Corporate Income Taxation

by Kahn, Douglas A.; Lehman, Jeffrey S.

• ISBN13: 9780314256928
• ISBN10: 031425692X
• Edition: 5th
• Format: Hardcover
• Copyright: 2000-12-01
• Publisher: West Academic

Summary

Corporate tax laws have changed radically-most importantly due to the Tax Reform Act of 1986. This treatise is aimed at generalists who need a comprehensive overview of corporate tax doctrine and tax laws, specialists who need a way to synthesize the relevant authorities on a particular question, and students who want a discursive text to read along with their casebook. Discusses the crucial issues of corporate taxation. This book provides a comprehensive understanding of the field, enhance law student performance on exams, and also provides a useful guide for attorneys practicing in this area.

Table of Contents

Preface	iii
Introduction	1	(60)
This Chapter	3	(1)
A. Historical and Doctrinal Overview
Some History	4	(2)
A Glance at the Structure of Current Doctrine	6	(11)
The Corporation's Tax Liability	6	(5)
The Shareholder's Tax Liability on Account of Distributed Corporate Earnings	11	(2)
The Shareholder's Tax Liability on Account of Gain from the Sale of Corporate Stock	13	(2)
Nonrecognition Treatment for Certain Formal Shifts in The Way a Business Enterprise is Conducted	15	(2)
B. Theoretical Overview
Forms of Investment	17	(5)
Incidence of the Corporate Income Tax	22	(3)
The Two-Tier Tax Structure	25	(3)
``Integration'' of Corporate and Shareholder Taxes	28	(8)
Shareholder-Level Dividends-Received Exclusions, Deductions, and Credits	29	(6)
Corporate-Level Dividends-Paid Deductions and Split-Rate Systems	35	(1)
``Full'' Integration (Shareholder Allocation)	35	(1)
Taxes, Asset Values, and Capitalization	36	(3)
Realization, Lock-In Effects, and Nonrecognition	39	(1)
Preferential Capital Gains Rates	40	(1)
Debt and Equity	41	(5)
Consequences of the Commitment to a Compromise System	46	(4)
The Path-Dependency of Tax Treatment	46	(2)
The Substantive Importance of Analytic Categories	48	(2)
C. Three Important Doctrinal Categories
What Is a Corporation?	50	(3)
Who Is the Owner of Property?	53	(3)
What Is Debt and What Is Equity?	56	(5)
Nonliquidating Distributions to Shareholders	61	(192)
A. Generally
Introduction	65	(1)
Dividend-Received Deduction for Corporate Shareholders
In General	66	(4)
Potential Abuse of the Dividend-Received Deduction	70	(2)
B. Distributions to Shareholders of Cash or Property (Other Than Stock or Stock Rights of the Distributing Corporation)
Amount Distributed	72	(2)
Definition of ``Dividend''	74	(5)
Disguised and Constructive Dividends	79	(11)
In General	79	(3)
Automatic Dividend Rule	82	(4)
Below-Market Interest Loans	86	(3)
Diversion of Corporate Assets	89	(1)
Earnings and Profits	90	(21)
In General	90	(5)
Effect of Discharge of Indebtedness on E and P	95	(1)
Computation of Depreciation for E and P Purposes	96	(5)
Effect of Distributions on E and P	101	(6)
Distribution of Corporation's Bonds and Debt Obligations	107	(1)
Amendments to § 312	107	(1)
Nonliquidating Distributions to 20 Percent Corporate Shareholder	108	(3)
Distributions to Shareholders in Excess of Earnings and Profits	111	(1)
Extraordinary Dividends to a Corporate Shareholder	112	(3)
Basis of Property Distributed to Shareholders	115	(1)
C. Distributing Corporation's Recognition of Gain or Loss
General Utilities Doctrine	116	(2)
Current Status of General Utilities	118	(4)
D. Distribution in Redemption of a Shareholder's Stock
Introduction	122	(2)
Attribution of One Individual's or Entity's Stock Ownership to a Different Individual or Entity	124	(6)
Redemptions Which are Treated as a Purchase of Stock Rather Than as a Dividend	130	(49)
Not Essentially Equivalent to a Dividend	131	(19)
Substantially Disproportionate Redemptions	150	(3)
Termination of Shareholder's Interest	153	(2)
Preclusion of Family Attribution	155	(8)
Waiver of Attribution by an Entity	163	(5)
Accrued Dividends	168	(1)
Partial Liquidations---Standards Set at the Corporate Level	168	(11)
Income Recognition by Distributing Corporation	179	(1)
Redemption of Stock: Effect on Corporation's Earnings and Profits	179	(8)
Extraordinary Dividend Resulting from Stock Redemption or Partial Liquidation	187	(1)
Distribution in Redemption of Stock Which was Included Within the Gross Estate of a Decedent for Federal Estate Tax Purposes	188	(8)
Redemption of Stock of One Shareholder as a Dividend to Other Shareholders	196	(2)
Constructive Redemption---The Sale of Corporate Stock Either to a Subsidiary Corporation or to a Sister Corporation	198	(20)
Brother-Sister Corporations	199	(8)
Intragroup Sales	207	(1)
Mirror Subsidiaries	208	(3)
Parent-Subsidiary Corporations	211	(7)
Overlap with § 351	218	(1)
E. Distributions of Stock or Stock Rights of the Distributing Corporation
Introduction	218	(1)
Stock Dividends	219	(12)
Historical Background Prior to the 1954 Code	219	(2)
The 1954 Code	221	(2)
The Status of § 305 After the 1969 Act Amendments	223	(7)
Stripped Bonds and Preferred Stock	230	(1)
Stock Dividend Equivalents	231	(5)
Treatment of a Taxable Stock Dividend	236	(2)
Basis of Stock Received as a Tax-Free Dividend Under § 305(a)	238	(2)
Preferred Stock Bail-Outs and Section 306 Stock	240	(13)
Definition of Section 306 Stock	242	(3)
Disposition of Section 306 Stock	245	(5)
Exemption from Section 306 Treatment	250	(2)
Priority of Section 303	252	(1)
Liquidation of a Corporation and Taxable Sales of Corporate Businesses	253	(130)
A. Complete Liquidation
Introduction	255	(2)
The Liquidating Corporation's Recognition of Gain or Loss	257	(9)
Shareholder's Treatment in Ordinary Liquidation	266	(2)
Reincorporations	268	(4)
Liquidation of a Controlled Subsidiary Corporation	272	(23)
Requisites for Nonrecognition for Parent Corporation	273	(4)
Minority Shareholders	277	(2)
Taxation of the Liquidating Subsidiary	279	(3)
Partial or Full Satisfaction of Subsidiary's Indebtedness to its Parent	282	(7)
Purchase of Subsidiary's Debt by Parent	289	(3)
Parent's Indebtedness to its Subsidiary	292	(1)
Planned Termination of Parent Corporation	293	(2)
B. Taxable Purchase and Sale of a Corporate Business
Sale of Corporate Assets Pursuant to a Liquidation	295	(11)
Nonrecognition for Asset Sales Prior to 1986	297	(2)
Repeal of Nonrecognition for Liquidating Sales	299	(1)
Installment Sales by Liquidating Corporations	300	(6)
Allocation of Purchase Price	306	(1)
Sales of Stock	306	(74)
Replacement of Old § 334(b)(2) and of the Kimbell-Diamond Rule	308	(1)
The Operation of § 338	309	(9)
P Purchases Control of Stock of T	318	(10)
§ 338 Election	328	(1)
Liability for the Tax and Reporting of Gain	328	(2)
Section 338(h)(10) Election	330	(8)
New T's Basis in its Assets	338	(10)
The Consistency Rules	348	(30)
Usefulness of a § 338 Election	378	(1)
Treatment of Certain Liquidations for Tax Avoidance	378	(1)
Information Report Required	379	(1)
Sale of Assets---Allocation of Price	380	(3)
Collapsible Corporations	383	(22)
A. Function and Operation of Collapsible Provisions
Nature of the Problem	384	(2)
Effect of Collapsible Characterization	386	(1)
Definition of Collapsible Corporation and Consideration Whether Subsequent to 1986 it is Possible for a Corporation to be Collapsible	387	(7)
Presumption of Collapsibility	394	(1)
B. Exceptions to Collapsible Treatment
Section 341(d)	394	(1)
Section 341(e)	395	(4)
Section 341(f)	399	(3)
C. Examples
Illustrations	402	(3)
Retention of Corporate Earnings	405	(72)
A. General Statement
Generally	407	(1)
B. Personal Holding Company Tax
Introduction	408	(2)
Personal Holding Company: Definition	410	(23)
Gross Income	411	(1)
Ordinary Gross Income (OGI)	411	(1)
Adjusted Ordinary Gross Income (AOGI)	412	(2)
Personal Holding Company Income	414	(17)
Stock Ownership Test	431	(2)
Taxation of Personal Holding Companies	433	(9)
Undistributed Personal Holding Company Income (UPHC Income)	433	(2)
Dividends Paid Deduction	435	(7)
Incentive to Liquidate	442	(1)
Liquidation of a Personal Holding Company	442	(2)
Significance of the Personal Holding Company Tax	444	(1)
C. Accumulated Earnings Tax
Introduction	444	(3)
Tax Avoidance Purpose	447	(4)
Calculation of Accumulated Taxable Income	451	(6)
Calculation of Accumulated Earnings Credit	457	(1)
Reasonable Needs of the Business	458	(12)
In General	458	(3)
Working Capital	461	(3)
Reasonably Anticipated Needs of the Business	464	(2)
Section 303 Redemption Needs	466	(1)
Excess Business Holding Redemption Needs	466	(1)
Availability of Existing Capital	467	(3)
Burden of Proof	470	(2)
Stock Redemption Agreements	472	(5)
Small Businesses	477	(134)
A. Generally
Introduction	481	(1)
B. Subchapter S
Introduction	482	(2)
Terminology for Distinguishing Types of Corporations	484	(2)
Eligibility	486	(35)
In General	486	(4)
Qualified Subchapter S Subsidiary (QSSS)	490	(1)
Trusts as Shareholders	491	(9)
Nominal Stock Ownership	500	(1)
One Class of Stock Requirement	501	(1)
Hybrid Stock	502	(2)
Straight Debt	504	(2)
Current Treatment of Hybrid Stock	506	(3)
Call Options	509	(2)
Convertible Debt	511	(1)
Restricted Stock	511	(1)
Buy-Sell Arrangements	512	(3)
Differences in Amounts or Timing of Actual Distributions	515	(6)
Election	521	(2)
Taxable Year	523	(1)
Effect of a Subchapter S Election	524	(7)
In General	524	(1)
Pass-Through of Tax Items	525	(1)
Tax Returns and Consistency Requirement	526	(1)
Reallocation of Tax Items Among Members of a Shareholder's Family	527	(1)
Adjustments of Corporation's Tax Items	527	(1)
Carryforward and Carryback of Tax Items From or To an S Corporation's Taxable Year	528	(1)
Characterization of Pass-Through Tax Items	529	(1)
Pass-Through of Built-In Gains	529	(2)
Pass Through of Passive Investment Income	531	(1)
Earnings and Profits	531	(1)
Shareholder's Basis in S Corporation's Stock and Debt Obligation	532	(11)
Adjustments to Shareholder's Basis	532	(5)
Order of Adjustments and Effect on Shareholder's Deduction of Loss and Treatment of Receipt of Corporate Distributions	537	(3)
Shareholder's Guaranty of Third-Party Loan to Corporation	540	(3)
Limitation on Shareholders' Deductions	543	(8)
In General	543	(2)
Post-Termination Transition Period	545	(2)
Worthless Stock	547	(1)
At Risk and Passive Activity Loss Limitations	548	(2)
Other Limitations	550	(1)
Distributions Received From an S Corporation	551	(11)
In General	551	(1)
Accumulated Adjustments Account	551	(5)
Post-Termination Transition Period	556	(1)
Distribution of Appreciated Property	556	(1)
Distribution of Pre-1983 Accumulated E and P	557	(1)
Illustration	558	(4)
Termination of Election	562	(8)
Revocation	562	(1)
New Shareholder	562	(1)
Foreign Income	563	(1)
Cessation of Qualification as S Corporation	563	(1)
New Election After Termination	564	(1)
S Termination Year	564	(2)
Tax Treatment of S Termination Year	566	(2)
Passive Investment Income Causing Termination of S Election	568	(2)
Invalid Election	570	(1)
Taxation of Passive Investment Income	570	(4)
Taxation of Built-in Gains	574	(21)
Fringe Benefits	595	(1)
Sale of S Corporation's Stock	595	(5)
Acquisition of S Corporation's Carryover of Disallowed Losses	600	(2)
C. Losses on Small Business Stock (§ 1244)
Normal Treatment of Losses	602	(1)
Operation of § 1244	603	(2)
Qualification for § 1244 Treatment	605	(2)
Repeal of Written Plan Requirement	606	(1)
Definition of ``Small Business Corporation''	606	(1)
Usefulness	607	(1)
D. Gain from Qualified Small Business Stock (§ 1202)
Exclusion from Gross Income	608	(1)
Limitation on Amount of Exclusion	608	(1)
Qualified Small Business	609	(1)
Qualified Small Business Stock	609	(2)
Organization of a Corporation	611	(80)
Introduction	613	(1)
The Basic Rules Apart From Section 351	613	(3)
An Overview of Section 351	616	(10)
Nonqualified Preferred Stock	619	(6)
Business Purpose Requirement	625	(1)
``Persons in Control Immediately After the Exchange''	626	(10)
The Transferor Must Transfer ``Property''	636	(2)
The ``Exchange'' Requirement	638	(3)
Transfers ``Solely in Exchange for Stock''	641	(3)
The Receipt of ``Boot,'' Part I (In General)	644	(4)
Controlled Corporation's Recognition of Gain or Loss	648	(1)
The Receipt of Boot, Part II (Corporate Assumption of Transferor Liability and Netting of Obligations)	648	(21)
Tax-Avoidance Purpose	651	(3)
Liabilities in Excess of Basis	654	(14)
Controlled Corporation's Deduction When Liability Is Paid	668	(1)
The Receipt of Boot, Part III (Corporate Obligation to Shareholder)	669	(6)
Overriding Section 351	675	(16)
Statutory Overrides	675	(1)
Depreciation recapture---Sections 1245 and 1250	675	(1)
Related Party Transactions---Section 1239	676	(1)
Reallocations by the Commissioner---Section 482	677	(1)
Anti-Bailout Rule I---Section 304	678	(2)
Anti-Bailout Rule II---Section 306	680	(1)
Accounting Method Changes---Sections 446 & 481	681	(1)
Reorganizations---Section 368	682	(1)
Non-Statutory Overrides	683	(1)
Assignment of Income	683	(2)
The Tax Benefit Rule	685	(3)
The Business Purpose Test and the Court Holding Doctrine	688	(3)
Corporate Divisions	691	(132)
Introduction	693	(1)
Forms of Corporate Divisions	694	(1)
Nonrecognition Treatment and the Potential for Tax Avoidance	695	(3)
An Overview of Section 355	698	(8)
``Distributes''	706	(1)
``Stock or Securities''	707	(3)
Distribution of a Controlling Interest	710	(3)
The ``Device'' Test	713	(3)
The Five-Year Active Trade or Business Requirement	716	(18)
Active Conduct of a Trade or Business	717	(3)
Active Conduct of a Trade or Business Through a Subsidiary	720	(1)
The Five-Year Requirement	721	(1)
Division of an Integrated Business and the Problem of ``Expansions''	722	(2)
Division of an Old, Longstanding Business	724	(2)
Division Following a Recent Expansion	726	(4)
Active Business ``Immediately After the Distribution''---Corporate Divisions Followed by Corporate Acquisitions	730	(4)
Nonstatutory Requirements---Business Purpose and Continuity of Interest	734	(13)
Business Purpose	735	(4)
Continuity of Interest	739	(8)
Excess Securities Boot, Stock Boot, Nonqualified Preferred Stock Boot, and Interest Substitute Boot	747	(12)
Excess Securities Boot	747	(3)
Stock Boot	750	(2)
Nonqualified Preferred Stock Boot	752	(7)
Stock Rights and Warrants	759	(1)
Tax Consequences for Shareholders When Boot is Distributed	759	(21)
Section 356---General Rules	760	(1)
Section 356---Amount and Characterization of Gain	760	(12)
Section 356---Special Problems in Split-Offs With Boot	772	(3)
Section 356---Testing for Dividend Equivalency	775	(5)
Basis Calculation	780	(8)
Intragroup Distributions	788	(1)
Taxation of the Distributing Corporation	788	(35)
Not Pursuant to a Reorganization	789	(2)
Pursuant to a Reorganization	791	(1)
Gain Recognition Required by § 355(d) and (e)	792	(1)
Section 355(d)	793	(13)
Section 355(e)	806	(15)
Earnings and Profits	821	(2)
Reorganizations	823	(142)
Introduction	826	(1)
What Is At Stake?	827	(8)
Tax Consequences of Mergers and Acquisitions That Do Not Qualify as Reorganizations	829	(1)
Asset Acquisitions That Do Not Qualify as Reorganizations	830	(1)
Stock Acquisitions That Do Not Qualify as Reorganizations	831	(2)
Tax Consequences of Mergers and Acquisitions That Qualify as Reorganizations	833	(2)
The Historical Evolution of Reorganizations---Picturing the Development of Extrastatutory Glosses	835	(26)
Continuity of Proprietary Interest	837	(11)
Continuity of Business Enterprise	848	(13)
Other Judicial Doctrines	861	(1)
An Overview of the Statutory Requirements of Reorganizations Today---Picturing the Development of Legislative Categories	861	(12)
Divisive Reorganizations	862	(1)
Acquisitive Reorganizations	863	(10)
Nondivisive, Nonacquisitive Reorganizations	873	(1)
A Closer Look at Statutory Reorganizations	873	(81)
Simple A Reorganizations: Two-Party Mergers	875	(3)
Simple B Reorganizations: Two-Party Acquisitions, Solely Voting Stock for Stock	878	(16)
Simple C Reorganizations: Two-Party Acquisitions, Mostly Voting Stock for Substantially All the Assets	894	(10)
Post-Reorganization ``Drop-Downs'' and § 368(a)(2)(C)	904	(4)
Triangular B Reorganizations	908	(4)
Triangular C Reorganizations	912	(6)
Triangular A Reorganizations: Forward Triangular Mergers Under 368(a)(2)(D)	918	(3)
Triangular A Reorganizations: Reverse Triangular Mergers Under 368(a)(2)(E)	921	(5)
Triangular Reorganizations; Effect on Parent's Basis in the Acquiring Corporation's Stock	926	(2)
Use of Contingent and Escrowed Stock, and Other Shareholder Agreements	928	(3)
Acquisitive D Reorganizations	931	(5)
Bankruptcy (G) Reorganizations	936	(2)
Nonacquisitive Form Changes (F Reorganizations)	938	(2)
Recapitalizations (E Reorganizations)	940	(3)
Exchange of stock for stock	943	(4)
Exchange of bonds for stock	947	(1)
Exchange of bonds for bonds	948	(1)
Exchange of stock for bonds	949	(2)
The Reorganization as Sword: Combating Liquidation-Reincorporation Transactions	951	(3)
Gain Recognition in Qualifying Reorganizations	954	(11)
Boot in a Qualifying Reorganization	955	(6)
General Utilities Repeal (The Distribution of Appreciated Assets) in the Context of a Qualifying Reorganization	961	(4)
Acquisition or Retention of Tax Attributes	965	(96)
A. Generally
Introduction	967	(8)
B. Acquisition of Tax Attributes
Introduction	975	(2)
Liquidation of Subsidiary Corporations	977	(1)
Acquisitive Reorganizations	977	(1)
Triangular Reorganizations	978	(2)
Taxable Years and Carrybacks	980	(2)
F Reorganizations	982	(1)
Net Operating Losses	983	(6)
Earnings and Profits	989	(9)
C. Statutory Limitations
Introduction	998	(1)
The § 382 Limitation on Net Operating Loss Carryforwards and on Built-In Losses	999	(43)
The § 383 Limitation on Carryovers of Net Capital Losses and of Certain Tax Credits	1042	(4)
Limitation on Offsetting Preacquisition Losses and Credits of One Corporation Against Another's Built-In Gains	1046	(6)
Acquisitions Made to Evade or Avoid Income Tax---§ 269	1052	(9)
Multiple Corporations	1061	(72)
A. Generally
Introduction	1063	(1)
B. Consolidated Returns
Introduction	1063	(2)
Qualifications	1065	(3)
Acquisition of a Corporation Solely or Primarily for a Tax Purpose	1068	(2)
Election	1070	(3)
Taxable Year and Accounting Method	1073	(1)
Consolidated Taxable Income	1074	(15)
Computation	1074	(1)
Intercompany Transactions	1075	(2)
Matching Rule	1077	(6)
Acceleration Rule	1083	(3)
Intercompany Distributions	1086	(1)
Application of § 267(f)	1087	(2)
Earnings and Profits and Investment Adjustments	1089	(12)
Earnings and Profits	1090	(5)
Investment Adjustments to Stock Basis	1095	(6)
Excess Loss Account	1101	(1)
Group Structure Change	1102	(3)
Built-in Losses and Loss Carryovers	1105	(9)
Built-in Losses	1105	(6)
Consolidated Net Operating Loss Deduction	1111	(3)
Limitation on Deduction of SRLY Carryover Losses	1114	(3)
Application of §§ 382 and 383 to a Consolidated Group	1117	(1)
C. Limitation on Tax Benefits for Related Corporations
Introduction	1117	(3)
Allocation of Income and Deductions Under § 482	1120	(5)
Other Statutory Restrictions	1125	(4)
Transfers and Acquisitions Made for the Purpose of Securing a Tax Benefit	1129	(2)
Conclusion	1131	(2)
Table of Cases	1133	(12)
Table of Internal Revenue Code Sections	1145	(24)
Index	1169