Tax Flashcards
3 Main types of tax planning
Converting income type
usually ordinary income -> capital gains
Shifting income between pockets
Shifting income from one time period to another
Example of income type shifting
Seagram redeeming its interest in DuPont for consideration including warrants, which preserved its proportional control, thus making the transaction qualify as a dividend and subject to the DRD. Seagram received $1.7bn total tax savings, of which DuPont pocketed $700m
Example of shifting income from one pocket to another
Only works at state level:
Company owns > 80% of a REIT rents office space from its own REIT Dividends itself back the money Ends up with the same amount of money PLUS a rent deduction
Examples of shifting income from one time period to another
COLI
- I take out insurance
Shorting against the box:
- I hold appreciated shares
- I borrow the same number of shares and sell them
- I pay no tax on that sale, because I borrowed them
- Later I return the shares, using the original shares I had
- I pay tax on that
- The interest I pay to borrow the shares is the cost to defer the tax
Hallmark of C Corporation taxation
Double taxation
Tax code section governing corporate formation
Section 351
Principle underlying Section 351
Section 351 makes most corporate formations nontaxable in order to stimulate entrepreneurial activity
Why would corporate formation be taxable without Section 351
In a corporate formation, the contribution of property into a corporation would be a recognized event, requiring tax on the difference between the basis in the property contributed and its fair market value.
3 basic conditions for Section 351
- Investors contribute property to the corporation
- Investors receive stock in the corporation
- Investors collectively control 80% or more of the corporation after the transaction
If section 351 applies, what are investors taxed on?
The lesser of realized gain and the boot received in the transaction; never a loss
If section 351 applies, what is the corporation being formed taxed on
Nothing
If section 351 applies, what is the basis of the investors in the stock received?
Substituted basis: basis of property contributed, plus any gain, less boot received
What is the corporation’s basis in property contributed in a 351 formation
Carryover basis: investor’s basis in property contributed plus any gain recognized
What is the investor’s holding period in the stock received in a 351 formation
Substituted holding period: holding period includes the period of time the investor held the contributed property. Cash has a holding period of zero for this purpose
What is the corporation’s holding period in property contributed in a 351 formation
Same as the investor’s
What is the idea of the “lesser of” rule?
Taxation on realized gain to the extent cash is received. (If there is more gain than cash received, only the cash portion is taxed; if there is more cash received than gain, only taxed on gain)
What is the idea underlying the substituted basis rule?
Your basis goes up by any gain (you don’t have to pay tax on it again) but goes down by how much you’ve been cashed out
Inherent tax penalty in 351 corporate formation
Duplication of tax liabilities
Potential for backdoor liability sharing in 351 corporate formation
If A and B contribute to new corporation, and A’s property has a hidden tax liability while B’s does not, then B suffers
5 major M&A/divestiture tax issues
SCBAL
- Shareholders’ tax liability
- Corporate-level tax
- Basis
- tax Attributes of target (NOLs, tax credits, basis in stock/assets of subsidiaries)
- Leverage
4 Structural/Tax divestiture issues
- Cash received divesting parent?
- Parent recognizes gain?
- Shareholders recognize gain?
- Basis step-up?
Tax classification of acquisitions
- Stock acquisition
a. Taxable, no 338 election
b. Taxable, 338 election
c. Tax-free - Asset acquisition
a. Taxable
b. Tax-free - Taxable
a. asset
(Cash, yes, yes, yes, no)
b. stock, 338 election
(Cash, yes, yes, yes, no)
c. stock, no 338 election
(Cash, yes, no, no, yes) - Tax-free
a. asset
(Stock, no, no, no, yes)
b. stock
(Stock, no, no, no, yes)
When is goodwill tax-deductible
When assets are stepped up
