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” If they want to challenge salaries. i) SHCorpSub-Corp ii) §243: Dividends Received Deductions (for Tiered corporations) (1) If you receive divdends from another corporations. you get the 100% Dividends received deductions. 395. and not linked to performance companies). (b) If you are a 20% or more ownership.000 (Capital losses (limited to your capital gains)) = $1. Complex Corporate structure. you get 75% deduction. c) What about tiered corporations. you are hiding what is really salary (as dividends) to get that rate.8M deductions iii) Taxable Income: $2. $400. they each have 500K in their pockets. g) Fines.000 (cap gains) + $10. because they don’t need them).000 iv) Left After-Tax: $790. in C. you get 50% deduction. 100%. penalties & settlements for sex harassment disputes that are subject to a non-disclosure agreements. BEFORE: it was an incentive to pay high salaries. so in total. they pay 40%. Code sections that police personal exemptions (§67-68 don’t apply to corporations. Somewhat simpler.8=$1M*21%=210. Emil & Betty Each take $395. It was better to hold the property and give the corporation a rental.=79.000-79.000.000 pay tax as equal shareholders. (a) For up to 19. medical expenses (instead: insurance premiums).000. h) Problem (P-31) i) How much Income: $2. d) No capital gain preferential tax rate for corporations. (i) § 1504: 80% or more ownership.000.b) Non-qualified: Personal-type deductions: personal exemption. your DRD tiers drop from 50%. 75%. 79K+79K+210K=368K vi) If.6M (gross profits) + $200. The change in rates has switched the incentives.8% tax rate). we’ll give you a deduction for the receipt of those deductions (2) As your ownership interest drops.8M gross income ii) Deductions : $800.000 ACRS depreciation + $200. v) Total Tax Liability: 368K (36.000=. f) Local lobbying gone. NOW: pay low salaries. you get the 100% deduction. vii)What has the change in the code. It will pay (qualified dividends) 20% tax.000 (operating expenses) + $800.00 a piece.99% ownership. e) Limit of $1M to certain executives (formerly only applied to public companies. .8-$1.000 (muni bonds) = $2. they end up paying $200. (c) For “affiliated corporations”. 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. when it distributed stock in return for real estate. no recognized at shareholder level. are . below certain income levels. or with respect to a securities futures contract (as defined in section 1234B). No gain or loss shall be recognized by a corporation with respect to any lapse or acquisition of an option. then you take the parternship and put IT into the corporation. Its not really non- recognition. then the basis shall be the same as it would be in the hands of the transferor. but the basis you’ll get taxed. $2000 (Return of Basis) 5) Formation of a Corporation a) May want to start as an S-corp (Losses flwo-through to the Shareholder. At the Corporate level. as discussed above). nor is cap loss (cap losses). viii) § 199(A). It more deferral. who can offset their own income. to buy or sell its stock (including treasury stock). it is Subject to two levels of tax. f) Pre-incorporation Gains: (THEREFORE. (2) Cap Gains is not “business income”. By pushing all pre-incorporation assets into the corporation. Does a Pass-through Entity help? For certain pass-throughs. its doubled. basis the basis in the property. at rates. increased in the amount of gain recognized to the transferor on such transfer. and can use it sooner. in combination. it had not gains. and later when you generate more profits. QBI: you get a 20% of the QBI. 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. e) § 362: If property was acquired by a corporation in connection with a reorganization to which this part applies. $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). 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. (1) The statute is 9 pages long. NOW (in 2017). you can get a 20% deduction. but the basis is fmv. Basis: 25K (4) D no recognition. Capital asset? (2) How long have you held the stock? It depends on the character of the asset you gave up. you get a little help on your holding period. i) Is it a good § 351 transaction. 5 in basis (§ 351 applies to gain/losses). If you’re NOT into 351. no gain/loss level viii) What is the corporate basis? It’s the transferred basis of the assets. . 1032 is NOT dependent on § 351. he can tack. (b) § 1245: If you are putting (not to worry if you’re a shareholder). Regulation § 1. § 1223 says you get to tack. and so you still have nonrecognition. but if you’re disposing of depreciable. under § 362. iii) When you sell the stock (1) Whats the character? Generally speaking. 25K+5K+5K+2K+(25-5)=52K (§362e) i) PP59-60. but whether its short or loss. Then you get to tack. he can tack. So.453B-1. did you meet the requirements? ii) What happens if you fail to satisfy § 351. how does this work. but he doesn’t get to tack (not a capital asset). EXCEPT loss deductions. You still take the basis. We don’t really care. Basis: 25 (2) B puts in Cash. tangible property into the corporation. If you have a capital gain asset OR a § 1231 asset (real/depreciable property asset used in yoru business). so the incentive has been changed to push items into pre-incorporation assets into the corporation. If you give up land for . 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. (a) What about the corporation? It ALWAYS tacks. Basis 5K (5) E no recognition he can tack. You no longer have non- recognition. (1) A puts in cash. lower than the individual rate. g) If you have a good § 351. you don’t get a short/long term capital rates at the corporate rate. Basis: 5K (3) C no recognition. There’s a flat rate. so its good. Basis of 2K vii)What happens at the Corporate level § 1032. Gain on property you settle into the c. It a § 1001 recognition of assets. 60-69 Problem A. then At the corporate level. We can only deduct capital losses up to capital gains. Life. . Death. Overview of Corporate Tax: Birth. Mergers & Acquisitions/Sales Formation/Birth/Life/Death/Termination ¼ Exam: Formation question.