Corporate Tax Rules

economics exam answers

Title 26 in USC

-internal revenue code


IRS enforces the code, does not make it

-Congress makes the code

IRS under executive branch


3 types of treasury regulations that interpret IRC


-Treasury dpt’s interpretation of what the tax law says

-not enforceable and is not law


-how you have to do something

-should follow these


-the secretary of the treasury shall regulate as needed to enforce parts of code



All tax laws start in the House of Reps

House ways and means committee

-Always invite IRS and Treasury people to hear committee

Bill is vote don by committee and then taken to House floor

If approved by 2/3rds of House it goes to Senate

Finance Committee

If approved by senate it gets sent to Conference Committee

-adjust differences in senate and House Bills

Sent to president

Very first income tax came from Lincoln


Tax Court

Civil tax cases

Judges from Treasury…

No juries

5 years at most in jail for taxes

Beyond a reasonable doubt

Preponderance of evidence

–          To convince the govt they are wrong


United States District court

Federal District Court


Choice of Entity

Sole Proprietorship

Schedule C form 1040

Must use calendar year end

Cash method of counting

Sub section A

–          General Rule

  • Always an exception
  • Cash method is mandatory unless inventories are a material income producing factor

Liability is personal and unlimited


Partnership- 2 + individuals

File 1065

No income taxes

Flow through entity

Reported to personal income tax forms

General Partnership

-All partners are personally liable for debts

Partners end up suing each other

Limited Partnership

Limited partners not liable for debts



Taxed as a partnership


Can have one partner LLC (SMLLC)



2 types

C corp

S corp

Corporations are Taxed under sub chapter c (where c corp comes from)

S corp under sub section S


C corp

File annual tax return

Rate starts at 15% and goes up to 35%

Dividends are not deductible by corporation


S corp

No income taxes

Flow through entity

Shareholders pay their ownership % and pay it on income tax


Payroll taxes


Class 2


G7 Nations

Canada, Germany, France, Italy, UK, USA, Japan


How to incorporate?

Filed in state of incorporation

Secretary of State

In Ohio 2 pieces are filed

  1. Articles of Incorporation
    1. Name of the corporation
    2. Address of offices
    3. Purpose clause

i.      Why are they incorporated

  1. Number of shares of stock authorized to issue
  2. Name of the directors of the corporation
  3. Appointment of Agent
    1. Be able to serve as statutory agent

i.      Able to receive legal documents

  1. Name agent
  2. Address of agent
  3. Phone number of agent


SoS will send confirmation letter along with charter corporate number to identify


All information is available online


Now the corporation exists


Corporation -à stock certificate | shareholder

Shareholder à $ | Corporation


The Majority Shareholder votes controls what the corporation does


Shareholders appoint directors

Directors appoint officers

Secretary, president, VP


By Laws of a Corporation

–          Functions for all of the officers


IRS gives federal ID number for filing taxes


Ohio withholding tax and vendor licenses


If shareholder contributes property instead of cash, the shareholder has a tax consequence

Section 351 of Internal Revenue Code


Shareholder that transfers something of value transferor

Corporation that receives the value is the transferee

ee- receiving something


Payment to shareholder is a dividend


If shareholder receives salary or bonus from corporation, it is subjected to a limitation

–           Reasonable and Necessary Compensation is deductible from corporation

–          Section 162

–          Extreme third party arm’s length business terms


Risk capital – may lose the money

No guarantee that the money will come back from the stocks


Loan to corporation

Debit cash

Credit Loan payable to shareholder


Secured creditors get paid first in the case of a bankruptcy

Shareholders get paid last

Loans receive promissory note


Companies that have to be a corporation

-insurance company

-Federal organized companies

– Publically traded partnership

– entity owned by state or subdivision of state

– if for profit

-Business entity wholly owned by foreign government

1120 is the form filed as a corporation for taxes


Corporations that receive dividends from other corporations can exclude 100% of income received from the dividends from income

Fines and penalties not deductible by a corporation


Charity deductions up to 50% of income


Effective tax rate: Payment/ taxable income









Personal Service Corporations

Automatic 35% tax rate

448 (d) in IRC

If it meets 2 tests it is a PSC

Substantially all activities involve performing services

–          Health, engineering, architects, accountants, actuaries, performing arts, consultants

Substantially all stock owned by employees performing those services

Code section 7701 has definitions

95% or more of stock is owned by shareholders performing services

By not checking the box on tax form it extends the limitation by 1 year to 4 years


—- Slovenia, Greece, Iceland… 20% corporate tax

Canada 15%


C corp form 11-20 has to be filed with IRS campuses on the 15th day of the 3rd month at the end of its tax year

–          Can file a form 7004 for an extension, 6 months

–          All domestic corporations have to file regardless of taxable income


S corp must file 11 20 s on the 15th day of the 3rd month after end of tax year

-7004 gives 6 month extension


Partnership or LLC files 1065 on 15th day of 4th month at end of tax year

-no income means no filing


1040’s/individuals file on 15th day on 4th month

4868 form gives 6 month extension

If you are single and under 65 before jan 1st, 2012 and gross 2011 income is 9,500 dollars or less, no 1040 required

-null if self-employment tax liability is 400 dollars and up

65 or older and single has to have 10950 dollars

1041 required if trustee of the trust or executor of state files due on 15th of 4th month

-if 600 dollars or more of gross income

– OR beneficiary is a non-resident alien


Controlled Group

Parent c corporation has shareholders of the parent corporation

Parent c corporation may have subsidiary corporations that are separate corporations

Parent corporation owns stock in subsidiary corporation

Wholly owned


If parent corporation divided itself up into smaller corporations, the tax liability is divided

Puts you in lower tax brackets

Commonly controlled group as defined by 1563

2 or more corporations owned directly or indirectly by the same shareholders or groups



3 types of controlled groups (section 1563)


Parent-subsidiary group- connected by at least 80% ownership in one or more corporations

Example: parent corporation owning 80% + of subsidiary corporation

First 50,000 of taxable income is taxed at 15% , allocated among group.

Example 2: Parent owns 85% of stock of subsidiary corporation and also owns another parent subsidiary in which it owns 100%


Parent owns 85% of stock of subsidiary corporation 1 and also owns another parent subsidiary 1 in which it owns 100%. Sub 2 owns 30% of sub 3. Sub 1 owns 40% of sub 3

Sub 3 is not part of parent-subsidiary group


Brother sister control group

2 or more corporations

5 or less individuals, trusts or estates own 80% or more of the stock of each corporation

Same 5 own More than 50% of the stock of each corporation, taking into account commonly owned stock, to each corporation



Shareholders                            North C Corp               South C Corp                   common

______________——————————— —————————————————–


Will                                    30%                                        70%                                30%

Gale                                      70%                                      30%                                30%



Combined control group

3 or more corporations in which each corporation is a member of a parent sub group or a brother sister group

And, one or more of the corporations is both the parent and a member of a brother sister group



Shareholders      A corp    C corp     B corp


Amy                     50%             50%    0%

Ben                      50%               50%    0%

A corp                 0%                 0%      100%



Consolidated Return: Common parent corp that owns at least 80% of another corp, and one or more of the members owns at least 80% of each other corporation included in the group



Transferor sends assets to transferee

Stock is sent from transferee to transferor


Non-recognition section

Section 351

Even if there is a gain, it is not recognized for tax purposes


FMV of building at appraised amount is $100,000

Adjusted basis= cost – depreciation  =  10,000

Realized gain is $90,000

Recognized gain (goes on tax return):

Section 351: if one or more persons transfer property to a corporation and solely in the exchange receive stock from the corporation, no gain or loss shall be recognized by the transferor

Quid pro quot must say basis is 10,000, not 100,000


Section 7701 defines a person as individuals, corps, partnerships, trusts…


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