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FTax SM_ch19_p001-004

2011 Federal Taxation (with H&R BLOCK At Home(TM) Tax Preparation Software CD-ROM)

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* C HAPTER NINETEEN * CORPORATIONS: FORMATION AND OPERATION SOLUTIONS TO PROBLEM MATERIALS DISCUSSION QUESTIONS 19-1 There are six corporate characteristics. These are associates, profit motive, continuity of life, centralized management, limited liability, and free transferability of interest. In the past, only those entities that possessed a majority of the last four corporate characteristics listed above were treated as corporations for tax purposes. However, the new "check-the box" regulations simplified the entity classification process. Currently, a corporation is an entity chartered by a state and those unincorporated business entities that elect to be taxed as corporations. (See pp. 19-2 and 19-3 and Reg. § 301.7701-2.) 19-2 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 the limited liability without double taxation. (See p. 19-4.) 19-3 a. Corporations are entitled to a 70, 80, or 100 percent dividends-received deduction. [See p. 19-7 and § 243(a).] b. Corporations do not have the dichotomy of deduction between for and from A.G.I. All allowable deductions are considered in arriving at taxable income. (See p. 19-6.) c. Corporate casualty losses are not reduced by either the $100 or 10 percent of A.G.I. (See p. 19-6.) d. The charitable contribution deduction for corporations is limited to 10 percent of taxable income without reduction for charitable contributions, the dividends-received deduction, NOL carrybacks, and capital loss carrybacks. Individuals apply limitations of 20, 30, or 50 percent of A.G.I. [See pp. 19-13 through 19-15 and §§ 170(b)(2) and (e).] e. Capital losses may only be used to reduce capital gains. Individuals can offset up to $3,000 of ordinary income with capital losses. (See p. 19-16 through 19-17.) f. Corporations are limited to a three-year back and five-year forward carryover of capital losses. All carryovers are deemed short-term losses. Individuals may carry forward capital losses indefinitely. Capital loss carryforwards for individuals retain their identity as short-term or long-term losses. (See p. 19-16.)
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g. Corporations are subjected to depreciation recapture under §§ 1245 and § 1250 in the same manner as individuals. In addition, § 291 reclasses 20 percent of the otherwise § 1231 gain as ordinary on the sale of § 1250 property. (See p. 19-17.)
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