Fundamental of Corporate Taxation – Prof.

Davis
1) Business Entities
a) Sole Proprietorship; doing business in your own name. Earn your profits as
your business, get taxed directly to the sole proprietor
b) Partnership: All entities taxed as partnerships (including LLCs) (Partners
are called owners, partners, or members. There is no tax at the flow-through
level. The earnings flow-through to the earnings, and the owners pay the
taxes, regardless of the distribution.
c) Corporations
i) S-Corp: Controlled by Sub-chapter S
(1) Also flow-through entities to their shareholders. The rules are similar
to partnership rules (except with respect to borrowing rules.)
Sometimes much simpler to operate than an LLC (which may have a
document charter ranging hundreds of pages). Flows through to
shareholders. Tax liability-One time.
ii) C-Corps: Controlled by Sub-chapter C (Note: Some LLCs and
Partnerships are taxed as corporations; so there is some flexibility). As
the C-corp has earnings, when then are distributed to Shareholders, there
is taxation at two levels (one at the entity level, one at the shareholder
level). How do distribution occur? (1) shareholder liquidation; (2)
(1) Pre-1980 Individual rates were higher than C-corp. Post-1986, corp
rates were higher than Individual rates.
(2) Pre-1980:
(a) Individual bracket was 70%;
(b) Corp rate was 46%;
(c) Cap Gains was 20%
(3) 2017 Tax Act:
(a) Individual bracket was 37%;
(b) Corp rate was 21%;
(c) Cap Gains was 20%
d) Focus on Semester: C-Corporations.
2) Common Law Doctrines & their relationship to Corp. Tax
a) Sham Transaction doctrine
b) Economic substance
c) Substance Over Form
d) Business Purpose
e) Step Transaction
f) ASSIGNMENT: pp18-21; 22-24; 28-43
3) D
a) § 212 doesn’t apply to corporations, because that it production of income, they
only have a trade or business “hat”
b) Non-qualified: Personal-type deductions: personal exemption; medical
expenses (instead: insurance premiums); Code sections that police personal
exemptions (§67-68 don’t apply to corporations, because they don’t need
them). Somewhat simpler.
c) What about tiered corporations. Complex Corporate structure.
i) SHCorpSub-Corp
ii) §243: Dividends Received Deductions (for Tiered corporations)
(1) If you receive divdends from another corporations, we’ll give you a
deduction for the receipt of those deductions
(2) As your ownership interest drops, your DRD tiers drop from 50%; 75%;
100%.
(a) For up to 19.99% ownership, you get 50% deduction.
(b) If you are a 20% or more ownership; you get 75% deduction.
(c) For “affiliated corporations”, you get the 100% deduction.
(i) § 1504: 80% or more ownership, you get the 100% Dividends
received deductions.
d) No capital gain preferential tax rate for corporations.
e) Limit of $1M to certain executives (formerly only applied to public companies,
and not linked to performance companies).
f) Local lobbying gone.
g) Fines, penalties & settlements for sex harassment disputes that are subject
to a non-disclosure agreements.
h) Problem (P-31)
i) How much Income: $2.6M (gross profits) + $200,000 (cap gains) + $10,000
(muni bonds) = $2.8M gross income
ii) Deductions : $800,000 (operating expenses) + $800,000 ACRS depreciation
+ $200,000 (Capital losses (limited to your capital gains)) = $1.8M
deductions
iii) Taxable Income: $2.8-$1.8=$1M*21%=210,000
iv) Left After-Tax: $790,000. Emil & Betty Each take $395,000 pay tax as
equal shareholders. It will pay (qualified dividends) 20% tax,=79,000.
395,000-79,000=.
v) Total Tax Liability: 368K (36.8% tax rate), 79K+79K+210K=368K
vi) If, in C, they each have 500K in their pockets, they pay 40%, they end up
paying $200,00 a piece, so in total, $400,000.
vii)What has the change in the code. The change in rates has switched the
incentives. BEFORE: it was an incentive to pay high salaries. It was
better to hold the property and give the corporation a rental. NOW: pay
low salaries. If they want to challenge salaries, you are hiding what is
really salary (as dividends) to get that rate.
 viii) § 199(A). Does a Pass-through Entity help? For certain pass-throughs,
below certain income levels, you can get a 20% deduction.
(1) The statute is 9 pages long.
(2) Cap Gains is not “business income”; nor is cap loss (cap losses). QBI:
you get a 20% of the QBI.
4) Section 453
a) Payment x (Gross Profit)/(Total K Price)
i) Land (basis 2K) (fmv 20K)
ii) 4K per year x (18K)/(20K)
(1) Year 1: $3600 Gross Income; $400 Return of Basis
(2) Year 2: Same…
(3) Year 3:…
(4) Year 4:…
(5) Year 5:…18K(gain on the property=Total Gross Income); $2000
(Return of Basis)
5) Formation of a Corporation
a) May want to start as an S-corp (Losses flwo-through to the Shareholder, who
can offset their own income, and can use it sooner, and later when you
generate more profits, then you take the parternship and put IT into the
corporation.
b) § 351: No gain or loss shall be recognized if property is transferred to a
corporation by one or more persons solely in exchange for stock in such
corporation and immediately after the exchange such person or persons are
in control
c) § 358: Basis is the basis in property given up.
d) § 1032: No gain or loss shall be recognized to a corporation on the receipt of
money or other property in exchange for stock (including treasury stock) of
such corporation. No gain or loss shall be recognized by a corporation with
respect to any lapse or acquisition of an option, or with respect to a securities
futures contract (as defined in section 1234B), to buy or sell its stock
(including treasury stock).
e) § 362: If property was acquired by a corporation in connection with a
reorganization to which this part applies, then the basis shall be the same as
it would be in the hands of the transferor, increased in the amount of gain
recognized to the transferor on such transfer.
f) Pre-incorporation Gains: (THEREFORE, as discussed above), no recognized
at shareholder level, basis the basis in the property. Its not really non-
recognition. It more deferral. At the Corporate level, it had not gains, when
it distributed stock in return for real estate, but the basis you’ll get taxed.
By pushing all pre-incorporation assets into the corporation, it is Subject to
two levels of tax. NOW (in 2017), its doubled, at rates, in combination, are
 lower than the individual rate, so the incentive has been changed to push
items into pre-incorporation assets into the corporation.
g) If you have a good § 351, how does this work.
i) Is it a good § 351 transaction, did you meet the requirements?
ii) What happens if you fail to satisfy § 351. You no longer have non-
recognition. It a § 1001 recognition of assets. Gain on property you settle
into the c. If you’re NOT into 351, then At the corporate level, 1032 is
NOT dependent on § 351, and so you still have nonrecognition. You still
take the basis, but the basis is fmv.
iii) When you sell the stock
(1) Whats the character? Generally speaking, Capital asset?
(2) How long have you held the stock? It depends on the character of the
asset you gave up. If you give up land for . If you have a capital gain
asset OR a § 1231 asset (real/depreciable property asset used in yoru
business), you get a little help on your holding period. Then you get to
tack. § 1223 says you get to tack.
(a) What about the corporation? It ALWAYS tacks. We don’t really
care. We can only deduct capital losses up to capital gains, but
whether its short or loss, you don’t get a short/long term capital
rates at the corporate rate. There’s a flat rate.
(b) § 1245: If you are putting (not to worry if you’re a shareholder), but
if you’re disposing of depreciable, tangible property into the
corporation, the corporation …
h) Problem (p59)
i) A: 25K(fmv) for 25 shares (no gain/loss)
ii) B: 10K(fmv) for 10 shares (realized gain of 5K)
iii) C: land 20K(fmv) for 20 shares (realized loss of 5K)
iv) D: equip 25K(fmv) for 25 shares (realized 20/1245)
v) E: note 20K(fmv) with 2K basis for 20 shares (realized gain 18K)
vi) Did we satisfy § 351? They ended up all of it, so its good.
(1) A puts in cash, but he doesn’t get to tack (not a capital asset); Basis: 25
(2) B puts in Cash, 5 in basis (§ 351 applies to gain/losses); Basis: 5K
(3) C no recognition, he can tack; Basis: 25K
(4) D no recognition, he can tack; Basis 5K
(5) E no recognition he can tack; Regulation § 1.453B-1. Basis of 2K
vii)What happens at the Corporate level § 1032, no gain/loss level
viii) What is the corporate basis? It’s the transferred basis of the assets,
under § 362, EXCEPT loss deductions. So, 25K+5K+5K+2K+(25-5)=52K
(§362e)
i) PP59-60; 60-69 Problem A;
 Overview of Corporate Tax: Birth, Life, Death, Mergers & Acquisitions/Sales
Formation/Birth/Life/Death/Termination

¼ Exam: Formation question.