A537 - Corporate & Partnership Tax Instructor: Dwight Drake Calculating the Entity’s Taxable Income Section 63: Taxable income equals gross income minus allowable deductions. Section 61: Gross income “means all income from whatever source”. Section 162: Deduction for “all ordinary and necessary expenses paid or incurred in carrying on any trade or business.” The “Big 12” comparisons to individuals: 1. No personal expenses. 2. No exemptions. 3. No non-business deduction limitations. 4. Huge dividends exclusion on dividends from other C corps. 5. Capital losses only to extent of capital gains.

A537 - Corporate & Partnership Tax Instructor: Dwight Drake Calculating the Entity’s Taxable Income C Corps compared to individuals (Con’t): 6. 10% charitable contribution limitation vs. 50% for personal. 7. No at-risk and passive loss limitations. 8. Losses trapped inside corp – carry back or over, but not pass thru. 9. One mill executive comp limit for public C corps. 10. Any tax year, except for “personal service C corps” – must show business purpose for non-calendar year and pay deferral deposit per Must use accrual accounting method unless farm, personal service corps or gross receipts under 5 mill. 12. Deductions and loss limits on transactions between C Corp and more- than-50% owner per 267.

A537 - Corporate & Partnership Tax Instructor: Dwight Drake C Corp Alternative Minimum Tax Good News! Not apply in first year of corp, not apply in first three years if average gross receipts under 5 mill, not apply if annual gross receipts in preceding three years under 7.5 mill. Bottom line: All small C corps safe. AMT burden: 1. Add back Section 56 adjustments 2. Add back 75% of Adjusted Current Earnings account 3. AMT rate is 20% The “Push to Kill It” is on!

A537 - Corporate & Partnership Tax Instructor: Dwight Drake C Corp Penalty Taxes Good News: They have been de-fanged (temporarily?) with 15% rate. Section 531 Accumulated Earnings Tax - 15% tax on excess accumulating earnings in C corp. Minimum of 250k each year (150k for professionals. The game is justifying accumulations. Section 541 Personal Holding Company Tax – 15% tax on undistributed personal holding company income. 50% or more of stock owned by five or fewer and 60% or more of income from dividends, interest, rents, capital gains and certain personal service income. Rescue dividends permitted to avoid tax.

A537 - Corporate & Partnership Tax Instructor: Dwight Drake Two Important C Corp Factors 1. A buys stock for 10k. Company makes millions, keeps most to grow business and pays only minor dividends. Company is sold down road for millions and A gets 1.2 mill for his stock. What is A’s basis? What is A’s gain? 2. C Corp A adopts 1/31 tax year and earns 400k for year ending 1/ To reduce taxes, A pays Walter a 300k bonus on 1/30/2005. What calendar year is bonus reported by Walter? When must Walter report income? How would this change if C Corp was calendar year and bonus was paid on 12/31/04?

A537 - Corporate & Partnership Tax Instructor: Dwight Drake Partnerships - Entity vs. Aggregate Theories Aggregate: 1. Partnership pays no taxes 2. Income and losses pass thru to partners Entity: 1. Partnership files information return 2. Partnership determines its own income or loss, except for designated “separately-stated items” 3. Character of income item and holding period determined at entity level 4. Accounting method and tax year set at entity level

A537 - Corporate & Partnership Tax Instructor: Dwight Drake Most Common Separately-Stated Items Charitable contributions Capital gains and losses Section 1231 gains and losses (business assets) Interest income Investment interest expense Dividends Foreign taxes Income and losses from passive activities AMT preference items

A537 - Corporate & Partnership Tax Instructor: Dwight Drake Revenue Ruling Timing: 1. Partnership formed and buys stock 6/1/66 2. Partner C sells partnership interest to D on 2/1/67 3. Partnership sells stock at gain 5/1/67 4. Hence, partnership held 11 months; D held 3 months. Issue: What impact to D if CG period 6 months? Ruling: Holding period determined at entity level per 702(b). Hence, D gets long-term capital gain treatment. Query: Can entity level determination ever hurt? See Demirjian v. Comm’r (page 80) – 1033 non-recognition election must be made at entity, not partner, level.

A537 - Corporate & Partnership Tax Instructor: Dwight Drake Partnership Assignment of Income v. Section 704 Types of assigned income: 1. Fully earned, waiting to be collected 2. Right to receive, but not fully earned, same type of business 3. Right to receive, but not fully earned, different type of business. Schneer v. Comm’r Majority: #2 assignment works. Other two will trigger assignment of income doctrine. Halpren Dissent: No conflict in assignment of income and 704 – issue is resolved by agency law

A537 - Corporate & Partnership Tax Instructor: Dwight Drake Partner’s Outside Basis Formula (705) Contributions to partnership: Plus: 1. Taxable income allocated to partner 2. Tax-exempt income allocable to partner 3. Excess depletion deductions over basis Less: 1. Losses allocable to partner 2. Distributions to partner 3. Expenditures not deductible and not capitalized 4. Oil and gas depletion deduction to extend not exceed allocable basis. Plus: The Section 752 liability twist – Up or down

A537 - Corporate & Partnership Tax Instructor: Dwight Drake