1. Taxation of Corporations and Shareholders
Law T 501
University of Washington School of Law
LLM Program in Taxation
Instructor: Dwight Drake
Fall 2009
LLM Corporate Tax Instructor: Dwight Drake

2. LLM Corporate Tax Instructor: Dwight Drake
Contact Info – Office Hours
Phones: , ,
URL:
CorpTaxindex.shtml
Office Hours: Room 416
- Thursday 11:30 a.m. to 1:00 p.m.
- By Appointment.
Whenever else you can catch me!
LLM Corporate Tax Instructor: Dwight Drake

3. LLM Corporate Tax Instructor: Dwight Drake
Course Objectives
Substantive knowledge base – Corporate Taxation
Develop, hone tax learning skills
Internalize the “Concepts”
Strengthen analytical, problem-solving skills
Introduce the planning process
Your role – design, not default
LLM Corporate Tax Instructor: Dwight Drake

4. America’s Privately-Owned Businesses
29 Million
99 % of all employers
75% of all new jobs
53% of private workforce
70% of all first jobs
50% of all sales
Largest client base for professionals
Badly under-serviced by Bar
LLM Corporate Tax Instructor: Dwight Drake

5. Flash Presentation (20 Min. approx) by Dwight Drake
The Lawyer’s Role as an Advisor to Business Owners, Professionals and Entrepreneurs
Flash Presentation (20 Min. approx) by
Dwight Drake
Law School Website-Career-Students-Job Resources-Career Tools-Flash
Note: It takes a few minutes to load
LLM Corporate Tax Instructor: Dwight Drake

6. LLM Corporate Tax Instructor: Dwight Drake
Some Tips…
First: Beat Up Code. Learn to talk Code
Find the “Concept” of each section.
Then Text and Regs. to fill gaps for you.
First work Problems hard on your own.
Download PP Slides in advance of class – reconcile with your own answers. This is key learning moment.
Think and mentally prepare your pitch.
Track class discussion.
Write personal summary following class.
Get ahead – Stay ahead!
LLM Corporate Tax Instructor: Dwight Drake

7. LLM Corporate Tax Instructor: Dwight Drake
Grade Criteria
100% final
No tricks or gimmicks
Focus on problems and class discussion
Can use any non-living thing
Key is to have your reminder aids well organized
Premium on knowing scope of materials well
Completely “Ace-Able” by all!
LLM Corporate Tax Instructor: Dwight Drake

8. LLM Corporate Tax Instructor: Dwight Drake
Federal Tax Sources
Pers. Income , ,163.5
Corp. Income
Social Insurance
Excise Taxes
Estate & Gift
Misc
Total Revenue , , , , , , ,567.7
All in billions
LLM Corporate Tax Instructor: Dwight Drake

9. LLM Corporate Tax Instructor: Dwight Drake
Business Entity Forms
C Corporations - Subchapter C (§§ )
S Corporations - Subchapter S (§§ )
Unincorporated Single Owner - Individual Proprietorship
General Partnerships – Subchapter K (§§ )
Limited Partnerships – Subchapter K (§§ )
Limited Liability Companies - Subchapter K (§§ )
LLM Corporate Tax Instructor: Dwight Drake

10. US Businesses Projected Revenues 2007
Corporations $ Trillion (84.2%)
Sole Proprietorships $ Trillion (4.8%)
Partnerships $ Trillion (5.3%)
Limited Liab. Companies $ Trillion (5.7%)
Total $ Trillion
LLM Corporate Tax Instructor: Dwight Drake
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

11. Duncan and Sandy Smith Plan
Remainder
Duncan and Sandy
Living Trust
Income
Charitable
Deduction
Son Trust
Term
Use
Assets
Home
Daughter Trust
Charitable
Remainder
Trust
Personal
Residence
Trust
Remainder
Alma
Mater
Daughter Trust
Compensation
Assets
Income
GC Trust – 1
Contributions
Family
L.L.C.
(Growth) C
Corporation
Units
GC Trust – 2
Qualified
Retirement
Plan
Assets
Distributions
GC Trust – 3
Family
L.L.C.
(New)
Distributions
Holding
S Corp
(Parent)
Units
GC Trust – 4
Income,
support
QSSS
Corp
(One)
Distributions
GC Trust – 5
Cash
Dynasty
Insurance
Trust
QSSS
Corp
(Two)
GC Trust – 6
LLM Corporate Tax Instructor: Dwight Drake
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

12. Our Focus Issues – The Big Picture
Taxation of Corporations
Entity Formation Tax Issues
Capital Structure Tax Issues
Dividends and Other of Non-Liquidating Distributions
Transactions Between the Corporation and Its Shareholders
Corporate Liquidations
Taxable Transfers of Corporate Assets or Stock
Brief Introduction to Corporate Tax-Free Reorganizations
LLM Corporate Tax Instructor: Dwight Drake

13. The Big Overriding Traps
Sham Transaction
Business Purpose
Step-Transaction
Substance Over Form
Section 482
LLM Corporate Tax Instructor: Dwight Drake

14. Trap One: Sham Transaction
Business Entity
Service Fees
Cash Transfers
Phony Off Shore
Operation
Common Owner
Note: No Business Purpose
LLM Corporate Tax Instructor: Dwight Drake

15. Trap Two: Form Over Substance
C Corp
500k loan
- Deductible interest
- No repayment plan
10k for stock
Shareholder
What’s wrong here?
LLM Corporate Tax Instructor: Dwight Drake

16. Trap Three: Step Transaction
Business Entity
Cash proceeds sale of asset
Asset Gift
Child of owner
Owner
Cash Gift
Note: No Business Purpose
LLM Corporate Tax Instructor: Dwight Drake

17. LLM Corporate Tax Instructor: Dwight Drake
Trap Four: Section 482
Bargain sale
C Corp A
C Corp B
Imputed Income
Imputed Dividend
Imputed
Contribution
Common owners
LLM Corporate Tax Instructor: Dwight Drake

18. LLM Corporate Tax Instructor: Dwight Drake
Calculating the Entity’s Taxable Income
Taxable Income = Gross income - Allowable Deductions
Section 63
Gross Income = “all income from whatever source”.
Section 61
Deductions = “all ordinary and necessary expenses paid or
incurred in carrying on any trade or business” + Special
Deductions
Section 162
LLM Corporate Tax Instructor: Dwight Drake

19. Compared to Personal Income Taxes…
No personal expenses.
No exemptions.
Capital losses only to extent of capital gains.
10% charitable contribution limitation vs. 50% for personal
Any tax year, except for “personal service C corps” and S corp.
Must use accrual accounting method unless farm, personal service corps or gross receipts under 5 mill.
Deductions and loss limits on transactions between C Corp and more- than-50% owner per 267.
LLM Corporate Tax Instructor: Dwight Drake

20. Select Corp Deduction Provisions
Section 162(m) $1 mill executive comp limit for public C corps
Section 243 Dividend Deduction - 70%, 80%, or 100%
Section 199 Domestic Production Deduction - % of lesser of taxable income or “qualified production income”.
- 6% , 9% after 09.
- Key limitation: 50% of w-2 wages.
- Key definitions related to “qualified production income”
from FSC and DISC regs.
- With repeal of Extraterritorial income (ETI) rules, real winners are
manufactures who sell in U.S.
LLM Corporate Tax Instructor: Dwight Drake

21. LLM Corporate Tax Instructor: Dwight Drake
C Corp Bracket Racquet
First 50k %
Next 25k %
Next 9 mill, 925k %
Over 10 mill %
Plus…
First Bubble: If over 100k, lesser of 5% of excess or 11.75k
Second Bubble: If over 15 mill, lesser of 3% of excess or 100k.
Bad News: If qualified personal service corporation, flat 35%
LLM Corporate Tax Instructor: Dwight Drake

22. LLM Corporate Tax Instructor: Dwight Drake
C Corp Alternative Minimum Tax
Good New! Not apply:
In first year of corp
In first three years if average gross receipts under 5 mill
In any year if gross receipts in preceding three years less 7.5 mill.
Bottom Line: All Small C corps Safe.
AMT Burden:
Add back Section 56 adjustments
Add back 75% of Adjusted Current Earnings account
AMT rate is 20%
The “Push to Kill It” is on!
LLM Corporate Tax Instructor: Dwight Drake

23. LLM Corporate Tax Instructor: Dwight Drake
C Corp Losses
Losses
Carry Back
Carry Forward
C Corp
Never Pass Thru
Shareholders
LLM Corporate Tax Instructor: Dwight Drake
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

24. Basis Game Corporation’s Inside Basis in Assets Contributions
Distributions
Shareholder’s
Outside Basis in Assets
LLM Corporate Tax Instructor: Dwight Drake

25. C Corp Non-Basis Booster
LLM Corporate Tax Instructor: Dwight Drake
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

26. S Corp, Partnership, LLC Loss
Hurdles:
Basis limitations (704(d) and 1366(d))
At-risk limitations (465)
Passive activity limitations (469)
S Corp
Pass Thru
Owners
LLM Corporate Tax Instructor: Dwight Drake
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

27. S Corp, Partnership, LLC Income
Impacts:
No entity level tax
1366(a) separately stated items
Entity level accounting period & elections
Generally calendar year
S Corp
Pass Thru
Owners
LLM Corporate Tax Instructor: Dwight Drake
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

28. LLM Corporate Tax Instructor: Dwight Drake
S Corp Basis Adjustments Per 1367
Basis Up
Basis Up
Contributions
Distributions
Income
Losses
Basis Down
Basis Down
LLM Corporate Tax Instructor: Dwight Drake

29. Pass-Thru Entity Basis Booster
LLM Corporate Tax Instructor: Dwight Drake
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

30. LLM Corporate Tax Instructor: Dwight Drake
Problem P. 24
Boots Inc. Taxable Income and Regular Tax
Inventory Sales ,500,000
Dividends ,000
Capital Gains ,000
Gross Income ,800,000
Operating Expenses ,000
Depreciation ,000
Capital Loss (limited to gain) ,000
Passive activity loss ,000
Dividend received deduction (243) ,000
Taxable Income ,000,000
LLM Corporate Tax Instructor: Dwight Drake

31. LLM Corporate Tax Instructor: Dwight Drake
Problem P. 24
Tax liability:
15% of 50k = ,500
25% of 25k = ,250
34% of 925k = ,500
First bubble = ,750
Tax ,000 (Note: Flat 34% Rate)
LLM Corporate Tax Instructor: Dwight Drake

32. LLM Corporate Tax Instructor: Dwight Drake
Problem P. 24
(b) Dividends totaling $660,000 distributed:
Shareholders 20% = ,000
Corporate tax = ,000
Total tax hit ,000.
Combined tax rate %
Note: Without Bush favorable capital gain rate, due to expire at the end of 2010, Shareholder tax goes to 40% combined rate and total tax hit goes to 60.4%.
LLM Corporate Tax Instructor: Dwight Drake

33. LLM Corporate Tax Instructor: Dwight Drake
Problem P. 24
(c) Compensation of $1 million paid to Emil and Betty
Shareholders 40% = ,000
Corporate tax =
Total income tax hit = ,000.
Combined tax rate %
But this not all - there’s another tax that no one ever wants to talk about: The Payroll Tax.
LLM Corporate Tax Instructor: Dwight Drake

34. LLM Corporate Tax Instructor: Dwight Drake
Problem P. 24
Payroll Tax:
15.3% of first 106.8k per person (2009 Amount).
2.9% on excess per person.
Half deductible by corp.
Impact in this situation:
Payroll taxes ,360
Shareholder income ,000
Corporate tax
Total income tax hit = ,360.
Combined tax rate %
LLM Corporate Tax Instructor: Dwight Drake

35. LLM Corporate Tax Instructor: Dwight Drake
Problem P. 24
Note impact if S corporation:
- No corporate tax
- No payroll tax
- If passive losses good, total income passed thru to shareholders is 1,067,000 (no 70k 264 dividends deduction, and 3k capital loss). Tax as follows to shareholders:
100k 20% = ,000
40% = ,800
Total Tax ,800 (40.7%)
LLM Corporate Tax Instructor: Dwight Drake

36. Earnings Bailout – The New Math
C Corp C Corp S Corp
Dividend Bail Comp Bail Owner Bail
100k Income
C Corp Tax ,
Shareholder Inc Tax , , ,627
Payroll Tax ,
Total , , ,627
Percentage % % %
LLM Corporate Tax Instructor: Dwight Drake