Corporate Income Taxation
Authors:
Kahn, Douglas A. / Kahn, Jeffrey H. / Perris, Terrence G. / Lehman, Jeffrey S.
Edition:
6th
Copyright Date:
2009
23 chapters
have results for Corporate Income Taxation
Appendix. Researching Corporate Income Taxation on Westlaw 123 results (showing 5 best matches)
- Corporate Income Taxation
- . Browse the list of topics and subtopics and select a topic or subtopic to search by clicking the hypertext links. For example, to search for sources that discuss taxation of corporate divisions, click
- The fields discussed below are available in Westlaw case law databases you might use for researching issues related to corporate income taxation.
- Suppose you need to gain background information on double taxation of distributed corporate income.
- • If you know the title of an article but not the journal in which it was published, access the JLR database and search for key terms in the title field. For example, to retrieve the article “The Uncertain Case Against the Double Taxation of Corporate Income,” type the following Terms and Connectors query:
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Preface to the Sixth Edition 4 results
- While the corporate tax rules are intricate, in some respects the subject of corporate taxation is easier to learn than is the basic income tax course. This is because the corporate tax provisions are so interrelated that they are similar to the pieces of a jigsaw puzzle in which it is easier to put them together once you have the composite picture in focus.
- A major difference between the corporate tax rules and those studied in a basic income tax course is the aforementioned interrelationship of corporate tax provisions. With a few exceptions, in a basic income tax course, the student typically deals with a single statute at a time. In corporate taxation, that will rarely be the case. Instead, each situation invokes a number of related statutes that operate in concert. One aspect of dealing with multiple statutes together is that it adds to the complexity of the topic, but a counter consequence is that it makes it much easier to discern the purpose of the provisions and thereby to anticipate how they are likely to be construed.
- This book is designed to serve as an aide to a student who is taking a basic or advanced course in corporate taxation or in business planning. The authors have described the basic rules dealing with corporate taxation to provide a student with a map from which it will be easier for the student to grasp specific provisions and to analyze the issues presented. The authors have included numerous examples to illustrate how the corporate tax rules operate and to help the student understanding of complex provisions.
- This book is not a definitive work of all of the intricate and complex rules of corporate taxation. A detailed discussion of those rules, while of great usefulness to a practitioner, is likely to be somewhat overwhelming for a student and may well interfere with the student’s grasp of the subject. Instead, the book focuses on the basic rules and their exceptions, which are fully explained and illustrated. Some details are included because they can provide the student with a better understanding of the basic structure of the provisions under discussion.
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Chapter 1. Introduction 26 results (showing 5 best matches)
- A corporation is not allowed a deduction for distributions it makes to a shareholder on account of the shareholder’s stock. The taxation of the corporation on its income together with the denial of a deduction for the distributions it makes to shareholders who are taxed on that distribution results in the double taxation of corporate income. Currently, the tax law provides some relief from that double taxation by applying preferential lower tax rates to the income that noncorporate shareholders recognize from certain dividend income, but that provision is not likely to survive for many more years.
- The goal of the double tax system is to impose an income tax at the corporate level and again when the funds reach the hands of an individual. However, a shareholder of a corporation can itself also be a corporation. If left unattended, a dual tax system could lead to multiple taxation of income passed through a chain of corporate ownership. The tax law provides several devices to prevent or mitigate that consequence so as to reduce the tax cost of having a chain of corporate ownership. Those devices are discussed later in this book
- The actual tax rates that apply to a corporation are not identical to the nominal rates that are listed in § 11. The reason for the difference is that the lower bracket rates are phased out if the corporation’s taxable income exceeds specified figures. The phase-out is accomplished by adding a surtax until the additional tax equals the amount of tax that was saved by having the lower tax bracket applied. The maximum nominal tax bracket is 35%, and so if a corporation’s taxable income is high enough to phase out all of the lower bracket rates, all of that corporation’s income will be taxed at an effective 35% rate. Because of the surtaxes to phase out lower brackets, the actual tax rate on a dollar of corporate income can exceed 35%. Moreover, because the surtaxes apply only to a specified range of income, a corporation’s marginal tax bracket can be lower than the preceding bracket’s tax rate. Taking the surtaxes into account, the tax rates on corporate income, other than the income...
- In addition to the regular corporate tax rates and the surtaxes on income within specified ranges, there are several other surtaxes that can apply to corporations and increase their tax liability. Two of those are the Personal Holding Company surtax and the Accumulated Earnings surtax. Since many corporate tax courses will omit the subject of those surtaxes, they are not discussed in this book.
- A C corporation is taxed on all of its income reduced by deductions that are allowed by the Code. While individuals have personal exemption deductions and a standard deduction allowance, corporations that are taxed under the regular corporate tax system have neither. So, every dollar of income that is not reduced by a specific deduction is taxable.
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Chapter 6. S Corporations 119 results (showing 5 best matches)
- The purpose of Subchapter S is to prevent the double taxation of corporate income for certain qualified and electing corporations. In general, the shareholders will increase their basis in their corporate stock for income that passes through to them, and they will reduce their basis in the corporation’s stock for losses or deductions that pass through to them. Since the corporation’s income is taxed to its shareholders at the end of the corporation’s taxable year, even when not distributed to the shareholders, an S corporation’s actual distribution to a shareholder generally does not cause the shareholder to recognize income. Instead, the shareholder reduces his basis in his corporate stock. If the distribution exceeds the shareholder’s basis, the excess is treated as a gain from the sale of the stock.
- In the absence of a remedial provision, a C corporation that has appreciated assets could avoid the imposition of a corporate tax on that appreciation by making an election to become an S corporation. Once the election became effective, the corporation’s recognized gain would be passed through to its shareholders and therefore would be taxed only once at individual rates. Without the S election, the gain would have been taxed twice—once at the corporate level and again at the individual shareholder’s level when the proceeds are distributed to the shareholders. To prevent the use of the Subchapter S election as a device for escaping corporate taxation of appreciation that arose prior to the effective date of the election, Congress imposed a corporate tax on the “net recognized built-in gains” of an S corporation when it is recognized within a specified period. This tax is set forth in § 1374.
- § 1362(d)(3). In the absence of such a restriction, a closely held C corporation could easily avoid the double-tax Subchapter C regime by selling its business assets and, instead of liquidating and thereby triggering a tax to its shareholders, becoming a corporate investment vehicle for its shareholders and electing S corporation status to avoid corporate tax on the investment income.
- § 6.34 Taxation of Passive Investment Income
- § 6.34 Taxation of Passive Investment Income
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Chapter 4. Complete Liquidation of a Corporation and Taxable Sales of a Corporation’s Business Part 2 74 results (showing 5 best matches)
- Note that providing nonrecognition to the liquidation of a subsidiary does not contravene the policy of double taxation—that is, the policy that corporate income should be taxed both at the corporate level and again at the individual shareholder’s level when ultimately distributed into the hands of an individual shareholder. Since any appreciation of the subsidiary’s assets remains intact in corporate solution in the hands of the parent corporation, there is no avoidance of a corporate level tax, and the double tax system remains secure.
- Corporate businesses are typically bought and sold in one of two ways: Either the corporation sells its assets (after which it may or may not be liquidated); or the shareholders sell their shares (after which the purchaser may or may not liquidate the acquired corporation). This part of the chapter discusses the general patterns of taxation applied to these two methods of buying and selling corporate businesses when the transaction does not qualify as a reorganization. Reorganizations are discussed in Chapter
- If, instead, the target’s stock was purchased by a corporation, old § 334(b)(2) allowed the corporate purchaser to liquidate the target and thereby obtain a basis in the acquired assets equal to the purchase price for the stock as properly adjusted for income or loss recognized by the target after the purchaser had acquired its stock. The purchasing corporation did not recognize income from the liquidation; and, under the pre–1986 version of § 336, the liquidating corporation recognized income only to the extent of several overrides (e.g., recapture provisions) to § 336. The income overrides to the pre–1986 version of § 336 were the same as the ones that overrode nonrecognition on a target’s sale of its assets under the old version of § 337. Thus, taxable acquisitions of a corporation’s assets under the old version of § 337 or of stock plus a liquidation under old § 334(b)(2) achieved similar (although not identical) tax consequences.
- In a taxable corporate acquisition, the purchasing corporation has the option of purchasing either the target corporation’s assets or its doctrine, the old version of § 337 generally prevented the target from recognizing gain or loss on most of its assets, and the purchaser obtained a cost basis in the acquired assets. The target recognized no gain or loss on liquidating, but the target’s shareholders recognized their gain or loss. So, the net result was a single taxation on the sale, and the purchaser obtained a cost basis.
- The sham transaction doctrine, which plays such an important role in the taxation of corporations and shareholders, can apply to purported liquidating distributions to cause them to be recharacterized as some other type of payment. For example, in Braddock Land Co. v. Commissioner, ...a complete liquidation, individual shareholders of the corporation forgave the corporation’s debt to them on account of unpaid salary and interest, which amounts previously had been accrued and deducted by the corporation. Finding no business purpose for the purported cancellation of the debts, the Tax Court treated the cancellation as a sham and ignored it. Thus, part of the liquidating proceeds received by the shareholders was treated as payments made in satisfaction of the corporation’s debts for salary and interest and, therefore, constituted ordinary income to the shareholders. Under current law, if a cancellation of such debts by a shareholder were treated as bona fide, it might cause the...
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Chapter 2. Distributions to Shareholders: § 301 Distributions 73 results (showing 5 best matches)
- A dividend paid to a corporate shareholder is ordinary income to the corporate shareholder and does not qualify for the capital gains rates that apply to noncorporate shareholders. In any event, corporations, unlike individuals, are not given any special tax rates for their capital gains. However, corporate shareholders are given tax relief for their dividend income if certain qualifications are satisfied.
- In certain circumstances, a corporate shareholder’s receipt of an “extraordinary dividend” on a share of stock that the corporate shareholder had held for two years or less at the time that the dividend was declared can cause a reduction of the shareholder’s basis in that share of stock or can cause the shareholder to recognize additional income. § 1059(a). The reduction of the shareholder’s basis in that share of stock is made at the beginning of the “ex-dividend date” for the extraordinary dividend. § 1059(d)(1). The “ex-dividend date” is the first day after the extraordinary dividend was declared that a purchaser of the share of stock on which the extraordinary dividend was declared would purchase that stock ex-dividend (i.e., the dividend would be paid to the seller and not to the purchaser). § 1059(d)(4). The amount of the reduction of the corporate shareholder’s basis in the share of stock equals the amount of the extraordinary dividend on that share that effectively is taken...
- A corporate expenditure or loss will reduce the corporation’s capacity to make distributions to its shareholders, and as a result, such expenditures or losses typically reduce even when they are not deductible from gross income for income tax purposes. For example, capital losses that exceed capital gains, losses disallowed under § 267, and payment or accrual of federal income tax liability will reduce a corporation’s
- Prior to the adoption of the JGTRRA in 2003, a dividend to a shareholder, whether the shareholder was a corporation or an individual, was taxed at ordinary income rates. As noted above, corporate shareholders were treated differently in that typically only a fraction of a dividend was taxed to them. The 2003 Act did not change the treatment of corporate shareholders, but it made a significant change in the treatment of dividends paid to noncorporate shareholders. That provision is scheduled to expire in the year 2011.
- . However, § 301(e) states that solely for purposes of determining the taxable income (and the basis adjustment of the distributing corporation’s stock) of 20 percent corporate shareholders, the of the distributing corporation are determined as if § 312(n) did not apply. Thus, for 20 percent corporate shareholders, the adjustment to the
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Chapter 7. Organization Of A Corporation 79 results (showing 5 best matches)
- The anticipatory assignment of income principle is a judicially created doctrine providing that a person who earns the right to income cannot escape taxation by assigning the right to that income to a third party. It is clear that § 351 does not preclude the application of the assignment of income doctrine,
- • the corporate transferee agrees in a closing letter with the Commissioner that it will report the payments received on the transferred receivables in its gross income with the same characterization that the income would have had in the hands of the transferor.
- A is keeping deductible payments at the shareholder level, where they will offset income taxed at the shareholder’s marginal rate. But A is transferring income-producing accounts receivable to a corporation, where they will give rise to income taxed at the corporation’s marginal rate. Since the 1993 amendments to the Code reinstated the traditional regime, where corporate marginal rates are often significantly lower than individual rates, the assignment-of-income doctrine may once again be used to keep taxpayers from strategically splitting income and deductions in this fashion. Note that under the traditional regime one must worry not only about a taxpayer in A’s position retaining accounts payable in the course of a § 351 exchange, but also about a taxpayer in A’s position who prepaid all his accounts payable before entering into the § 351 exchange.
- Section 306 is intended to minimize the use of preferred stock to permit shareholders to enjoy capital gains treatment of their share of corporate income without reducing their voting interest in the corporation.
- The circumstance of a taxpayer’s having an asset subject to a nonrecourse liability that is greater than the amount of the taxpayer’s basis in that asset sometimes arises in connection with the holding of improved real estate. How can a taxpayer in that circumstance place the realty in corporate solution without incurring tax liability under § 357(c)? One possibility, if the LLC) will engage in a bona fide business activity, and the income will be divided between the taxpayer and the corporation. Even if the parties’ motivation for choosing to do business in partnership (or LLC) form was to avoid the income recognition that § 357(c) would have caused if taxpayer had instead contributed the realty to a corporate entity, the partnership anti-abuse rules will not apply;
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Chapter 10. Acquisition or Retention of Tax Attributes Part 2 114 results (showing 5 best matches)
- L, a new loss corporation, reports its income on a calendar year basis. L had an ownership change on December 31, Year Three. For Year Four, L had taxable income (before deducting any carryover losses) of $100,000. In addition, L had a § 382 limitation of $25,000; a pre-change net operating loss carryover of $12,000, and a minimum tax credit under § 53 of $48,000. The first use of the § 382 limitation is to permit the deduction of the $12,000 net operating loss carryover. That reduces L’s taxable income to $88,000, and leaves $13,000 of unused § 382 limitation. The amount of the § 383 credit limitation is the difference between the regular corporate tax on $88,000 (L’s taxable income) and the regular corporate tax on $75,000 (L’s $88,000 of taxable income reduced by the $13,000 of unused § 382 limitation). The following corporate tax rates apply to Year Four: the first $50,000 of taxable income is taxed at a 15% rate, the next $25,000 of taxable income is taxed at a 25% rate, and...
- except that in the current year, X terminated business A and began conducting a different business (B), which produced the income that X earned that year. Even though the income was earned in a different business from the one that was conducted in prior years and produced the loss, the net operating loss can be deducted from the income earned by X from the B business. This accords the same treatment to a corporate entity that would be provided to an individual. For example, if X had been an individual, there would be no restriction on his deducting a loss from one business against the income earned from a different business. Thus, the tax law extends to a corporate entity the same right that it grants to individual taxpayers to offset gains from one enterprise against losses that result from another enterprise.
- Another statutory provision that can affect the extent to which a tax attribute generated by one business can be utilized by another business is § 482. However, that provision is a very broad topic in its own right, which extends far beyond the topic of corporate taxation, and we have chosen not to discuss it in this book.
- To prevent or restrict such trafficking in tax attributes, Congress adopted several statutory provisions, and the courts applied several non-statutory doctrines. For example, the familiar anticipatory assignment of income doctrine was employed in appropriate circumstances to prevent the shifting of income from a profitable corporation to a loss corporation. As early as 1924, Congress adopted the antecedent of § 482, which authorizes the Commissioner to reallocate income and deductions among related businesses to prevent tax avoidance and to reflect income more accurately. This statutory provision gives the Commissioner far broader discretion to shift income or deductions from one business activity to another than would be available under the anticipatory assignment of income doctrine. While § 482 continues to be an important weapon for the Commissioner to prevent the marketing of tax attributes, we have chosen not to discuss that provision in this book. For a description of how that...
- The typical fact pattern involves a corporation that conducts business over a number of years and creates tax attributes that involve either a significant income history or a series of net operating loss, capital loss, or credit carryforwards potentially usable in future years. Then the corporation disposes of all or nearly all of its assets, ceases its business activity, and thereupon becomes, in the words of Rev. Rul. 61–191, “a corporation in name and semblance only, without corporate substance and serving no real corporate purpose,” even though the corporation has not formally dissolved or liquidated for purposes of state law.
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Chapter 8. Corporate Divisions Part 2 126 results (showing 5 best matches)
- The question seems effectively resolved in the regulations. Even when long-term capital gains and dividend income are taxed at the same marginal rates as those applied to ordinary income, a nonrecognition corporate division followed by a sale or liquidation could still be utilized to insulate a portion of the distribution from taxation as a recovery of the basis that is allocated to the distributed property. That potential for the utilization of basis, which is not available for section 301 distributions, is deemed sufficient under the regulations to cause the application of the device provision if the other conditions of that provision are present.
- doctrine so that a corporation could not thereafter escape taxation on the appreciation of its assets. After the 1986 repeal of the doctrine, Congress became concerned that § 355 could be utilized to permit the sale of a corporation’s business in such manner as to avoid any tax to the corporation itself. In other words, the shareholders of the corporation could manipulate the disposition of the assets of one of the corporations so that the corporation would not recognize any gain from that disposition. The appreciation of those assets would not escape corporate taxation since the appreciation would remain in corporate solution; so the device would merely defer a corporate tax rather than to avoid it permanently. Congress felt that this deferral of the corporate tax conflicted with the policy behind the repeal of the
- Of course, post-transactional sales following a corporate division do have a potential to convert dividend income to capital gain, which is not as much cause for concern in the acquisitive reorganization context. However, that issue is much more efficiently handled through enforcement of the device restriction than it could be addressed through more aggressive application of the continuity requirement. Perhaps one could argue that sales of distributing corporation stock the corporate division could be structured to provide the shareholders with the same opportunity to convert dividend income to capital gain as post-distribution sales would afford, although that seems problematic since the selling shareholders have thereby disposed of their rights in both distributing and controlled. Nevertheless, if one accepts that argument for the sake of discussion, one might then find a policy justification for applying the continuity requirement to pre-corporate-division stock sales that would
- Such an argument would not be persuasive. It would be virtually coincidental that a pre-distribution sale that afforded the opportunity to convert dividend income to capital gain with basis recovery would violate the continuity requirement. Perhaps many such transactions would violate continuity, but most could easily be structured around the continuity requirement. Thus, the differential treatment of the continuity requirement between corporate divisions, on the one hand, and acquisitive reorganizations, on the other hand, could not reasonably be justified as a means to enforce the policy against using corporate divisions to convert dividend income to capital gain. The continuity requirement simply takes too broad an approach to be effective for that purpose. If Treasury concludes that pre-distribution sales create a significant risk of permitting dividend income to be converted to capital gain with basis recovery, that issue can be effectively addressed only through an expansion...
- The regulations indicate that the “device” test is concerned primarily with situations in which a shareholder might use a nonrecognition corporate division to transform dividend income into capital gains. Currently, the maximum statutory rate that can be applied to dividend income distributed by a domestic corporation is 15% (ignoring the effects of exemption and deduction phaseouts), which, of course, is the same as the marginal capital gains rate—i.e., usually, 15%. As previously noted, many predict that this parity between the dividend tax rate and the long-term capital gain tax rate may be permitted to expire after 2010, and that the tax rate on dividend income may revert to that applicable to other categories of ordinary income, but that is not clear at this writing. Until then, the parity between two tax rates naturally raises the question of whether the device test remains viable in that environment.
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Chapter 3. Distributions in Redemption of Stock Part 2 54 results (showing 5 best matches)
- The capital gains rate treatment that JGTRRA added to the Code does not alter the landscape for corporate shareholders. Since corporations are taxed at the same rate on capital gains and ordinary income, corporations generally prefer dividend treatment in order to qualify for the dividend-received deduction. If a corporate shareholder has a high basis in its stock, it could then prefer to have purchase treatment.
- the statute. Instead, they chose to amend the consolidated return regulations to provide that § 304 will not apply to stock sales within an affiliated group filing consolidated federal income tax returns.
- As previously noted, all or part of the amounts distributed to a shareholder pursuant to a stock redemption or a partial liquidation may constitute a § 301 distribution. Some or all of the amount treated as a § 301 distribution can constitute dividend income to the distributee. If the distributee is itself a corporation, the dividend can qualify the distributee for a dividend-received deduction under § 243 (or §§ 244 or 245). If, under § 1059, such a dividend is treated as an “extraordinary dividend” to the corporate distributee, the amount of the “nontaxed portion” of the dividend will reduce the corporate distributee’s basis in its stock of the distributing corporation or will cause the corporate distributee to recognize a gain (typically, any such gain will be a capital gain). The “nontaxed portion” of a dividend is equal to the amount of dividend-received deduction that was allowable under §§ 243, 244 or 245 to the corporate distributee on account of that dividend. ...corporate...
- If the shareholder (the transferor) who transferred stock to the acquiring corporation is itself a corporation, and if the amount received by the corporate shareholder is treated as a § 301 distribution, the amount that is treated as a dividend to the shareholder will qualify the shareholder for a dividend-received deduction under § 243. Any such dividend will constitute an extraordinary dividend under § 1059(e)(1)(A)(iii)(II). The amount of the dividend-received deduction will reduce the corporate shareholder’s basis in its fictitious shares of the acquiring corporation’s stock, and therefore will reduce the amount added to the corporate shareholder’s basis in the shares of the acquiring corporation’s stock that it actually owns. If the amount of the dividend-received deduction exceeds the corporate shareholder’s basis in the fictitious stock of the acquiring corporation, the corporate shareholder will recognize a gain for the amount of the excess.
- Note that the qualification of distributions as ones made in partial liquidation does not require that none of the shareholder-distributees be a corporation. A distribution in partial liquidation can be made to a corporate shareholder, but a corporate shareholder cannot qualify for purchase treatment under § 302(b)(4).
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Chapter 9. Reorganizations Part 2 46 results (showing 5 best matches)
- The study of reorganizations lies at the heart of the study of corporate taxation.
- D reorganizations straddle the world of corporate divisions and corporate acquisitions. Some (but not all) corporate divisions qualify as D reorganizations. Similarly, some (but not all) corporate acquisitions qualify as D reorganizations.
- Why does the Code provide such favorable tax treatment to reorganizations? At a very high level of generality, the reason is familiar. It is similar to the reason that certain transfers of assets to controlled corporations receive favorable treatment under § 351 and certain corporate divisions (which may or may not qualify as reorganizations) receive favorable treatment under § 355. Congress is concerned that the doctrine of realization can create “lock-in” effects; the prospect of a substantial tax liability might deter people from engaging in economically desirable and productive business transactions. In the field of reorganizations, as in those other domains, Congress has attempted to strike an appropriate balance between the policy interest in minimizing lock-in and the policy interest in enforcing a two-tier tax on realized income.
- In Rev. Rul. 2000–5, 2000–1 C.B. 436, the Service ruled that compliance with a corporate law merger statute is not sufficient to qualify a transaction as an A reorganization. We have already noted that the extra-statutory requirements of business purpose, continuity of proprietary interest, and continuity of business enterprise must be satisfied. In that Revenue Ruling, the Service stated that there are other requirements, namely that the “transaction effectuated under a corporate law merger statute must have the result that one corporation acquires the assets of the target corporation by operation of the corporate law merger ...the acquiring corporation in exchange for some of their stock in the target, and they retained their remaining stock of the target. The transaction qualified as a merger under the applicable state corporate law. In the second situation, the target transferred its assets and liabilities to each of two acquiring corporations, and the target was then liquidated...
- Another variant of the A reorganization involves a merger of T into a limited liability company (“LLC”) in which the acquiring corporation is the sole member. Unless it elects to be treated as a corporation for U.S. tax purposes, such an LLC is treated as a “disregarded entity” under Treas. Reg. § 301.7701–2(a), which means that it is disregarded as an entity separate from its owner, A, for federal income tax purposes. Thus, if no election has been made to treat such an LLC as a corporation for federal income tax purposes, a statutory merger of T into such an LLC will be treated for federal income tax purposes as though T had effected a statutory merger directly into A.
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Chapter 4. Complete Liquidation of a Corporation and Taxable Sales of a Corporation’s Business 9 results (showing 5 best matches)
- As a result of changes that have occurred in both the federal income tax law and in the corporate laws of many states since the enactment of § 338(h)(10), it has been possible for some time for a non-corporate purchaser to achieve tax results substantially similar to § 338(h)(10) even before regulations are finally promulgated under § 336(e). For example, many states permit a corporation to “check the box” to convert itself into a single-member limited liability company (LLC) for state law purposes. Such an election results in a liquidation of the electing corporation for federal income tax purposes. Even if a subsidiary is organized in a state that does not provide for such an election, the subsidiary could be merged into a sibling LLC; and that merger is also treated as a liquidation of the corporation for federal income tax purposes. In some circumstances, a merger will not be a good option because of restrictions on the transferability of some of the subsidiary’s assets; and...
- Federal Income Taxation of Corporations and Shareholders
- The “Blue Book” is the name commonly given to a report prepared by the Staff of the Joint Committee on Taxation explaining a tax act that was recently enacted.
- Staff of Joint Comm. on Taxation, 100th Cong., General Explanation of the Tax Reform Act of 1986, 341 (Joint Comm. Print 1987).
- Under current tax law, there are limited circumstances in which a parent can have a basis in its subsidiary’s debt that is less than the principal amount of that debt. Prior to 1980, that could occur when a parent purchased its subsidiary’s debt from a third party for an amount that was less than the principal amount of the debt. Currently, under § 108(e)(4), when a parent purchases a subsidiary’s debt for less than the principal amount (i.e., the amount that is payable over the remaining term of the debt exclusive of interest that accrues after the parent’s acquisition of the debt), the subsidiary will realize cancellation of indebtedness income in the amount of the difference. The extent to which the subsidiary will recognize that realized income turns upon the application of § 108 and of the common law rules dealing with cancellation of indebtedness income. In addition, the transaction is treated as if the subsidiary issued a new debt instrument to the parent in cancellation of...
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Chapter 5. Distribution of Stock and Stock Rights and Section 306 Stock 67 results (showing 5 best matches)
- For a discussion of the history of the tax law’s treatment of stock dividends prior to the adoption of the 1954 Code, see Boris I. Bittker and James S. Eustice, Federal Income Taxation of Corporations and Shareholders, (hereinafter Bittker and Eustice) at ¶ 8.40 [1] (7th ed. 2006).
- The ordinary income that a shareholder recognizes on the disposition of section 306 stock is treated as dividend income for purposes of applying the capital gain rate treatment accorded by § 1(h)(11). However, for other tax purposes, unless Treasury specifies otherwise and it has not yet done so, the ordinary income that the shareholder recognized on the disposition is not treated as a dividend. So, a disposition of section 306 stock by any means other than a redemption (or a constructive redemption) has no effect on the corporation’s . Also, if a shareholder who sells section 306 stock is itself a corporation, the ordinary income the corporate shareholder recognized will not be treated as a dividend; and so the shareholder will not qualify for the dividend-received deduction provided by § 243.
- A Technical Revision of the Federal Income Tax Treatment of Corporate Distributions to Shareholders
- Nonvoting preferred stock would be used because its subsequent disposition would not affect the control of the corporation, its terms could be set so as to prevent its participating in corporate income above its preference rights, and the terms could be designed to satisfy the requirements of a potential purchaser of the stock
- disposition of certain stock that had been acquired in tax-free transactions, including stock received as a tax-free stock dividend, to be taxable as either ordinary income or as a § 301 distribution, rather than as capital gain. The reason for its adoption was to deal with the then existing potential for using preferred stock as a device to “bail-out” earnings of a corporation in a manner that caused much lower tax consequences to the shareholders than would have been incurred if the earnings were simply distributed to them as dividends. Dividends, of course, usually constitute ordinary income to a shareholder who receives them. Prior to 2003, dividend income was taxed at the same rates as other ordinary income, except that a corporate shareholder is granted a special deduction under § 243 for most dividends it receives.
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Chapter 11. Consolidated Returns 82 results (showing 5 best matches)
- Dubroff et al., Federal Income Taxation of Corporations Filing Consolidated Returns (Matthew Bender) (Second Edition) (2009), at § 42.03[6][a], n. 621.
- Instead of conducting several business enterprises in a single corporate entity, a separate corporation can be used to conduct each business. The stock of the several corporations can be held by the same persons in essentially the same proportion; or, alternatively, the corporations can be organized in a chain in which all of the corporations are linked together with one parent or higher-tier corporation whose stock is held by the several shareholders. A consolidated return is permitted only for such a chain of corporations, which is referred to either as an “affiliated group” or as a “consolidated group,” in which the highest-tier corporation, or “common parent,” files a single corporate federal income tax return that includes all of the income, deduction, credits, and tax of all corporations in the chain.
- Tax-exempt income
- The availability of the consolidated return election and the conditions for permitting it have been altered by Congress on a number of occasions. When the provision for consolidated returns was first adopted in 1917, affiliated corporations were required to file a consolidated return; but in 1921, Congress made it optional for the affiliated group to decide to file in a consolidated form or not. During the period from 1934 to 1942, only a few types of corporate businesses were permitted to file a consolidated return; but after World War II began, the privilege was extended to affiliated corporations in general. However, from 1942 to 1964, the tax rate imposed on consolidated return income was higher than that imposed on a single corporation (i.e., an additional tax of 2% was imposed on the corporations’ consolidated income). This additional 2% tax was repealed in 1964.
- A device that was once employed to minimize corporate taxes was for a profitable corporation to acquire the stock of a less successful corporation that had losses that had been incurred in an economic sense but had not yet ripened into a deductible item. The corporations would then file a consolidated return so that, when the acquired corporation subsequently recognized the built-in loss as a deduction that exceeded the acquired corporation’s income for that year, the net loss of the acquired corporation would offset the income of the acquiring corporation. The practice of “trafficking” in deductions and some of the tax provisions designed to prevent that practice were discussed in Chapter
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Table of Contents 21 results (showing 5 best matches)
Chapter 9. Reorganizations 44 results (showing 5 best matches)
- The third point concerns the effect that dividend treatment to a corporate shareholder will have on the shareholder’s basis. Of course, to the extent the target shareholder must recognize gain or dividend income as a result of the application of § 356(a), he receives an increased basis in the nonrecognition property he received in the reorganization. However, if the shareholder is a corporation, the amount that such corporate shareholder receives that is characterized as a dividend will be treated as a redemption of stock for purposes of applying § 1059. If such constructive redemption is not part of a pro rata redemption to all shareholders (as it very likely will not be), the dividend will be an “extraordinary dividend” to the corporate shareholder and will cause a reduction of the shareholder’s basis in its stock.
- in 1986 came greater concern for the possibility that appreciated assets might migrate from the corporate level to the shareholder level without triggering corporate-level taxation. Section 361(c)(2) is designed to guard against that danger.
- The boot-first approach is generally more likely to give rise to dividend treatment. Historically, such a result was usually more attractive to corporate shareholders but less attractive to individual shareholders. At least for the present, however, that difference in position does not exist and will not exist so long as the tax rate applicable to dividend income is the same as the tax rate applicable to long-term capital gain. It is unclear at this writing whether such treatment of dividend income will
- doctrine, it could still prove beneficial to engage in such a transaction as a means whereby the shareholders could extract cash from the corporation at capital gain rates rather than the ordinary income rates that were otherwise applicable to dividend income. However, after the 2003 amendments to the Code, which reduced the tax rate applicable to most dividend income to the same rate as applies to capital gain, even that incentive for the liquidation/reincorporation transaction was substantially reduced. At present, the potential usefulness of this technique is limited to special circumstances where there is not a substantial amount of built-in gain to be recognized by the liquidating corporation (or where the corporation has tax attributes that will shelter such gain and might otherwise expire unused) and the shareholders have a sufficiently high basis in their stock that a substantial amount of the cash distributed will be treated as tax-free recovery of basis. On such special...
- At the corporate level, the issuance of stock in cancellation of old bonds can trigger cancellation of indebtedness income pursuant to § 61(a)(12) of the Code. For many years, this possibility was not enforced,
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Index 37 results (showing 5 best matches)
- Reallocation of corporate income and loss, 316–317
- See, Controlled Corporations, Transfers to; Consolidated Return; Corporate Division; Reorganizations; S Corporations; Sale of Corporate Stock; Section 301 Distributions; Section 306 Stock; Stock Dividends
- See, Sale of Corporate Assets; Sale of Corporate Stock
- Taxation of, 243
- See, Controlled Corporations, Transfers to; Corporate Division, Reorganizations
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Chapter 8. Corporate Divisions 34 results (showing 5 best matches)
- 86 T.C. 745 (1986). By agreement between AT&T and the IRS, the decision was not appealed. Candace A. Ridgway, Corporate Separations, (Tax Management Portfolios U.S. Income Series 776–3d, 2009) at n. 156.
- When a corporate division includes the distribution of boot, the If the distribution of boot causes the distributee shareholder to recognize dividend income, the distributing corporation’s If the distribution of boot causes the distributee shareholder to recognize a gain that is not dividend income, it seems likely that the gain will cause a reduction of the distributing corporation’s
- Of course, even if the nonrecognition rule were to apply, Y’s basis in its assets would not be stepped up to reflect the amount paid by A for the hardware business. Accordingly, if Y were later to be liquidated, Y would recognize a gain. Presumably, therefore, A would pay X somewhat less for the X stock than it would be prepared to pay for the assets that Y contributed to X. Nevertheless, Congress did not wish to permit the continued deferral of taxation of any portion of the unrealized appreciation in the hardware business. Accordingly, § 355(d) requires X to recognize income on distributing the Y stock.
- § 355(a)(2)(C). Before 1954, a corporate division had to qualify as a reorganization in order to obtain nonrecognition treatment. To do so, a corporation that wished to spin off a pre-existing subsidiary to its shareholders without triggering the recognition of income had to first drop its shares in the subsidiary into a new subsidiary and then distribute the shares of the new subsidiary to its shareholders. See § 368(a)(1)(D). Thus, it was relatively easy for a parent with a pre-existing subsidiary to use the intermediate step of dropping down the stock of the pre-existing subsidiary to satisfy the reorganization requirement. That intermediate step no longer is necessary.
- In 1996, Treasury proposed to Congress to deal with this problem by amending and expanding the scope of § 355(d) so as to cause a distributing corporation to recognize income on making a distribution of a subsidiary’s stock in a ...transaction if the shareholders failed to maintain a 50% interest in both corporations, by vote and value, during the four-year period beginning two years prior to the distribution. That proposal was not adopted, but a different version of that approach was adopted in 1997 when Congress added § 355(e) to the Code. Congress determined that a corporate division should not be permitted to be tax-free to the distributing corporation if it is accompanied by a significant change in the ownership interests in either the distributing or any of the controlled corporations, regardless of whether the change of ownership takes place in the context of a nonrecognition transaction or in the context of an outright purchase. There is no good reason to require recognition...
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Chapter 3. Distributions in Redemption of Stock 10 results (showing 5 best matches)
- Bleily & Collishaw, Inc. v. Commissioner, 72 T.C. 751 (1979). In that case, redemptions made over a six-month period were held to be purchases under § 302(b)(3). The taxpayer, a corporate shareholder, contended that the redemptions were dividends, but the Tax Court held that they qualified under § 302(b)(3). The reason that the corporate taxpayer sought to have the redemption characterized as a dividend was that the taxpayer could then have utilized the dividend-received deduction of § 243.
- The Service will not rule on whether a redemption qualifies under § 302(b), and presumably will not rule on § 303 either, where the redeemed stock is held as security or in escrow for the payment of corporate notes if there is a possibility that the stock will be returned to the shareholder. Rev. Proc. 2008–3, Section 3.01(31). The Service has further stated that it will not rule on the tax effect of a redemption where payment is made in corporate notes payable over a period of time in excess of 15 years. Rev. Proc. 2008–3, Section 4.01(20).
- Corporate distributions need not be in redemption of stock to qualify as a partial liquidation if the distributions are made pro rata among the shareholders. Fowler Hosiery Co., Inc. v. Commissioner, 301 F.2d 394 (7th Cir. 1962); Rev. Rul. 90–13, 1990–1 C.B. 65.
- To the extent that the distribution in partial liquidation to a corporate shareholder is treated as a dividend which is “nontaxed” because of a dividend-received deduction or similar deduction, it can cause a reduction of the distributee corporation’s basis or gain recognition under § 1059. See Section
- , supra. The treatments applied to corporate divisions and reorganizations are discussed in Chapters
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- But see § 312(h) and Treas. Reg. § 1.312–10 for the determination of earnings and profits of corporations involved in a corporate division.
- The election to use the interim closing method must be made on or before the due date (including extensions) of the loss corporation’s income tax return for the change year. Once made, the election is irrevocable. Treas. Reg. § 1.382–6(b)(2).
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- Publication Date: September 23rd, 2009
- ISBN: 9780314204745
- Subject: Taxation
- Series: Hornbooks
- Type: Hornbook Treatises
- Description: This book is a useful companion to law students taking a course in this area. It can also serve as a course book that will provide an introduction to the subject as a prelude to applying the principles to a set of problems. This complex topic has been made comprehensible to readers who are not yet conversant with the area and is a valuable supplement to a casebook or set of problems. The book discusses the crucial issues of corporate taxation and provides numerous examples illustrating how the various provisions operate.
