Corporate Income Taxation

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

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ISBN: 9780314043733 | 031404373X
Cover: Hardcover
Copyright: 1/1/1995

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Non-Liquidating Distributions to Shareholders; Liquidation of a Corporation and Taxable Sales or Corporate Businesses; Collapsible Corporations; Retention of Corporate Earnings; Small Businesses; Organization of a Corporation; Corporate Divisions; Reorganizations; Acquisition or Retention of Tax Attributes; Multiple Corporations.

Preface

iii

Introduction

(70)

This Chapter

(1)

Historical and Doctrinal Overview

Some History

(3)

A Glance at the Structure of Current Doctrine

(12)

The Corporation's Tax Liability

(5)

The Shareholder's Tax Liability on Account of Distributed Corporate Earnings

(2)

The Shareholder's Tax Liability on Account of Gain from the Sale of Corporate Stock

(1)

Nonrecognition Treatment for Certain Formal Shifts in The Way a Business Enterprise is Conducted

(3)

Theoretical Overview

Forms of Investment

(4)

Incidence of the Corporate Income Tax

(3)

The Two-Tier Tax Structure

(4)

``Integration'' of Corporate and Shareholder Taxes

(10)

Shareholder-Level Dividends-Received Exclusions, Deductions, and Credits

(5)

Corporate-Level Dividends-Paid Deductions and Split-Rate Systems

(1)

``Full'' Integration (Shareholder Allocation)

(1)

Debates Over Integration in the United States

(2)

Taxes, Asset Values, and Capitalization

(3)

Realization, Lock-In Effects, and Nonrecognition

(1)

Preferential Capital Gains Rates

(4)

Debt and Equity

(5)

Consequences of the Commitment to a Compromise System

(4)

The Path-Dependency of Tax Treatment

(2)

The Substantive Importance of Analytic Categories

(2)

Three Important Doctrinal Categories

What Is a Corporation?

(6)

Who Is the Owner of Property?

(3)

What Is Debt and What Is Equity?

(5)

Nonliquidating Distributions to Shareholders

(180)

Generally

Introduction

(1)

Dividend-Received Deduction for Corporate Shareholders

In General

(4)

Potential Abuse of the Dividend-Received Deduction

(2)

Distributions to Shareholders of Cash or Property (Other Than Stock or Stock Rights of the Distributing Corporation)

Amount Distributed

(2)

Definition of ``Dividend''

(5)

Disguised and Constructive Dividends

(10)

In General

(3)

Automatic Dividend Rule

(4)

Below-Market Interest Loans

(3)

Earnings and Profits

(21)

In General

(5)

Effect of Discharge of Indebtedness on E and P

103

(1)

Computation of Depreciation for E and P Purposes

104

(5)

Effect of Distributions on E and P

109

(6)

Distribution of Corporation's Bonds and Debt Obligations

115

(1)

Amendments to § 312

115

(1)

Nonliquidating Distributions to 20 Percent Corporate Shareholder

116

(3)

Distributions to Shareholders in Excess of Earnings and Profits

119

(1)

Basis of Property Distributed to Shareholders

120

(1)

Distributing Corporation's Recognition of Gain or Loss

General Utilities Doctrine

121

(1)

Current Status of General Utilities

122

(4)

Distribution in Redemption of a Shareholder's Stock

Introduction

126

(3)

Attribution of One Person's or Entity's Stock Ownership to a Different Person or Entity

129

(5)

Redemptions Which are Treated as a Purchase of Stock Rather Than as a Dividend

134

(48)

Not Essentially Equivalent to a Dividend

135

(19)

Substantially Disproportionate Redemptions

154

(3)

Termination of Shareholder's Interest

157

(9)

Preclusion of Family Attribution

Waiver of Attribution by an Entity

166

(4)

Accrued Dividends

170

(1)

Partial Liquidations---Standards Set at the Corporate Level

171

(11)

Income Recognition by Distributing Corporation

182

(1)

Redemption of Stock: Effect on Corporation's Earnings and Profits

182

(8)

Distribution in Redemption of Stock Which was Included Within the Gross Estate of a Decedent for Federal Estate Tax Purposes

190

(9)

Redemption of Stock of One Shareholder as a Dividend to Other Shareholders

199

(1)

Constructive Redemption---The Sale of Corporate Stock Either to a Subsidiary Corporation or to a Sister Corporation

200

(18)

Brother-Sister Corporations

201

(7)

Intragroup Sales

208

(1)

Mirror Subsidiaries

209

(3)

Parent-Subsidiary Corporations

212

(6)

Overlap with § 351

218

(1)

Distributions of Stock or Stock Rights of the Distributing Corporation

Introduction

218

(1)

Stock Dividends

219

(10)

Historical Background Prior to the 1954 Code

219

(2)

The 1954 Code

221

(2)

The Status of § 305 After the 1969 Act Amendments

223

(6)

Stock Dividend Equivalents

229

(5)

Treatment of a Taxable Stock Dividend

234

(3)

Basis of Stock Received as a Tax-Free Dividend Under § 305(a)

237

(2)

Preferred Stock Bail-Outs and Section 306 Stock

239

(12)

Definition of Section 306 Stock

240

(4)

Disposition of Section 306 Stock

244

(4)

Exemption from Section 306 Treatment

248

(2)

Priority of Section 303

250

(1)

Liquidation of a Corporation and Taxable Sales of Corporate Businesses

251

(122)

Complete Liquidation

Introduction

253

(2)

The Liquidating Corporation's Recognition of Gain or Loss

255

(9)

Shareholder's Treatment in Ordinary Liquidation

264

(1)

Reincorporations

265

(5)

Liquidation of a Controlled Subsidiary Corporation

270

(22)

Requisites for Nonrecognition for Parent Corporation

271

(3)

Minority Shareholders

274

(2)

Taxation of the Liquidating Subsidiary

276

(3)

Partial or Full Satisfaction of Subsidiary's Indebtedness to its Parent

279

(8)

Purchase of Subsidiary's Debt by Parent

287

(3)

Parent's Indebtedness to its Subsidiary

290

(1)

Planned Termination of Parent Corporation

291

(1)

Taxable Purchase and Sale of a Corporate Business

Sale of Corporate Assets Pursuant to a Liquidation

292

(7)

Nonrecognition for Asset Sales Prior to 1986

295

(2)

Repeal of Nonrecognition for Liquidating Sales

297

(1)

Installment Sales by Liquidating Corporations

297

(2)

Allocation of Purchase Price

299

(1)

Sale of Stock

299

(72)

Replacement of Old § 334(b)(2) and of the Kimbell-Diamond Rule

302

(1)

The Operation of § 338

303

(8)

P Purchases Control of Stock of T

311

(10)

§ 338 Election

321

(1)

Liability for the Tax and Reporting of Gain

321

(2)

Section 338(h)(10) Election

323

(7)

New T's Basis in its Assets

330

(10)

The Consistency Rules

340

(29)

Usefulness of a § 338 Election

369

(1)

Treatment of Certain Liquidations for Tax Avoidance

370

(1)

Information Report Required

371

(1)

Sale of Assets---Allocation of Price

371

(2)

Collapsible Corporations

373

(22)

Function and Operation of Collapsible Provisions

Nature of the Problem

374

(2)

Effect of Collapsible Characterization

376

(1)

Definition of Collapsible Corporation and Consideration Whether Subsequent to 1986 it is Possible for a Corporation to be Collapsible

377

(6)

Presumption of Collapsibility

383

(1)

Exceptions to Collapsible Treatment

Section 341(d)

384

(1)

Section 341(e)

385

(3)

Section 341(f)

388

(3)

Examples

Illustrations

391

(4)

Retention of Corporate Earnings

395

(72)

General Statement

Generally

397

(1)

Personal Holding Company Tax

Introduction

398

(2)

Personal Holding Company: Definition

400

(23)

Gross Income

401

(1)

Ordinary Gross Income (OGI)

401

(1)

Adjusted Ordinary Gross Income (AOGI)

402

(2)

Personal Holding Company Income

404

(17)

Stock Ownership Test

421

(2)

Taxation of Personal Holding Companies

423

(9)

Undistributed Personal Holding Company Income (UPHC Income)

423

(2)

Dividends Paid Deduction

425

(7)

Incentive to Liquidate

432

(1)

Liquidation of a Personal Holding Company

432

(2)

Significance of the Personal Holding Company Tax

434

(1)

Accumulated Earnings Tax

Introduction

434

(3)

Tax Avoidance Purpose

437

(4)

Calculation of Accumulated Taxable Income

441

(6)

Calculation of Accumulated Earnings Credit

447

(1)

Reasonable Needs of the Business

448

(12)

In General

448

(3)

Working Capital

451

(3)

Reasonably Anticipated Needs of the Business

454

(2)

Section 303 Redemption Needs

456

(1)

Excess Business Holding Redemption Needs

456

(1)

Availability of Existing Capital

457

(3)

Burden of Proof

460

(2)

Stock Redemption Agreements

462

(5)

Small Businesses

467

(120)

Generally

Introduction

471

(1)

Subchapter S

Introduction

472

(2)

Terminology for Distinguishing Types of Corporations

474

(1)

Eligibility

475

(33)

In General

475

(4)

Trusts as Shareholders

479

(9)

Nominal Stock Ownership

488

(1)

One Class of Stock Requirement

489

(1)

Hybrid Stock

490

(2)

Straight Debt

492

(2)

Current Treatment of Hybrid Stock

494

(2)

Call Options

496

(2)

Convertible Debt

498

(1)

Restricted Stock

499

(1)

Buy-Sell Arrangements

500

(3)

Differences in Amounts or Timing of Actual Distributions

503

(5)

Election

508

(2)

Taxable Year

510

(1)

Effect of a Subchapter S Election

511

(7)

In General

511

(1)

Pass-Through of Tax Items

512

(1)

Audits and Administrative Procedures

513

(1)

Reallocation of Tax Items Among Members of a Shareholder's Family

514

(1)

Adjustments of Corporation's Tax Items

514

(1)

Carryforward and Carryback of Tax Items From or To an S Corporation's Taxable Year

515

(1)

Characterization of Pass-Through Tax items

516

(1)

Pass-Through of Built-In Gains

516

(2)

Pass Through of Passive Investment Income

518

(1)

Earnings and Profits

518

(1)

Shareholder's Basis in S Corporation's Stock and Debt Obligation

519

(9)

Adjustments to Shareholder's Basis

519

(3)

Order of Adjustments and Effect on Shareholder's Deduction of Loss and Treatment of Receipt of Corporate Distributions

522

(4)

Shareholder's Guaranty of Third-Party Loan to Corporation

526

(2)

Limitation on Shareholders' Deductions

528

(7)

In General

528

(1)

Post-Termination Transition Period

529

(2)

Worthless Stock

531

(1)

At Risk and Passive Activity Loss Limitations

531

(3)

Other Limitations

534

(1)

Distributions Received From an S Corporation

535

(10)

In General

535

(1)

Accumulated Adjustments Account

535

(4)

Post-Termination Transition Period

539

(1)

Distribution of Appreciated Property

539

(1)

Distribution of Pre-1983 Accumulated E and P

540

(1)

Illustration

541

(4)

Termination of Election

545

(8)

Revocation

545

(1)

New Shareholder

546

(1)

Foreign Income

546

(1)

Cessation of Qualification as S Corporation

546

(1)

New Election After Termination

547

(1)

S Termination Year

548

(1)

Tax Treatment of S Termination Year

549

(2)

Passive Investment Income Causing Termination of S Election

551

(1)

Invalid Election

552

(1)

Taxation of Passive Investment Income

553

(3)

Taxation of Built-in Gains

556

(20)

Fringe Benefits

576

(1)

Losses on Small Business Stock (§ 1244)

Normal Treatment of Losses

577

(1)

Operation of § 1244

578

(2)

Qualification for § 1244 Treatment

580

(2)

Repeal of Written Plan Requirement

581

(1)

Definition of ``Small Business Corporation''

581

(1)

Usefulness

582

(1)

Gain from Qualified Small Business Stock (§ 1202)

Exclusion from Gross Income

583

(1)

Limitation on Amount of Exclusion

583

(1)

Qualified Small Business

584

(1)

Qualified Small Business Stock

584

(3)

Organization of a Corporation

587

(58)

Introduction

589

(1)

The Basic Rules Apart From Section 351

589

(3)

An Overview of Section 351

592

(2)

``Persons in Control Immediately After the Exchange''

594

(7)

The Transferor Must Transfer ``Property''

601

(2)

The ``Exchange'' Requirement

603

(2)

Transfers ``Solely in Exchange for Stock''

605

(3)

The Receipt of ``Boot,'' Part I (In General)

608

(4)

Controlled Corporation's Recognition of Gain or Loss

612

(1)

The Receipt of Boot, Part II (Corporate Assumption of Transferor Liability and Netting of Obligations)

612

(11)

Tax-Avoidance Purpose

613

(2)

Liabilities in Excess of Basis

615

(8)

Controlled Corporation's Deduction When Liability Is Paid

623

(1)

The Receipt of Boot, Part III (Corporate Obligation to Shareholder)

623

(6)

Overriding Section 351

629

(16)

Statutory Overrides

629

(1)

Depreciation recapture---Section 1245 and 1250

629

(1)

Related Party Transactions---Section 1239

630

(1)

Reallocations by the Commissioner---Section 482

631

(1)

Anti-Bailout Rule I---Section 304

632

(2)

Anti-Bailout Rule II---Section 306

634

(1)

Accounting Method Changes---Sections 446 & 481

635

(1)

Reorganizations---Section 368

636

(1)

Non-Statutory Overrides

637

(1)

Assignment of Income

637

(3)

The Tax Benefit Rule

640

(2)

The Business Purpose Test and the Court Holding Doctrine

642

(3)

Corporate Divisions

645

(80)

Introduction

647

(1)

Forms of Corporate Divisions

647

(2)

Nonrecognition Treatment and the Potential for Tax Avoidance

649

(2)

An Overview of Section 355

651

(4)

``Distributes''

655

(2)

``Stock or Securities''

657

(2)

Distribution of a Controlling Interest

659

(2)

The ``Device'' Test

661

(4)

The Five-Year Active Trade or Business Requirement

665

(15)

Active Conduct of a Trade or Business

666

(3)

Active Conduct of a Trade or Business Through a Subsidiary

669

(1)

The Five-Year Requirements

670

(1)

Division of an Integrated Business and the Problem of ``Expansions''

671

(1)

Division of an Old, Longstanding Business

672

(3)

Division Following a Recent Expansion

675

(3)

Active Business ``Immediately After the Distribution''---Corporate Divisions Followed by Corporate Acquisitions

678

(2)

Nonstatutory Requirements---Business Purpose and Continuity of Interest

680

(6)

Business Purpose

681

(3)

Continuity of Interest

684

(2)

Excess Securities Boot, Stock Boot and Interest Substitute Boot

686

(6)

Excess Securities Boot

687

(2)

Stock Boot

689

(3)

Tax Consequences for Shareholders When Boot is Distributed

692

(14)

Section 356---General Rules

692

(1)

Section 356---Amount and Characterization of Gain

693

(6)

Section 356---Special Problems in Split-Offs With Boot

699

(3)

Section 356---Testing for Dividend Equivalency

702

(4)

Basis Calculation

706

(5)

Taxation of the Distributing Corporation

711

(11)

Not Pursuant to a Reorganization

712

(9)

Pursuant to a Reorganization

721

(1)

Earnings and Profits

722

(3)

Reorganizations

725

(108)

Introduction

727

(1)

What Is At Stake?

728

(7)

Tax Consequences of Mergers and Acquisitions

That Do Not Qualify as Reorganizations

729

(1)

Asset Acquisitions That Do Not Qualify as Reorganizations

730

(1)

Stock Acquisitions That Do Not Qualify as Reorganizations

731

(2)

Tax Consequences of Mergers and Acquisitions

That Qualify as Reorganizations

733

(2)

The Historical Evolution of Reorganizations---Picturing the Development of Extrastatutory Glosses

735

(15)

Continuity of Proprietary Interest

737

(6)

Continuity of Business Enterprise

743

(7)

Other Judicial Doctrines

750

(1)

An Overview of the Statutory Requirements of Reorganizations Today---Picturing the Development of Legislative Categories

750

(12)

Divisive Reorganizations

751

(1)

Acquisitive Reorganizations

752

(10)

Nondivisive, Nonacquisitive Reorganizations

762

(1)

A Closer Look at Statutory Reorganizations

762

(60)

Simple A Reorganizations: Two-Party Mergers

764

(3)

Simple B Reorganizations: Two-Party Acquisitions, Solely Voting Stock for Stock

767

(11)

Simple C Reorganizations: Two-Party Acquisitions, Mostly Voting Stock for Substantially All the Assets

778

(8)

Post-Reorganization ``Drop-Downs'' and § 368(a)(2)(C)

786

(1)

Triangular B Reorganizations

787

(3)

Triangular C Reorganizations

790

(3)

Triangular A Reorganizations: Forward Triangular Mergers Under 368(a)(2)(D)

793

(2)

Triangular A Reorganizations: Reverse Triangular Mergers Under 368(a)(2)(E)

795

(3)

Use of Contingent and Escrowed Stock, and Other Shareholder Agreements

798

(2)

Acquisitive D Reorganizations

800

(6)

Bankruptcy (G) Reorganizations

806

(1)

Nonacquisitive Form Changes (F Reorganizations)

807

(2)

Recapitalizations (E Reorganizations)

809

(3)

Exchange of Stock for Stock

812

(4)

Exchange of bonds for stock

816

(1)

Exchange of bonds for bonds

817

(1)

Exchange of stock for bonds

817

(2)

The Reorganization as Sword: Combating Liquidation-Reincorporation Transactions

819

(3)

Gain Recognition in Qualifying Reorganizations

822

(11)

Boot in a Qualifying Reorganization

824

(5)

General Utilities Repeal (The Distribution of Appreciated Assets) in the Context of a Qualifying Reorganization

829

(4)

Acquisition or Retention of Tax Attributes

833

(94)

Generally

Introduction

835

(8)

Acquisitio of Tax Attributes

Introduction

843

(1)

Liquidation of Subsidiary Corporations

844

(1)

Acquisitive Reorganizations

844

(1)

Triangular Reorganizations

845

(2)

Taxable Years and Carrybacks

847

(2)

F Reorganizations

849

(1)

Net Operating Losses

850

(7)

Earnings and Profits

857

(8)

Statutory Limitations

Introduction

865

(1)

The § 382 Limitation on Net Operating Loss Carryforwards and on Built-In Losses

866

(41)

The § 383 Limitation on Carryovers of Net Capital Losses and of Certain Tax Credits

907

(4)

Limitation on Offsetting Preacquisition Losses and Credits of One Corporation Against Another's Built-In Gains

911

(7)

Acquisitions Made to Evade or Avoid Income Tax---§ 269

918

(9)

Multiple Corporations

927

(72)

Generally

Introduction

929

(1)

Consolidated Returns

Introduction

929

(2)

Qualifications

931

(3)

Acquisition of a Corporation Solely or Primarily for a Tax Purpose

934

(2)

Election

936

(3)

Taxable Year and Accounting Method

939

(1)

Consolidated Taxable Income

940

(16)

Computation

940

(1)

Intercompany Transactions

941

(1)

Non-Deferred Intercompany Transactions

941

(2)

Deferred Intercompany Transactions

943

(8)

Intercompany Distributions

951

(5)

Earnings and Profits and Investment Adjustments

956

(10)

Earnings and Profits

957

(3)

Investment Adjustments to Stock Basis

960

(6)

Excess Loss Account

966

(2)

Group Structure Change

968

(1)

Built-in Deductions and Loss Carryovers

969

(9)

Built-in Deductions

969

(5)

Consolidated Net Operating Loss Deduction

974

(4)

The 1991 Proposed Changes to Limitations on Built-in and Carryover Deductions

978

(2)

Limitation on Deduction of SRLY Carryover Losses

978

(1)

Limitations on Built-in Deductions

979

(1)

Consolidated Return Change of Ownership (CRCO) Limitation

980

(1)

Application of §§ 382 and 383 to a Consolidated Group

980

(2)

Limitation on Tax Benefits for Related Corporations

Introduction

982

(3)

Allocation of Income and Deductions Under § 482

985

(5)

Other Statutory Restrictions

990

(5)

Transfers and Acquisitions Made for the Purpose of Securing a Tax Benefit

995

(2)

Conclusion

997

(2)

Table of Cases

999

(14)

Table of Internal Revenue Code Sections

1013

(12)

Index

1025

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Corporate Income Taxation

Summary

Table of Contents

Supplemental Materials