Cover Page

Title Page

Copyright Page

Preface

About the Authors

Acknowledgment

Table of Contents

CHAPTER 1 FEDERAL TAX STATUS OF BUSINESS ORGANIZATIONS

¶1.1 FORMS OF BUSINESS ORGANIZATION UNDER STATE LAW

¶1.2 FEDERAL TAX STATUS POSSIBILITIES

¶1.2.1 Choices for Federal Tax Status

¶1.2.2 Changes in Tax Status

¶1.3 S CORPORATION STATUS

¶1.3.1 Getting S Corporation Status

¶1.3.2 Keeping/Ending S Corporation Status

¶1.4 CONSEQUENCES OF FEDERAL TAX STATUS—OVERVIEW

¶1.4.1 Federal Income Tax

¶1.4.2 Federal Insurance Contributions Act Tax (FICA tax) and Self- Employment Contributions Act Tax (SECA tax)

¶1.5 CHOICE OF FEDERAL TAX STATUS

¶1.6 TOO MUCH OF A GOOD THING?

¶1.6.1 Judicial Doctrines

¶1.6.2 Clear Reflection of Income in Dealings Between Controlled Businesses

¶1.6.3 Personal Holding Companies

¶1.6.4 Multiple C Corporations

CHAPTER 2 FORMATION OF THE CORPORATION

¶2.1 TRANSFERS OF PROPERTY TO THE CORPORATION: BACKGROUND

¶2.1.1 Measuring Gain/Loss Realized

¶2.1.2 Full Recognition of Gain/Loss Realized?

¶2.1.3 Transactions between Certain Related Persons

¶2.2 TRANSFERS OF PROPERTY TO THE CORPORATION: NONRECOGNITION UNDER CODE SEC. 351

¶2.2.1 Requirements for Nonrecognition

¶2.2.2 Gain/loss recognized to SH-N

¶2.2.3 SH-N’s basis

¶2.2.4 C&S Corp.’s basis

¶2.2.5 The Installment Method

¶2.2.6 A Peek at the Broad View (¶ 2.5)

¶2.3 ASSUMPTION OF SH-N’S LIABILITIES IN CODE SEC. 351 TRANSACTIONS

¶2.3.1 Incurred (Fixed) or Non-Incurred?

¶2.3.2 General Rules for Incurred Liabilities

¶2.3.3 SH-N’s Gain Recognized

¶2.3.4 SH-N’s Stock Basis

¶2.4 INCORPORATION OF THE BUSINESS; STARTING UP C&S CORP.

¶2.5 TRANSFERS OF PROPERTY TO THE CORPORATION: THE BROAD VIEW

¶2.5.1 SH Partial Retention of Assets

¶2.5.2 Gain/Loss Recognition on Assets Transferred to C&S Corp.

¶2.6 ACQUISITION OF STOCK BY PURCHASE, GIFT, OR INHERITANCE

CHAPTER 3 C CORPORATIONS—OPERATIONS

¶3.1 TAXABLE INCOME AND RATES

¶3.1.1 Taxable Income; Line 28 of Form 1120

¶3.1.2 Rates

¶3.2 ACCOUNTING PERIODS AND METHODS

¶3.2.1 Taxable Year

¶3.2.2 Basic Accounting Methods

¶3.2.3 Changes in Accounting Methods

¶3.3 ITEMS OF INCOME

¶3.3.1 Dividends

¶3.3.2 Prepaid Income

¶3.3.3 The Corporation’s Own Stock and Stock Options

¶3.3.4 Capital Gains

¶3.3.5 Gain on Deferred Payment Sales

¶3.3.6 Gain Transactions with “Related Persons”

¶3.4 ITEMS OF DEDUCTION

¶3.4.1 Property Transactions

¶3.4.2 Depreciation and Amortization

¶3.4.3 Special Accrual Method Rules

¶3.4.4 Compensation (both accrual and cash method taxpayers)

¶3.4.5 Other Deductions

¶3.5 FINANCIAL ACCOUNTING NET INCOME (FANI)

¶3.5.1 Federal Income Tax Expense

¶3.5.2 Schedules Reconciling Taxable Income and FANI

CHAPTER 4 C CORPORATIONS—DISTRIBUTIONS

¶4.1 DETERMINING E&P (THE E&P AUDIT)

¶4.2 IMPACT OF CASH DISTRIBUTIONS

¶4.3 CODE SEC. 301 DISTRIBUTIONS OTHER THAN CASH

¶4.3.1 Gain/Loss Property

¶4.3.2 Promissory Notes

¶4.3.3 Stock and Stock Rights

¶4.3.4 Deemed Distributions

¶4.4 REDEMPTIONS

¶4.4.1 301 Redemptions

¶4.4.2 Sale Redemptions

¶4.4.3 What’s at Stake in Redemptions of C Corp. Stock?

¶4.4.4 Bootstrap Sale Redemptions

¶4.5 DOUBLE TAXATION OF DIVIDENDS

¶4.5.1 Statutory Relief for C corp. SHs—Dividends Received Deduction (DRD)

¶4.5.2 Statutory Relief for Individual SHs—Maximum Rate

¶4.5.3 Self-Help by Individuals

CHAPTER 5 S CORPORATIONS—OPERATIONS AND DISTRIBUTIONS

¶5.1 OPERATIONS AND DISTRIBUTIONS OVERVIEW

¶5.1.1 The Initial Six-Step Analysis

¶5.1.2 Generic Worksheet

¶5.2 SPECIAL OPERATIONS AND DISTRIBUTIONS PROBLEMS

¶5.2.1 Computation of S Corp.’s Items of Income, Deduction, and Credit

¶5.2.2 Pass-Through of Items to SHs

¶5.2.3 Losses and the Adjusted Basis Limitation

¶5.2.4 Code 301 Distributions to Shareholders

¶5.2.5 Exchange Redemptions. [7th and 8th steps in the 8-step analysis]

¶5.2.6 Miscellaneous

CHAPTER 6 CHANGING C OR S CORPORATION TAX STATUS

¶6.1 MOVING FROM C TO S; THE TAX ON BUILT-IN GAINS

¶6.1.1 Impact Generally

¶6.1.2 The Concept of the BIG Tax

¶6.1.3 BIG Tax Formula

¶6.1.4 Initial BIG Tax Planning

¶6.1.5 BIG Tax: Planning for the “Accrual Method Rule”

¶6.1.6 Other Special Rules Affecting the Accrual Method Rule

¶6.1.7 Comprehensive BIG Tax Examples

¶6.2 LIQUIDATIONS

¶6.2.1 Section 331 Liquidations

¶6.2.2 Code Sec. 332 (Subsidiary) Liquidations

¶6.2.3 Relevance to Chapter 7 Taxable Dispositions of the Corporation

¶6.3 REFLECTIONS ON TERMINATION OF C STATUS

¶6.4 REFLECTIONS ON TERMINATION OF S STATUS

CHAPTER 7 ACQUISITION OF THE CORPORATION OR ITS ASSETS

¶7.1 AN OVERVIEW OF ACQUISITION GOALS

¶7.1.1 Outline of the Chapter

¶7.2 THE DOUBLE-TAX PROBLEM

¶7.3 ACQUISITION OF ASSETS

¶7.3.1 Taxation of Target

¶7.3.2 Recapture Provisions

¶7.3.3 Basis and tax attributes

¶7.3.4 Allocation of purchase price among the assets purchased

¶7.3.5 Valuation issues

¶7.3.6 The Five Patterns in Sales of Assets

¶7.4 ACQUISITION OF STOCK

¶7.4.1 Default

¶7.4.2 Election for Acquisition of Stock to Be Treated as Acquisition of Assets

¶7.5 TIMING OF GAINS; THE INSTALLMENT SALES PROVISIONS

¶7.6 OVERVIEW OF ACQUISITIVE REORGANIZATIONS

¶7.6.1 The Foundation for Tax-Free Acquisitions

¶7.6.2 Statutory Framework and Principal Nonstatutory Requirements

¶7.6.3 Tax-free asset acquisitions

¶7.6.4 Tax-free stock acquisitions

¶7.7 SUMMARY OF TAX CONSEQUENCES OF TAX-FREE ACQUISITIONS

¶7.7.1 Asset Acquisitions

¶7.7.2 Stock Acquisitions

¶7.7.3 Treatment of Syd (the shareholder of target)

¶7.7.4 Participation of Foreign Companies

CHAPTER 8 PARTNERSHIPS

¶8.1 PARTNERSHIP (PNS) FEDERAL TAX STATUS

¶8.1.1 Requirements for Partnership (PNS) Federal Tax Status

¶8.1.2 General Anti-Abuse Rules

¶8.2 ACQUISITION OF AN INTEREST IN A PARTNERSHIP BY CONTRIBUTION OF PROPERTY

¶8.2.1 General

¶8.2.2 Debt Relief or Debt Assumption When Property is Contributed

¶8.2.3 Inside and Outside Basis and Book

¶8.2.4 Organization Expenses

¶8.3 OPERATIONS

¶8.3.1 The Partnership as an Entity

¶8.3.2 Items of Income, Deduction, and Credit

¶8.3.3 Distributive Shares

¶8.3.4 Family Partnerships

¶8.3.5 General Activity Limitations on Passthrough Losses and Deductions

¶8.3.6 Dealings Between the PNS and its Partners

¶8.4 DISTRIBUTIONS

¶8.5 CHANGES IN THE PARTNERS AND THEIR INTERESTS

¶8.5.1 Sale and Purchase of a Partnership Interest

¶8.5.2 Services for an Interest in the Partnership

¶8.6 ELECTIONS RELATING TO INSIDE BASIS

CHAPTER 9 U.S. TAXATION OF INTERNATIONAL TRANSACTIONS

¶9.1 U.S. BUSINESSES WITH INTERNATIONAL TRANSACTIONS

¶9.1.1 Recognition of Income

¶9.1.2 Receipts in Foreign Currency

¶9.2 RECOGNITION AND BLOCKAGE ISSUES

¶9.2.1 Blocked Income

¶9.3 OPERATION OF A FOREIGN BRANCH AND THE ROLE OF THE FOREIGN TAX CREDIT

¶9.3.1 The Effect of Foreign Currency

¶9.3.2 The Foreign Tax Credit

¶9.3.3 Operating through a Foreign Affiliate and the Role of the Indirect Credit

¶9.3.4 Defining Foreign Taxes on Net Income

¶9.3.5 Realization Issues

¶9.3.6 Timing Issues

¶9.3.7 The Use of Hybrid Entities and Special Timing Issues

¶9.3.8 Contested Foreign Taxes

¶9.3.9 The Limitation of Code Sec. 904

¶9.3.10 Foreign-source Net Income and Allocation of Expenses

¶9.3.11 Loss Recapture Rules

¶9.4 SPECIAL HOLDING COMPANY AND ANTI-DEFERRAL RULES

¶9.4.1 Subpart F

¶9.4.2 Definition of a CFC

¶9.4.3 Taxation under Subpart F

¶9.5 NON-US PERSONS WITH US BUSINESS TRANSACTIONS

¶9.5.1 The Jurisdictional Bases of US Taxation and Summary of Basic Rules

¶9.5.2 Taxation on the Basis of Source

¶9.5.3 Taxation on Basis Other than Source

¶9.5.4 Computation of Tax of Foreign Entities and Persons Engaged in Business in the US: The Concept of “Effectively Connected”

¶9.5.5 The Branch Tax

¶9.6 THE EFFECT OF TAX TREATIES ON TAXATION

¶9.6.1 The Functions of Income Tax Treaties

¶9.7 ADJUSTMENTS TO INTERCOMPANY TRANSFER PRICING

¶9.7.1 Transfer Pricing — Treatment of Interest

¶9.7.2 Transfer Pricing — Income from Services

¶9.7.3 Transfer Pricing — Sale of Tangible Property

¶9.7.4 Transfer Pricing — Intangible Property

¶9.7.5 Cost Sharing Arrangements

¶9.7.6 Advance Pricing Agreements

¶9.7.7 Mutual Agreement Procedure

APPENDICES

Topical Index

A

B

C

D

E

F

G

I

L

M

N

O

P

Q

R

S

T

U

W

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