1. Principles of Taxation: Advanced Strategies
Slide 2-1
Principles of Taxation: Advanced Strategies
Chapter 2
Organizational Strategies
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

2. Business Organization Forms
Slide 2-2
Corporations
C Corporation
S Corporation
Pass-through Entities
Unincorporated Businesses
S Corporations
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

3. Unincorporated Entities
Slide 2-3
Sole Proprietorships
Partnerships
Limited Partnerships
Limited Liability Partnerships
Limited Liability Companies
Disregarded Entities
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

4. State Taxation S Corporations Some states recognize election
Slide 2-4
S Corporations
Some states recognize election
Some require separate state election
Some tax as C Corporation
Franchise Tax
May be imposed on unincorporated entities
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

5. C Corporations Income subject to tax at corporate rates
Slide 2-5
Income subject to tax at corporate rates
Double Taxation
Dividends taxable to shareholders
Dividends received deduction
Constructive Dividends
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

6. Passthrough Entities Income taxed once to owner of entity
Slide 2-6
Income taxed once to owner of entity
Income taxed at owner’s rate
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

7. Losses-C Corporations
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Deductible only against income earned by corporation
NOL carryovers
Carryback- 2 years
Carryforward – 20 years
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

8. Losses- Passthrough Entities
Slide 2-8
Losses passed through to owner to offset other income
Limitations
Basis
At Risk
Passive Loss
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

9. Debt- C Corporations
Slide 2-9
Shareholders must sometimes lend money to adequately capitalize corporation
Debt vs. Equity
Interest deductible; Dividends nondeductible
Beware of debt recharacterized as equity
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

10. Section 351 Overview S1 and S2 control C S2 S1 Property C Stock Stock
Slide 2-10
Section 351 Overview
S1 and S2 control C S2 S1
Property C
Stock
Stock
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

11. Section 351 Requirements Property transferred for stock
Slide 2-11
Property transferred for stock
Transferors control corporation after transfer
Control- 80% of voting and nonvoting stock
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

12. Section 351 Consequences Result: No gain or loss to shareholders
Slide 2-12
Result: No gain or loss to shareholders
Shareholder takes a substituted basis in his or her stock
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

13. Section 351- Boot Property received by shareholders other than stock
Slide 2-13
Property received by shareholders other than stock
Consequences:
Shareholder recognizes gain equal to lesser of fair market value of boot received or gain realized
Basis of stock reduced by amount of boot received
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

14. Section 351- Liability Assumption
Slide 2-14
Generally no effect on income recognition
Exceptions:
No Business Purpose
Debt exceeds basis of assets transferred
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

15. Sec 351- Effect on Corporation
Slide 2-15
No gain or loss to corporation on issuance of stock due to Section 1032
This would be true even if Section 351 did not apply
Corporation takes carryover basis in assets
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

16. Contributions to Corporation Capital
Slide 2-16
No gain to corporation
Shareholder increases basis in stock
May be done by nonshareholders
Often done by governments or civic groups to encourage business
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

17. Partnership Formation Overview
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Property P
Partnership Interest
Partnership Interest
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

18. Partnership Formation
Slide 2-18
Partnership Formation
No gain or loss to partners on receipt of partnership interest for property
No control requirement
Partner takes substituted basis in partnership (“outside basis”)
Partnership’s basis in assets (“inside basis”) is carried over
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

19. Disguised Sales Anti abuse rule
Slide 2-19
Disguised Sales
Anti abuse rule
Applies when partner makes contribution of appreciated property to partnership at the same time receiving a cash distribution
A portion of the property contributed is deemed sold
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

20. Partnership Liability Assumption
Slide 2-20
Treated as a nontaxable cash distribution that reduces partner’s outside basis but does not cause recognition of gain
Exception: Debt relief exceeds partner’s outside basis
Allocation of liability depends on whether liability is recourse or nonrecourse
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc

21. Sales to Controlled Entities
Slide 2-21
Section 267 prevents recognition on losses incurred on sales to controlled entities
Gains on sales of capital assets to controlled entities result in ordinary income to seller if asset is depreciable by buyer
Gains on sales of capital assets between a partner and a controlled partnership result in ordinary income unless asset is capital asset to buyer
McGraw-Hill/Irwin Copyright (c) 2003 by the McGraw-Hill Companies Inc