Federal Income Taxation of Business Enterprises: Cases, Statutes, Rulings, 4th. Edition 2012

Transcription

1 Faculty Book Display Case School of Law Federal Income Taxation of Business Enterprises: Cases, Statutes, Rulings, 4th. Edition 2012 Sergio Pareja The University of New Mexico School of Law, Richard A. Westin University of Kentucky Ricahrd C.E. Beck New York Law School Follow this and additional works at: Part of the Business Organizations Law Commons, and the Tax Law Commons Recommended Citation Pareja, Sergio; Richard A. Westin; and Ricahrd C.E. Beck. "Federal Income Taxation of Business Enterprises: Cases, Statutes, Rulings, 4th. Edition 2012." (2012). This Book is brought to you for free and open access by the School of Law at UNM Digital Repository. It has been accepted for inclusion in Faculty Book Display Case by an authorized administrator of UNM Digital Repository. For more information, please contact

2 FEDERAL INCOME TAXATION OF BUSINESS ENTERPRISES CASES, STATUTES, RULINGS THIRD EDITION RICHARD A. WESTIN Professor of Law University of Kentucky College of Law RICHARD C.E. BECK Professor of Law New York Law School SERGIO PAREJA Associate Professor of Law University of New Mexico School of Law Vandeplas Publishing UNITED STATES OF AMERICA

3 Westin, Richard A., Beck, Richard C.E., Pareja, Sergio Federal Income Taxation of Business Enterprises Cases, Statutes and Rulings Third Edition 20 I 0 Published by: Vandeplas Publishing - January International Parkway, 5 th Floor Lake Mary, FL USA All Rights Reserved ISBN: Richard A. Westin & Richard C.E. Beck & Sergio Pareja- 2010

4 Preface Albert Einstein once said that "things should be as simple as possible, but no simpler." That wise observation applies to the teaching of federal income taxation, among other things. In recent years, the Internal Revenue CQ_de has become ever more complex, as has the teaching of the taxation of business enterprises. The practical problem is that the law student who plans a career in business law is in an unpleasant predicament. He or she must either avoid federal income tax courses, and bear the guilty knowledge that a large area of relevant law has been overlooked, with significant implications in terms of personal feelings of inadequacy, or face the burden of taking a large dose of notoriously difficult courses in corporate and partnership taxation. This book is designed to alleviate that Hobson's choice. Whether it has succeeded is for the instructor and student to decide. This book provides teaching materials for a basic income taxation course dealing with the taxation of partnerships, corporations, S corporations, and limited liability companies. In addition, it alludes to a short list of other business enterprises. It can definitely be completed in the usual three hours assigned to such courses, on the assumption that students will spend two hours of preparation for each hour in the classroom. The book begins with the study of partnerships, moves to C corporations, then to S corporations, then to limited liability companies, and closes with an optional review of some unusual forms, such as cooperatives, regulated investment companies, and real estate investment trusts. In general, we take a cradle-to-grave approach to each subject. Our teaching of the course out of these materials convinces us that the order is realistic and effective. The cases have been extensively edited, and most footnotes in the original cases have been eliminated (and in one case, split) without any explicit reference to the fact of their elimination, other than the words in this paragraph. Case and statute citations of the court and commentators, as well as footnotes, have been omitted without so specifying; numbered footnotes are from the original materials but do not retain the original numbering, except by accident. The book is fairly rich with problems that are scattered along the way, rather than at the end of each chapter. They are not especially difficult and are designed to build confidence while at the same time forcing at least some review of the central Code provisions and pertinent regulations. We do not view this as a "problems" book, and we advise students that if they find themselves struggling unduly with a problem, to drop it, but always at least take a crack at the problems, because if they do not, the colloquy in class in which the answer is revealed will pass over their heads. Richard A. Westin Lexington, Kentucky, 2009 Richard C.E. Beck New York City, New York, 2009 Sergio Pareja Albuquerque, New Mexico, 2009 V

5 Summary Table of Contents Preface... v Table of Contents... xiii CHAPTER 1. THE TAX CHARACTER OF PARTNERSHIPS... 1 A. Introduction... 1 B. The Growing Popularity of Partnerships... 2 C. Partnership Status...,... 3 D. IRS Audits CHAPTER 2. PARTNERSHIP FORMATION A. Contributions of Capital B. Contributions of Services C. Assignment of Income Principles CHAPTER 3. PARTNERSHIP OPERATIONS A. Taxation of Partnership Operations CHAPTER 4. TRANSACTIONS BETWEEN PARTNERS AND PARTNERSHIPS A. Limitations on Losses in Transactions between Partners and Partnerships B. Conversion of Character of Assets C. Limitations on Current Deductions on Transactions Between Partners and Partnerships D. Guaranteed Payment E. Disguised Transactions F. Fringe Benefits CHAPTER 5. PARTNERSHIP ALLOCATIONS A. Allocation of Profits and Losses Generally B. Apportioning Partnership Liabilities C. Varying Intra-Year Capital Shares D. Family Partnerships CHAPTER 6. SALES AND EXCHANGES OF PARTNERSHIP INTERESTS A. Taxation of the Seller: The General Rule B. Exception For C. Taxation of the Buyer CHAPTER 7. OPERATING DISTRIBUTIONS A. Effect on Partner B. Effect on Partnership Vll

6 C. Disproportionate Distributions Involving "Hot Assets" CHAPTER 8. LIQUIDATION OF A PARTNERSHIP INTEREST A. Introduction B. Sale Versus Liquidation C. Taxing the Partner: Section D. Liquidating the Two-Person Partnership E. Taxation of the Partnership F. Selecting between a Sale or a Liquidation of the Partnership Interest G. The Partnership Anti-Abuse Rule Regulations CHAPTER 9. TERMINATION OF A PARTNERSHIP A. Introduction B. Termination by Cessation of Business C. Technical Terminations CHAPTER 10. MERGER AND DIVISION OF PARTNERSHIPS A. Merger of Partnership Date B. Division of a Partnership CHAPTER 11. DEATH OF A PARTNER A. Partnership Income B. Estate Taxes C. Other Estate Tax Issues CHAPTER 12. INTRODUCTION TO THE CORPORATE INCOME TAX A. Incidence of the Income Tax B. Integration of Corporate and Shareholder Level Taxes C. Corporate Taxes and Tax Rates D. Operating Via Overseas Subsidiaries CHAPTER 13. RECOGNITION OF THE CORPORA TE FORM A. Background B. Other Bases for Attacking the Corporation Form CHAPTER 14. ORGANIZATION OF A CORPORATION A. Introduction B. Taxation of the Corporation C. Taxation of the Shareholder D. Transfer of Property in Exchange for Stock E. Stock F. The Special Problem of Nonqualified Preferred Stock Vlll

7 G. The Control Requirement H. Control Immediately After the Transaction I. Accommodation Transferors J. The Impact of "Boot" K. Assumption of Liabilities L. Property Transferred in Exchange M. Basis of Transferor's Stock N. Corporation's Basis for Property It Receives Special Problems of Midstream Incorporation P. Contributions to Capital Distinguished Q. Organizational and Syndication Expenditures CHAPTER 15. PLANNING THE CORPORATION'S CAPITAL STRUCTURE A. The Debt-Equity Problem B. The Section 1244 Stock Opportunity C. Section 1202 and 1044 Opportunity CHAPTER 16. DISTRIBUTIONS FROM CORPORATIONS TO SHAREHOLDER A. Introduction B. Basic Structure C. Chronological Aspects of Dividends D. "Earnings and Profits" Explained E. Disguised and Constructive Distributions F. Distributions of Property G. Distribution of Corporate Obligations H. Dividends-Received Deduction I. Minimum Holding Period in Order to Claim Dividends- Received Deduction J. Mandatory Basis Stock Reduction for Extraordinary Dividends K. Leveraged Dividends L. Dividends-Received Deductions and Sale of a Subsidiary M. Stock Dividends N. Basis and Holding Period of Stock Section 306 Stock CHAPTER 17. REDEMPTIONS OF CORPORA TE STOCK A. Constructive Ownership B. Redemption not Essentially Equivalent to a Dividend C. Substantially Disproportionate Redemptions D. Complete Termination of the Shareholder's Interest E. Redemptions in Partial Liquidation of the Corporation F. Redemptions to Pay Death Taxes G. Redemptions through Related Corporations lx

8 CHAPTER 18. LIQUIDATIONS A. State Law Background B. Complete Liquidations C. Recognition of Losses under D. Section 332 Liquidations CHAPTER 19. TAXABLE ACQUISITIONS A. Introduction B. Types of Taxable Acquisitions C. Asset Purchases D. Overviews of E. Stock Purchases CHAPTER 20. TAX-FREE CORPORA TE DIVISIONS A. Tax-Free Corporate Divisions under Current Law B. Tax Treatment of Distributing Corporation, Aside from 355(d) and (e) C. Recent Limits on Tax-Free Divisions 355(d) and 355(e) D. Spin-off Followed by a Taxable Acquisition E. Tax Treatment of Distributees in a Corporate Division F. Distributions in Connection with Taxable Divisions CHAPTER 21. CORPORATE REORGANIZATIONS A. Introduction B. Code Structure C. Statutory Mergers and Consolidations D. Type B Reorganizations E. Type C Reorganizations F. Triangular Mergers G. Acquisitive Type D Reorganizations H. Type E Reorganizations I. Type F Reorganizations J. Type G Reorganizations K. Treatment of the Parties to a Reorganization L. Contingent Payouts CHAPTER 22. CARRYOVERS OF TAX ATTRIBUTES AND RESTRICTIONS ON CARRYOVERS A. Section 269: The Subjective Approach to Denying Losses B. Section 382: The Objective Approach to Losses C. Section 384: Limitation on Use of Pre-Acquisition Losses To Offset CHAPTER 23. SPECIAL CORPORA TE PENALTY OR REGULATORY TAXES A. Introduction B. Accumulated Earnings Tax X

9 C. Calculating the Tax D. Personal Holding Companies E. Limitations on the Use of Multiple Corporations F. Consolidated Returns CHAPTER 24. S CORPORATIONS: DEFINITION AND QUALIFICATIONS A. lntroduction B. Eligibility to Elect Status C. Loss of Status Via Termination or Revocation of the Election CHAPTER 25. T AXA TI ON OF THE ENTITY AND ITS OWNERS A. Conduit Model B. Computation of Corporate Tax Base C. Elections D. Built-in Gains Tax on S Corporations that Formerly Were C Corporations E. Tax on Excess Net Passive Income F. Pass-Through oflncome and Loss: Timing of Pass- Through and Character oflncome G. Limits on Use of Losses and Deductions H. Current Distributions: Introduction I. Relationship of Subchapter S to Rest of Code CHAPTER 26. LIMITED LIABILITY COMPANIES A. Background B. The Wyoming Response C. Current Status D. Selected Complications Appendix: Flow Chart and IRS Forms Flow Chart Form 1065: U.S. Partnership Return oflncome Schedule K-1: Partner's Share oflncome, etc Form 2553: Election by a Small Business Corporation Form 8832: Entity Classification Election Xl

10 Table of Contents Preface... v Summary Table of Contents... vii CHAPTER 1. THE TAX CHARACTER OF PARTNERSHIPS... 1 A. Introduction: State Law Characteristics Tax Background... 1 B. The Growing Popularity of Partnerships... 2 C. Partnership Status... 3 Larson v. Commissioner... 4 Notes... 6 Rev. Rul Partner in a Partnership or Lender Dorzback v. Collison... l 0 Notes Publicly Traded Partnerships Problem Election Against Partnership Status Madison Gas & Electric Co. v. Commissioner Notes Retroactive Amendments of Partnership Agreement D. IRS Audits Problem l CHAPTER 2. PARTNERSHIP FORMATION A. Contributions of Capital Nonrecognition of Gain United States v. Stafford Notes Basis Effects a. Impact of Section 704(c) on Contributed Property b. Holding Periods Impact of Debt on Outside Basis Problem Capital Accounts Problem Section 724: Closing Loopholes Problem B. Contributions of Services Capital Interest Received for Services a. Impact on the Service Partner McDougal v. Commissioner b. Impact on the Partnership Xlll

11 Problem Receipt of a Profits Interest for Services Campbell v. Commissioner Rev. Proc Problem C. Assignment of Income Principles CHAPTER 3. PARTNERSHIP OPERA TIO NS A. Taxation of Partnership Operations Computing Partnership Income a. Separately Stated Items Gershkowitz v. Commissioner Note b. Disallowed Deductions c. Organization, Syndication and Start-Up Expenditures Problem Partnership Level Elections a. Accounting Method Problem b. The Partnership's Tax Year Notes Problem Problem Tax Consequences to Partners a. Timing of Distributive Shares Commissioner v. Goldberger's Estate Notes b. Character of Distributive Shares Problem c. The Special Case of Electing Large Partnerships d. Adjustments to Basis (1) Partner's (Outside) Basis and Partnership's (Inside) Basis (2) Impact oflncome and Loss on a Partner's Basis (3) Impact of Distributions on a Partner's Basis (4) Outside Basis Adjustments for Partnership Income That Is Tax-Exempt (5) Basis Adjustments for Partnership Expenses That Are Nondeductible (6) Basis Adjustments for Partnership Expenditures That Are Capitalized (7) Symmetry between Inside and Outside Basis Problem XIV

12 e. General Deferral Limitation on Flow-Through of Losses Sennett v. Commissioner Questions f. Other Restrictions on Losses (1) At-Risk Rules (2) Hobby Losses (3) Passive Activity Losses Problem CHAPTER 4. TRANSACTIONS BETWEEN PARTNERS AND PARTNERSHIPS A. Limitations on Losses in Transactions between Partners an Partnerships B. Conversion of Character of Assets C. Limitations on Current Deductions on Transactions Between Partners and Partnerships Problem D. Guaranteed Payment Impact on Recipient Pratt v. Commissioner Note Problem Rev. Ru! Notes Guaranteed Payment Plus Allocation Problem Problem E. Disguised Transactions Compensation Disguised as a Distribution Problem Sales and Exchanges Disguised as Distributions Problem F. Fringe Benefits CHAPTER 5. PARTNERSHIP ALLOCATIONS A. Allocation of Profits and Losses Generally Orrisch v. Commissioner Note I. Special Allocations Versus "Bottom-Line" Allocations Post-1985 Approach to Partnership Allocations a. Economic Effect b. Substantial (1) General Rule (2) Shifting and Transitory Allocations (a) Shifting Allocations Problem xv

13 (b) Transitory Allocations Problem c. Amendment of the Partnership Agreement d. Partner's Interest in the Partnership Problem B. Apportioning Partnership Liabilities I. The Meaning of "Partnership Liabilities" Determining Whether a Partnership Liability is Recourse or Nonrecourse... l Apportioning Recourse Liabilities Problem Apportioning Nonrecourse Liabilities... l Allocating Deductions Attributable to Nonrecourse Debt. l 03 a. Background... l 04 b. The Four-Part Test Problem I 06 C. Varying Intra-Year Capital Shares Varying Capital Interests... l Admission of New Partner Sale, Exchange, or Liquidation of Entire Interest Cash method Items Limit... l 08 Problem l 08 D. Family Partnerships... I Recognition of the Family Partnership... I Limits on Allocations... I 09 Problem l 09 CHAPTER 6. SALES AND EXCHANGES OF PARTNERSHIP INTERESTS A. Taxation of the Seller: The General Rule Problem B. Exception For l. Contract Interests as Unrealized Receivables Ledoux v. Commissioner Traditional Recapture Items Inventory Items Problem Calculating Gains and Losses from Sale or Exchange of Partnership Interests Inventory Items Problem C. Taxation of the Buyer l. Introduction Section 743(b) Optional Basis Adjustment Rev. Rul Problem Section 755: Allocating Section 743 Basis Adjustment Problem XVl

14 CHAPTER 7. OPERATING DISTRIBUTIONS A. Effect on Partner l 1. Introduction l 2. Distributions ofcash Problem Problem Distributions of Property a. Distributee's Basis in Distributed Property and Partnership Interest Problem b. Character and Holding Period of Distributed Property c. Section 732( d) Election Problem d. Distributions of Encumbered Property Rev. Rul Problem B. Effect on Partnership Section 734 Election l a. Ameliorating timing problems: Section 734(b) (l)(a) and (b)(2)(a) b. Basis: Section 734(b )(I )(8) and (b )(2)(8) Problem C. Disproportionate Distributions Involving "Hot Assets" Problem CHAPTER 8. LIQUIDATION OF A PARTNERSHIP INTEREST A. Introduction B. Sale Versus Liquidation Problem 8-l Foxman v. Commissioner Notes Modified Distribution Rules for Partnership Liquidations Losses on Distribution Problem l 53 C. Taxing the Partner: Section l 53 l. Role of Payments for Partner's Share of Property: Section 736(b) Treatment of Payment for Partner's Share of Unrealized Receivables and Goodwill Treatment of 736(a) Payments Problem Interaction of 75l(b) on 736 Payments Timing of a 73 l(a) Gain XVll

15 Estate of Thomas P. Quirk v. Commissioner Question D. Liquidating the Two-Person Partnership E. Taxation of the Partnership F. Selecting between a Sale or a Liquidation of the Partnership Interest Kinney v. United States Notes Problem G. The Partnership Anti-Abuse Rule Regulations General Anti-abuse Rule Abuse of Entity Treatment CHAPTER 9. TERMINATION OF A PARTNERSHIP A. Introduction B. Termination by Cessation of Business Neubecker v. Commissioner Problem C. Technical Terminations Section 754 Issues Problem Evans v. Commissioner Problem CHAPTER 10. MERGER AND DIVISION OF PARTNERSHIPS A. Merger of Partnerships Rev. Rul Notes Rev. Ru! Notes Problem Problem I 93 B. Division of Partnership Problem CHAPTER 11. DEATH OF A PARTNER A. Partnership Income... I Generally Problem Problem of Lost Deductions B. Estate Taxes Quick's Trust v. Commissioner Note Rev. Ru! Problem C. Other Estate Tax Issues XVlll

16 1. Estate Freeze Buy-Sell Agreement St. Louis County Bank, Executor v. United States of America Notes Problem CHAPTER 12. INTRODUCTION TO THE CORPORATE INCOME TAX A. Incidence of the Corporate Income Tax B. Integration of Corporate and Shareholder Level Taxes C. Corporate Tax Base and Tax Rates D. Operating Via Overseas Subsidiaries CHAPTER 13. RECOGNITION OF THE CORPORATE FORM A. Background Commissioner v. Bollinger Notes and Questions B. Other Bases for Attacking the Corporation Form Achiro v. Commissioner Note Problem CHAPTER 14. ORGANIZATION OF A CORPORATION A. Introduction B. Taxation of the Corporation l C. Taxation of the Shareholder D. Transfer of Property in Exchange for Stock E. Stock Hamrick v. Commissioner F. The Special Problem ofnonqualified Preferred Stock G. The Control Requirement Rev. Rul Problem H. Control Immediately after the Transaction Fahs v. Florida Machine & Foundry Co Notes I. Accommodation Transferors Problem J. The Impact of "Boot" Rev. Ru! K. Assumption of Liabilities Peracchi v. Commissioner Problem L. Property Transferred in Exchange James v. Commissioner XlX

17 Note M. Basis of Transferor's Stock Problem N. Corporation's Basis for Property It Receives Problem Problem Problem Special Problems of Midstream Incorporation Hempt Bros., Inc. v. United States Notes Rev. Rul I P. Contributions to Capital Distinguished Senate Report No. I Notes Problem Q. Organizational And Syndication Expenditures CHAPTER 15. PLANNING THE CORPORA TIO N'S CAPITAL STRUCTURE A. The Debt-Equity Problem Plantation Patterns, Inc. v. Commissioner Notes Problem I B. The Section 1244 Stock Opportunity Problem I C. Section 1202 and 1044 Opportunities Problem I CHAPTER 16. DISTRIBUTIONS FROM CORPORATIONS TO SHAREHOLDERS WITH RESPECT TO THEIR SHARES A. Introduction B. Basic Structure C. Chronological Aspects of Dividends D. "Earnings and Profits" Explained Problem Problem Problem E. Disguised and Constructive Distributions Stinnett's Pontiac Service, Inc. v. Commissioner Problem F. Distributions of Property Notes and Problems Problem I G. Distribution of Corporate Obligations H. Dividends-Received Deduction I. Minimum Holding Period to Avoid Basis Reduction xx

18 J. Mandatory Stock Basis Reduction for Extraordinary Dividends Problem K. Leveraged Dividends Problem L. Dividends-Received Deductions and Sale of a Subsidiary Litton Industries, Inc. v. Commissioner Question M. Stock Dividends Problem Optional Distributions to Shareholders Distributions of Common and Preferred Stock Problem Distributions on Preferred Stock Problem Distributions of Convertible Preferred Stock Problem Disproportionate Distributions Problem Constructive Distributions Problem Problem N. Basis and Holding Period of Stock Section 306 Stock Problem CHAPTER 17. REDEMPTIONS OF CORPORATE STOCK A. Constructive Ownership B. Redemption not Essentially Equivalent to a Dividend United States v. Davis Notes and Questions Problem Problem Problem C. Substantially Disproportionate Redemptions Patterson Trust v. United States Notes Problem D. Complete Termination of the Shareholder's Interest Priv. Ltr. Rul Notes Grove v. Commissioner Problem E. Redemptions in Partial Liquidation of the Corporation Problem l Problem F. Redemptions to Pay Death Taxes XXI

19 Rev. Rul Problem G. Redemptions through Related Corporations Problem CHAPTER 18. LIQUIDATIONS A. State Law Background B. Complete Liquidations I. Shareholder Level Effects Corporate Level Effects Problem Problem Notes C. Recognition of Losses under House of Representatives Report No. 841, Problem Problem D. Section 332 Liquidations I. Requirements Imposed by Minority Shareholders Problem Rev. Rul Notes Problem Problem CHAPTER 19. TAXABLE ACQUISITIONS A. Introduction B. Types of Taxable Acquisitions C. Asset Purchases Newark Morning Ledger Co. v. United States Note D. Overview of Problem Problem E. Stock Purchases I. The Section 338(g) Election Deemed Elections under Problem Section 338(h)(IO) Bilateral Election Section 336(e) Unilateral Election Review of Some Options Problem l CHAPTER 20. TAX-FREE CORPORA TE DIVISIONS Illustrative Problem Gregory v. Helvering xxu

20 A. Tax-Free Corporate Divisions under Current Law Control Distribution Threshold Problem Business Purpose Rafferty v. Commissioner Notes Device for Distributing Earnings and Profits Active Trade or Business Requirement Problem Vertical Division of a Single Business Horizontal Division of a Single Business Nielsen v. Commissioner Notes and Questions Problem B. Tax Treatment of Distributing Corporations, Aside from 355(d) and (e) General Rules Impact on Tax Attributes of Distributing Corporation Spin-Off of Unwanted Assets Followed by Tax-Free Acquisition Commissioner v. Morris Trust Notes C. Recent Limits on Tax-Free Divisions: 355(d) and I. Section 355(d) Limitation Section 355(e) Limitation Problem D. Spin-Off Followed by a Taxable Acquisition E. Tax Treatment of Distributees in a Corporate Division Boot in a Spin-Off Split-Off or Split-Up Problem F. Distributions in Connection with Taxable Divisions CHAPTER 21. CORPORATE REORGANIZATIONS A. Introduction B. Code Structure C. Statutory Mergers and Consolidations Minimum Continuity of Proprietary Interest Estate of Mose Silverman v. Commissioner Note G.C.M Rev. Ru! Notes JE. Seagram Corp. v. Commissioner Rev. Ru! Notes XXlll

21 XXIV Problem Continuity of Business Enterprise in a Reorganization Problem D. Type B Reorganizations General Notes Creeping "B" Reorganizations Problem Problem Acquiring Company's Basis in Target Company Stock Problem E. Type C Reorganizations Substantially All the Properties Permissible Consideration Overlaps Rev. Rul Problem F. Triangular Mergers Forward Triangular Mergers Reverse Triangular Mergers Problem G. Acquisitive Type D Reorganizations and 356(b) Notes H. Type E Reorganizations Bazley v. Commissioner Notes Rev. Rul Notes I. Type F Reorganizations Problem J. Type G Reorganizations K. Treatment of the Parties to a Reorganization I. Impact on Corporations a. As to the Transferor (Target) Corporation b. As to the Transferee (Acquiring) Corporation c. The Acquiring Company's Basis in Acquired Assets d. Foreign Corporations Taxation of Shareholders and Security Holders Commissioner of Internal Revenue v. Clark Notes Rev. Rul Note Problem Problem L. Contingent Payouts Rev. Proc

22 CHAPTER 22. CARRYOVERS OF TAX ATTRIBUTES AND RESTRICTIONS ON CARRYOVERS Problem A. Section 269: The Subjective Approach to Denying Losses Canaveral International Corp. v. Commissioner Question B. Section 382: The Objective Approach to Losses l. Introduction a. Ownership Change b. Owner Shift Involving 5% Shareholders c. Equity Structure Shift d. Constructive Ownership Limits on the Use of NOL after an Ownership Change a. Business Continuity Requirement b. Annual Income Limitation c. Anti-Stuffing Rules d. Built-in Gains and Losses Problem Problem Problem Problem C. Section 384: Limitation on Use of Pre-Acquisition Losses to Offset Built-In Gains Problem Problem Problem CHAPTER 23. SPECIAL CORPORA TE PENALTY OR REGULATORY TAXES A. Introduction B. Accumulated Earnings Tax Myron's Enterprises v. United States Problem C. Calculating the Tax Problem D. Personal Holding Companies Introduction Determination of Personal Holding Company Status a. The Incorporated Talent Rev. Rul b. The Incorporated Pocketbook c. The Incorporated Yacht d. Miscellaneous (1) In the Foreign Sphere (2) Overlap (3) Deficiency Dividends (4) Realism XXV

23 Problem E. Limitations on the Use of Multiple Corporations Problem F. Consolidated Returns Qualifying to File a Consolidated Return Computing Consolidated Income and Loss Deferral and Elimination of Intercompany Transactions lntercompany Distributions Basis in Subsidiary Stock Implications of Admitting and Eliminating Members Wolter Construction Company, Inc. v. Commissioner. 518 Problem Problem CHAPTER 24. S CORPORATIONS: DEFINITION AND QUALIFICATIONS A. Introduction B. Eligibility to Elect Status Subsidiary Corporations One Hundred Shareholder Limit Limits on Types of Shareholders a. Nonresident Aliens b. Trusts ( I )Trusts Other than Qualified Subchapter S Trusts and Electing small Business Trusts (2)Qualified Subchapter S Trusts - 136l(d) (3)Electing Small Business Trust c. Estates d. Charities Problem One Class of Stock a. General Rule Paige v. United States Portage Plastics Co. v. United States b. Straight Debt Safe Harbor c. Treasury Views on Debt and Hybrid Instruments Explanations of Provisions General Rules Exceptions to General Rules Shares Taken Into Account Rules Relating to Debt Obligations, Call Options and Similar Instruments in General Obligations Designated as Debt Certain Safe Harbors for Obligations Designated as Debt Safe Har for Call Options XXVl

24 Exceptions for Certain Call Options Election Procedure a. Effect of Election b. Shareholder Consents for Obtaining S Corporation Status c. Corporate Election Problem C. Loss of Status Via Termination or Revocation of the Election Revocation Termination a. By Cessation of Small Business Corporation Status Problem Problem b. By Violating Passive Income Limitation S Termination Year Relief for Inadvertent Terminations CHAPTER 25. T AXA TI ON OF THE ENTITY AND ITS OWNERS A. Conduit Model B. Computation of Corporate Tax Base Accounting Method Taxable Year Taxable Income and Distributive Shares C. Elections D. Built-In Gains Tax on S Corporations That Formerly Were C Corporations Problem Problem E. Tax on Excess Net Passive Income Problem Problem F. Pass-Through of Income and Loss: Timing of Pass- Through and Character oflncome Pro Rata Share Rule Problem Priv. Ltr. Ru! Notes Problem Basis of Stock Problem Reallocation among Family Groups Davis v. Commissioner Notes G. Limits on Use of Losses and Deductions General Limitation XXVll

25 Problem Manipulation of Debt and Guarantees Estate of Leavitt v. Commissioner Questions H. Current Distributions: Introduction Corporations without E&P Problem Corporations with E&P a. lmpact b. Election to Purge Earnings and Profits c. The Accumulated Adjustments Account ("AAA") Revisit Problem Distributions of Property Post-Termination Distributions Problem I. Relationship of Subchapter S to Rest of Code Special Interactions of Subchapter S and Subchapter C a. Liquidations Priv. Ltr. Rul Notes b. Corporate acquisitions c. S Corporation as a Shareholder Notes Problem Problem d. Fringe Benefits e. At-Risk Rules f. Hobby-Loss Rules g. Passive Activity Loss Rules h. Alternative Minimum Tax i. Transactions with Related Taxpayers j. Audits of S Corporations Multiform S Corporations Priv. Ltr. Rul Notes CHAPTER 26. LIMITED LIABILITY COMPANIES A. Background B. The Wyoming Response Rev. Rul C. Current Status Priv. Ltr. Rul Notes D. Selected Complications XXVlll

26 Appendix: Flow Chart and IRS Forms Flow Chart Form 1065: U.S. Partnership Return of Income Schedule K-1: Partner's Share oflncome, etc Form 2553: Election by a Small Business Corporation Form 8832: Entity Classification Election XXIX