PORTFOLIO

Tax Shelters (Portfolio 798)

Be a trusted advisor to your clients with Bloomberg BNA Tax Portfolios. In this portfolio, Premier tax experts explore the goals and boundaries of appropriate tax planning and tax minimization transactions, including codification of the so-called “economic substance doctrine” in Code §7701(o) and various other statutory and common law rules that may limit the availability of claimed tax benefits; examines Code sections, regulations, and IRS guidance relating to reportable transactions, reportable transaction penalties, and required statements disclosing uncertain tax positions, including Code §§6011, 6111, 6112, 6662A, 6707, 6707A, and 6708 and Schedule UTP.

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DESCRIPTION

The Tax Shelters, No. 798-2nd, explores the goals and boundaries of appropriate tax planning and tax minimization transactions, including codification of the so-called “economic substance doctrine” in Code §7701(o) and various other statutory and common law rules that may limit the availability of claimed tax benefits; examines Code sections, regulations, and IRS guidance relating to reportable transactions, reportable transaction penalties, and required statements disclosing uncertain tax positions, including Code §§6011, 6111, 6112, 6662A, 6707, 6707A, and 6708 and Schedule UTP; explores Circular 230 tax practice and opinion rules and the so-called “disqualified opinion” and “disqualified advisor” statutory rules contained in Code §6664; explores criminal enforcement practices and procedures as they relate to government actions against firms and practitioners; and generally examines where lines should be drawn by courts between appropriate tax planning and abusive tax avoidance transactions.


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AUTHORS

Bloomberg BNA Portfolios are written by leading tax professionals who set the standard as leaders in their fields. The Tax Shelters, No. 798-2nd portfolio was authored by the following attorneys. 

 

JEFF PARAVANO

Jeff Paravano, Managing Partner, BakerHostetler, has a broad-based tax practice involving tax controversy and tax litigation; corporate, partnership, and venture capital transactions; and domestic and cross-border tax planning. He also represents clients' interests before enforcement officials, federal policy makers, and on Capitol Hill. Jeff previously served as firmwide Chair of the firm's Tax Group, which is among the largest law firm tax practices in the United States. Before returning to the firm from Treasury in 2003, Jeff served as Senior Advisor to the Assistant Secretary, Tax Policy, at the United States Department of Treasury. While at Treasury, Jeff was responsible for providing advice on a wide range of tax policy and technical issues, including tax legislation and corporate, partnership, REIT, and financial sector tax guidance. He also was one of the primary authors of the final tax shelter regulations and is author of the Tax Management Portfolio on Tax Shelters, T.M. 798. 

 

Credentials / magna cum laude, Georgetown University Law Center; LL.M. in Taxation, with distinction, Georgetown University Law Center; Managing Partner, Baker & Hostetler LLP, Washington, D.C; former Firmwide Chair of Baker & Hostetler's Tax Group; former Senior Advisor to the Assistant Secretary, Tax Policy, United States Department of Treasury; former adjunct professor of law (LL.M. tax programs), Georgetown University Law Center and Case Western Reserve University School of Law; Fellow, American College of Tax Counsel; member, Board of Directors of Tannewald Foundation for Excellence in Tax Scholarship; Chair, American Bar Association Tax Section's Committee on Government Submissions (COGS); former Chair, American Bar Association Tax Section's Affiliated and Related Corporations Committee (Consolidated Returns); former Editor in Chief, The Tax Lawyer; former Tax Club President, frequent author, program chair, and speaker on tax topics. Admitted to practice in New York, Connecticut, Ohio, Colorado, Maryland, and Washington, D.C. Special thanks to Melinda L. Reynolds, co-author of the prior version of this portfolio, and to my tax colleagues at Baker & Hostetler, Paul Schmidt, Stuart Bassin and John Lehrer, for their assistance with this version.


TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. General Pattern of Personal Holding Company Provisions

A. Definition of “Personal Holding Company”

1. The Income Test

2. The Stock Ownership Test

B. Treatment of a Personal Holding Company in General

III. Corporations Excepted from Personal Holding Company Status

Introductory Material

A. Tax-Exempt Corporations

B. Banks

C. Life Insurance Companies

D. Surety Companies

E. Foreign Corporations

F. Lending or Finance Companies

1. 60% Test

2. 20% Test

3. Business-Expense Test

4. Limitation on Loans to Shareholders

5. Relationship Between 542(c)(6) and 542(c)(2)

G. Small Business Investment Companies

H. Corporations in Title 11 or Similar Cases

I. S Corporations

J. Pre-2005 Exceptions for Foreign Personal Holding Companies and Passive Foreign Investment Companies

IV. Definition of a Personal Holding Company: The Income Test

A. In General

B. Gross Income

1. In General

2. Manufacturing, Merchandising, and Mining Businesses

3. Farming

4. Service Businesses

a. In General

b. Absence of a Profit Motive

c. Reimbursed Expenses

5. Installment Sales

6. Partnerships

7. Insurance Companies Other Than Life Insurance Companies

8. Foreign Corporations

C. Definition of “Ordinary Gross Income”

1. In General

2. Section 1231 Gains

3. Sections 1245 and 1250 Gains

D. Definition of “Adjusted Ordinary Gross Income”

1. Adjustments to Gross Income from Rents

a. Income from Rents

b. Adjustments in General

c. Exception for Depreciation on Certain Tangible Personal Property

d. Deductions Allocable to Rents

e. Interest on Loans Not Used to Purchase Property

2. Adjustments to Mineral, Oil, and Gas Income

a. In General

b. Deductions Allocable to Royalties and Working Interests

3. Interest Income Exclusions

E. Personal Holding Company Income (PHCI)

1. Dividends, Etc.

a. Dividends

b. Interest

(1) In General

(2) Interest Excluded from the Interest Category

(3) Items That May Be Treated as Interest Although Not Characterized as Interest by Parties

(4) Imputed Interest

c. Royalties (Other Than Mineral, Oil, Gas, or Copyright Royalties)

(1) General Definition

(2) Royalties Compared with Joint Venture Income

(3) Royalties Compared with Capital Gains

(4) Royalties on Computer Software

d. Annuities

2. Rents

a. Items Constituting Rent

(1) Rents Contrasted with Royalties

(2) Compensation for Use of Tangible Personal Property Manufactured by Taxpayer

(3) Interest on Sale of Real Property

(4) Delay Rentals

(5) Joint Operating Agreements

(6) Expenses of Lessor and Improvements

b. Test for Treating Rent as Personal Holding Company Income (PHCI)

(1) Fifty Percent Test

(2) Ten Percent Test

(a) In General

(b) Distributions of Other Personal Holding Company Income

3. Mineral, Oil, and Gas Royalties

a. Items Constituting Mineral, Oil, and Gas Royalties

b. Tests for Treating Mineral, Oil, and Gas Royalties as Personal Holding Company Income

(1) Fifty Percent Test

(2) Ten Percent Test

(3) Fifteen Percent Test

4. Copyright Royalties

a. Fifty Percent Test

b. Ten Percent Test

c. Twenty-Five Percent Test

5. Produced Film Rents

6. Rents from 25% Shareholders

a. In General

b. What Constitutes Use by an Individual

c. Compensation for Use of Property

d. Ten Percent Test

7. Personal Service Contracts

8. Estates and Trusts

F. The Sixty Percent Test

V. Definition of a Personal Holding Company: The Stock Ownership Test

A. In General

B. Stock Ownership as a Factor of Personal Holding Company Income

1. Personal Services Contracts

2. Use of Corporate Property

3. Royalties as Personal Holding Company Income

C. Valuation of Stock

D. Amount of Stock Outstanding

E. Period of Ownership

F. Direct or Indirect Ownership

VI. Attribution of Ownership Under 544

A. Situations in Which Attribution Rules Apply

B. Stock Held by a Corporation, Partnership, Estate or Trust

1. In General

2. Constructive Ownership of Trust or Estate Assets

C. Constructive Ownership by Reason of Family and Partnership Ownership

1. Family Attribution

2. Attribution Between Partners

D. Convertible Securities

1. General

2. Securities Convertible at Different Times

E. Constructive Ownership by Reason of Options

1. In General

2. Period of Constructive Ownership

F. Attribution Rules Apply Only Against Taxpayer

G. Reattribution

1. Situations in Which There Will Be Reattribution

2. Situations in Which There Will Not Be Reattribution

a. Family or Partner Attribution

b. Convertible Securities

H. Option Rule in Lieu of Family and Partner Rule Where Both Are Applicable

VII. Corporations Filing Consolidated Returns

A. In General

B. Exceptions

1. Ineligible Affiliated Groups

a. Test for Ineligible Groups

b. Dividends Received by a Common Parent

2. Excluded Corporations

C. Consolidated Income for Personal Holding Company Purposes

1. In General

2. Certain Dividend Income Received from a Nonincludible Life Insurance Company

3. Treatment of Dividends Received by Members of an Affiliated Group

D. Effect of Determining Personal Holding Company Liability on a Consolidated Basis

E. Importance of Planning

VIII. Return Requirement for Personal Holding Companies

IX. Computation of the Personal Holding Company Tax

X. Computing Undistributed Personal Holding Company Income

A. Taxable Income

B. Adjustments Under 545(b)

1. Taxes

2. Charitable Contributions

3. Dividends Received Deduction

4. Net Operating Loss

5. Net Capital Gain

6. Certain Expenses and Depreciation

C. Adjustments Under 545(c)

D. Adjustments Under Pre-1990 545(c)

XI. Dividends Paid Deduction

A. In General

B. Definition of Dividend

1. In General

2. Formal Declaration

3. Dividends in Kind

4. Distributions in Liquidation

a. General Comments

b. Distributions to Corporate Distributees

c. Distributions to Noncorporate Distributees

d. Interrelation with 543(a)(2)

e. Liquidating Distribution Constituting Step in Reorganization

C. Preferential (Disproportionate) Dividends

D. Tax-Free Distributions

E. Distributions by Member of an Affiliated Group

F. Dividends Paid After Close of Taxable Year

G. Dividend Carryover

H. Consent Dividends

1. General Purpose

2. Consent Procedure

3. Effect of Consent

4. Definition of Consent Stock

5. Limitation on Consent Dividends

a. Preferential Dividends

b. Section 316 Limitation

6. Nonresident Aliens and Foreign Corporations

I. Deficiency Dividends

1. In General

2. Need for Determination

3. Payment of Deficiency Dividend

4. Claim for Deduction

5. Effect on Dividends Paid Deduction

6. Interest, Additional Amounts, or Penalties

7. Credit or Refund

8. Limitation on Assessment and Collection

9. Stay of Collection

10. Liquidated Corporation

11. Successor Corporation


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Revenue Act of 1964, P.L. 88–272, 88th Cong., 2d Sess. (1964), Excerpts Section 225-Personal Holding Companies

Worksheet 2 Foreign Investors Tax Act of 1966, P.L. 89–809, 89th Cong., 2d Sess. (1966), Excerpts Act Section 104(b), Amending Code 882 Act Section 104(h), Amending Code 542, 543, and 545 Senate Report on Foreign Investor Tax Act of 1966

Worksheet 3 Foreign Investors Tax Act of 1966, P.L. 89–809, 89th Cong., 2d Sess. (1966), Excerpts Act Section 206, Amending Code 543 Senate and Conference Committee Reports on Section 206

Worksheet 4 Tax Reform Act of 1976 P.L. 94–455, 94th Cong., 2d Sess. (1976) Excerpts Act Sec. 2106, Amending Code 543 Senate Report on the Tax Reform Act of 1976 General Explanation of the Tax Reform Act of 1976

Worksheet 5 Tax Equity and Fiscal Responsibility Act of 1982 P.L. 97–248, 97th Cong., 2d Sess. (1982) Excerpts Act Section 293, Amending Code 542 House Report on Tax Equity and Fiscal Responsibility Act of 1982

Worksheet 6 EXAMPLE Computation of Undistributed Personal Holding Company Income (UPHCI)

Worksheet 7 Statement by Personal Holding Company Claiming Rental Expenses in Excess of Rental Income (Regs. 1.545–2(h)(2))

Worksheet 8 Corporate Designation of Distribution in Complete Liquidation as Dividend (Regs. 1.316–1(b)(5))

Bibliography

OFFICIAL

Statutes:

Primary:

Secondary:

Treasury Rulings:

Cases:

UNOFFICIAL

Periodicals:

1986

1987

1991

1992

1993

2000