THE FEDERAL INCOME TAXATION OF CORPORATIONS, PARTNERSHIPS, LIMITED LIABILITY COMPANIES, AND THEIR OWNERS

Transcription

1 THE FEDERAL INCOME TAXATION OF CORPORATIONS, PARTNERSHIPS, LIMITED LIABILITY COMPANIES, AND THEIR OWNERS SECOND EDITION by JEFFREY L. KWALL Professor of Law, Loyola University Chicago School of Law Of Counsel, Schwartz & Freeman NEW YORK, NEW YORK FOUNDATION PRESS 2000

2 TABLE OF CONTENTS PREFACE TO SECOND EDITION PREFACE TO FIRST EDITION - vii TABLE OF INTERNAL REVENUE CODE SECTIONS xxv TABLE OF TREASURY REGULATIONS - - xliii TABLE OF INTERNAL REVENUE RULINGS xlvii TABLE OF MISCELLANEOUS RULINGS, xlix TABLE OF CASES - li TABLE OF AUTHORITIES- lv PART ONE. INTRODUCTION 1. Perspective 3 v A. The Business as an Entity Under State Law - 3 B. The Business as a Taxpaying Entity The C Corporation 5 C. The Business as a Tax Accounting Entity The S Corporation and the Partnership - 8 D. Proposal for Uniform Taxation of All Businesses Preview of the Future? 10 Treasury Department Report-Integration of the Individual and Corporate Tax Systems 10 PART TWO. OPERATIONS 2. C Corporation Operations - 19 A. Corporate Income Tax Tax Rates Scope of Corporate Gross Income- 22 a. Inclusionary Aspects Income From Services 23 Haag v. Commissioner 23 b. Inclusionary Aspects Gains From Property 29 General Utilities & Operating Co. v. Helvering 30 c. Exclusionary Aspects General-- 33 Castner Garage, Limited v. Commissioner 34 d. Exclusionary Aspects Corporate Specific Scope of Corporate Deductions 38 a. Reducing Double Taxation Elliotts, Inc. v. Commissioner 39 Thoni Service Corporation v. United States 46 Fin Hay Realty Co. v. United States - 48 Maxwell v. Commissioner 54 b. Inhibiting Triple Taxation 58 Litton Industries, Inc. v. Commissioner xv

3 xvi TABLE OF CONTENTS A. Corporate Income Tax Continued 4. Corporate Alternative Minimum Tax - 64 B. Corporate Penalty Taxes Accumulated Earnings Tax 65 United States v. Donruss Co 66 Snow Manufacturing Company v. Commissioner Personal Holding Company Tax 77 Irving Berlin Music Corporation v. United States 78 Darrow v. Commissioner - 81 C. Consequences of Operating Loss 85 D. Distinguishing Corporation From Shareholders Commissioner v. Bollinger S Corporation Operations - 95 A. Computation of Gross Income and Deductions 95 Revenue Ruling :~ 98 B. Allocation to Shareholders Shareholders Taxed^When Income Earned 100 Knott v. Commissioner 100 Nelson v. Commissioner Rigid Allocation Rule 105 C. Consequences of Operating Loss 109 Selfe v. United States 111 Estate ofleavitt v. Commissioner 115 Hitchins v. Commissioner 121 D. Distinguishing S Corporation From C Corporation Small Business Corporation 125 a. Not More Than 75 Shareholders 125 Revenue Ruling b. No Ineligible Shareholders 126 IRS Letter Ruling c. Not More Than One Class of Stock- 129 Paige v. United States The Election 134 Leather v. Commissioner 134 E. Transitional Problems Built-in Gains, Accumulated C Earnings Net Operating Loss 144 Rosenberg v. Commissioner Partnership Operations 149 A. Computation of Gross Income and Deductions 149 B. Allocation to Partners Partners Taxed When Income Earned Flexible Allocation Rule a. Introduction to Economic Effect 155

4 TABLE OF CONTENTS xvil B. Allocation to Partners Continued Orrisch v. Commissioner 156 b. Introduction to Capital Accounts 162 c. General Test for Economic Effect 163 d. Alternate Test for Economic Effect 165 e. Substantiality 167 (1) Transitory Allocations and Shifting Tax Consequences ; 167 (2) General Restriction 171 f. Partner's Interest in Partnership 172 C. Allowance of Allocated Deduction/Loss 173 Garcia v. Commissioner 181 D. Modifying an Allocation 184 Lipke v. Commissioner 184 E. Distinguishing Partnership From Proprietorship 188 Revenue Ruling Barron v. Commissioner 189 F. Distinguishing Partnership from Taxpaying Entity Non-Publicly Traded Partnerships 192 Simplification of Entity Classification Rules 193 Revenue Ruling Publicly Traded Partnerships 197 PART THREE. DISTRIBUTIONS 5. C Corporation Distributions A. One-Side Distribution Dividend to the Extent of Earnings & Profits a. Conceptualizing Earnings & Profits 202 Commissioner v. Gross 203 b. Quantifying Earnings & Profits 207 Revenue Ruling Camouflaged One-Side Distribution 211 a. Loan or Distribution Jaques v. Commissioner :? 212 b. Business or Personal Use of Corporate Property 217 Resenhoeft v. Commissioner 217 c. Discharge of Corporate or Personal Obligation Sullivan v. United States 221 Revenue Ruling B. Redemption Distinguishing Sale From One-Side Distribution 227 a. Not Essentially Equivalent to a Dividend 227 United States v. Davis >. 228 Revenue Ruling b. Attribution Rules 233 c. Substantially Disproportionate Redemption 235 Revenue Ruling 87-88, 235

5 xviii TABLE OF CONTENTS B. Redemption Continued Glacier State Electric Supply Company v. Commissioner 237 d. Complete Termination of Interest 244 (1) Sale and/or Redemption Zenz v. Quinlivan 245 Estate ofdurkin v. Commissioner 247 Arnes v. United States 255 Antes v. Commissioner 257 (2) Attribution Issues Lynch v. Commissioner 261 Rickey v. United States e. Impact on Earnings & Profits Sale to Related Corporation 275 Coyle v. United States C. Liquidation Taxable Liquidation Rendina v. Commissioner Ethel M. Schmidt v. Commissioner 288 Ford v. United States Subsidiary Liquidation George L. Riggs, Inc. v. Commissioner 295 Revenue Ruling D. Special Characterization Rules S Corporation Distributions 305 A. One-Side Distribution No Accumulated Earnings & Profits Accumulated Earnings & Profits Camouflaged One-Side Distribution ^ 311 Joseph Radtke, S.C. v. United States 311 B. Redemption, 313 Revenue Ruling C. Liquidation Partnership Distributions 321 A. Current Distribution Distribution of Money - ~ 322 a. Actual Distribution Revenue Ruling b. Reduction in Partnership Liabilities 325 (1) Change in Form of Partnership.---^ Revenue Ruling (2) Cancellation of Partnership Indebtedness 327 Revenue Ruling IRS Technical Advice Memorandum Distribution of Property, Other Than Money 331

6 TABLE OF CONTENTS XIX A. Current Distribution Continued 3. Distribution of Marketable Securities 333 House Ways & Means Committee Report to IRC 731(c) B. Distribution in Liquidation of Partner's Interest General Rules Identifying the Taxable Event Weiss v. Commissioner Distinguishing Liquidation of Interest From Sale 341 Crenshaw v. United States Service Partnership Tolmach v. Commissioner.--- -~ Impact of 751 Assets a. Sale of Interest b. Liquidation of Interest. 357 c. Disposition of Distributed Property Partnership Level Adjustments Jones v. United States C. Termination of Partnership 368 Crawford v. Commissioner 368 Revenue Ruling PART FOUR. CONTRIBUTIONS 8. C Corporation Contributions 377 A. Transfer of Property for Stock Deferral of Gain or Loss Kamborian v. Commissioner 378 Intermountain Lumber Company v. Commissioner 384 James v. Commissioner Basis as Gain/Loss Preservation Mechanism Assignment of Income 393 Revenue Ruling B. Transfer of Property for Other Consideration Receipt of Property in Addition to Stock 396 Revenue Ruling Relief From Liabilities Lessinger v. Commissioner Peracchi v. Commissioner Revenue Ruling Receipt of Property, But No Stock 412 Hardman v. United States 412 C. Contribution to Capital Commissioner v. Fink 415

7 xx TABLE OF CONTENTS 9. S Corporation Contributions 421 A. Transfer of Property for Stock DEFERRAL OF GAIN OR Loss BASIS AS GAIN/LOSS PRESERVATION MECHANISM ASSIGNMENT OF INCOME 423 B. Transfer of Property for Other Consideration Partnership Contributions 427 A. Transfer of Property for Partnership Interest Deferral of Gain or Loss 428 a. Property and Exchange Requirements 428 United States v. Stafford 428 b. Receipt of a Profits Interest 433 Diamond v. Commissioner 433 Campbell v. Commissioner Revenue Procedure Basis as Gain/Loss Preservation Mechanism Assignment of Income 447 Schneer v. Commissioner a. Allocation of Pre-Contribution Gain or Loss 454 b. Distribution of Contributed Property Characterization Issues 457 B. Transfer of Property for Other Consideration 458 Otey v. Commissioner C. Partnership Anti-Abuse Rule 464 PART FIVE. CORPORATE DISPOSITIONS AND ACQUISI- TIONS 11. Taxable Transfers A. Perspective The Time Value of Money Achieving Collective Tax Savings 474 Davidson v. Davidson B. Asset Transfer Tax Consequences to Seller Williams v. McGowan Martin Ice Cream Company v. Commissioner Tax Consequences to Buyer 483 a. Residual Method of Allocation Senate Finance Committee Report to IRC b. Uniform Amortization of Intangible Assets 486 House Ways & Means Committee Report to IRC Evaluating the Relative Positions of Seller and Buyer in an Asset Sale - 488

8 TABLE OF CONTENTS xxi B. Asset Transfer Continued 4. Contingent Liabilities IRS Technical Advice Memorandum C. Stock Transfer Tax Consequences to Seller Tax Consequences to Buyer...: a. Historical Perspective Kimbell-Diamond Milling Company v. Commissioner b. The I.R.C. 338 General Election Evaluating the Relative Positions of Seller and Buyer in a Stock Sale (With 338 Election) Evaluating the Relative Positions of Seller and Buyer in a Stock Sale (Without 338 Election) The I.R.C. 338(h)(10) Election Nontaxable Transfers A. Perspective Cottage Savings Association v. Commissioner Common Law Doctrines 515 a. Continuity of Proprietary Interest John A. Nelson Co v. Helvering Le Tulle v. Scofield b. Continuity of Business Enterprise c. Business Purpose and Plan of Reorganization The Statutory Scheme ' 523 B. Asset Transfer Transfer of "Substantially All" the Assets Helvering v. Elkhorn Coal Co Receipt of Solely Voting Stock a. Liabilities of The Transferor -, United States v. Hendler United States v. Hendler b. Money or Other Property Revenue Ruling Liquidation of the Transferor Revenue Procedure The Nondivisive D Reorganization C. Stock Transfer "Control" Immediately After the Acquisition Revenue Ruling Receipt of Solely Voting Stock a. Liabilities of the Target Revenue Ruling b. Money or Other Property Revenue Ruling Chapman v. Commissioner Miscellaneous Announcement Substance Over Form

9 xxii TABLE OF CONTENTS C. Stock Transfer Continued Revenue Ruling West Coast Marketing Corporation v. Commissioner 562 D. Statutory Merger Continuity of Proprietary Interest a. Nature of Consideration 567 Roebling v. Commissioner 567 Paulsen v. Commissioner b. Pre-Merger and Post-Merger Continuity 579 Kass v. Commissioner J.E. Seagram Corp. v. Commissioner 583 Continuity of Interest Final Regulations Continuity of Business Enterprise and Business Purpose 587 W-L Molding Company v. Commissioner Plan of Reorganization 593 King Enterprises, Inc. v. United States 593 E. Acquisition By Subsidiary For Parent Stock Acquisition of Assets or Stock by Subsidiary 599 Groman v. Commissioner Merger Into Subsidiary 602 Revenue Ruling Acquisition by Parent Followed by "Drop Down" 603 F. Reverse Triangular Merger 604 Revenue Ruling Revenue Ruling Revenue Ruling G. Bankruptcy Reorganizations Senate Finance Committee Report to the Bankruptcy Tax Act of H. Characterization of Boot Gain 613 Commissioner v. Clark 613 I. Proposal for Uniform Acquisition Scheme Preview of the Future? 620 The Subchapter C Revision Act of Carryovers and Carrybacks A. Restrictions on Loss Carryovers The Evil Primitive Remedies 632 Libson Shops, Inc. v. Koehler 632 Stange Company v. Commissioner Effective Statutory Response 641 a. The Trigger 642 IRS Letter Ruling b. The Limitation 649 B. Restrictions on Loss Carrybacks 653 Bercy Industries, Inc. v. Commissioner 653

10 TABLE OF CONTENTS xxiii 14. Transfers Involving S Corporations. 659 A. Taxable Transfers Asset Transfer 659 IRS Letter Ruling Stock Transfer B. Nontaxable Transfers PART SIX. CORPORATE DIVISIONS AND REARRANGE- MENTS 15. Corporate Divisions A. Distribution of Assets Taxable Partial Liquidation Shareholder Level Consequences 667 Commissioner v. Sullivan 667 Revenue Ruling Revenue Ruling Corporate Level Consequences B. Distribution of Stock Tax-Free Spin-Off/Split-Off Shareholder Level Consequences 675 a. The Evil Gregory v. Helvering 675 b. The Defense (1) Business Purpose for the Distribution 680 Commissioner v. Wilson 680 Revenue Procedure (2) Not a Device for the Distribution of Earnings and Profits Pulliamv. Commissioner 688 (3) Both Corporations Engaged in Active Business 697 Coady v. Commissioner The Edna Louise Dunn Trust v. Commissioner 702 (4) Continuity of Proprietary Interest 707 c. Characterization of Boot Gain 709 Revenue Ruling Corporate Level Consequences 712 a. Spin-Off After Taxable Stock Transfer 712 Revenue Ruling Revenue Ruling b. Split-Off After Taxable Stock Transfer 716 House Ways & Means Committee Report to IRC 355(d) c. Spin-Off Before Tax-Free Reorganization Commissioner v. Mary Archer W. Morris Trust 719

11 xxiv TABLE OF CONTENTS 16. Corporate Rearrangements 725 A. Change in Capital Structure- - -~ Distribution of Common Stock Towne v. Eisner Revenue Ruling Revenue Ruling Revenue Ruling Distribution of Preferred Stock 734 Chamberlin v. Commissioner 734 Senate Finance Committee Report to IRC Bialo v. Commissioner Recapitalization Bazley v. Commissioner Revenue Ruling Revenue Ruling Revenue Ruling B. Change in Operating Entity F Reorganization 761 Revenue Ruling Revenue Ruling Liquidation-Reincorporation Berghash v. Commissioner Smothers v. United States - Warsaw Photographic Associates, Inc. v. Commissioner Conversion to Limited Liability Company 786 IRS Letter Ruling INDEX 789