FEDERAL INCOME TAXATION OF CORPORATIONS AND PARTNERSHIPS

Transcription

1 ASPEN PUBLISHERS FEDERAL INCOME TAXATION OF CORPORATIONS AND PARTNERSHIPS Fourth Edition RICHARD L. DOERNBERG K. H. Gyr Professor of Law Emeritus, Emory University Emory University School of Law HOWARD E. ABRAMS Professor of Law, Emory University Emory University School of Law DON A. LEATHERMAN W. Allen Separk Distinguished Professor of Law University of Tennessee College of Law Wolters Kluwer Law & Business AUSTIN BOSTON CHICAGO NEWYORK THE NETHERLANDS

2 SUMMARY OF CONTENTS Contents Preface xi xxvii I SUBCHAPTER C CORPORATIONS 1 1 Introduction to the Corporate Income Tax 3 2 Corporate Formation 7 3 Corporate Operation 77 4 Distributions of Cash and Property Redemptions and Partial Liquidations Distributions of Stock Liquidations Integration of the Corporate and Individual Income Taxes Taxable Acquisitions Acquisitive Reorganizations Divisive Reorganizations, One-Party Reorganizations Combining Tax Attributes: Net Operating Losses and Affiliated Corporations Penalty Provisions The Corporation as a Separate Taxable Entity 473 II, SUBCHAPTER S CORPORATIONS S Corporations: Overview S Corporations: Selected Topics Transition Issues 541 IX

3 x Summary of Contents III SUBCHAPTERS K PARTNERSHIPS The Structure of Partnership Taxation Determining Distributive Shares A Partner's Outside Basis Nonliquidating Distributions A Partner's Transactions with the Partnership Acquisitions of Partnership Interests Dispositions of Partnership Interests Loss Limitations v -. _ Inside Basis Adjustments Partnership-Level Issues 799 Table of Cases 817 Table of Revenue Rulings and Procedures 821 Index 823

4 CONTENTS Preface xxvii I SUBCHAPTER C CORPORATIONS 1. Introduction to the Corporate Income Tax Corporate Formation 7 A. Introduction 7 1. The 351 Philosophy 7 2. The Statutory Terrain 9 B. Qualification under Property " 11 James v. Commissioner 11 Notes Stock Control 18 Kamborian v. Commissioner 19 Notes * 23 Intermountain Lumber Co. v. Commissioner 25 Notes C. Tax Consequences of 351 Exchange In General 33 Rev. Rul Rev. Rul XI

5 xii Contents 2. Assumption of Liabilities 40 Peracchi v. Commissioner 43 Notes Securities Boot and Installment Method Review D. Interaction of 351 With Other Code Sections and Legal Doctrines 57 Bradshaw v. United States 57 C-lec Plastics v. Commissioner 63 Notes 66 Hempt Bros., Inc. v. United States 69 Notes Corporate Operation 77 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 B. Capital Structure 87 Joint Committee on Taxation, Federal Income Tax Aspects of Corporate Financial Structures 88 Bauer v. Commissioner 92 Notes Distributions of Cash and Property 103 A. Cash Distributions 104 Rev. Rul Divine v. Commissioner 107 Notes B. Property Distributions The Effect of a Distribution of Property on the Distributing Corporation's Income 117

6 Contents xiii 2. The Effect of a Distribution of Property on the Distributing Corporation's Earnings and Profits The Effect of a Distribution of Property on Shareholders C. Disguised or Constructive Dividends 124 Baumer v. United States 125 Gilbert v. Commissioner 132 Notes D. Intercorporate Dividends ', 142 Litton Industries, Inc. v. Commissioner 142 Notes Redemptions and Partial Liquidations 151 A. Treatment of Shareholders Complete Terminations under 302(b) (3) 153 Seda v. Commissioner 153 Notes Substantially Disproportionate Redemptions under 302(b)(2) 159 Notes Redemptions Not Essentially Equivalent to a Dividend 163 United States v. Davis 163 Henry T. Patterson Trust v. United States 167 Notes Partial Liquidations under 302(b) (4). 177 Rev. Rul Notes ' B. Treatment of the Corporation 182 C. Redemptions Related to Other Transactions Redemptions in Lieu of Buy-Sell Agreements 183 Holsey v. Commissioner 183 Sullivan v. United States 186 Notes Redemptions as Part of Bootstrap Acquisitions Redemptions for More or Less than Stock Value 191 Commissioner v. Fink 193 Notes

7 xiv Contents D. Redemptions by Related Corporations Rev. Rul Notes Citizens Bank & Trust Co. v. Commissioner 205 Notes Distributions of Stock 211 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) 212 a. Actual Distributions 212 Frontier Savings Association v. Commissioner 213 Rev. Rul Notes 220 b. Constructive Distributions 221 Rev. Rul Rev. Rul Notes B. Tainting of Stock under Chamberlin v. Commissioner 228 Fireoved v. United States 231 Rev. Rul Rev. Rul Notes Liquidations 247 Rendina v. Commissioner 249 Notes 254 A. Section 331 Liquidations, Treatment Shareholders 255 a. Exchange Treatment under b. Treatment of Liabilities 255 c. Contingent Assets 256 d. Installment Notes 256 e. Allocation of Stock Basis to Liquidating Distributions Treatment of Liquidating Corporation 257 a. Recognition of Gain or Loss at the Corporate Level 257 b. Treatment of Liabilities 258

8 Contents c. Treatment of Corporate-Level Losses 259 d. Costs of a Liquidation The Court Holding Co. Doctrine and Former Commissioner v. Court Holding Co. 262 Notes Subsidiary Liquidations and Related Provisions Section 332 Liquidations 266 Associated Wholesale Grocers, Inc. v. United States 267 Notes, 276 ' v 279 Integration of the Corporate and Individual Income Taxes 281 A. The Incidence and Effects of the Corporate Tax 281 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) 286 Notes 289 B. Methods of Integration 290 Reporter's Study of Corporate Tax Integration 292 Notes Taxable Acquisitions 297 A. Asset Purchase -, Overall Tax Treatment Allocation of Purchase Price 299 B. Stock Purchase Individual Purchaser Corporate Purchaser: Notes C. Bootstrap Acquisitions 308 D. Expenses in Connection with an Acquisition 308 INDOPCO, Inc. v. Commissioner 308 Notes 314 E. Corporate Acquisitions and the Use of Debt 317 Joint Committee on Taxation, Federal Income Tax Aspects of Corporate Financial Structures 317 Notes 325

9 xvi Contents 10. Acquisitive Reorganizations 327 A. Introduction 327 B. Judicial Requirements Continuity of Proprietary Interest 330 Notes 331 Kass v. Commissioner 333 Notes C. Definitional Issues The A Reorganization: Statutory Mergers and Consolidations The B Reorganization: Stock for Stock 343 Chapman v. Commissioner 344 Notes The C Reorganization: Stock for Assets 356 Notes The Nondivisive D Reorganization 359 Smothers v. United States 360 Notes Remote Continuity Triangular Reorganizations D. Taxation Overview Corporate-Level Taxation Shareholder-Level Taxation : 377 Notes, 378 ' 382 E. The Status of Creditors in Corporate Reorganizations 382 F. Reorganizations of Insolvent or Financially Distressed Corporations G. Policy Divisive Reorganizations 389 A. Taxation under Coady v. Commissioner 389 Rev. Rul Notes

10 Contents xvii B. Variations 407 Bhada v. Commissioner 407 Notes Commissioner v. Morris Trust 412 Notes One-Party Reorganizations 423 A. Recapitalizations 423 Bazley v. Commissioner 424 Notes 426 B. Reincorporations Combining Tax Attributes: Net Operating Losses and Affiliated Corporations 431 A. Carryover of Tax Attributes Section Section Notes Section Section Section Commissioner v. British Motor Car Distributors 444 Notes B. Affiliated Corporations 449 Notes Penalty Provisions 459 A. Accumulated Earnings Tax 459 Notes B. Personal Holding Company Tax 468 Notes 469

11 xviii Contents 15 The Corporation as a Separate Taxable Entity 473 A. Definition of a Corporation Morrissey v. Commissioner Professional Corporations The Association Regulations Larson and Limited Partnerships The "Check-the-Box" Regulations Limited Liability Companies 477 B. Dummy Corporations " 478 Commissioner v. Bollinger 478 Notes C. Reallocation of Income and Related Issues Section 482 in General 484 a. Sales 485 b. Services 488 c. Rentals of Tangible Property 489 d. Licenses of Intangible Property 489 e. Loans The Interplay of 482 and Foreign Law Income Shifting and the Assignment of Income Doctrine Denial of Tax Benefits under 269A The "Graduated Bracket Amount" and 1561 (a) 494 II SUBCHAPTER S CORPORATIONS : S Corporations: Overview 497 A. Introduction 497 B. The S Corporation Election 499 Kean v. Commissioner 499 Rev. Rul Notes C. Formation 506 D. Pass-Thru of Corporate Income and Deduction E. Nonliquidating Distributions F. Dispositions of Shares and Liquidating Distributions Disposition of Stock Not in Redemption

12 Contents xix 2. Redemptions of Stock Liquidating Distributions S Corporations: Selected Topics 521 A. One Class of Stock 521 Notes 521 ^ 523 B. Qualified Subchapter S Subsidiaries " 524 Notes C. Stock and Debt Basis 527 Estate of Leavitt v. Commissioner 529 Notes D. Assignment of Income Concerns Precontribution Appreciation and Related Family Ownership and Section 1366(e) E. Sales of Stock and the Section 338 (h) (10) Election Transition Issues 541 A. From C Corporation to S Corporation Shareholder Taxation of Distributions Corporate-Level Tax on Built-in Gains Disabilities Associated with Passive Investment Income 546 Notes No Carryover from C Year to S Year 548 B. From S Corporation to C Corporation ' 549 III SUBCHAPTER K PARTNERSHIPS The Structure of Partnership Taxation 553 A. Note on Limited Liability Companies 553

13 xx Contents B. The Pass-Thru of Partnership Income 554 United States v. Basye C. Formation and Operation of the Partnership D. Nonliquidating Distributions E. Dispositions of Partnership Interests Determining Distributive Shares 569 A. B. C. D. E. F. G. H. Basic Maintenance of Capital Accounts Economic Effect I: The General Test Notes Economic Effect II: The Alternate Test Rev. Rul Notes Failure to Satisfy the Economic Effect Test Notes Allocations with Respect to Contributed Property 1. Allocations to the Contributing Partner under Section 704(c)(l)(A) Notes 2. Reverse Section 704 (c) Allocations to the Existing Partners Allocations of Deductions Attributable to Nonrecourse Debt 1. Definitions a. Nonrecourse Liability b. Minimum Gain c. Nonrecourse Deductions 2. General Principles 3. Distribution of Refinancing Proceeds 4. Book/Tax Disparities 5. Partner Nonrecourse Debt Substantiality under 704 (b) Notes Prohibitions on Retroactive Allocations

14 Contents xxi 21 A Partner's Outside Basis 623 A. Basic Principles under B. Partnership Indebtedness and Outside Basis History and Basic Principles 626 Abramson v. Commissioner Allocations under the Regulations 631 Notes 632 a. Recourse Liabilities ', 633 i. The Regulatory Scheme v Notes ii. Some Questions 635 b. Nonrecourse Liabilities C. Why 752? 640 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 644 E. Bifurcated Holding Period of a Partnership Interest 645 F. The Effect of Indebtedness on Partnership Allocations Allocations under the Alternate Test for Economic Effect Property Encumbered by Multiple Indebtedness Partial Guarantees 649 a. Last Dollar Guarantee 649 b. First Dollar Guarantee Nonliquidating Distributions 651 A. Distributions Not Subject to 751 (b) Basic Taxation Rules 651 a. Recognition of Gain and Loss, 651 b. Basis of Distributed Property and Outside Basis 651 c. The Timing of Taxation 653 Notes Distributions and Capital Accounts 654 a. Excess Cash 654 b. Appreciated and Loss Property 655 i. Predistribution Book/Tax Disparities 656 ii. Book/Tax Disparity Caused by Asset Revaluation 657

15 xxii Contents iii. Book/Tax Disparity Caused by Insufficient Outside Basis Distributions of Encumbered Property 659 Rev. Rul Notes Distribution of Marketable Securities Disposition of Distributed Assets 665 v B. Distributions Subject to 751 (b) The Definition of Unrealized Receivables The Definition of Substantially Appreciated Inventory 667 a. Partnership Inventory Items 667 b. Substantial Appreciation 668 s3. Operation of 751 (b) 669 Notice C. Distributions and the Dynamic Nature of Recourse Debt A Partner's Transactions with the Partnership 681 A. Guaranteed and Similar Payments B. Disguised Sales The Rules 684 a. Basic Principles 684 b. Simultaneous Contributions and Distributions 685 i. Contributions of Unencumbered Property 685 ii. Contributions of Encumbered Property 686 c. Nonsimultaneous Disguised Sales. 689 i. The Two-Year Presumptions 689 ii. Rebutting the Presumptions 689 iii. The Timing Rules 690 d. Effect on Other Provisions The Exceptions 693 a. Reasonable Guaranteed Payments 693 b. Reasonable Preferred Returns 693 c. Operating Cash-Flow Distributions 693 d. Preformation Expenditures 694 e. The Disclosure Rules B. Distributions of Contributed Property: 704(c) (1) (B) C. Swap Transactions under Notes

16 Contents xxiii D. Capitalization Avoidance and 707(a) (2) (A) E. Limitations Applicable to Controlled Partnerships Disallowed Losses 701 Notes Capital Gains Acquisitions of Partnership Interests ~~~ 705 A. Contributions of Property Basic Principles Encumbered Property Payables and Receivables Promissory Notes Holding Periods Disposition of Contributed Property Contributions to Investment Companies 713 B. Contributions of Services Taxation of the Contributing Partner 715 Revenue Procedure Notes Taxation of the Partnership 721 C. Noncontribution Acquisitions Dispositions of Partnership Interests 725 A. Distributions in Liquidation of a Partnership Interest A Note on Notes ' Application of a. A First Note on the Application of b. Classification of Payments under c. Taxation of Payments in Liquidation of a General Partnership Interest When Capital Is Not a Material Income-Producing Factor 733 d. Taxation of Payments under 751 (b) 734 e. Deferred Payments under f. Section 736, Partnership Goodwill, and the 704 (b) Regulations 737

17 xxiv Contents g. A Final Note on the Application of B. Disposition of a Partnership Interest Basic Rules Application of 751 (a) Taxation of the Capital Gains Portion 744 a. Holding Period 744 b. Capital Gain Rate Non-Sale Dispositions 745 v 5. Closing of the Taxable Year Termination of the Partnership 746 Notes Death of a Partner 750 C. Partial Dispositions 750 vl. No Partnership Liabilities 751 a. Partial Sale of a Single Interest 751 b. Sale of One Interest Out of Many Partnership Liabilities Are Present Loss Limitations 753 A. Section 704 (d): The Outside Basis Limitation The Relation of 704(d) to 704(c) Transfers of Partnership Interests B. Section 465: The At-Risk Limitation An Overview of The 465 Proposed Regulations Application of 465 to Partners and Partnerships 760 ' 762 C. A Reexamination of 704(d) and its Relation to 704(b) Misallocation of Loss Contributions of Notes 765 D. Section 469: The Passive Loss Limitations 766 E. Section 163(d): The Investment Interest Limitation Inside Basis Adjustments 771 A. The Inside Basis Adjustment under 734(b) Distributions Triggering the Inside Basis Adjustment 772

18 Contents xxv a. Nonliquidating Distributions of Excess Cash 772 b. Nonliquidating Distributions of High-Basis Property 773 c. Liquidating Distributions The Amount of the Adjustment under 734(b) Allocating the 734 (b) Adjustment under a. Allocation of Positive 734 (b) Adjustments 776 b. Allocation of Negative 734 (b) Adjustments 777 c. Allocation of 734 (b) Adjustments to Depreciable Property 778 Notes I 778 ' v The Flaw in the 734 (b) Inside Basis Adjustment B. The Inside Basis Adjustment under 743(b) Two-Way Adjustments under 743 (b) Allocating the 743 (b) Adjustment under a. Basic Rules 789 b. Allocation of 743 (b) Adjustments to Depreciable Property 791 c. Partnership Disposition of Adjusted Property Distribution of Property Subject to a 743(b) Basis Adjustment 792 Notes C. Mechanics of the Election 794 Notes 795 D. Optional Basis Adjustments and Capital Accounts 795 E. Basis Adjustments under 732 (d) Partnership-Level Issues 799 A. Classification as a Partnership Elective Classification 800 Notes Publicly Traded Partnerships Recognizing Partner Status 804 a. General Principles 804 b. Family Partnerships B. Partnership Elections Taxable Year Method of Accounting 809 C. Special Issues The Anti-Abuse Rules 810

19 xxvi Contents a. The General Anti-Abuse Rule b. The Abuse of Entity Rule Treatment of Organization and Syndication Expenses Cancellation of Indebtedness Income and Table of Cases 817 Table of Revenue Ruling and Procedures 821 Index v 823