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CORPORATE TAX OUTLINE 1) BACKGROUND a) 3 Themes: i) Rates (1) Graduated lower rates for sm corps. Beyond 75K – paying 35%. ii) (1) Corporate Level : profits taxed under §11(b); (2) SH level - dividends. Gen higher than Pships, LLC, S Corp . (2) Distortions - Affects behavior in order to avoid scheme/lower tax. Below issues result in drain on resources do to facts/circ analysis. (a) COMPENSATION OR DIVIDEND ? 1. Issue- Compensation is ded by corp (§162), dividend is NOT. 2. Analysis: a. Reasonable compensation; b. Was it paid for services rendered? c. Factors: Nature & extent of svc, comparable salaries, indicia of reasonableness. 3. OCS- SH refused to pay double tax and paid himself as emp- 90% of corp earnings. Ct- this id disguised dividend. (b) DEBT OR EQUITY ? 1. Issue- Need $$ to operate corp. SH lends $$ as debt b/c its deductible. Debt/equity- risk in co is a matter of degree, yet, there is line bet whether its deductible or not by corp. 2. Preferred stock- a. Ragland; RR 90-27 . If no way preferred can force co to pay $$ invested - its equity. If preferred co to pay back $$ - debt. (c) RETAINED EARNINGS KEPT 1. Dividend v. Co Growth- Double tax discourages distribution to SH (dividend) b/c they will be taxed. Cf: if Corp keeps retained 2. LIMITATION- 15% penalty tax. Earnings retained beyond ‘reasonable needs of business’. (d) BRACKET RIDE- 1. 15% rate for corp earnings $50K and under. T’s can take advantage of low rate. 2. Limitation: §1561, 1563: a. No Splitting up into Many Corps. If you have controlled corp of another (80% ownership by vote or value), can’t divide into many corps and get 15% rate. iii) Capital Gain (1) Under §11, SH get top 15% rate for div. Lessens double tax burden. b) CHOICE OF FORM i) Trust ii) Partnership iii) Corporation (1) ANALYSIS: (a) Trust or business entity? 1. Trust – wealth preservation. Business entity- bus prupose. 1
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2. FACTORS: a. Business objective- conduct business & divide profits. What business is authorized to do under governing docs. b. Associates- hired to work towards business purpose. (b) If business entity: 1. Partnership: More than 1 indiv; default. 2. LLC: 1 person OK, must opt into LLC status. 3. Corporation: 2 ways: a. Incorporated under laws of state; b. Elect to be corp (or will be treated as partnership.) 2) DISTRIBUTIONS- Dist of $$, property, EXCEPT corporation’s stock. a) Distributions of Money IMPACT ON SHAREHOLDER: i) DIVIDEND - §301(c)(1): Dividend is included in GI @ 15% rate . §1(h) (1) EARNINGS & PROFITS- §316(a): dividend = dist of property made by corp to its SH out of its accumulated E&P or current E&P.
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This note was uploaded on 10/18/2011 for the course LAW 123 taught by Professor Curtis during the Spring '11 term at USC.

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