CONTENTS I SUBCHAPTER C CORPORATIONS 1. 1 Introduction to the Corporate Income Tax 3. 2 Corporate Formation 7

Transcription

1 CONTENTS Preface xxvii I SUBCHAPTER C CORPORATIONS 1 1 Introduction to the Corporate Income Tax 3 2 Corporate Formation 7 A. Introduction 7 1. The 351 Philosophy 7 2. The Statutory Terrain 9 B. Qualification Under Property 11 James v. Commissioner 12 Notes Stock Control 19 a. Definition of Control 19 b. The Transferor Group 19 Kamborian v. Commissioner 20 Notes 24 c. Immediately after the Exchange 25 Intermountain Lumber Co. v. Commissioner 26 Notes 32 Problem 34 xi

2 xii Contents 4. Exceptions 34 C. Tax Consequences of a 351 Exchange A Solely for Stock Exchange 35 Problems Boot 37 a. Shareholders Gain or Loss 37 Rev. Rul b. Shareholders Basis and Holding Period 39 c. Transferee Corporation Gain or Loss 40 d. Transferee Corporation Basis and Holding Period 40 Problems Assumption of Liabilities 41 a. In General 41 b. Assuming a Liability 44 c. Avoiding 357(c)(1) Gain 44 Peracchi v. Commissioner 45 Notes 55 Problems 56 d. Some Anti- Abuse Rules Additional Basis Rules 58 a. Multiple Asset Transfers 58 Rev. Rul b. Section 362(e) 60 Problem Securities Boot and the Installment Method 62 Problem 62 D. Interaction of 351 with Other Code Sections and Legal Doctrines 63 Bradshaw v. United States 63 C- lec Plastics v. Commissioner 69 Notes 72 Hempt Bros., Inc. v. United States 75 Notes 78 Problems 80 3 Corporate Operation 83 A. Corporate Tax Rates and Base Taxable Entity Tax Rate Taxation of Capital Gains and Losses Corporate Tax Base Passive Loss Limitations Taxable Year and Accounting Methods Corporate Alternative Minimum Tax 89 Problems 90 B. Capital Structure 90 Joint Committee on Taxation, Federal Income Tax Aspects of Corporate Financial Structures 91

3 Contents xiii Bauer v. Commissioner 96 Notes 101 Problems Distributions of Cash and Property 109 A. Cash Distributions 110 Rev. Rul Divine v. Commissioner 113 Notes 117 Problems 123 B. Property Distributions The Effect of a Distribution of Property on the Distributing Corporation s Income The Effect of a Distribution of Property on the Distributing Corporation s Earnings and Profits The Effect of a Distribution of Property on Shareholders 129 Problem 130 C. Disguised or Constructive Dividends 130 Baumer v. United States 132 Welle v. Commissioner 139 Notes 142 Problems 149 D. Intercorporate Dividends 149 Litton Industries, Inc. v. Commissioner 149 Notes 154 Problems Redemptions and Partial Liquidations 159 A. Treatment of Shareholders Complete Terminations under 302(b)(3) 161 Seda v. Commissioner 161 Notes 164 Problems Substantially Disproportionate Redemptions under 302(b)(2) 168 Notes 169 Problems Redemptions Not Essentially Equivalent to a Dividend 173 United States v. Davis 173 Henry T. Patterson Trust v. United States 177 Notes 181 Problems Partial Liquidations under 302(b)(4) 188 Rev. Rul Notes 189

4 xiv Contents Problem 192 B. Treatment of the Corporation 192 C. Redemptions Related to Other Transactions Redemptions in Lieu of Buy- Sell Agreements 194 Holsey v. Commissioner 194 Sullivan v. United States 197 Note 199 Problem Redemptions as Part of Bootstrap Acquisitions 201 Problems Redemptions for More or Less than Stock Value 202 Commissioner v. Fink 203 Notes 207 Problem 208 D. Redemptions by Related Corporations Rev. Rul Notes 211 Problem 215 Citizens Bank & Trust Co. v. Commissioner 216 Notes Distributions of Stock 223 A. Distributions of Stock and Stock Rights Under The General Rule of Nontaxability under 305(a) Exceptions to the General Rule: 305(b) and (c) 224 a. Actual Distributions 224 Frontier Savings Association v. Commissioner 225 Rev. Rul Notes 232 b. Constructive Distributions 233 Rev. Rul Rev. Rul Notes 237 Problem 239 B. Tainting of Stock Under Chamberlin v. Commissioner 240 Fireoved v. United States 243 Rev. Rul Rev. Rul Notes 252 Problems Liquidations 259 Rendina v. Commissioner 261

5 Contents xv Note 266 A. Section 331 Liquidations Treatment of Shareholders 267 a. Exchange Treatment under b. Treatment of Liabilities 267 c. Contingent Assets 268 d. Installment Notes 268 e. Allocation of Stock Basis to Liquidating Distributions Treatment of Liquidating Corporation 269 a. Recognition of Gain or Loss at the Corporate Level 269 b. Treatment of Liabilities 270 c. Treatment of Corporate- Level Losses 271 d. Costs of a Liquidation The Court Holding Co. Doctrine and Former Commissioner v. Court Holding Co. 274 Notes 275 Problem 278 B. Subsidiary Liquidations and Related Provisions Section 332 Liquidations 279 Associated Wholesale Grocers, Inc. v. United States 280 Notes 288 Problem Integration of the Corporate and Individual Income Taxes 293 A. The Incidence and Effects of the Corporate Tax 293 Integration of the Individual and Corporate Tax Systems: Taxing Business Income Once Investing in America s Future: Report of the Department of Treasury on the Economic Effects of Cutting Dividend and Capital Gains Taxes in 2003 (March 14, 2006) 298 Notes 301 B. Methods of Integration 302 Reporter s Study of Corporate Tax Integration Notes 307 Problems Taxable Acquisitions 309 A. Asset Purchase Overall Tax Treatment Allocation of Purchase Price 311 B. Stock Purchase Individual Purchaser Corporate Purchaser:

6 xvi Contents a. Introduction 314 b. Background 314 c. Qualification 316 d. Operation 316 e. Examples 317 Notes 320 Problems Corporate Seller 336(e) 325 Notes 327 C. Bootstrap Acquisitions 328 D. Expenses in Connection with an Acquisition 328 INDOPCO, Inc. v. Commissioner 328 Notes 334 E. Corporate Acquisitions and the Use of Debt 337 Joint Committee on Taxation, Federal Income Tax Aspects of Corporate Financial Structures 337 Notes Acquisitive Reorganizations 347 A. Introduction 347 B. Judicial Requirements Continuity of Interest 350 a. Continuity- Preserving Consideration 350 Notes 351 b. Quantity of Continuity- Preserving Consideration 353 Kass v. Commissioner 353 Notes 356 c. Continuity of Business Enterprise 359 d. Business Purpose 360 Problems 363 C. Definitional Issues The A Reorganization: Statutory Mergers and Consolidations 365 Problems The B Reorganization: Stock for Stock 366 Chapman v. Commissioner 367 Notes 377 Problems The C Reorganization: Stock for Assets 380 Notes 381 Problem The Nondivisive D Reorganization 383 Smothers v. United States 385 Notes 392 Problem Remote Continuity Triangular Reorganizations 395 Problem 397

7 Contents xvii 7. Multi- Step Mergers 397 Rev. Rul Notes The Step-Transition Doctrine 402 Rev. Rul Note 405 Problem 406 D. Taxation Overview Corporate- Level Taxation 407 a. The Transferor Corporation s Gain or Loss 407 b. The Acquiring Corporation s Gain or Loss 408 c. The Acquiring Corporation s Bases and Holding Periods in Acquired Assets 408 d. The Parent s Basis in Subsidiary Stock Following a Triangular Reorganization 409 e. Corporate Expenses 409 f. Examples 410 Problem Shareholder- Level Taxation 411 Notes 412 Problems 416 E. The Status of Creditors in Corporate Reorganizations 417 F. Reorganizations of Insolvent or Financially Distressed Corporations 418 Problem 422 G. Policy Divisive Reorganizations 425 A. Taxation Under Overview Potential Abuse Statutory and Judicial Requirements 427 a. The Active Trade or Business Requirement 427 Coady v. Commissioner 427 Rev. Rul Notes 434 b. The Device Limitation 437 c. Business Purpose 438 d. The Distribution Requirement 441 e. Continuity of Interest Forms of Divisive Transactions Taxation of Divisive Transactions Predistribution Purchases Section 355(d) Nonqualifying Transactions Criss- Cross Transactions 448 Problems 448 B. Variations 450 Problem 451

8 xviii Contents Commissioner v. Morris Trust 451 Notes 457 Problem One- Party Reorganizations 463 A. Recapitalizations 463 Bazley v. Commissioner 465 Notes 467 B. Reincorporations 469 Problems Combining Tax Attributes: Net Operating Losses and Affiliated Corporations 473 A. Carryover of Tax Attributes Section Section Notes Section Section Section Commissioner v. British Motor Car Distributors 486 Notes 488 Problems 490 B. Affiliated Corporations 492 Notes 493 Problems Penalty Provisions 503 A. Accumulated Earnings Tax 504 Notes 505 Problem 512 B. Personal Holding Company Tax 512 Notes The Corporation as a Separate Taxable Entity 517 A. Definition of a Corporation Morrissey v. Commissioner Professional Corporations The Association Regulations Larson and Limited Partnerships 519

9 Contents xix 5. The Check- the- Box Regulations Limited Liability Companies 521 B. Dummy Corporations 522 Commissioner v. Bollinger 522 Note 527 Problem 528 C. Reallocation of Income and Related Issues Section 482 in General 529 a. Sales of Tangible Property 530 b. Services 533 c. Rentals of Tangible Property 534 d. Licenses of Intangible Property 534 e. Loans The Interplay of 482 and Foreign Law 536 Problem Income Shifting and the Assignment of Income Doctrine 537 Problem Denial of Tax Benefits under 269A 539 II SUBCHAPTER S CORPORATIONS S Corporations: Overview 543 A. Introduction 543 B. The S Corporation Election 545 Kean v. Commissioner 545 Rev. Rul Notes 551 Problems 553 C. Formation 553 D. Pass- Thru of Corporate Income and Deduction 555 Problem 557 E. Nonredemptive, Nonliquidating Distributions 557 Problem 560 F. Dispositions of Shares and Liquidating Distributions Disposition of Stock Not in Redemption 560 Problems Redemptions of Stock Liquidating Distributions 565 Problem S Corporations: Selected Topics 569 A. One Class of Stock 569 Notes 569 Problem 571

10 xx Contents B. Qualified Subchapter S Subsidiaries 572 Notes 572 Problem 575 C. Stock and Debt Basis 575 Problem 578 D. Assignment of Income Concerns Pre- Contribution Appreciation and Related Problems 578 Problems Family Ownership and 1366(e) 579 E. Sales of Stock and 336(e) and 338(h)(10) Elections 580 Problems Transition Issues 583 A. From C Corporation to S Corporation Shareholder Taxation of Distributions 583 Problems Corporate- Level Tax on Built- In Gains 586 Problem Disabilities Associated with Passive Investment Income 588 Notes 589 Problem No Carryover from C Year to S Year 591 B. From S Corporation to C Corporation 591 III SUBCHAPTER K PARTNERSHIPS The Structure of Partnership Taxation 597 A. Note on Limited Liability Companies 597 B. The Pass- Thru of Partnership Income 598 United States v. Basye 599 Problem 604 C. Formation and Operation of the Partnership 604 Problem 606 D. Nonliquidating Distributions 606 Problems 611 E. Dispositions of Partnership Interests 611

11 Contents xxi 20 Determining Distributive Shares 613 A. Basic Maintenance of Capital Accounts 614 Problem 616 B. Economic Effect I: The General Test 616 Notes 624 Problems 625 C. Economic Effect II: The Alternate Test 625 Rev. Rul Notes 629 Problems 632 D. Allocations with Respect to Contributed Property Allocations to the Contributing Partner under 704(c)(1)(A) 632 Problem 636 a. The Traditional Method 637 b. The Traditional Method with Curative Allocations 637 c. The Remedial Allocation Method 639 Notes 641 Problem Reverse 704(c) Allocations to the Existing Partners 642 Problems 644 E. Failure to Satisfy the Economic Effect Test 644 Notes 646 F. Allocations of Deductions Attributable to Nonrecourse Debt Definitions 648 a. Nonrecourse Liability 648 b. Minimum Gain 649 c. Nonrecourse Deductions General Principles Distribution of Refinancing Proceeds Book/ Tax Disparities Partner Nonrecourse Debt 659 Problem 659 G. Substantiality under 704(b) 660 Notes 662 Problems 665 H. Prohibitions on Retroactive Allocations 666 Problems A Partner s Outside Basis 669 A. Basic Principles under B. Partnership Indebtedness and Outside Basis History and Basic Principles 672 Abramson v. Commissioner 672

12 xxii Contents 2. Allocations under the Regulations 677 Notes 678 a. Recourse Liabilities 678 Note 680 Problems 681 b. Nonrecourse Liabilities 682 Problems 686 C. Why 752? 686 D. Holding a Partnership Interest Through a Disregarded Entity Guarantee of a Disregarded Entity s Partnership Obligation The Impact of Assets Owned by the Disregarded Partner 690 E. Bifurcated Holding Period of a Partnership Interest 691 F. The Effect of Indebtedness on Partnership Allocations Nonliquidating Distributions 695 A. Distributions not Subject to 751(b) Basic Taxation Rules 695 a. Recognition of Gain and Loss 695 b. Basis of Distributed Property and Outside Basis 695 c. The Timing of Taxation 697 Note 698 Problems Distributions and Capital Accounts 698 a. Excess Cash 698 b. Appreciated and Loss Property 700 Problem Distributions of Encumbered Property 703 Rev. Rul Note 707 Problem Distribution of Marketable Securities 708 Problem Disposition of Distributed Assets 709 Problem 710 B. Distributions Subject to 751(b) The Definition of Unrealized Receivables The Definition of Substantially Appreciated Inventory 711 a. Partnership Inventory Items 711 b. Substantial Appreciation Operation of 751(b) 713 a. Step 1: Determine Each Partner s Predistribution Share of the Partnership s 751(b) Income 714 b. Step 2: Determine Each Partner s Postdistribution Share of the Partnership s 751(b) Income 714

13 Contents xxiii c. Step 3: Compute the 751(b) Ordinary Income to the Partners 715 d. Step 4: Adjust Inside and Outside Bases for the Income Recognized in Step e. Step 5: Apply the rules of 731, 732, and 733 to the Actual Distribution 715 f. Example 716 C. Distributions and the Dynamic Nature of Recourse Debt A Partner s Transactions with the Partnership 725 A. Guaranteed and Similar Payments 725 Problems 727 B. Disguised Sales 728 Canal Corporation and Subsidiaries v. Commissioner 728 Notes 734 Problems 744 C. Distributions of Contributed Property: 704(c)(1)(B) 744 Problem 745 D. Swap Transactions under Notes 747 Problem 748 E. Capitalization Avoidance and 707(a)(2)(A) 749 Problem 750 F. Limitations Applicable to Controlled Partnerships Disallowed Losses 751 Note Capital Gains 753 Problems Acquisitions of Partnership Interests 755 A. Contributions of Property Basic Principles Encumbered Property 756 Problem Payables and Receivables 759 Problem Promissory Notes Holding Periods Disposition of Contributed Property 762 Problem Contributions to Investment Companies 763 B. Contributions of Services Taxation of the Contributing Partner 764

14 xxiv Contents Revenue Procedure Notes 766 Problem Taxation of the Partnership 769 C. Noncontribution Acquisitions 771 Problem Dispositions of Partnership Interests 773 A. Distributions in Liquidation of a Partnership Interest Application of a. A First Note on the Application of b. Classification of Payments under c. Taxation under 736(a) of Payments in Liquidation of a General Partnership Interest When Capital Is Not a Material Income- Producing Factor Taxation under 736(b), 731, and Notes Taxation of Payments under 751(b) Deferred Payments Section 736, Partnership Goodwill, and the 704(b) Regulations 785 Problem 786 B. Disposition of a Partnership Interest Basic Rules Application of 751(a) 787 Problems Taxation of the Capital Gain Portion 790 a. Holding Period 790 b. Capital Gain Rate Non- Sale Dispositions Closing of the Taxable Year Termination of the Partnership 792 Notes 794 Problems Death of a Partner 795 C. Partial Dispositions No Partnership Liabilities 796 a. Partial Sale of a Single Interest 796 b. Sale of One Interest Out of Many Partnership Liabilities Are Present Loss Limitations 799 A. Section 704(d): The Outside Basis Limitation The Relation of 704(d) to 704(c) 800

15 Contents xxv 2. Transfers of Partnership Interests 801 Problem 802 B. Section 465: The At- Risk Limitation An Overview of The 465 Proposed Regulations Application of 465 to Partners and Partnerships 806 Problem 808 C. A Reexamination of 704(d) and Its Relation to 704(b) Misallocation of Loss 808 Problem Contributions of Notes 811 D. Section 469: The Passive Loss Limitations 812 E. Section 163(d): The Investment Interest Limitation 814 Problems Inside Basis Adjustments 817 A. The Inside Basis Adjustment under 734(b) Distributions Triggering the Inside Basis Adjustment 818 a. Nonliquidating Distributions of Excess Cash 818 b. Nonliquidating Distributions of High- Basis Property 819 c. Liquidating Distributions The Amount of the Adjustment under 734(b) Allocating the 734(b) Adjustment under a. Allocation of Positive 734(b) Adjustments 822 b. Allocation of Negative 734(b) Adjustments 823 c. Allocation of 734(b) Adjustments to Depreciable Property 824 Notes 825 Problems The Flaw in the 734(b) Inside Basis Adjustment 826 Problem 828 B. The Inside Basis Adjustment under 743(b) Two- Way Adjustments under 743(b) Allocating the 743(b) Adjustment under a. Basic Rules 836 b. Allocation of 743(b) Adjustments to Depreciable Property 838 c. Partnership Disposition of Adjusted Property Distribution of Property Subject to a 743(b) Basis Adjustment 839 Notes 840 Problems 841 C. Mechanics of the Election 842 Note 843 D. Optional Basis Adjustments and Capital Accounts 843 E. Basis Adjustments under 732(d) 844

16 xxvi Contents 28 Partnership- Level Issues 847 A. Classification as a Partnership Elective Classification 848 Notes Publicly Traded Partnerships Recognizing Partner Status 852 a. General Principles 852 b. Family Partnerships 852 Problem 855 B. Partnership Elections Taxable Year 855 Problems Method of Accounting 857 C. Special Issues The Anti- Abuse Rules 858 a. The General Anti- Abuse Rule 858 Problem 860 b. The Abuse of Entity Rule Treatment of Organization and Syndication Expenses 860 Problem Cancellation of Indebtedness Income and Table of Cases 865 Table of Revenue Ruling and Procedures 871 Index 875