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2. Corporations--Introduction

2. Texas Forms of Business Organization. . 3. Texas Forms of Business Organization. Sole proprietorshipLimited liability companyPartnershipGeneralLimited partnershipLimited Liability partnershipCorporation. 4. Federal Forms of Business Organization. . 5. Federal Forms of Business Organization.

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2. Corporations--Introduction

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    1. 1 2. Corporations--Introduction L. Bravenec (rights reserved) 9 July 2001

    2. 2 Texas Forms of Business Organization

    3. 3 Texas Forms of Business Organization Sole proprietorship Limited liability company Partnership General Limited partnership Limited Liability partnership Corporation

    4. 4 Federal Forms of Business Organization

    5. 5 Federal Forms of Business Organization Sole proprietorship (Schedule C of Form 1040) Partnership (Form 1065) S corporation (Form 1120S) C corporation (Form 1120)

    6. 6 How do we get from Texas to Federal?

    7. 7 How do we get from Texas to Federal? Texas Federal default* Federal elective*_ Prop. Proprietorship None LLC Prop. (1 member) Corporation—C or S PS (2+ members) Corporation—C or S PS PS Corporation—C or S Corp. C corporation S corporation [*Domestic entities]

    8. 8 C Corporations--Computation of Taxes Regular Federal Income Tax (“Regular FIT”) Taxable years permitted All 12, except for personal service corporations Accrual method required? C corps. w/average annual sales >$5,000,000 All taxpayers with inventories, with exception for taxpayers w/average annual sales <$1,000,000

    9. 9 C Corporations--Computation of Taxes Regular Federal Income Tax (“Regular FIT”) Income Installment method for 1221 and 1231 capital assets Additional 1250 depreciation recapture (20% SL)

    10. 10 Regular FIT on C Corporations Deductions Organization expenses--60 month amortization Charitable contributions deduction Accrual method C corps.--paid w/in 2 1/2 of next year Contributions of certain inventory--basis + 1/2 appreciation, limited to 2x basis Care of ill, needy, or infants Scientific property to colleges & certain scientific research organizations Computer technology and equipment for grades K-12 Capital losses--3 yrs back, 5 yrs forward; only CG Dividends received deduction [Frames 12 – 21]

    11. 11 Regular FIT on C Corporations Rates No special rate for capital gains Separate, graduated* rate schedule [*Flat 35% for personal service C corps.]

    12. 12 Regular FIT--Dividends Received Deduction Amount, subject to exceptions [Frames 7 - 11] 70%, if <20% ownership 80%, if =/>20% ownership 100%, if =/>80% ownership and elected, or if consolidated return for year of dividend No effect on stock basis, subject to exceptions [Frames 13, 18-20]

    13. 13 Dividends Received Deduction--Limitations Amount 1st exception--taxable income limitation [Frame 14] 2nd exception--brief holding period [Frame 15] 3rd exception--debt financed portfolio stock (only for 70% & 80% DRD) [Frames 16 & 17] Stock Basis 1st exception--“extraordinary” dividend [Frames 18-20] 2nd exception--“affiliated corps. filing consolidated returns

    14. 14 DRD--Amount--T.I. Limitation Ex. 1 Xcorp. Ycorp. Zcorp. Dividends received 100 100 100 Operating income 900 900 900 Operating expense 980 700 910 T.I. (w/o DRD) ___ ___ ___ D.R.D. ___ ___ ___ T.I. (w/DRD) ___ ___ ___

    15. 15 DRD--Amount--Brief Holding Period Ex. 2. X Corp. purchases 1% of GCM common stock on 1/25/99 for $5,000 cash (none borrowed), receives a dividend of $200, and sells this stock for $4,800 on 3/10/99. What is X Corp. trying to do? The rule: corp. buys and sells stock within 45 days (90 days for certain preferred stock)

    16. 16 DRD--Amount-- Debt Financed Portfolio Stock Ex. 3. Y Corp. purchases 1% of GCM common stock on 1/25/99 paying $5,000 cash, of which $2,000 was borrowed. It received a dividend of $200 while it owned the stock, and paid $25 interest on the loan. It sold this stock on 4/15/99for $4,800. What is Y Corp. trying to do?

    17. 17 DRD--Amount-- Debt Financed Portfolio Stock Portfolio stock exists unless the corporate S/H owns =/>50% (voting and value), or =/>20% when 5 or fewer corps. own =/>50% Any D.R.D. is reduced by the average indebtedness %, but the reduction is not greater than the interest expense on the debt

    18. 18 DRD--Stock Basis Reduction-- Extraordinary Dividends Ex. 4. Z Corp. purchases 1% of GCM common stock on 1/25/99 for $5,000 cash (none borrowed), and continues to hold it. GMC pays a $450 dividend on 11/25/00 and a $250 dividend on 1/15/01. What is Z Corp. trying to do?

    19. 19 Dividends Received Deduction Stock Basis. Reduction in only two situations: Extraordinary dividend. One type exceeds a threshold percentage of the stock’s basis and is announced w/in two years of the S/H’s acquisition of shares [Slide 17] Dividend by corporation filing consolidated return with S/H corporation

    20. 20 DRD--Stock Basis Reduction-- Extraordinary Dividends Div. announced w/in 2 years of acquisition Extraordinary? Threshold percentage of the greater of basis or value of stock. 5% of preferred stock. Combine all dividends during any 85 day period w/in the 2 years. 10% of common stock. Combine all dividends during any 85 day period w/in the two years. 20% of stock basis. Combine all dividends during any one year period w/in the two years.

    21. 21 DRD--Is It Really a Dividend? Example 4A. P Corp. wants to purchase T Corp. from D Corp. for $500. D has a basis of $100. Here’s the transaction: T pays D a “dividend” of a $200 promissory note. P purchases T for $300. T pays off the promissory note with funds furnished by P. What are the parties trying to accomplish?

    22. 22 Related C Corporations--“Affiliated” Parent & 80% owned subsidiaries Common parent with =/>80% (voting & value) of at least one subsidiary. Each 80% owned subsidiary. Election for Consolidated Return Common RIT return, AET, PHCT, and AMT Losses of one member offset income of other members. Income deferred on intercompany transactions. (Losses already deferred when ownership >50%) Other--Tax free liquidation of affiliated sub.

    23. 23 Related C Corporations--“Controlled” Ex. 7. Individual T has a business which has annual net income of about $200,000. T forms T1 Corp. with 1/2 of the business assets and T2 Corp. with the other 1/2. T1 and T2 then form T1&2 Partnership, each being a 50% partner. What is individual T trying to accomplish?

    24. 24 Related C Corporations--“Controlled” “Controlled” group Parent-subsidiary Common parent owns =/>80% of at least one subsidiary (voting or value). Brother-sister =/>80% total ownership (voting or value) =/>50% common ownership (voting or value) Disadvantages: One Federal RIT rate bracket for group. One $250,000 AET exemption. One $40,000 AMT exemption.

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