RelativeResourceManager

RelativeResourceManager - H Chapter One H INCOME TAXATION...

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H Chapter One H INCOME TAXATION OF CORPORATIONS SOLUTIONS TO PROBLEM MATERIALS DISCUSSION QUESTIONS 1-1 Historically, an association that was not treated as a corporation under state or Federal law (e.g., a partnership) could be classified as a corporation for Federal income tax purposes and thus be inadvertently exposed to the disadvantages of the regular (C) corporate form of doing business. The aspects that were addressed in determining whether an association should be classified and taxed as a corporation included: (1) Continuity of life, (2) Centralized management, (3) Limited liability, and (4) Free transferability. If three of these four characteristics were satisfied, an entity would be taxed as a corporation, even if the entity was treated differently under state law. For example, a limited liability partnership (LLP) or a limited liability company (LLC) could be treated as a corporation for tax purposes if it had, along with limited liability, two of the other three characteristics (e.g., centralized management and no restrictions on the transfer of interests). Naturally, the above classification rules led to a great number of conflicts between the IRS and taxpayers. To simplify this process, the IRS issued regulations effective January 1, 1997 that replace the old rules for classifying entities with a ‘‘check-the-box’’ system. Under the current rules, an entity organized as a corporation under state law, or an entity classified under the Code as a corporation, will be treated as a corporation and will not be allowed to make an election. However, any other business entity (e.g., an LLC) that has at least two members may elect to be treated as a corporation or partnership for tax purposes (an entity with only one member will be treated as a corporation or a sole proprietorship). In general, existing entities will continue to operate as they are as long as there is a reasonable basis for the current classification. (See pp. 1-5 and 1-6.) 1-2 The IRS may try to disregard the corporation if its organization and/or operation is solely to reduce taxes (i.e., a sham). The shareholders may try to ignore the corporation if they want limited liability without double taxation. (See pp. 1-6 and 1-7.) 1-3 a. Both corporate and individual taxpayers must include as income all dividends-received. However, corporations are entitled to a 70 percent or more dividends-received deduction in arriving at taxable income. [See pp. 1-9 through 1-14 and § 243(a).] b. Corporations do not have the dichotomy of deductions between ‘‘for’’ and ‘‘from’’ A.G.I. All allowable deductions are considered in arriving at taxable income. (See p. 1-8.) c. Corporate casualty losses are not reduced by the $100 statutory floor and 10 percent of A.G.I. (See p. 1-8.) d. Corporations are limited to a charitable contribution deduction of 10 percent of taxable income without reduction for charitable contributions, the dividends-received deduction, NOL carrybacks, and capital loss carrybacks, instead of 20, 30, or 50 percent of A.G.I. [See pp. 1-17 through 1-19 and § 170(b)(2).] e.
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This note was uploaded on 05/19/2010 for the course ACCT 407 taught by Professor Smith during the Spring '10 term at University of San Francisco.

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RelativeResourceManager - H Chapter One H INCOME TAXATION...

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