Corporate Tax I and II First Assignment

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CORPORATE TAXFall, 2012

PROFESSOR Deborah Schenk

Introduction

In this course, we will study how the federal governmentattempts to tax corporations and their owners. We will study indetail most of the important provisions governing corporationsand their shareholders. (This course is a combination of theseparate Corporate Tax I and II courses and covers the samesubjects.) Every tax lawyer must be familiar with corporatetaxation. It is an extremely difficult, but to tax lawyers,endlessly interesting subject.

Class Schedule

The class meets Mondays and Thursdays 2-4 p.m. The first fewweeks are a little different. Please note the following:

Thursday August 30Monday September 3 [no class; Labor Day]Wednesday September 5 [legislative Monday]Thursday September 7Monday September 10 [no class and no make-up unless announced]Thursday September 13Monday September 17 [no class; Yom Kippur]

Thursday September 20Friday September 21 [make-up class for Yom Kippur]

From Monday September 24 until Thursday December 6 (last day ofclasses), class meets every Monday and Thursday with theexception of November 22 (Thanksgiving).

Course Materials

There is no coursebook assigned. Instead materials are posted

on the website under Course Materials. There is a packet foreach unit of the course.

There is one required book for the course: a copy of theInternal Revenue Code and Regulations. You can use an abridgedversion but it should be current.


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There are two recommended, but not required books for thiscourse:

Cheryl D. Block, Corporate Taxtion (Aspen, 3rd Edition)The book should be available at the NYU Bookstore. You do notneed to buy this book; use it only if you feel the need for asupplement. This is a hornbook that explains in some detailthe Code sections we will be studying.

Boris Bittker & James Eustice, Taxation of Corporations andTheir Shareholders (7 th ed. Warren, Gorham & Lamont).This book, referred to by everyone as B&E, is the bible ofcorporate taxation; every corporate tax lawyer refers to it. Ifthe answer to a corporate tax question is not in the book, itdoes not exist. Do not purchase this book; it is expensive. Ifyou are inclined to look at it, there are copies in the library.

Syllabus

The syllabus for the course describes each of the units we willcover this semester. It is posted under Course Documents.

Class Assignments

There is an assignment for each unit of the course, posted under

Assignments. I teach using a problem method and there are 10units and assignments for the class. Each assignment includes anintroductory note, reading assignments, and a set of problems.After each class I will post the next assignment underAnnouncements.

The problems should be prepared before class. I do not lecture;the classes are a discussion of the problems. If you have notdone the reading or looked at the problems, you will have somedifficulty following the class. Corporate tax is intenselystatutory. You will be consulting the Code (and the regs)

constantly. Plan on bringing the applicable sections to class.

Blackboard Discussion Group

I will maintain and monitor a discussion group throughout thesemester. I use it (and I hope the class will use it) to postinteresting items, to clarify class discussion, to answer or


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post questions. Class members are not required to post to nor isthere credit for posting (it is pure education) but you areresponsible for anything that is posted there. There is noanonymous posting. Please post all substantive questions on thediscussion board so that everyone can benefit from the answers.

Final Exam

There will be a three hour in class, open book final exam. I willprovide further information regarding the final exam in class. You will use your computer to submit your answers. Caveat:Your computer will be in "lock-down" or "secure" mode, meaningthat its use will be limited to the functional equivalent of apen, i.e., solely for recording your answers. You will not beable to access any material on your hard drive, and you will nothave access to the internet. Therefore, although you may bringwhatever materials you wish to the exam - notes, outlines, etc.- you will have to work with hard copies. You should assumethat you should have all materials with you during the exam.You may want a calculator, as you will not be able to accessExcel. Nothing fancy just a calculator that does basicarithmetic if adding numbers in your head is not your forte.

Grading

Your final grade for the course will be based on the final examand that grade can be increased for class participation. I willexplain how I take class participation into account in the firstclass.

Contact Information

Although I will have formal office hours on Mondays 4-5 andThursdays from 1-2, I will be in my office most of the week andyou should feel free to stop in with questions or to chat. I amin 430H. You can call me at 212-998-6163 or e-mail me [email protected] if you want to make a specificappointment.


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Corporate Tax I and IIFall, 2012

Professor Deborah Schenk

Syllabus of Topics Covered

Unit I Introduction

1. Why tax corporate income?2. Corporate rates3. Choice of form and entity classification

Unit IIDistributions

1. Cash distributions

2.

Distributions of property (other than stock of the distributing corporation)3. Constructive dividends4. Dividend received deduction

Unit III--Redemptions

1. Redemptions treated as distributions2. Redemptions treated as exchanges3. Attribution rules4. Partial liquidations5. Brother-sister and parent-sub redemptions

Unit IVDistributions of Stock

1. Stock dividends2. Distributions of tainted stock

Unit VTransfers to Controlled Corporations

Unit VILiquidations and Taxable Acquisitions

1. Regular liquidations and taxable asset acquisitions2. Parent-Subsidiary liquidations and taxable stock acquisitions

Unit VIINontaxable Asset Acquisitions

1. Type A reorganizations2. Type C reorganizations


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Unit VIIINon Taxable Stock Acquisitions

1. Type B reorganizations

Unit IXTriangular Reorganizations

Unit XSplit-offs and Spinoffs

1. Divisive Type D reorganizations2. Spin-offs


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1

Corporate TaxationFall 2012

Professor Deborah Schenk Unit I

Code: 1(a) through (e), (h), (i), 11, 1201(a), 1211(a), 1212(a), 7701(a)(1) through (5), (c),7704 (omit (d)(3) (5), (e), (g))

Regs: 301.7701 1, 2(a), 2(b)(1) through (8)(i) & (ii), 2(c); 3(a), 3(b)(1), (2), 3(c)(1)(i),(ii), (iv) & (v)(C)

Materials: Excerpt from Avi-Yonah article; Corporate Tax Rates; Overview of EntityClassification

Problems

1. In the eyes of the Internal Revenue Code, a corporation is a person. Like any individualtaxpayer, a corporation pays a separate federal income tax based on a calculation of itsannual gross income less certain business expenses. Like any individual taxpayer, acorporation interacts with the IRS on its own behalf: it files annual federal income taxreturns, requests tax refunds, responds to audit notices, disputes IRS findings of deficiencies and pays tax penalties. Why do we impose a separate tax on corporations?(Youll find the excerpt from the Avi-Yonah article helpful in answering this question.)

2. Marginal rates for corporate taxpayers are listed in 11. To what extent are these ratesprogressive? Many corporations with income exceeding $10 million have an effective

tax rate of 15% or lower. How is this possible? (A simplified way of determiningcorporate tax rates is found in the Corporate Tax Rates material.)

3. Take a look at 1(f)individual tax rates are adjusted for inflation. Is there somethingcomparable in 11? Why do you suppose this is so?

4. Take a look at 1 (a) and (i). Current individual tax rates are in a state of flux. The so-called Bush tax cuts, which reduced individual tax rates, are in effect until December2012. The current top rate is 35%. Unless Congress acts, these rates will go back to therates in effect before 2001, bringing back a top rate of 39%.

5. As you are aware, long-term capital gains rates are preferential. The top rate is 15% butthat also is scheduled to terminate at year end and return to a 20% rate. Can corporatetaxpayers use this preferential capital gains rate? Is there a preferential rate in 11?Take a look at 1201.

6. Take a look at 1(h)(11), which treats qualified dividends as capital gain. Thispreferential rate is also scheduled to expire at year end. If Congress does not act,dividends would be taxed as ordinary income. Does this provision apply to corporations?


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7. Blue Chip Co. is a U.S. entity taxable as a corporation under Subchapter C of the Code.Blue Chip Co. is an accrual method taxpayer that uses the calendar year. Husband andWife, individuals who are both U.S. citizens, own 100% of the stock of Blue Chip Co.Blue Chip Co. has taxable income for 2011 of $21,000,000. On December 31, 2011, Blue

Chip Co. distributes to Husband and Wife, who are in the top marginal federal incometax bracket, the (after tax) proceeds of its last (pre tax) $1,000,000 of earnings.

a. How much of the distribution do Husband and Wife retain after all applicablefederal income tax has been paid on the $1,000,000?

b. What if Blue Chip Co were treated as a partnership (not subject to 7704) forU.S. federal income tax purposes instead of as a C corporation?

8. Same facts as in Question (1), but assume that Blue Chip Co. is incorporated in theUnited Kingdom. Assume for purposes of this question that the UK imposes a corporate

tax of 35% on corporate earnings and that Blue Chip Co.s shares are listed on theLondon Stock Exchange.

a. How much of the distribution do Husband and Wife retain after all applicable UKand US income tax has been paid on the $1,000,000?


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Excerpt fromReuven S. Avi-Yonah, Corporations, Society, and the State: A Defense of

the Corporate Tax, 90 Va. L. Rev. 1193 (2004)

(Start reading at III.)


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+ 2(,1 1/,1(

Citation: 90 Va. L. Rev. 1231 2004

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CORPORATE TAX RATES


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OVERVIEW OF CHECK-THE-BOX REGULATIONS

Treas. Reg. 301.7701-2(b)

Provides list of per se corporations that are ALWAYS be treated as C corps. No election available. Includes:state law corporations (joint stock company, joint stock association)certain listed foreign entities

Treas. Reg. 301.7701-3

Provides the entity electionProvides default classification rules for entities not electing

ENTITY CLASSIFICATION RULES FOR DOMESTIC AND FOREIGN ENTITIES

DOMESTIC

If a per se corporation under Treas. Reg. 301.7701-2(b), the inquiry is over; no election can be made.

If not a per se corporation, and the entity has:two or more members,

o default: partnershipo can elect: corporation

one membero default: disregardedo can elect: corporation

FOREIGN

If a per se corporation under Treas. Reg. 301.7701-2(b), the inquiry is over; no election can be made.

If not a per se corporation, and the entity has:

two or more members, ando All members have limited liability

default: corporationcan elect: partnership

o One or more has unlimited liabilitydefault: partnershipcan elect: corporation

one member with unlimited liabilityo default: disregardedo can elect: corporation

one member with limited liabilityo default: corporationo can elect: disregarded entity