Choice of Entity (Portfolio 700)

Tax Management Portfolio, Choice of Entity, No. 700-3rd, discusses federal income tax and other considerations pertinent in choosing the most advantageous legal form for conducting business and investment activities. This Portfolio provides a summary perspective on the various legal forms of business enterprises and their relative advantages and disadvantages. These forms primarily include the sole proprietorship, a general partnership, a limited partnership, a regular corporation, an S corporation, a limited liability company, and a trust. A variety of other specialized entities have unique treatment as specified under the Internal Revenue Code, however, and those entities are also examined in this Portfolio.

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Tax Management Portfolio, Choice of Entity, No. 700-3rd, discusses federal income tax and other considerations pertinent in choosing the most advantageous legal form for conducting business and investment activities. This Portfolio provides a summary perspective on the various legal forms of business enterprises and their relative advantages and disadvantages. These forms primarily include the sole proprietorship, a general partnership, a limited partnership, a regular corporation, an S corporation, a limited liability company, and a trust. A variety of other specialized entities have unique treatment as specified under the Internal Revenue Code, however, and those entities are also examined in this Portfolio.
The discussion in this Portfolio has been quite significantly impacted by the choice of entity or “check-the-box” regulations which were effective January 1, 1997. These regulations permit much greater flexibility and far fewer impediments in the choice of a business entity.
A sole proprietorship is the simplest form of doing business since no separate legal entity needs to be created for state law purposes and no assets are required to be separately transferred to a distinct legal entity. All profits are immediately taxed directly to the proprietor, and the proprietor directly bears all the business risks associated with the operation.
A partnership can be either a general or limited partnership. In either situation, the partnership is an alliance of two or more persons who intend to carry on a business (or investment activity) as co-owners for profit. The partnership is itself not subject to federal income taxation. Rather, all the income, deductions, and other tax attributes are allocated to the partners in accordance with the partnership agreement. In a general partnership all the partners have unlimited personal liability for the debts of the partnership. In a limited partnership, however, those partners designated as limited partners only have exposure for liabilities to the extent of their respective capital contributions (and obligations for contributions) to the partnership. This limitation on liability will exist because of the application of a limited partnership law enacted by a state legislature, and not because of a provision of the federal income tax laws, assuming the parties comply with the requirements of the limited partnership statute.
A corporation is a separate legal entity that ordinarily is itself immediately subject to federal income taxation on its taxable income. When these earnings are distributed (as dividends) to the shareholders of the corporation, those shareholders are also taxed on the receipt of those corporate profits. None of the shareholders are personally liable for corporate obligations (assuming they have not independently agreed with some creditor to be liable for those obligations and the corporation is correctly organized). Under some circumstances, however, a corporation can elect to be an “S corporation” for federal income tax purposes. This status enables the corporate level income to flow through and be taxed immediately to the shareholders (but not be taxed to the corporation itself), the “S” corporation merely being a conduit. Thereafter, the S corporation income is not taxed to the shareholders when subsequently distributed to them (since previously taxed to them when realized by the corporation).
An increasingly important alternative in this context is the limited liability company (“LLC”), as permitted under the laws of the states. This structure permits the limitation of entity level liabilities as to all owners. The LLC is ordinarily treated as a partnership for federal income tax purposes, but it does not have many of the constraints that are imposed on S corporations.
A trust can also be used as an entity for holding investment assets, but not for the operation of a business (in which event the trust becomes a partnership or a corporation for federal tax purposes). A trust can be a grantor trust or a regular trust (i.e., a “true trust”). In some situations, ownership interests in a trust may be widely distributed and the ownership units regularly traded on a securities exchange.
A comparison of the attributes of these various entities necessitates an examination of both (i) the legal and business structure and (ii) particularly for purposes of this Portfolio, the federal income tax rules applicable throughout the entire life cycles of these entities. Consequently, this Portfolio provides an expansive discussion of the various entity characterization rules of the “check-the-box” regulations. Further, this Portfolio includes a comparison of the income tax rules applicable to entities (i) when being organized, (ii) when operating and receiving profits or incurring losses, (iii) when making distributions of profits in cash, property, or entity ownership units, (iv) when terminating an ownership interest, (v) when the entire enterprise terminates, and (vi) when the enterprise engages in a tax-free restructuring. Various additional issues relevant to entity choice, including estate planning considerations, are examined in the latter portion of this Portfolio.


William P. Streng

William P. Streng, Wartburg College (B.A., 1959); Northwestern University School of Law (J.D., 1962); Law Clerk to Honorable Lester L. Cecil, Chief Judge, U.S. Court of Appeals for the Sixth Circuit, 1963-1964; associated with Taft, Stettinius & Hollister, Cincinnati, Ohio, 1964-1970; Attorney-Advisor, Office of the Assistant Secretary for Tax Policy (Office of Tax Legislative Counsel), U.S. Dept. of the Treasury, Washington, D.C., 1970-1971; Deputy General Counsel, Export-Import Bank of the United States, Washington, D.C., 1971-1973; Professor of Law, School of Law, Southern Methodist University, Dallas, Texas, 1973-1980; Visiting Professor, College of Law, The Ohio State University, 1977; Haynes & Boone, Dallas, Texas (Of Counsel, 1977-1979); Bracewell & Patterson (now Bracewell & Giuliani), Houston, Texas (partner, 1980-1985; Consultant, 1985-); Professor of Law, University of Houston Law Center (1985-); Visiting Professor, New York University School of Law (1990); Distinguished Lecturer at the University of Hong Kong Law Faculty (1992); Fulbright Professor at the University of Stockholm Law Faculty, Stockholm, Sweden (1993); Visiting Fellow at the Victoria University Law Faculty, Wellington, New Zealand (1996); Lecturer, U.S. International Taxation, University of Leiden, The Netherlands (1997 & 1998 and 2000); Visiting Professor, The University of Texas School of Law (2002); Visiting Professor, Department of International and Business Law, International Graduate School of Social Sciences, Yokohama National University, Japan (2005). Member of American Law Institute (including its Tax Advisory Group), International Fiscal Association (including its Council), International Academy of Estate and Trust Law, American Bar Association's Section of Taxation, Tax Management Advisory Board, and various other professional organizations.

Table of Contents

Detailed Analysis

I. The Framework for Choosing a Business Entity

A. The Issues in Choosing a Business Entity

B. Evolution of Relevant Federal Income Tax Legislation

1. Business Tax Legislative Changes

2. The Tax Reform Act of 1986

3. The Revenue Reconciliation Act of 1990

4. The Omnibus Budget Reconciliation Act of 1993

5. The Small Business Job Protection Act

6. The Taxpayer Relief Act of 1997

7. Internal Revenue Service Restructuring and Reform Act of 1998

8. The 2001 Tax Relief Act

9. The Jobs and Growth Tax Relief Reconciliation Act of 2003

10. The American Jobs Creation Act of 2004

11. Tax Increase Prevention and Reconciliation Act of 2005

C. The 1996 "Check the Box" Entity Classification Rules

D. Possible Future Legislative Developments

1. Evaluating the Classification System of Corporate-Shareholder Taxation

2. Simplification of the Business Income Taxation

3. Possible Future (2007 and Beyond) Legislative Changes

E. An Overarching Consideration - The Advisor's Ethical Issues

II. Alternative Business Organization Forms

A. Options for the Choice of the Business Entity

B. Sole Proprietorship

C. Joint Venture

D. General Partnership

E. Limited Partnership

1. In General

2. Family Limited Partnership

F. Limited Liability Partnership

G. Limited Liability Limited Partnership

H. Publicly Traded Partnership

I. Limited Liability Company

1. Benefits of the LLC Structure

2. The LLC as an Alternative to the S Corporation

3. The LLC as an Alternative to Partnerships

4. The "Series LLC"

J. C Corporation

K. S Corporation

L. Special Entities

1. Special Income Taxation Criteria

2. Small Business Corporation, Qualified Small Business Corporation, and Specialized Small Business Investment Company

a. Section 1244/Small Business Corporation Stock

b. "Qualified Small Business Stock"

c. Specialized Small Business Investment Company

3. Financial Institutions

4. Insurance Companies

5. Real Estate Investment Trust

6. Regulated Investment Companies

7. Real Estate Mortgage Investment Conduits

8. Financial Asset Securitization Investment Trust

9. Domestic International Sales Corporation

10. Foreign Entities

a. Classification of Foreign Entities

b. Foreign Partnerships

c. Foreign Corporations

d. Controlled Foreign Corporation

e. The Repealed Foreign Sales Corporation and Extraterritorial Tax Regimes

f. Passive Foreign Investment Companies

g. Stapled Entities

h. "10-50 Corporations"

i. Dual Resident Corporations

M. Trusts and Estates

1. Alternatives

2. Lifetime/Inter Vivos Trusts

3. Testamentary Trusts

4. Grantor Trusts

5. Business Trusts

6. Foreign Trusts

7. Investment Trusts

8. Liquidating Trusts

9. Estates

N. Nominees/Dummy Corporations

O. Tax-Exempt Entities

P. Cooperatives

Q. Other Specialized Entities

R. Special Funds

1. Section 468B Designated Settlement Fund

2. Nuclear Decommissioning Reserve Fund

3. Environmental Remediation Trusts

S. Nontaxable Entities

III. Federal Tax Classification of Entities

A. Summary Perspective

B. History of the "Association" Classification Dispute

1. Background

2. Tax Cases and Rulings on the Validity of a Corporation

3. Tax Impact of Incorrect Entity Classification

C. Pre-1997 Entity Classification Rules

1. Characteristics

a. Relevant Criteria

b. Preponderance of Corporate Characteristics Required

c. Other Classification Factors

2. Associates

3. Objective to Carry on Business and Divide the Gains

4. Continuity of Life

a. In General

b. Effect of Agreement to Continue Business

5. Centralized Management

a. In General

b. Partnerships

c. Limited Liability Companies

6. Limited Liability

a. In General

b. General Partnerships

c. Limited Partnerships

d. Limited Liability Companies

7. Free Transferability of Interests

D. Entity Classification Under the "Check-the-Box" Regulations

1. Background

2. Summary of the 1996 Entity Classification Regulations

3. Schematic Outline of Classification System

4. Identifying Separate Entities

a. Joint Undertakings

b. Certain Local Law Entities Not Recognized

c. Single-Owner Organizations

d. Cost Sharing Arrangements

5. Business Entities

a. In General

(1) Specially Treated Organizations

(2) Trusts

b. Corporations

(1) In General

(2) Foreign Entities

(a) Per Se Corporations

(b) Exceptions for Certain Foreign Entities

(c) Other Business Entities

6. Elective Classification of "Eligible Entities"

a. In General

b. Entities with Two or More Members

c. Single-Member Entities

7. Default Classification Rules

a. Domestic Eligible Entities

b. Foreign Eligible Entities

c. Exception for Existing Eligible Entities

(1) In General

(2) Foreign Entity Classification Must Be "Relevant" Prior to Regulations

8. Elections

a. Necessity

b. Election Procedure

(1) Form 8832

(2) Attachment of Form 8832 to Return of Entity or Owners

(3) Signature on Form 8832

(4) Taxpayer Identification Numbers

(5) Relief for Certain Foreign Eligible Entities

c. Effective Date of Election

(1) In General

(2) Special Rules

(a) Tax-Exempt Organizations

(b) REITs

d. Restriction on Classification Changes

e. Loss of Classification

9. Effective Date of Check-the-Box Regulations

10. Information Return Concerning Foreign Disregarded Entities

E. Planning Implications of the Check-the-Box Regulations

1. Use of Limited Liability Companies (LLCs)

2. Single Member Entities

a. In General

b. An Alternative to the S Corporation

c. State Tax Considerations

d. Section 1031 Like Kind Exchanges

e. Consolidated Returns

f. Achieving U.S. Tax Deferral on Foreign Earnings

g. Foreign Tax and Foreign Tax Credit Impact

h. Section 367 Applicability

i. Recognition of Deficits with a Foreign Structure

j. Avoiding PFIC Status

k. Summary Concerning Branch Treatment

3. Simplification of Organizational Documents

4. Estate Planning/Valuation Considerations

5. Elimination of 1% Test for Partners or Members

6. Foreign Tax Planning

7. Changing the Tax Status of Entities

a. Potential Tax Impact on Changing Classification

b. Association Status Elected

c. Election by Disregarded Entity to Be an Association

d. Changing from Association to Partnership Status

e. Association or Partnership Elects to Be a Disregarded Entity

f. Changing from One Partnership Type to Another Partnership Type

g. Changing from Single Member Disregarded Entity to Partnership

h. Changing from C Corporation to S Corporation

i. Changing from Foreign Corporation to Single Member Entity

j. Changing from Per Se Corporation to Entity Electing Corporate Classification

IV. Business/Local Law Considerations in Choosing an Entity

A. Business Planning Issues

B. Term of the Entity's Existence

C. Transferability of Interests

1. Partnerships

2. Corporations

3. Trusts

4. Limited Liability Companies

D. Limitation of Liability

1. Partnerships

2. Corporations

3. Business Trust

4. Limited Liability Companies

E. Expense and Complexity of Forming and Operating Entity

1. Corporations

2. Partnerships

3. Limited Liability Companies

4. Business Trusts

F. Entity Recognition in Another Jurisdiction

G. Consistency in Treatment Between State Law and Federal Tax Law

V. Organizational Considerations

A. Organizational Mechanics and Transfers of Property to New Entities

1. Entity Formation Issues

2. Sole Proprietorship

a. Mechanics of Entity Formation

b. Federal Income Tax Effects

3. Single Owner Entity

a. Mechanics of Entity Formation

b. Federal Income Tax Effects

4. C Corporation

a. Mechanics of Entity Formation

b. Federal Income Tax Effects

(1) Treatment to Shareholder

(2) Treatment to Transferee Corporation

(3) Organizational Costs

5. S Corporation

a. Mechanics of Entity Formation

b. Income Tax Effects

6. Partnership

a. Mechanics of Entity Formation

b. Income Tax Effects

(1) Treatment to the Partner

(2) Treatment to the Partnership

(3) Treatment of Organizational Costs

7. Limited Partnerships (Including Limited Liability Partnerships)

a. Mechanics of Entity Formation

b. Income Tax Effects

8. Limited Liability Company

a. Mechanics of Entity Formation

b. Income Tax Effects

9. Trusts

a. Mechanics of Entity Formation

b. Income Tax Effects

(1) Revocable Trust

(2) Irrevocable Trust

10. Estates

a. Mechanics of Entity Formation

b. U.S. Income Tax Effects

11. Foreign Corporations

a. Mechanics of Entity Formation

b. U.S. Income Tax Effects

12. Foreign Partnerships

a. Mechanics of Entity Formation

b. U.S. Income Tax Effects

13. Foreign Trusts

a. Mechanics of Entity Formation

b. U.S. Income Tax Effects

14. Comparisons

B. Capital Structure and Debt vs. Equity Considerations

1. Tax Issues Concerning Capital Structure

2. Sole Proprietorship

3. C Corporation

4. S Corporation

a. Limitation on Capital Structure

b. Debt Safe Harbor Rule

c. Shareholder's Tax Basis for Corporate Debt

d. Adjustments to Shareholder's Tax Basis for S Corporation Stock

5. Partnership

a. Applicability of Debt/Equity Issues

b. Partner's Tax Basis for Partnership Contributions

c. Inclusion of Partnership Debt in Basis

6. Limited Liability Company

a. Member's Basis in Membership Interest

b. Inclusion of Limited Liability Company Debt in Basis

7. Trust

8. Other Entities

9. Comparisons

C. Federal Tax Limits on the Number of Entity Owners

1. Sole Proprietorship

2. C Corporation

3. S Corporation

4. Partnership

5. Limited Liability Company

6. Trusts

7. Other Entities

D. Publicly Traded Partnerships

1. Background: The "Publicly Traded" Concept

2. IRS Guidance

3. Transactions Establishing Publicly Traded Status

a. In General

b. Interest in a Partnership

c. Transfers of Interests in Partnerships

(1) Definition of "Transfer"

(2) Involvement of Partnership in Transfers

d. Established Securities Markets

e. Secondary Market or Substantial Equivalent of a Secondary Market

(1) In General

(2) Secondary Market or the Substantial Equivalent Thereof

(3) Circumstances Not Constituting Secondary Market

4. Exceptions to PTP Status: Safe Harbors

a. Possible Safe Harbors Available

b. Private Transfers Not Involving Trading

(1) In General

(2) Block Transfers

(3) Closed-End Redemption and Repurchase Agreements

c. Redemption and Repurchase Agreements

d. Qualified Matching Services

(1) Mechanics of Matching Service

(2) Requirements for Qualified Matching Service

(3) Closing of Sale

(4) Optional Features of Qualified Matching Service

e. Private Placements

(1) General Rule

(2) Exceptions for Offerings Outside U.S.

(3) Anti-Avoidance Rule

f. Lack of Actual Trading

5. Exceptions for Partnerships with Qualifying Income

a. Qualifying Income

b. Inadvertent Termination

6. Effect of Classification as a Corporation

7. Technical Terminations of Publicly Traded Partnerships

8. Effective Dates and Transitional Rules for Existing Partnerships - In General

VI. Operational Tax Considerations

A. Tax Planning Issues Summarized

B. Taxation of Income

1. Who Is Taxed/Applicable Rates

a. Sole Proprietorship

b. Partnership

c. Corporation

d. S Corporation

e. Trusts & Estates

f. Other Entities

g. Comparisons

2. Special Allocations of Income and Deductions

a. Objective of "Special Allocations"

b. Sole Proprietorship

c. Partnership

(1) Special Allocations of Income

(2) Family Partnerships

(3) Contributed Property

(4) Late Entry Partners

d. C Corporation

e. S Corporation

f. Trust

g. Other Entities

h. Comparisons

3. Tax Accounting Concepts

a. Potential Benefit of Tax Accounting Variances

b. Sole Proprietorship

c. Partnership

d. C Corporation

e. S Corporation

f. Trusts and Estates

g. Other Entities

h. Comparisons

4. Assignment of Income and Deductions

a. Potential Benefit of Income Assignments

b. Sole Proprietorship

c. Partnership

d. C Corporation

e. S Corporation

f. Trust

g. Other Entities

h. Comparisons

5. Choice of Taxable Year - Adoption and Change

a. Importance of Tax Year Choice

b. Sole Proprietorship

c. Partnership

d. C Corporation

e. S Corporation

f. Trusts & Estates

g. Other Entities

h. Comparisons

6. Choice of Accounting Method

a. In General

(1) Cash Method

(2) Accrual Method

(3) Other Permissible Methods

(4) Hybrid Methods

b. Sole Proprietorship

c. Partnership

d. C Corporation

e. S Corporation

f. Trusts and Estates

g. Comparisons

7. Applicability of Tax Loss Limitation Rules

a. Identification of Tax Loss Limitation Rules

b. Sole Proprietorship

c. Partnership

d. C Corporation

e. S Corporation

f. Trust

g. Comparisons

C. Alternative Minimum Tax

1. Structure of Alternative Minimum Tax

2. Sole Proprietorship

3. Partnership

4. C Corporation

5. S Corporation

6. Trust

7. Comparisons

D. Estimated Tax Payments

1. Sole Proprietorship

2. Partnership

3. C Corporation

4. S Corporation

5. Trust

a. Payment Requirement

b. Allocation to Beneficiaries

6. Comparisons

E. Tax Return Filing Requirements

1. Sole Proprietorship

a. Return Filing Requirement

b. Filing Date for Return

2. Partnership

a. Return Filing Requirement

b. Filing Date for Return

3. C Corporation

a. Return Filing Requirement

b. Filing Date for Return

4. S Corporation

a. Return Filing Requirement

b. Filing Date for Return

5. Trust

a. Return Filing Requirement

b. Filing Date for Return

VII. Distributions of Cash, Property and Entity Ownership Units

A. Cash Distributions

1. Options for Income Tax Treatment

2. Sole Proprietorship

3. C Corporation

a. Shareholder/Recipient Treatment

b. Distributor Corporation Treatment

4. S Corporation

a. Shareholder/Recipient Treatment

b. Distributor Corporation Treatment

5. Partnership

a. Distributee Partner Treatment

b. Distributor Partnership Treatment

6. Trust

a. Distributee Beneficiary Treatment

b. Distributor Trust Treatment

7. Other Entities

8. Comparisons

B. Distributions of Property Other Than Cash

1. Alternative Tax Choices for Property Distributions

2. C Corporation

a. Distributor Corporation Treatment

b. Shareholder/Recipient Treatment

3. S Corporation

a. Distributor Corporation Treatment

b. Shareholder/Recipient Treatment

4. Partnership

a. Distributor Partnership Treatment

b. Distributee Partner Treatment

5. Trust

a. Distributor Trust Treatment

b. Distributee Beneficiary Treatment

6. Other Entities

a. Distributor Treatment

b. Distributee Treatment

7. Comparisons

C. Disguised or Constructive Distributions

1. Income Tax Treatment Choices

2. C Corporation

3. S Corporation

4. Partnership

5. Trust

6. Other Entities

7. Comparisons

D. Distributions of Entity Ownership Units

1. Alternative Distribution Techniques

2. Corporate Stock Distributions

a. Corporate Stock & Stock Rights/Section 305

(1) Distribution May Be Ordinary Dividend

(2) Distributions in Lieu of Money

(3) Disproportionate Distributions

(4) Distributions of Common and Preferred Stock

(5) Distributions on Preferred Stock

(6) Distributions of Convertible Preferred Stock

(7) Transactions Treated as Distributions

(8) Stock Rights

b. Section 306 Stock

(1) Postponed Ordinary Income Taxation

(2) Definition of § 306 Stock

(3) Dispositions Other Than Redemptions

(4) Redemptions

(5) Exceptions

3. S Corporation Stock Distributions

4. Partnership Unit Distributions

a. Options

b. Changes in Income Interests

c. Changes in Capital Interests

d. Closing of Partnership Year

5. Trust Unit Distributions

6. Other Entity Distributions

7. Comparisons

VIII. Termination/Partial Termination of an Entity Ownership Interest

A. Options for Terminating Entity Ownership Interest

B. Terminating the Sole Proprietorship Interest

C. Corporate Share Sales/Redemptions/Partial Liquidations

1. Share Sale to Third Party

a. Sale by Shareholder

b. Corporate Level Impact

c. Sale of S Corporation Stock

2. Stock Redemption Transactions

a. Definition of Corporate Redemption Transaction

b. Complete Terminations

c. Substantially Disproportionate Redemptions

d. Redemptions Not Essentially Equivalent to a Dividend

e. Partial Liquidations

f. Corporate Level Impact of Redemption Transaction

D. Partnership Interest Transfers

1. Partnership Interest Sale to Third Party

a. Effect to Selling Partner

b. Partnership Level Impact

2. Liquidation of Entire Partnership Interest - Sale to Partnership

a. Impact to Selling Partner

b. Sale of Partial Interest

c. Determining Partner's Distributive Share When Interest Terminated

d. Partnership Level Impact

E. Trust Interest Transfers

1. Types of Trust Interest Transfers

2. Trust Interest Sale to Third Party

a. Sale of Grantor Trust Interest

b. Sale by Beneficiary of Nongrantor Trust Interest

c. Impact at the Trust Level

d. Sale of Unit Trust Interest

3. Transfer of Ownership Interest to the Trust

a. Grantor Trust

b. Nongrantor Trust

F. Comparisons

IX. Taxable Disposition/Liquidation of the Entire Enterprise

A. Tax Issues and Planning Concerning the Termination of the Entire Enterprise

B. Terminating the Sole Proprietorship

C. Corporate Sales/Liquidations

1. Mechanics of Termination of Corporate Entity

2. Federal Income Tax Effects

a. Shareholder Level Results

(1) Stock Transfers

(2) Liquidation/Cash Distributions

(3) Liquidation/Property Distributions

(4) Liquidation/Reincorporation Risk

b. Corporate Level Effects

(1) Stock Purchase

(2) Complete Liquidation/Cash Distributions

(3) Liquidating Distributions of Installment Obligations

(4) Complete Liquidation/Property Distributions

(5) Liquidating Distribution/Loss Recognition Limitation

(6) Liquidation of a Controlled Corporate Subsidiary

D. Partnership Interest Sales/Complete Liquidations

1. Mechanics of Partnership Termination

a. Transferring All Partnership Interests

b. Complete Liquidation of the Partnership

2. Federal Income Tax Effects

a. Identifying a Partnership Termination

b. Sale of All Partnership Interests

c. Liquidating Distribution/Partner Level Tax Effects

d. Liquidating Distribution/Tax Effects to Partnership

E. Trust Interest Sales/Liquidations

1. Mechanics of Trust Termination

2. Federal Income Tax Effects

F. Comparisons

X. Tax-free Disposition of a Business Enterprise Interest

A. Mechanics/Tax Effects of Disposition

1. Types of Tax-Free and Tax-Deferred Dispositions

2. Sole Proprietorship

a. Like-Kind Exchanges

b. Transfer to Controlled Corporation

3. Corporate Spinoffs/Reorganizations

a. Available Choices

b. Spinoffs

(1) Tax-Free Corporate Division

(2) Shareholder Treatment Upon Spinoff Completion

c. Reorganizations

(1) Options for Tax-Free Acquisitions and Dispositions

(2) The Statutory Merger

(3) The "Stock-for-Stock" Exchange

(4) The "Stock-for-Assets" Exchange

4. Partnership

a. Availability of Tax-Free Exchange Mechanisms

b. Tax-Free Division of Partnership

c. Tax-Free Disposition of Entire Partnership

d. Conversion of Partnership to an LLC

e. Conversion into Single Member LLC

f. Single Member Entity Acquires New Member

5. Trusts

a. Alternative Disposition Techniques

b. Grantor Trusts

c. Nongrantor Trusts

6. Other Entities

7. Comparisons

B. Income Tax Attribute Carryovers

1. Identifying Important Tax Attributes

2. Sole Proprietorship

3. Corporate Spinoffs/Reorganizations

4. Partnership

XI. Multiple and Related Entities

A. Issues Concerning Multiple and Related Entities

B. Combined Income Tax Reporting

1. Sole Proprietorship

2. C Corporations

a. Identifying Multiple Corporation Relationships

b. Limitations on Multiple Tax Benefits

c. Allocation of Income and Deductions

d. Consolidated Tax Returns

(1) Eligibility to File Consolidated Return

(2) Election to File Consolidated Return

(3) Computation of Consolidated Taxable Income

(4) Liability for Consolidated Return Tax

(5) Benefits of Consolidated Return Tax Status

3. S Corporations

a. Affiliated Group Status

b. Ownership of Other Entities

4. Partnerships

a. Tiered Partnerships

(1) Description of Arrangement

(2) Allocation of Liabilities

(3) Fiscal Year Elections

(4) Transfer of Tiered Partnership Interests

b. Allocation of Income and Deductions

c. Share Ownership Arrangements

d. Trust Beneficiary Status

e. Corporate Holdings of Partnership Interests

5. Trusts

a. Multiple Trusts

b. Trusts and Beneficiaries

c. Trust as Partner

d. Trust as Corporate Shareholder

C. Transfer Pricing

1. Basic Rules

2. Regulations Under § 482

a. Best Method Rule

b. Pricing for Tangible Property Transfers

c. Pricing for Intangible Property

3. Applicability to Different Types of Entities

D. Special Rules for Transactions Between Owners and Entity

1. Types of Rules

2. Sales of Capital Assets

3. Sales of Depreciable Assets

4. Losses Arising from Sales of Property

XII. Compensation Issues

A. Reasonable Compensation Issues

1. In General

2. Effect to Employee

B. Fringe Benefits

1. General Nondiscrimination Rules

2. Group Term Life Insurance

3. Meals and Lodging

4. Accident and Health Plans

C. Qualified Retirement Plans

D. Payroll Withholding Considerations

E. Social Security Tax Considerations

1. Employer's Social Security Tax Responsibility

2. Self-Employment Tax

F. Unemployment Compensation Tax

XIII. Estate Planning Considerations

A. Types of Planning Issues

1. Alternative Estate Planning Situations

2. Valuation Situations

B. Pre-Death Ownership Restructurings

1. Objective of Enterprise Ownership Restructurings

2. Gift Tax Valuation in Ownership Restructurings

3. Corporate Restructurings

a. Income Tax Planning

b. Tax-Free Reorganization Treatment

c. Possible Dividend Treatment

d. Possible Preferred Stock Bailout Treatment

e. Transfer Tax Planning

3. Partnership Restructurings

C. Buy-Sell Agreements

1. Framework for Buy-Sell Agreements

a. Objective of Agreement

b. Alternative Structures for Buy-Sell Agreements

c. Fixing the Price to Be Paid

2. Payment Methods

D. Property Owned at Death

E. Valuation of Family Farms and Real Property

1. Special Valuation Procedure

2. Types of Qualified Property Ownership

3. Trade or Business Concept

F. Post-Death Special Tax Rules

1. Corporate Stock Redemption/§ 303

a. Availability of Exchange Treatment for Corporate Shareholder

b. Section 303 Requirements

c. Limitation of Redemption Amount

d. Parties Eligible to Use § 303

e. Time Limitations

2. Delayed Tax Payment Opportunities

a. Deferral Availability for Business Interests

b. Amount Deferrable

c. Qualifying Interest in Closely Held Businesses

d. Identifying the Qualifying "Closely Held Business"

e. Termination of Installment Privilege

f. Election Procedure

g. Similar Deferral for Trust Reversions and Remainders

G. Family Partnerships or Family LLCs

XIV. Special Transnational Considerations

A. Scope of Choice of Entity Issues

B. Foreign Taxing Regimes

C. U.S. Taxation of Inbound Foreign Enterprise Activities

1. U.S. Tax Characterization of Foreign Entity

2. Income Taxation on Profits

3. Branch Profits Tax

4. Earnings Stripping

D. Outbound Investment

E. U.S. Income Tax Treaties

F. Hybrid Entities

G. Dually Chartered Entities

XV. State Tax Implications

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 Alternative Business Organization Forms

Worksheet 2 Comparison of Business Entity Requirements

Worksheet 3 Chart Comparing Subchapter C with Subchapter S Corporation/Shareholder Tax Computations on Operating Income, Capital Gain and Distributed Income

Worksheet 4 Flow Chart-Summary of Elective Entity Classification Steps

Worksheet 5 Flow Chart for "Check the Box" Regulations-General Rules

Worksheet 6 Flow Chart for "Check the Box" Regulations-Domestic Eligible Entity

Worksheet 7 Flow Chart for "Check the Box" Regulations-Foreign Eligible Entity

Worksheet 8 Flow Chart for "Check the Box" Regulations-Existing Entity

Worksheet 9 Listing of Foreign Entities Characterized as "Per Se" Corporations

Worksheet 10 Charts Showing Entity Ownership Structuring Options

Worksheet 11 Summary of Federal Income Tax Forms Relevant to Various Types of Business and Investment Entities

Worksheet 12 Election Under Regs. § 1.761-2(b) to be Excluded from the Partnership Provisions of the Internal Revenue Code (Subchapter K)



Internal Revenue Code:

Treasury Regulations:

Treasury Rulings:


Committee Reports and Government Documents:


Selected Text and Treatises:

Planning Periodicals, Course Materials (including audiotapes, DVDs and other formats):

Electronic Materials and Websites for Uniform Acts Relevant to Choice of Entity: