1. in order to meet 80% test, shareholders who contributed services for their stock may also contribute a small amoun tof property so their stock ownership can contribute.  property must be equal to at least 10% of the value of services 
2. existing shareholders can contribute property to help group meet 80% test.  value of property must be at least 10% of the value of stock owned by the existing shareholder

1. transferor has wage income = FMV of the stock received (and basis in stock equal to that amount)
2. the corporation has a salary expense deduction (unless services were an organization expense)

=basis of all property transferred to the corporation +gain recognized by shareholder

-boot received by shareholder

-liabilities assumed by corporations

• basis of transferred assets is adjusted proportionately to prevent a benefit from losses.
• the corporation and shareholder can elect to reduce the stock's basis instead

1. total liabilities assumed by corporation > adjusted basis of property transferred by shareholder, gain recognized= liabilities assumed-basis of property transferred
2. debt not incurred by shareholder for valid business reasons, then corporate assumption will cause all of the debt relief to be treated as boot.  Gain recognized to extent of the realized gain

• stock exchanged for Section 1231 or Capital Assets: asset transfers holding period tacks on to stock holding period
• other property: holding period doesn't tack

• a corporation whose principal activity is the performance of personal services performed by employees who own substantially all of the stock
• cannot offset passive losses against either active or portfolio income
• tax rate is 35%
• generally must use a calendar year-end

• qualifies as this distinction if at any time during last half of the tax year more than 50% in value of its outstanding stock is owned by no more than 5 individuals
• can use passive losses to offset active income but not portfolio income

1. net capital loss is carried back 3 years and forward 5
2. accrual accounting is required except for small corporations (gross receipts < $5 million), certain personal services corporations, and "S" corporations
3. passive loss limits do not apply
4. can chose a fiscal year
5. corporate return is due on 15th day of the 3rd month following the close of a tax year

1. add nondeductible expenses to book income
2. add income that is taxable but not included in book income to book income
3. subtract nontaxable income that is included in book income
4. subtract deductions not expensed in book income

• to help troubled companies avoid bankruptcy
• debt discharge income realized in 2009, gross income is included ratably over 5 years beginning with the 5th tax year following the year of recognition
• if discharge begins in 2010, same rule applies except beginning with 4th tax year following year of recognition

• upto $5,000 can be deducted unless total organizational expenditures exceeds $50,000 (reduced dollar for dollar)
• expenses not deducted must be capitalized and amortized over 180 months
• examples: legal services, accounting services, meetings, fees to incorporate, etc.

• same rules as organizational expenses except for 2010 only ($10,000 of expenses are deductible and up to $60,000 total before phase-out)
• expenses that would be normal business expenses except the business hasn't started yet

• costs of issuing and selling stock
• must be capitalized, but can't be amortized

same as for individuals except...

• contribution of inventory or depreciable property used in trade or business used for the care of ill, needy, or infants, or where property is used for research have deduction of lower of (a) AB of property + 50%(FMV-AB) or (b) 2 X AB
• limitted to 10% of taxable income (excess carries forward for 5 years, but not backwards
• can deduct accrued contributions if actually paid within first 2.5 months of following tax year

1. contributions books and food inventory by comporations to a public elementary or secondary school that uses books in an appropriate manner
2. contributions computer equipment donated to schools or libraries 
3. contributions of newly manufactures scientific equipment to a college or university

• eligible stock must be domestic and held for 45 days (90 for preferred)
• corporation owns < 20%, DRD=70% dividends received
•  corporation owns < 80% but >20%, DRD=80% dividends received
• Corporation owns > 80%, DRD=100% dividends received
• DRD can't create or add to a NOL or finance debt for investment in stock

• corporations engaged in production activities within the U.S. qualify for a deduction equal to 9% X the lower of (a) qualified production activity income or (b) taxable income
•  qualified production activity income=gross receipts from domestic production -less- COGS, direct expenses allocated to income, and a pro-rate share of indirect expenses allocated to income
• deduction can't exceed 50% of wages allocable to domestic production income

gross income

less: deductions (except charitable, DRD, NOL carry back, and STCLE carryback)

taxable income for charitable limitation

less: charitable contributions (<=10% of above)

taxable income for DRD (NOL carryforward not allowed, nor is DPD)

Less: DRD

taxable income before carrybacks

less: NOL carryback and STCL carryback

taxable income

• if anual gross receipts for 3 years before tax year is less than $7,500,000, then TMT is $0
• if 3 year period is first 3 tax years, $5,000,000 is substituted for $7,500,000 and TMT for first year is always $0
• If AMT is required once, it is used from now on

increase taxable income when computing AMTI. examples:

• tax-exempt interest (private activity bonds except during 2009 or 2010)
• realty and leased personalty (excess of accelerated depreciation over SL for pre-1987 acquired prop)
• excess percentage depletion (over property's AB)
• excess intangible drilling and development costs

can either be added of subtracted to/from taxable income when computing AMTI.  examples...

• difference between 200% declining balance depreciation and 150% for 3,5,7, and 10-year property
• differences in gain/loss between regular tax and AMT
• difference in percentage completion method income over completed contract method income
• add regular tax less NOL in excess of AMT less net NOL

1. increase for life insurance proceeds less expenses related to policy
2. increase in municpal interest (not from 2009 or 2010) less related expenses
3. increase for 70% DRD (deduction not allowed)
4. adjustment reflecting installment sale method not allowed
5. increase for intangible drilling costs
6. increase for organizational expense amortization

1. excess charitable contributions
2. net capital losses
3. penalties
4. disallowed travel and entertainment
5. federal income taxes
6. 80% and 100% DRD

1. if ACE > AMTI (before the ACE adjustment), then 75% of this difference is used as an adjustment for calculating AMTI
2. ACE can also be a negative adjustment, but this is limited to cumulative amount of prior positive adjustments

1. allowed for carryover of NOL under AMT in prior years (limited to 90% of AMTI before NOL)
2. if special NOL rules are elected for 2008 or 2009, then 90% is changed to 100%

• when AMT is paid, a credit is generated for future years
• credit is limited to amount of AMT generated from timing differences
• credit available in years that AMT is less than regular tax to reduce regular tax, but not below TMT for that year

taxable income

+tax preferences

+/- AMT adjustments and ACE adjustments

AMTI

-minimum tax exemption

tax base

X tax rate (20%)

tentative tax

-regular tax

AMT

• designed to mitigate use of corporations to save on taxes.  
• tax of 15% imposed on undistributed accumulated taxable income

Taxable Income

+/- Adjustments

-dividends paid or deemed paid (consent)

-Accumulated earnings credit

Accumulated taxable income

• made to taxable income to reflect economic accumulations of income

1. - corporate income tax
2. -excess charitable contributions
3. - net capital loss
4. -net capital gain
5. +dividends received deductions
6. +any NOL or capital loss carryovers

greater of..

1. amount of current earnings and profits needed for the "reasonable needs" of the business (loans to SHers are not reasonable needs)-or-
2. $250,000 ($150,000 for service corporations) less the accumulated earnings and profits at beginning of year

• desgined to mitigate use of corporations solely to hold investments
• tax of 15% on undistributed phc income imposed on PHC corporations

Taxable income

+/- adjustments

adjusted taxable income

-dividends paid or deemed paid

Undistributed PHC Income

1. income test: passive income (div, interest, and sometimes rent, royalties and psc's) constitutes 60% of AOGI (adjusted ordinary gross income)
2. ownership test: more than 50% of the value of stock is owned directly of indirectly (spouse, granchildren, children, siblings, parents) by 5 or fewer individuals at any time during last half of tax year

1. -accrued income tax
2. -excess charitable contributions
3. -net capital gain (after tax)
4. +DRD
5. +carryover of NOL from year prior to previous year

1. dividends must be proportionately paid
2. includes consent dividends and dividends paid within 2.5 months of year end
3. includes "deficiency" dividends

• exists when one corporation owns at least 80% of the voting power of another corporation AND holds shares representing at least 80% of its value EVERY DAY of the tax year
• may elect to file a consolidated return

1. permits corporations to eliminate intercompany profits and losses
2. allows profitable corporation to offset its income against losses of another
3. permits net captial losses of one corporation to offset capital gaines of another

• deferred until disposition outside of consolidated firm
• nature of the gain or loss is determined by the use of the property at the time of the intercompany sale

1. foreign corporations
2. S corporations
3. insurance companies

1. election must be unanimous
2. irrevocable once elected
3. creates a joint and several tax liability
4. all members must conform tax year to that of the parent
5. intercompany dividends are eliminated from consolidated taxable income
6. parent adjusts the basis of the stock of a consolidated subsidiairy for allocable portion of income, losses, and dividends

1. parent-subsidiary corporation
2. brother-sister groups
3. certain insurance companies

1. one $250,000 accumulated earnings tax credit
2. limited to taxable in each of first 2 tax brackets
3. one Sec 179 expense deduction
4. one AMT exemption

• test must be met on last day of the year

1. stock possessing at least 80% of the voting power OR at least 80% of the total value of stock of each of the corporations (except the parent) is owned by one or more corporation AND
2. the common parent owns stock possessing at least 80% of the total combined voting power OR at least 80% of the total value of shares of atleast one of the other corporations

• tests must be met on last day of year

1. determining corporate tax brackets
2. determining accumulated earnings credit
3. determining minimum tax credit

1. control group rules must only be met on the last day of the tax year while affiliated groups must meet rules every day of tax year
2. 80% test for affiliated groups is for voting power and value, whereas the 80% test for  p-s is for voting power or value

made for exempt income or deductions that do not represent economic outlay

examples:

• municipal interest and life insurance proceeds
• DRD and DPAD
• deductions for carryovers from previous years
• proceeds from corporate life insurance policy (less cash surrender)

expenditures that arenot deductibile but represent economic outlays

examples:

• federal income tax (net of credits)
• related party losses
• penalties, fines, lobbying expenses, life insurance premiums for a "key" man
• disallowed portion of meals and entertainment

timing differences that can me negative or positive

examples:

• deferred portion of a gain from a current installment sale is added.  when recognized later, it will be subtracted
• depreciation deducted in excess of SL is added back
• section 179 expense subtracted
• net capital loss and the excess amount of charitable contributions

1. current and accumulated E&P are both negative: distributions are a return of capital (tax-free up to adjusted basis, excess is capital gain)
2. current and accumulated E&P are both positive:distribution is taxed as a dividend.  distributions are first taken from current E&P by allocating E&P up to the distribution date. once current E&P is depleted, then distributions reduce accumulated E&P
3. current E&P is positive but accumulated E&P is negative: a distribution is a dividend only to extent of current E&P
4. accumulated E&P is positive but current E&P is negative: a distribution is a dividend to the extent of net E&P on date of distribution

1. value of property distributed (less liabilities assume by shareholder) is amount that is eligible for dividend treatment
2. amount distributed=FMV-liabilities on property
3. distribution of appreciated property causes corporation to recognize a gain (not losses) like a sale of the property
4. is liabilty > FMV, FMV=liability
5. Basis of property to shareholder = FMV

• payment to SH that, although not formally declared as a dividend, is regarded as one
• also treated as dividends

• when a corporation repurchases stock from a shareholder
• treated by the shareholder as a sale of stock with a recognition of gain or loss

1. SH is able to offset stock basis against the redemption process
2. any resulting gain is treated as captial gain, which is often advantageous as compared to dividend income

1. distribution is not "essentially equivalent" to a dividend (NEED)
2. "substantially disproportionate" redemption will also qualify as a sale if the shareholder passes two tests: the "control" test and the "reduced interest test"
3. a "complete termination of SH's interest in the corporation"

• means that the SH must surrender the stock owned directly and indirectly
• family attribution can be waived with the execution of an agreement by the TP to notify the IRS of subsequent stock acquisitions within the next 10 years

1. entity to owner- SH is only subject to entity attribution if the corporation is controlled by the SH (owns more than 50%).  SH owns proportionate interest (equal to % ownership) of stock held by the corporation
2. owner to entity- stock owned by a 50% or greater SH is deemed to be owned in full by the corporation. (no attribution by SH who own less than 50% of entity)

1. entity to owner-stock owned by partnership is deemed to be owned by the partner based on her ownership interest in the partnership. (applies to ALL partners, not just 50% or more partner)
2. owner to entity-stock owned by a partner is deemed to be owned in full by the partnership no matter what

1. appreciated property distribution: gain is recognized. 
2. depreciated property: loss is not recognized, but corporation may have to recognize Section 1245 or 1250 recapture
3.  must reduce its E&P by lower of (1)redeemed stock's proportionate share of E&P or (2)amount of the redemption

• if redemption is actually treated as a dividend, then E&P is reduced by the greater of the FMV or adjusted basis of the property distributed, reduced by attached liabilities

• treated as a sale by noncorporate shareholders so it is a fourth method to qualify for redemption treatment.  
• must pass objective test and subjective test

1. stock held by decedent must be a large portion of estate (35% of adjusted gross estate)
2. redemption is limited to amount of federal and state death taxes and funeral and administrative expenses

1. stock distributions are not taxable to SH if there is no option to receive property in lieu of stock and there is no change in proportionate interest of SH
2. stock bailout is treated as a dividend to SH to extent of E&P at time of sale or redemption

1. gain or loss determined by: VALUE-ADJUSTED BASIS OF STOCK
2. gain or loss recognized by SH will generall be capital
3. if subject to liability, FMV is reduced by liability
4. AB of property received= FMV

1. computation of gain or loss is computed by AB-FMV
2. nature of G/L depends on nature of asset
3. if subjected to liability, FMV can't be less than liability
4. expenses incurred in liquidation are deducted on the last corporate return

loss is not recognized if..

• distribution of each asset is not pro rata-or-
• property distributed is disqualified property

1. disallowed if principal purpose was to recognize loss by corporation with liquidation
2. purpose is presumed if transfer occurs within two years of adoption of the plan of liquidation (unless business purpose is established)
3. decline in value of property after contribution results in deductible loss to liquidating corp. only built-in loss is disallowed

• parent takes a carryover basis in the distributed assets and inherits the subsidiary's tax attributes

no gain or loss is recognized by a parent under 2 circumstances

1. parent must own 80% of voting stock and other stock
2. subsidiary must distribute its assets within the tax year (can have 3 tax year window if elected)

1. merger: acquired corporation dissolves into another. at least 50% of the equity of the target is exchanged for stock.  the other 50% can be boot 
2. consolidation: both acquired and acquiring corporations dissolve into a new corporation
3. SH of acquired firm can only defer gains and losses to extent they receive equity in the acquiring corporation (voting and/or non-voting stock can be used)

1. voting stock of the acquiring firm for stock in target
2. acquiring must own at least 80% of target's stock after the acquisition
3. any consideration other than voting shares of acquiring company violates requirements

1. aquiring corp received "substantially all" (90% of net value and 70% of gross value) from Target for its own voting stock 
2. voting stock must be at least 80% of consideration provided and boot can't exceed 20% of consideration provided
3. liabilities attached to target's assets are assumed, but not considered boot unless other boot is given too.  

1. parent divides by transferring assets to a sub in exchange for sub shares
2. parent then distributes sub's shares to SH (spin-off), redeems its own stock with the sub's stock (split-off), or liquidates into two new corporations (Split-up)
3. parent must receive and distribute control of the sub in the exchange (80% of voting stock and other classes of stock)

1. transaction motivated by a business purpose
2. continuity of business enterprise (continues target's business and uses its assets)
3. continuity of interest (SH of target receive stock of acquirer >= 50% of the value of the  previously owned stock in target)
4. step transaction docterine (combine steps if interdependent but may lead to tax result)

1. no gain or loss is recognized if they receive only stock in exchange
2. if other property (in addition to stock) is received, it is treated as boot and recognized gain is lower of (A)boot received -or- (B)realized gain
3. basis to SH in stock received = basis in stock surrendered + Gain recognized - boot received

• dividend income to extent of SH proportionate share of Target's E&P
• remaining gain is capital gain

• tax characterisitics of the firm (ex: NOL, adjusted basis in assets, E&P, capital loss, etc)
• the Target's tax attributed survive reorganization

2 things that can happen to tax attributes because of reorganization

1. target firm disappears: acquiring corporation is entitled to the tax attributed
2. target survives as a subsidiary: tax attributes stay with target

1. E&P of target carries over to acquiring.  if this is a deficit, it can be used to offset only future earnings of the combined company
2. An NOL of Target is limited for acquiring's first tax return after reorganization to: ((Income of acquiring X # of days in year after transfer)/365)
3. if there is a significant change in the ownership of target (50% or more over a three-year period) the amount of Target's NOL that can be used annually in all future years is limited to: (FMV of target's stock before change x long-term tax-exempt rate)

1. if acquiring firm purchases the stock of the target and operates the target as a subsidiary, neither firm recognizes gain or loss
2. target's tax attributes trapped with target
3. acquiring firm uses purchase price of target's shares as subsidiaries adjusted basis
4. adjusted basis of target's assets don't change

1. requires recognition of any gain generated by difference between AB of the target's assets and FMV of the stock
2. benefit of the election is generally less than the tax cost triggered by gain recognition so it is rarely invoked

1. if merger occurs, target recognizes gains and losses on the transfer of its assets
2. AB of target's assets = fmv
3. excess purchase price is allocated to goodwill and amortized 15 years