2011 CCH. All Rights Reserved.
Taxation of Corporations:
SUMMARY OF CHAPTER
Corporation taxation is divided into six areas. They are (1) formation, (2) operation, (3) distributions, (4)
redemptions, (5) liquidations, and (6) reorganizations. This chapter focuses on the formation and operation of
A major concern when forming a business is the type of entity. The three major types are sole proprietorships,
partnerships, and corporations. Each entity has certain tax and nontax advantages and disadvantages.
A sole proprietorship is a form of business in which one person owns all the assets and is fully responsible
for all the liabilities. A partnership is a form of business in which two or more persons or entities own all the assets
and are responsible for the liabilities. It is based on a voluntary contract between these parties. A corporation is a legal
entity created by the authority of state law. It is separate and distinct from its owners and may be owned by one or
more persons or entities.
There are advantages of each type of entity. Corporations have limited liability, owners can have employee
status, corporations usually can raise funds more easily than can partnerships and sole proprietorships, and corporations
can have a tax year different from their owners. However, regular corporations produce double taxation and do not
pass through tax attributes (e.g., losses, credits, etc.) to their owners.
nition of a Corporation
A corporation is a legal entity owing its existence to the laws of the state in which it is incorporated. The
state laws de
ne all legal relationships of the corporation. New Regulations to Code Sec. 7701 issued in 1996 and
effective January 1, 1997, simpli
ed the entity classi
cation issue. Under the new “check-the-box” system, certain
business entities (entities other than trusts or those subject to special rules) automatically will be treated as corporations
for federal tax purposes. These entities are:
rms incorporated under federal or state law, associations, joint-stock
companies or joint-stock associations (as organized under a state statute), insurance companies, banks, business
entities wholly owned by a state or political subdivision of the state, business entities taxed as corporations under
another Code section, and certain foreign entities. Eligible entities (entities other than trusts or those subject to special
rules) that are not automatically treated as a corporation may elect (“check-the-box”) to be treated as a corporation
for federal tax purposes.
Organization of and Transfers to a Corporation
¶14,101 Use of Corporate Form
If the corporate form is desired, the owners must be certain they meet all the
ling requirements of the
state in which the company is organized. Next the owners must decide what type of property to transfer to the
corporation and how this property should be transferred. In general, taxpayers who exchange property other than cash