David Elkins - A Short & Happy Guide to Corporate Taxation

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Corporate Taxation

David Elkins

Professor and Distinguished Teaching Fellow
Netanya College School of Law (Israel)

A SHORT & HAPPY GUIDE SERIES

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a short & happy guide series is a trademark registered in the U.S. Patent and Trademark Office.

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ISBN: 978-1-64708-790-6

Short? Happy? Corporate Taxation??

You have got to be kidding.

This book is dedicated to my grandchildren: Eitan, Roi, Hila, Yael, Tzvi, Michal, Eyal, Noam, and Lavi.

OK, also to my grand-dog, Leo.

And from the Give Credit Where Credit is Due Department: heartfelt thanks to Christopher Hanna, Richard Reinhold, and Joel Elkins for their helpful comments.

Table of Contents

D. Effect of Property Distributions on Earnings and
Profits

The 80% Requirements: Non-Voting Shares and
Non-Common Shares

G. Redemptions Not Essentially Equivalent to a
Dividend

A. Liquidation of a Corporation That Is Not a
Subsidiary

Corporate-Level and Shareholder-Level
Taxation

e. Division and Expansion of an Existing Trade
or Business

Tax Consequences of a Type C
Reorganization

a. Qualifying as a Triangular B
Reorganization

a. Qualifying as a Triangular C
Reorganization

a. Exchange of Property in the
Reorganization

D. Blending the Tax Attributes of the Target and
Acquiring Corporations

b. Section 382 Limitation: Deferring Deduction
of the NOL

c. Section 382 Limitation: Anti-Stuffing
Rules

A Short & Happy Guide to Corporate Taxation

Chapter 1

Preface

It may surprise you to learn that you already know quite a bit about corporate taxation.

Think back to your basic income tax course. You probably spent most of your time learning about things like gross income, gains and losses from the sale of property, ordinary and necessary business expensesyou remember the drill. Well, most of what you learned there applies to corporations as well as to individuals. As evidence, recall the cases that you studied. A great many of them involved corporate taxpayers. More than likely, you did not even pay much attention to the identity of the taxpayer.

In fact, in at least one sense, computing the taxable income of a corporation is easier than computing the taxable income of an individual. As artificial entities, corporations cannot consume. Therefore, the extremely difficult problem of classifying expenses as personal or business (think about commuting, travel, meals, clothing, childcare, and so forth) simply does not exist in the case of a corporate taxpayer. Furthermore, as corporations receive no capital gains preference, the distinction between short-term and long-term capital gain is irrelevant, and the distinction between capital gain and ordinary income is important only because of the restrictions on the deduction of capital losses.

Okay, so what then is the field of corporate taxation all about?

Try this: What can corporations do that individuals cannot? One thing they can do is distribute earnings and capital to their shareholders (individuals dont have shareholders). Another is merge, divide, be acquired, and so forth (individuals cant do that either).

Thus, corporate taxation primarily concerns the tax consequences of those two phenomena: (a) the distribution of earnings and capital and (b) corporate restructuring. In this book, Chapters 113 deal with the former, and Chapters 1418 deal with the latter.

Ready? Here we go.

Chapter 2

Models of Corporate Taxation, a Brief History Lesson, and the Current State of Affairs

A.The Classical Model

Until the turn of the twenty-first century, U.S. corporate taxation was based on what is commonly referred to as the classical model. The idea behind this model is that a corporation is a legal person. Like a natural person, it can own property, it can incur debt, and, what is particularly important for our purposes, it can earn income. Now, the reasoning goes, if a corporation can earn income like a natural person, it can also pay taxes like a natural person. Therefore, the first element in the classical model is the imposition of income tax on the corporation.

The second element of the classical model concerns the distribution of earnings to the corporations shareholders. When shareholders receive a dividend, they report the dividend as income and pay the appropriate tax.

Superficially, the classical model seems conceptually sound. The corporation is a person. Its shareholders are separate persons. Each person pays tax on his, her, their, or its income. Each dollar of income is taxed once and only once.

However, if we dig a little deeper, we may notice a problem. The payment of tax by the corporation reduces the earnings available for distribution to shareholders. This means that shareholders bear the indirect burden of the corporate-level tax. Imposing an additional shareholder-level tax effectively amounts to double taxation of the corporations earnings.