income not reduced by specific deduction  Many same deductions as individuals (e.g., § 212), although some sections apply only to corps. (e.g., § 219)  Some nonrecognition provisions (defer taxation)  Special tax rates (35% max nominal, but also surtaxes) ~ page 3 for table  EXCEPT: personal service corp. taxed at 35% on all income § 11  Inapplicable: itemized/nonitemized deductions, AGI, §§ 67-68 lims. on deductions, std. deduction, preferential capital gains treatment, election to use cash receipts & disbursements method of accounting § 448  No deduction for shareholder distributions on account of stock  double taxation  Effects can be reduced w/closely-held corporations  Harbenger shift: double tax on corps.  more capital into partnerships, increase price of corp. goods  Movement in Eur. to integrate corp. & ind. taxes (shareholders take credit), but not so much in USA (no corp. support)  Dividends: taxed at capital gains rates (until 2013) to encourage capital investment, reduce double tax o Corporation = “associations, joint stock companies, and insurance companies” § 7701(a)(3)  What is “association”? Much litigation (Morrissey (S. Ct. 1937) ~ “resemblance test”)  Since 1997  “check the box” regs.  Eligible entity = (1) treated as bus. entity for fed. income tax, (2) not classified as corp. by § 301.7701-2  Non-eligible: incorp. orgs., ins. cos., certain foreign entities, REITs, publicy-traded partnerships treated as corps. by § 7704  If 2+ members  corp. or partnership (default)  If 1 member  corp. or “tax nothing” (default)

 § 301 Distributions to Shareholders o § 301 distribution = amt. of money + FMV of prop. in kind received by shareholder § 301(b)(1)

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Reduced (but not below zero) by sum of liabilities assumed by shareholder pursuant to distribution § 301(b)(2)  Recourse liab. assumed only when transferee accepts obligation, nonrecourse automatically transfers § 1.301-1(g) Dividend = distribution to shareholder out of e & p § 316(a)  Current e & p (for the given taxable yr.) first allocated pro rata to all distributions made that yr.  Allocated first to preferential-rights stock Rev. Rul. 69-440  If remainder  allocate accumulated (post-02/28/1913) e & p in chronological order of distribution  Std. only used to determine div., otherwise just use accumulated  Negative e & p: if accumulated  treat as 0 for div. purposes  If current  deduct from accumulated pro rata (up to that point in yr.) or actual loss if known  Tax at preferential rates (capital gains 15%), but otherwise treat as ordinary I (cannot deduct capital losses except up to $3K § 1211(b))  Only qualified div. from domestic corp. (except tax-exempt one or mutual savings bank) or lim. class of foreign corps.  Dividend-received deduction for corp. shareholders  Ordinarily 70% § 243(a)(1)  30% of div. taxed to shareholder  80% if corp. shareholder owns 20%+ of voting rights and value of outstanding stock § 243(c)  Ltd. by § 246(b)  100% if divs. paid among members of “affiliated group” §§ 243(a)(2), (3)  Holding period lims. (generally 45 days) § 243(c)  § 246A limitation on deduction where portfolio stock debt-financed Extraordinary div. (beyond certain basis threshold) to corp. shareholder holding stock < 2 yrs  reduce basis or recognize additional I § 1059 Disguised/constructive dividend = when closely held corp. confers benefit on shareholder  Examples: bargain sale, loans w/no intent to repay, unreasonably large salary or bonus to shareholder-employee (no § 162 deduction for excess)  Fact-specific inquiries, but cts. should be wary of policing reasonability of salaries Exacto Spring Corp. v. Comm’r (Posner, J.) // KAHN: “zone of reasonableness”  Rev. Proc. 67-14: waiver-of-divs. transaction legit. where bona fide bus. reason exists & relatives poised to benefit receive < 20% of total divs. distributed to nonwaiving shareholders Earnings & profits: not defined in IRC, guidelines under Rev. Proc. 75-17  Purpose: measure amts. available for distribution w/out impairing capital, use same accounting method as for taxable I  If gain/loss recognized  increase/decrease e & p § 312(f)(1) ~ if deferred  no e & p when realized  If permanent exclusion from I  when realized  Deduction of NOL or capital loss carryover not reduce e & p

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If discharge of indebtedness  increase e & p, except to extent tax attributes reduced by § 108 § 312(b)(1)  If § 301 distribution  reduce e & p but not below 0 § 312(a)  Distribution in excess of e & p  (1) reduce basis of stock (applied pro rata to all shares held in same class, Prop. § 1.301-2(a)), (2) treat remainder as capital gain from sale or exchange of prop. (applied individual to ea. share, not pro rata) § 301(c)(3)  Unappreciated prop.  reduce e & p by basis § 312(a)(3)  Appreciated prop.  increase current e & p by amt. of appreciation, then decrease accumulated e & p by FMV § 312(b)  Must account for reduction if prop. taken subject to liab. § 312(c)  If stock distribution to which § 301 applies b/c of § 305(b)  reduce e & p by FMV § 1.312-1(d)  If § 301 not apply  no effect on e & p § 312(d)  If installment sale  entire gain added to e & p in yr. of sale § 312(n)(5)  Depreciating tangible prop.  for e & p purposes use alt. MACRS depreciation system in §§ 168(g)(2), (3) § 312(k)(3)  diff. basis for gain/loss  20% corp. shareholder  §§ 312(k), (n) not apply when determining whether § 301 dist. is div. or return of capital § 301(e)  Distributing corp. must maintain 2 separate e & p accounts o Recognizing gain/loss on distribution  DEFUNCT General Utilities doctrine: recognize no gain or loss on making distribution in kind  If appreciated prop. distribution  recognize gain as if sold for FMV § 311(b)(1)  If depreciated prop.  recognize no loss § 311(a)  No gain/loss for distribution of own stock or debt instrument  If part-sale/part-distribution  allocate basis Honigman v. Comm’r (CA6 1972)  KAHN: wrongly decided, parallel w/part-gift/part-sale §§ 1.1001-1(e), 1.301-1(k) Ex. 1  § 267(a): no deduction for loss from sale/exch. of prop. btwn. family, ind. & 50%-owned corp., 2 corp. members of same controlled group, but § 267(d)  insulate transferee from gain  § 291(a): recognize gain if excess over real prop. subject to depreciation under §§ 1245, 1250 

 Distributions in Redemption of Stock o Stock redemption = corp. not in liquidation buys own stock from shareholder in exchange for prop.  Treat entire amt. paid in redemption as § 301 distribution unless specific statutory exemption under § 302(b) § 302(d)  If § 302(b) exception  “purchase” (distribution – basis = cap. gain/loss)  Individuals: pre-JGTRRA prefer purchase but now less salient, corp.: generally prefer div. treatment b/c div.-received deduction

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If § 301 distribution in stock redemption  unused basis  Currently: unused basis allocated to other stock in corp. held by same shareholder (but unclear how allocated) § 1.302-2(c)  Proposed: two-step process  (1) Excess distribution (above e & p) allocated pro rata on share-byshare basis among redeemed & retained shares – separately on ea. class of stock – reducing basis, w/any excess recognized as capital gain Prop. § 1.302-5(a)(1)  (2) Constructive (fictional) recapitalization, no gain/loss recognized ~ “exchange” old shares for new w/only real effect of new basis Prop. § 1.302-5(a)(2)  Divide new retained shares into at least 2 separate blocks: one has holding period & unused basis of redeemed shares after (1), other has holding period & unused basis of old retained shares; division made proportionately to FMV of ea. block  No need to divide if all pre-redemption shares had same value & holding period  More than 2 blocks if redeemed or old retained shares consisted of more than 1 class of stock  If all shares of same class redeemed  no retained shares  shareholder realizes loss on redeemed shares in amt. of unused basis Prop. § 1.302-5(a)(3)  Loss deferred & recognized at “inclusion date” Prop. § 1.3025(b)(4) o Stock attribution: use § 318 rules for redemption purposes § 302(c)(1), applied strictly regardless of actual independence  Family attribution: attribute ownership where stock owned by spouse, children, grandchildren, & parents § 318(a)(1)  Attribution from entity to beneficiaries or owners  Stock owned by/for partnership, trust, or estate considered owned proportionately by partners or beneficiaries § 318(a)(2)(A)  Stock owned by/for corp. deemed owned where shareholder has 50%+ interest in corp., in proportion to shareholder’s percentage interest (determined by stock value, not voting power) § 318(a)(2)(C)  Attribution to entity from beneficiaries or owners  Stock owned by/for partner or beneficiary of trust or estate deemed owned by partnership, trust, or estate § 318(a)(3)(A)  Stock owned by/for 50%+ shareholder § 318(a)(3)(C)  Options: holder of option to (1) acq. stock or (2) option to acq. stock § 318(a)(4), treat occasionally as extraordinary div. § 1059(e)(1)(A)  EXCEPTIONS  Attribution to/from estates: future-interest-holder in estate ≠ beneficiary § 1.318-3(a)  Trusts  Grantor deemed to own portion of stock taxed to him § 318(a)(2)(B)(ii) 

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 Attribution to trusts: ignore  5% interest of contingent beneficiary (“remote contingent interest”) § 318(a)(3)(B)(i) ~ but reverse not true  Party deemed to actually own attributed stock, allowing reattribution to third party § 318(a)(5)(A)  EXCEPT no reattribution where:  (1) attribution btwn. family members § 318(a)(5)(B)  (2) stock attributed to entity from beneficiary or owner (no “sideways attribution” to another beneficiary or owner) § 318(a)(5)(C) o Purchase treatment ~ stds. set at shareholder level, apply § 318 attribution § 302(c)(1)  Redemption not essentially equivalent to a div. § 302(b)(1)  Business purpose irrelevant; are circumstances resulting from redemption significantly different from circumstances that would’ve resulted if div.? Use “strict net effect” test US v. Davis  Redemption must result in meaningful reduction of proportionate interest in corp.: reduction of shareholder’s voting interest, div. rights, percentage interest in proceeds of complete liquidation, or some combination thereof  Redemption of voting stock  Maj. shareholder: must reduce to 50%- to qualify (CA8: supermajority to simple majority qualifies)  Min. shareholder: reduction of div. rights & liquidation interests more significant (can shareholder join w/others?)  Miniscule shareholder: any non-pro-rata redemption likely qualifies  Redemption of non-voting stock  If no voting stock after redemption  usually covered as purchase  If mix of voting & non-voting stock  distribution if > 50% voting pwr. or same proportion, unclear if diff. proportions  Hostility among shareholders  unclear if operation of § 302(b)(1) after § 318 attribution, but look at facts & circumstances (CA1 = yes, TC = maybe, CA5 & IRS = no)  Substantially disproportionate redemption § 302(b)(2)  Objective std.: shareholder (1) owns < 50%, (2) reduction in voting & (3) common stock of > 20%  If multiple redemptions = stock ownership not subst. disproportionate to holdings before  disqualify § 302(b)(2)(D)  If § 302(b)(2) applies to common stock redemption  same treatment for non-voting stock in same redemption  Termination of shareholder’s interest § 302(b)(3)  Preclude § 318(a)(1) family attribution where interest terminated & none acquired 10 yrs after redemption § 302(c)(2)(A)  Must notify IRS if interest acquired in 10-yr period & may lose bar  Purpose to avoid tax key § 302(c)(2)(B)  Entity (estate, trust, partnership, corporation) may waive family attribution § 302(c)(2)(C)

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Partial liquidation (std. set at corp. level) § 302(b)(4)  Shareholder-distributee must be non-corp., but certain entities (partnerships, estates, trusts) qualify ~ stock deemed held proportionately by partners/beneficiaries § 302(e)(5)  Definition: redemption “not essentially equivalent to a div.” that covers corp. contractions pursuant to plan § 302(e)(1)  Safe harbor: (1) corp. conducted 2+ trades or businesses immediately before distribution, both actively conducted during preceding 5 yrs & neither acquired by corp. during that period in taxable transaction, (2) distribution attributable to corp.’s ceasing 1+ of trade/bus., (3) corp. continued active conduct of 1+ trade/bus. after distribution §§ 302(e)(2), (3), (4)  Distribution must originate from ceased trade/bus., § 1.3461(b)(2), but need not be pro rata § 302(e)(4)  If pro rata  no actual redemption required  If plan to liquidate all stock in series of redemptions  complete liquidation § 346(a) o Effect on e & p  If § 301 distribution  treat as ordinary § 301 distribution  If purchase under § 302(a) or § 303  reduce e & p by amt. not in excess of ratable share of corp. accumulated e & p at time of redemption that is attributable to redeemed shares of stock § 312(n)(7)  Current e & p: allocate to any § 301 distribution, then add to accumulated e & p for redemption calculation; can use only portion of excess current e & p rated to elapsed portion of yr (pro rata on daily basis) o Automatic extraordinary div. where div. recognized by corp. distributee as consequence of stock redemption (triggering § 1059 – nontaxed portion of div. reduces basis)  Where div. resulted from partial liquidation as defined in § 302(e) § 1059(e)(1)(A)(i)  Where div. to corp. distributee resulted from stock redemption not pro rata to all shareholders § 1059(e)(1)(A)(ii)  Where distribution was a div. b/c of § 318(a)(4) stock attribution subject to option § 1059(e)(1)(A)(iii)(I)  Where div. treatment caused by § 304(a) § 1059(e)(1)(A)(iii)(II) o § 303: distribution in redemption of stock included in decedent’s gross estate for fed. estate tax purposes a “purchase” if:  (1) estate tax value of redeeming corp. stock included in decedent’s gross estate > 35% of “adj. gross estate” § 303(b)(2)(A)  Can combine 2+ corps.’ stocks, so long as estate had  20% of outstanding stock value  (2) interest in acq. prop. reduced by pmt. of deductible death taxes/expenses § 303(b)(3)  (3) time period: usually w/in 4 yrs after death § 303(b)(1)  (4) cap = death taxes + interest + deductible funeral/admin. expenses § 303(a)  Apply chronologically, “cap-up” even if redemption qualifies for § 302(b)

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o Constructive div. = redemption of retiring shareholder’s stock is div. to surviving shareholders only if they had a “primary & unconditional” obligation (e.g., crosspurchase agmt. via corp.) to purchase redeemed shares Rev. Rul. 69-808 o Constructive redemption = sale of corp. stock to subsidiary or sister corp. § 304  If stock sold to sister corp.  constructive redemption by acquiring corp. of own stock § 304(a)(1)  Treat shareholder’s sale of stock as exch. of issuing corp.’s stock for fictitious shares of acquiring corp. stock, followed immediately by redemption of fictitious stock  No gain/loss recognized § 351, same basis & holding period in fictional stock as in issuing corp. stock transferred §§ 358, 1223(1)  If § 301 distribution  div. to extent of combined e & p § 304(b)(2), excess reduces basis of acquiring corp.’s stock, left over = gain to shareholder  Add unused basis of fictional shares to shares of acquiring corp.’s stock § 1.304-2(a)  If corp. shareholder  div.-received deduction § 243, and treat as extraordinary div. § 1059(e)(1)(A)(iii)(II)  If § 302/303 purchase  gain/loss measured by basis in fictional shares of acquiring corp. deemed redeemed § 1.304-2(a), acquiring corp. basis in shares acquired from transferor = amt. paid Rev. Rul. 80-189  If stock sold to subsidiary corp.  constructive redemption by issuing (parent) corp. § 304(a)(2)  Similar to brother-sister corp., except if § 301 distribution  shareholder/transferor’s basis in transferred stock added to remaining shares of issuing corp.’s stock  If transaction is both brother-sister & parent-subsidiary  § 304(a)(2) parent-subsidiary rules take priority § 304(a)(1)  Persons selling stock must be in “control” (  50% voting pwr. or outstanding share value) of both issuing & acquiring corps., or where issuing corp. in “control” of acquiring corp.  Apply § 318 attribution, except for §§ 318(a)(2)(C), (3)(C) purposes  if shareholder owns 5  % < 50, then attribute the percentage of value of corp. outstanding stock held by shareholder § 304(c)  If § 304 control met  determine if § 301 dist. or purchase by §§ 302, 303 rules § 304(a), apply § 318 attribution, except disregard 50% lim. on corp. attribution § 304(b)(1)  make determination w/reference to issuing corp.’s stock § 304(b)(1)  If § 301 distribution  apply e & p of acquiring corp., then e & p of issuing corp.

 Complete Liquidation of Corporation o “Complete liquidation” = when corp. ceases to be a going concern & activities merely to wind up affairs, pay debts, & dist. remaining bal. to shareholders; no legal dissolution required § 1.332-2(c)

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Reincorporations: apparently liquidated corp. effectively returns as diff. corp. w/essentially same ownership & attributes  treat as continuation of liquidated one  Comm’r characterize as non-liquidation  treat as div. dist. under §§ 301, 302; or as reorg. in substance involving “boot” to shareholders o Shareholder treatment in ordinary liquidation  Dist. of assets in liquidation  treat as pmt. for shareholder’s stock § 331(a)  Cap. gain/loss to shareholder, & taxable event (gain/loss) to corp. § 336(a)  Amt. received in excess of basis = cap. gain, excess of basis over amt. received = cap. loss; computed on ea. share of stock separately § 1.331-1(e)  Basis of prop. dist. in kind where gain/loss recognizable = FMV of prop. at time of dist. § 334(a) ~ not apply to § 332 liquidation of sub. § 334(b) o Generally: liquidating corp. recognize gain/loss on liquidating dist. as if prop. sold to distributee at FMV § 336(a) ~ treat gains/losses separately  EXCEPTIONS to gains and losses: (1) liquidating sub corp. not recognize gain/loss on dist. to parent if § 332 applies to liquidation § 336(d)(3) , (2) liquidating dist. of “qualified prop.” pursuant to tax-free reorg. § 336(c), (3) dist. of “qualified prop.” pursuant to § 355(a)(1) nonrecognized corp. division § 355(c)  EXCEPTIONS to losses only § 336(d) ~ KAHN not like, w/2004 adoption of § 362(e) – requiring net gain to bypass issue – lims. no longer serve useful purpose of preventing doubling of loss deductions  § 336(d)(1) applies to related persons w/in § 267 meaning (> 50% outstanding stock value if individual, > 50% value or voting pwr. if corp.)  (1) non-pro rata dist. (and only dist.) of depreciated prop. (dist. of prop. must itself be pro rata), or  (2) disqual. prop. (prop. acquired by corp. w/in 5 yrs of dist. either in § 351 exch. or as cap. contribution)  § 336(d)(2) “anti-stuffing rule,” applies to prop. acq. by corp. in § 351 exch. or cap. contribution – to extent that prop. was depreciated when acq. (built-in loss), subordinate to § 336(d)(1) when both apply  Subjective test: if principal purpose in acq. was to recognize loss § 336(d)(2)(B)(i)(II)  Rebuttable presumption that if acq. w/in 2 yrs of plan of liquidation  taint § 336(d)(2)(B)(ii), generally not apply if prop. acq. w/in 1 st 2 yrs of existence  If apply  reduce basis for purposes of deter...