Author Archives: Nate

Accumulated Earnings Tax Explanation and Case Examples

This tax applies to corporations ‘formed or availed of for the purpose of avoiding income tax with respect to its shareholders by permitting E&P to accumulate instead of being divided or distributed’ This penalty is not self assessed Does not apply to PHC corporations The hard thing for the government to decide is when do…

Continue Reading →

Personal Holding Company Overview & Section 544 Attribution Rules

Historically, corporate tax rates have been lower than individual tax rates- sometimes much lower Corporations will sometimes intentionally not pay dividends in order to avoid paying the second layer of tax Personal holding company rules are designed to force a corporation to pay dividends under certain specific circumstances, or pay a penalty… the PHC penalty…

Continue Reading →

Equity Holder’s Tax Treatment, Special Equity Benefits

As a quick review, here’s an overview of how equity holder’s are taxed: Dividends Individuals are taxes at a 15% rate Corporations have a ‘dividend received deduction’ Sale of Stock Short-term Capital Gains Individuals are taxed at 35% Corporations are taxed at 35% Long-term Capital Gains Individuals are taxed at 15% Corporations are taxed at…

Continue Reading →

Shareholder Guarantees and Plantation Patterns vs Commissioner

Plantation Patterns vs Comissioner Case on Shareholder Guarantees John Jemison Jr. and Jemison Investment Company, of which Jemison was the president and controlling shareholder, formed a new corporation, New Plantation, to purchase all of the stock of Old Plantation from unrelated individual All of the stock of New Plantation was issued to Mrs. Marie Jemison…

Continue Reading →

Cancellation of Debt and Section 108

Corporate Level Consequences of Cancellation of Debt- Section 108 Section 108(a)(1): The discharge or cancellation or forgiveness of debt is generally included in the debtor’s gross income unless(meaning tax has to be paid on it): The debtor is in bankruptcy The debtor is insolvent The debt is qualified farm debt, or The debtor is not…

Continue Reading →

Creditor’s Loss Treatment, Business and Non-business Bad Debts, U.S. vs Generes

Creditor’s Loss Treatment Overview When things go downhill for a corporation, what happens is very different for a creditor versus an equity holder. If the creditor is a corporation, the bad debt that results is an ordinary deduction. But, if the creditor is something other than a corporation, then the bad debt can be treated…

Continue Reading →

Interest Disallowance, Section 279, and AHYDO Rules

Sections Dealing with Interest Disallowance Because interest paid on debt is deductible while dividends paid on equity are not, a lot of taxpayers attempt to structure their capital with large amounts of debt and small amounts of equity. Though they classify these instruments as debt, in a lot of cases the instruments “smell” like equity,…

Continue Reading →

Hybrid Instruments and IRS Notice 94-47

Instruments that are treated as debt for tax purposes and equity for regulatory, rating agency, and GAAP purposes are referred to as hybrid instruments. In 1994, the IRS issued Notice 94-47 which said that the purpose of the notice is to: Scrutinize hybrid instruments to decide whether their purported status as debt is appropriate Instruments…

Continue Reading →

Introduction to the Components of Capital Structure

An Introduction to the Components of Capital Structure of Corporations The capital structure, or how a business is financed, will always be through one or more of the following sources: Debt Equity, which is contributed capital Equity, which is retained earnings These instruments, whether debt or equity, can be issued in exchange for cash, property,…

Continue Reading →

Section 306 Stock: Chamberlain vs. Commissioner, 207 F.2d 462

On this page we’ll go over a summary of the Chamberlain vs. Commissioner case that resulted in this specific section. Here are the facts: Metal Moulding Corp issued a pro-rate preferred stock dividend to all of its common shareholders Prior to issuing the stock, it prearranged with two insurance companies to buy the preferred stock…

Continue Reading →

Page 2 of 4