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Corporate Taxation and Partnership Taxation, Exams of Business Finance

California State Polytechnic University (CPP) - Pomona Business Finance

A comprehensive overview of various tax-related topics in the context of corporate and partnership taxation. It covers a wide range of concepts, including control transfers, property distributions, earnings and profits, s-corporation taxation, and partnership formation and operations. The document delves into the tax implications of these transactions, highlighting the relevant code sections and the associated rules and regulations. It also discusses the treatment of recourse and non-recourse debt, partner contributions, and the limitations on losses. The level of detail and the breadth of topics covered suggest that this document could be a valuable resource for students or professionals studying corporate and partnership taxation, particularly in the context of advanced tax planning and compliance.

Typology: Exams

2024/2025

Available from 10/12/2024

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Taxation of Business Entities

Sole Proprietorship - ✔✔-Generally one person

-DBA: An Assumed Name

-Taxed once at the rate of the original owner

-No legal difference btwn the entity and the person

Limited Liability Corporations - ✔✔-Not incurred to the debts of others

-Debt is set apart from the debts of the owner

-Price for every $ the corp. earns it will be taxed twice.

Corporation Attributes - ✔✔-Operate under state law as an entity

separate from its owners, directors and officers

-Limited liability for Owners (Shareholders)

-Centralized Management- Directors appoint officer to run corporate

act

-Free Transferability of ownership rights

-Continuity of life: not affected by the death, insanity bankruptcy or

withdrawal of an owner

-Capacity for multiple (unlimited) owners

"Check the Box" Regulations - ✔✔Automatic classification of certain

entities as corporations- per se treatment

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Taxation of Business Entities

Sole Proprietorship - ✔✔-Generally one person

DBA: An Assumed Name
Taxed once at the rate of the original owner
No legal difference btwn the entity and the person Limited Liability Corporations - ✔✔-Not incurred to the debts of others
Debt is set apart from the debts of the owner
Price for every $ the corp. earns it will be taxed twice. Corporation Attributes - ✔✔-Operate under state law as an entity separate from its owners, directors and officers
Limited liability for Owners (Shareholders)
Centralized Management- Directors appoint officer to run corporate act
Free Transferability of ownership rights
Continuity of life: not affected by the death, insanity bankruptcy or withdrawal of an owner
Capacity for multiple (unlimited) owners "Check the Box" Regulations - ✔✔Automatic classification of certain entities as corporations- per se treatment

Recognition of the Corporate Entity - ✔✔-Moline Products: Corporation was a seperate entity and not an agent of the shareholder. Taxation at a corporate level.

Bollinger: Corp. was not a separate entity but merely an agent of the shareholders. Taxation at the shareholder level. Income Taxation of the Corporation - ✔✔Code 11: graduated tax rate structure: no lower level brackets for personal service companies. Code 267: limitation on Trans. Code 448(a): accounting method Code 1561: Multiple Corp. Favorable Tax Attributes - ✔✔-Progressive Tax Rate Structure: (begins at 15%) Low alt min tax (20%)
Owners may be employees of the Corp. Split income btwn corp and owner
Freedom to elect fiscal year
Dividend income subject to beneficial rules
Stock Capital Asset
Special rule allow ordinary loss treatment on certain stock
Stock based compensation

First have to form a C corp.
An Election at the federal level to have there corp taxed as an S corp.
Changes it to a Flow through entity
Legally independent identity apart from its shareholders
Files its own tax returns 1120S
Benefit of being a corporation but because its flow through the $ of profit is reported but it does not pay any tax
Distributed Pro-Rata to the shareholders
Limitation on the # of shareholders
Limited to types of Shareholders Partnerships - ✔✔-Flow Through Entity
$ will go out to the partners depending on their agreed distribution scheme
$ not taxed at the entity level
Partnership has to file a tax return but a partner doesn't have any limitation of liability
All the partners have liability for the actions of the other partners
Schedule C to the 1040 Limited Liability Companies - ✔✔-Note: LLC owners can elect for the IRS to tax the LLC as a sole proprietorship, partnership & Corporation, or S corp. Owners make this election through the IRS after the co forms with the state

LLC is a creation of state law
Dont exist for federal tax purposes Limited Liability Partnerships - ✔✔-Can elect to be a partnership if only one
2+ just by forming the LLC became a partnership Considerations in Choosing Form - ✔✔-Who owns (or will own) the business?
What is the Nature of each owner's interest
Who Manages (or will) the Business?
How (and When)will the money flow
What happens on Apr. 15 Forming A Corporation - ✔✔-Form a Corp. and Pay Tax
Internal rev. code a way to do it and not pay taxes Code Sec. 351 - ✔✔General Rule: 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 corporations and immediately after the exchange such person or persons are in control of the corp.

Sec. 351(a) & 368(c): Control - ✔✔-80% voting power; &

80% total value of other stock
If several transferors: --Integrated plan is necessary --Need not transfer assets simultaneously --Must, however, transfer with "expedition consistent with orderly procedure" Transfer After - ✔✔-Pre-existing binding agreement
then thy would have to treat it as a taxable sale Control: Transferring to Existing Corporations - ✔✔-A transfer to an existing corp. is tax free for a new shareholder if 80% int is acquired; or
Existing shareholders contribute prop so 80% requirement is satisfied
The value of the prop transferred must be at least 10% of the stock already owned Sec. 351 Example - ✔✔-J&K own 74% and 25% of x corp.
J transfers 25K to x corp for an add'l 25 shares
Control is met bc J owns 80% after the exchange (100/125)

Sec. 351: Effects - ✔✔-Gain or loss deferred in the transfer of prop to corp in return for stock is reflected in shareholder's tax basis in stock recv'd

Gain deferred decreases shareholder's tax basis in the stock to an amt equal to the stock's FMV less the gain deferred.
Loss deferred increases the shareholders tax basis in the stock to an amt equal to the stock's FMV plus the loss deferred. Ancillary Income Tax Rules for 351 Transfers - ✔✔-Basis 358 to shareholders basis of stock shall be same as the basis for the transferred property. Potential for double level income tax.
362: transferred basis for assets shifted into the corp. Holding Period: 1223 - ✔✔Transferor has a substituted holding period; Carryover holding period to the corporation Computing Tax Basis of Stock in 351 Transaction when Boot is recv'd - ✔✔- Cash contributed
(+) tax basis of other property
(+) gain recognized on the transfer
(-) FMV of boot recv'd
(-) Liabilities assumed by the corp. on prop. contributed =Tax basis of stock recv'd

Built in Loss Property - ✔✔362(e): the loss can only live in one place and the corp. has to choose which will have the carry over basis; the prop they didn't choose with a basis equal to FMV

Stck Basis: 100 B - 60 FMV= 40 loss
Corp. Basis: 50 B - 60 FMV= 0 loss --Only get the loss once Allocate the Gain or Boot Based on the FMV of the Asset that are Contributed - ✔✔-Ratio
Add up the FMV of all the Property that come is
The for each asset figure the percentage that is attributable to that asset
20% of the total FMV in the case
Allocate the boot to each asset that is coming in Determining the Gain Amts (351(b)) - ✔✔-Asset by asset application approach
Allocation of the boot consideration on a relative FMV of assets basis
No loss recognition permitted; no netting
Dividend holding period for stk recv'd
Asset tax bases to corp adjusted for boot.

Liability that Exceeds the Basis of Assets - ✔✔the excess will be treated as a recognized gain Sec. 351 Statement - ✔✔Shareholder

Description of the prop and its basis
Description of the stock recv'd
Description of boot recv'd
Description of any liabilities transferred Corporation
Same as above from all transferors Exception - ✔✔If both exception then the exemption for tax avoidance overrides the other exception Stock v. Debt - ✔✔-Sec. 351 consequences --Rcv'ing stock or debt
Pmt of dividends v. interest --Pro Rata Pmts
Repayment schedules
Impact on financial position
Differences in priority upon liquidation
DRD for dividends recv'd by other corporations

--Dividend of E&P --Basis --Capital Gain Rev. Rule 74 - 165 - ✔✔-Current E&P is allocated proportionately to all current year distribution

Accumulated E&P is allocated chronologically to distributions during the year (starting with first distribution)
Current loss is allocated pro rata against accumulated E&P available on the date of thee distribution, unless the date of the loss is specifically earmarked. Corporation Distribution of its own Obligation - ✔✔-311(b)(1)(A) gain recognized is required by a corp. on the distribution of appreciated property "other than an obligation of such corporation"
The corporations E&P is reduced by the principal amt of the obligation
Shareholder distribution level: --Dividend to the shareholder for the FMV of the obligation recv'd --Tax basis of the shareholder for the obligation recv'd as a dividend is the FMV of that obligation when recv'd by the shareholder. Constructive Dividends- Reg. 1.301-1(j) - ✔✔Types of disguised dividend distributions:
Excessive compensation to shareholders

Personal expense reimbursements
Excessive rent for use of prop
Excessive int on debt, or int paid on debt which really constitutes equity
Bargain sales of prop to shareholders
Interest-free loans to shareholder 3 Option to characterize It as a Dividend - ✔✔-Dividend: E&P --Accumulated E&P (AEP) --Current E&P (CEP)
Tax free return of capital: to the extent of the shareholders basis in stock
Capital Gain Constructive Dividends - ✔✔At the time they are made neither the shareholder or the corp. consider they are dividends but the gov't thinks they should be a dividend. Dividends Taxed - ✔✔Taxpayer must satisfy the holding period requirement of 60 days with the 120 days that begin 60-days to the stock going "ex-dividend"

--Expenses allocable to tax exempt income --Travel & Entertainment Expenses --Non-deductible Charitable Expenses

Timing Adjustments --Accelerated Dep. must be modified to straight line depreciation --Expensed items under 179 must be authorized Adjustments in Earning & Profits - ✔✔-E&P addition for income items --Municipal Bonds --Life Insurance proceeds (above tax basis) --Federal tax refunds
Deduction Add back items to E&P --Dividends to the corp. shareholder previously protected by a dividend recv'd deduction for FIT purposes
Amts deducted to determine E&P --Federal Income taxes Pd --Disallowed Losses- 265/ --Charitable Contributions above % limit --Disallowed T&E expense- 274
Timing Adjustments for E&P --Income components, pg 453 --Depreciation Components, 312

--Inventory- FIFO method; not LIFO --No statute of limitation on E&P determination Earnings and Profits Example - ✔✔-More than one distribution in the year

AEP 10K
CEP 28K
Distribution 30K on Mar 1
Distribution 10k on Sept 1
March 1 Distributions
Current EP 30K/40K *28K= 21K
Allocated Chromologically= 9K
All of the 30K distribution is a dividend
Sept 1 Distribution
Curent EP 10K/40K * 28K = 7K
AEP allocated chronologically= 1K
Only 8K distribution- Dividend; 2K is either ROB or CG Distributions of Property to Shareholders - ✔✔Income tax issues upon property ta distribution:
Income (loss?) recognition to distributing corp upon a distribution in kind

Redemption Scenarios - ✔✔If any of these events (die, incapacitation, divorce, sued) then they have a right to redeem those shares

Cross purchase agreement;
Right to first refusal Sec. 302 - ✔✔Attempted to codify when a redemption was not "substantially to a dividend" Tests:
Redemption not equivalent to a dividend (davis test)
Substantially Disproportionate (50/80 test)
Termination of Shareholders Interest
Partial Liquidation Sec. 318: Attributes - ✔✔-Family Attribution: No "double" family attribution (brothers dont take from sisters)
Entity to Beneficiary
Beneficiary to Entity
Option Attribution: deemed to own it even though haven't Family Attribution Example - ✔✔-Grandfather- parents take from children; but grandparents take from grandchildren
State if u owned 50% of the estate you take 50% of the stck

Grandfather can take through double attribution just not double family attribution
Total shares: 85 shares snapshot before
If u "sell" the 25 still take by attribution so nothing has changed so still 85 shares Davis Test - ✔✔Factors:
Ability to control the corp.
To take assets from the corp. and
Take E&P from the Corp. Revenue Ruling 85- 106 - ✔✔Ruling:
Factors to look at are the change in the taxpayer's --Right to vote --Right to Participate in current earnings --Right to share in net assets on liquidation Sec. 302: Redemption not equivalent to a dividend (davis test) - ✔✔Provides that a redemption which is neither a complete termination of interest nor substantially disproportionate may nevertheless qualify for exchange treatment if the redemption is not essentially equivalent to a dividend. This is a facts and circumstances test.

Corporate Taxation and Partnership Taxation, Exams of Business Finance

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Download Corporate Taxation and Partnership Taxation and more Exams Business Finance in PDF only on Docsity!

Taxation of Business Entities