LLM Corporate Tax Instructor: Dwight Drake Taxation of Corporations and Shareholders Law T 501...
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Transcript of LLM Corporate Tax Instructor: Dwight Drake Taxation of Corporations and Shareholders Law T 501...
LLM Corporate Tax Instructor: Dwight Drake
Taxation of Corporations and Shareholders
Law T 501
University of Washington School of LawLLM Program in Taxation
Instructor: Dwight Drake
Fall 2009
LLM Corporate Tax Instructor: Dwight Drake
Contact Info – Office Hours
Email: [email protected]
Phones: 425.281.1493, 425.222.5988, 360.778.1862
URL:http://faculty.washington.edu/djdrake/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
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
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
The Lawyer’s Role as an Advisor to Business Owners, Professionals and
Entrepreneurs
Flash Presentation (20 Min. approx) byDwight 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
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
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
Federal Tax Sources
2001 2002 2003 2004 2005 2006 2007
Pers. Income 994.3 858.3 793.7 809.0 927.2 1,043.9 1,163.5 Corp. Income 151.1 148.0 131.8 189.4 278.4 353.9 370.2Social Insurance 694.0 700.8 713.0 733.4 794.1 837.8 869.6Excise Taxes 66.2 67.0 67.5 69.9 73.1 74.0 65.1Estate & Gift 28.4 26.5 22.0 24.8 24.8 27.9 26.0Misc. 57.2 52.5 54.4 53.9 56.4 74.0 65.1
Total Revenue 1,991.2 1,853.2 1,782.3 1,880.3 2,153.9 2,407.3 2,567.7
All in billions
LLM Corporate Tax Instructor: Dwight Drake
Business Entity Forms
• C Corporations - Subchapter C (§§301-385)
• S Corporations - Subchapter S (§§1361-1379)
• Unincorporated Single Owner - Individual Proprietorship
• General Partnerships – Subchapter K (§§701-777)
• Limited Partnerships – Subchapter K (§§701-777)
• Limited Liability Companies - Subchapter K (§§701-777)
LLM Corporate Tax Instructor: Dwight Drake
Copyright 2005 Dwight Drake. All Rights Reserved.Business Planning: Closely Held Enterpriseswww. drake-business-planning.com
US BusinessesProjected Revenues 2007
Corporations $ 21.58 Trillion (84.2%)
Sole Proprietorships $ 1.23 Trillion (4.8%)
Partnerships $ 1.35 Trillion (5.3%)
Limited Liab. Companies $ 1.45 Trillion (5.7%) Total $ 25.61 Trillion
LLM Corporate Tax Instructor: Dwight Drake
Copyright 2005 Dwight Drake. All Rights Reserved.Business Planning: Closely Held Enterpriseswww. drake-business-planning.com
Duncan and Sandy Smith Plan
Daughter Trust
Son Trust
Daughter Trust
GC Trust – 1
GC Trust – 2
GC Trust – 3
GC Trust – 4
GC Trust – 5
GC Trust – 6
Duncan and Sandy Living Trust
PersonalResidenceTrust
FamilyL.L.C.(Growth)
FamilyL.L.C.(New)
DynastyInsuranceTrust
CharitableRemainderTrust
CCorporation
HoldingS Corp(Parent)
AlmaMater
Qualified Retirement
Plan
QSSSCorp(One)
QSSSCorp(Two)
IncomeCharitableDeduction
Assets
Remainder
Contributions
Distributions
Distributions
Compensation
Distributions
HomeTermUse
Assets
Assets
Cash
Remainder
Income
Units
Units
Income,support
LLM Corporate Tax Instructor: Dwight Drake
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
The Big Overriding Traps
• Sham Transaction
• Business Purpose
• Step-Transaction
• Substance Over Form
• Section 482
LLM Corporate Tax Instructor: Dwight Drake
Trap One: Sham Transaction
Business Entity
Phony Off ShoreOperation
Common Owner
Service Fees
Cash Transfers
Note: No Business Purpose
LLM Corporate Tax Instructor: Dwight Drake
C Corp
Shareholder
Trap Two: Form Over Substance
10k for stock 500k loan - Deductible interest - No repayment plan
What’s wrong here?
LLM Corporate Tax Instructor: Dwight Drake
Trap Three: Step Transaction
Business Entity
Child of owner Owner
Cash proceeds sale of asset
Asset Gift
Note: No Business Purpose
Cash Gift
LLM Corporate Tax Instructor: Dwight Drake
Trap Four: Section 482
C Corp A
Common owners
C Corp B
Bargain sale
Imputed Income
Imputed DividendImputedContribution
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
• 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.
Compared to Personal Income Taxes…
LLM Corporate Tax Instructor: Dwight Drake
• 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% 2007-09, 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.
Select Corp Deduction Provisions
LLM Corporate Tax Instructor: Dwight Drake
C Corp Bracket Racquet First 50k 15%
Next 25k 25%
Next 9 mill, 925k 34%
Over 10 mill 35%
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
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
C Corp Losses
Copyright 2005 Dwight Drake. All Rights Reserved.Business Planning: Closely Held Enterpriseswww. drake-business-planning.com
Losses
C Corp
Shareholders
Carry Back Carry Forward
Never Pass Thru
LLM Corporate Tax Instructor: Dwight Drake
Basis Game
Corporation’sInside Basis in Assets
Shareholder’s Outside Basis in Assets
Contributions Distributions
LLM Corporate Tax Instructor: Dwight Drake
C Corp Non-Basis Booster
Copyright 2005 Dwight Drake. All Rights Reserved.Business Planning: Closely Held Enterpriseswww. drake-business-planning.com
0
200
400
600
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Capital 1st Yr.Income
2nd Yr.Income
3rd Yr.loss
4th yr.income
Stock Basis
LLM Corporate Tax Instructor: Dwight Drake
S Corp, Partnership, LLC Loss
Copyright 2005 Dwight Drake. All Rights Reserved.Business Planning: Closely Held Enterpriseswww. drake-business-planning.com
Loss
S Corp
Owners
Pass Thru
Hurdles:
• Basis limitations (704(d) and 1366(d))
• At-risk limitations (465)
• Passive activity limitations (469)
LLM Corporate Tax Instructor: Dwight Drake
S Corp, Partnership, LLC Income
Copyright 2005 Dwight Drake. All Rights Reserved.Business Planning: Closely Held Enterpriseswww. drake-business-planning.com
Income
S Corp
Owners
Pass Thru
Impacts:
• No entity level tax
• 1366(a) separately stated items
• Entity level accounting period & elections
• Generally calendar year
LLM Corporate Tax Instructor: Dwight Drake
S Corp Basis Adjustments Per 1367
Contributions Distributions Income Losses
Basis UpBasis Up
Basis Down Basis Down
LLM Corporate Tax Instructor: Dwight Drake
Pass-Thru Entity Basis Booster
Copyright 2005 Dwight Drake. All Rights Reserved.Business Planning: Closely Held Enterpriseswww. drake-business-planning.com
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200
400
600
800
1000
1200
1400
1600
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2000
Capital 1st Yr.Income
2nd Yr.Income
3rd Yr.loss
4th yr.income
Stock Basis
LLM Corporate Tax Instructor: Dwight Drake
Problem P. 24
(a) Boots Inc. Taxable Income and Regular Tax
Inventory Sales 2,500,000
Dividends 100,000
Capital Gains 200,000
Gross Income 2,800,000
Operating Expenses 600,000
Depreciation 800,000
Capital Loss (limited to gain) 200,000
Passive activity loss 130,000
Dividend received deduction (243) 70,000
Taxable Income 1,000,000
LLM Corporate Tax Instructor: Dwight Drake
Problem P. 24
Tax liability:
15% of 50k = 7,500
25% of 25k = 6,250
34% of 925k = 314,500
First bubble = 11,750
Tax 340,000 (Note: Flat 34% Rate)
LLM Corporate Tax Instructor: Dwight Drake
Problem P. 24
(b) Dividends totaling $660,000 distributed:
Shareholders tax @ 20% = 132,000
Corporate tax = 340,000
Total tax hit 472,000.
Combined tax rate 47.2%
Note: Without Bush favorable capital gain rate, due to expire at the end of 2010, Shareholder tax goes to $264k @ 40% combined rate and total tax hit goes to 60.4%.
LLM Corporate Tax Instructor: Dwight Drake
Problem P. 24
(c) Compensation of $1 million paid to Emil and Betty
Shareholders tax @ 40% = 400,000
Corporate tax = 0
Total income tax hit = 400,000.
Combined tax rate 40%
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
Problem P. 24
(c) 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 52,360
Shareholder income 400,000
Corporate tax 0
Total income tax hit = 452,360.
Combined tax rate 45.2%
LLM Corporate Tax Instructor: Dwight Drake
Problem P. 24
(c) 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 dividends @ 20% = 20,000
967k @ 40% = 386,800
Total Tax 406,800 (40.7%)
LLM Corporate Tax Instructor: Dwight Drake
Earnings Bailout – The New Math
C Corp C Corp S Corp
Dividend Bail Comp Bail Owner Bail
100k Income
C Corp Tax 22,250 0 0
Shareholder Inc Tax 11,662 20,674 22,627
Payroll Tax 0 13,854 0
Total 33,912 34,528 22,627
Percentage 33.9% 34.5% 22.6%