This document provides an agenda and overview of a presentation on corporate tax law topics. It discusses whether the C corporation is becoming a more attractive entity choice compared to pass-through entities like partnerships and S corporations due to changing tax rates. It also covers recent developments related to purchase price allocations for asset acquisitions, the application of transaction cost allocation rules including the "next day rule", and new regulations allowing for section 336(e) elections to treat stock dispositions as deemed asset sales similar to section 338(h)(10) elections.

1. State Bar of South Dakota
Tax Update XXXV
Hot Topics in Corporate Tax Law
December 13, 2013
Kevin W. Kaiser

2. Agenda
• Is the C Corporation the New Entity Choice?
• Purchase Price Allocations
• Transaction Costs Allocations
• Qualified Stock Dispositions – Section 336(e)
• Loss Importation Rules – Section 362(e)
• Section 382 Small Shareholder Segregation Rules
• IRS Private Letter Ruling Policy Change
2

3. Choice of Entity
The C Corporation Question
• Choice of Entity Possibilities
– Pass-Through Entities
• LLCs
• Partnerships
• S Corporations
• Other
– REITS
– RICs
– Trusts
– Taxable Entity
• C Corporation
3

4. Choice of Entity
The C Corporation Question
• Tax Rates
Individual Rates (IRC section 1)
Prior Law
Maximum Rate
Ordinary income
35.0%
Medicare Tax on
Investment income
N/A
Total Tax Rate
35.0%
Current Law
39.6%
3.8%
43.4%
Note: Wages in excess of $200,00 for single filers and $250,000 for joint
filers are subject to an additional 0.09% Medicare tax.
4

5. Choice of Entity
The C Corporation Question
• Tax Rates
Individual Capital Gain Rates (section 1(h))
Current Rates
• Highest Ordinary
Income Tax Bracket
20.0%
• Ordinary Income Tax Brackets
Between 25.0 to 39.6%
15.0%
• Ordinary Income Tax
Brackets Below 25.0%
0.0%
* Capital gains rates also apply to qualified dividend income (section 1(h)(11)).
5

6. Choice of Entity
The C Corporation Question
• Tax Rates
Corporate Tax Rates (IRC section 11)
Taxable Income
$0 to $50,000
$50,000 to $75,000
$75,000 to $10,000,000
Over $10,000,000
Current Rates
15%
25%
34%
35%
Note: The lower tax bracket rates are phased out for incomes
greater than $100,000.
6

7. Choice of Entity
The C Corporation Question
• The tax rate gap between individuals and corporations is
growing larger
• Proposals to reduce the corporate tax rate to 28% or 25% (in
line with other OECD members)
• It may be more tax efficient to pool income in a C Corporation
and subject investment earnings to the lower corporate tax
rate
7

8. Choice of Entity
The C Corporation Question
• Advantages of C Corporations
– Ability to choose fiscal year (for non-PSCs)
– Low tax rates on the first $75,000 of annual income
– Section 1202 Qualified Small Business stock gain exclusion 100% exclusion applicable for stock acquired after 9/27/10
and before 1/01/14 (50% exclusion after 12-31-13)
– Section 1244 ordinary loss deduction for stock held in
certain small C Corporations
– Deferral of income through control of dividend timing
8

9. Choice of Entity
The C Corporation Question
• Disadvantages of C Corporations
 Double taxation on corporate earnings
o Income subject to tax at corporation level
o Income subject to tax again when distributed to shareholder
o Dividend income subject to 3.8% Medicare tax
 Lack of partnership/LLC flexibility and tax benefits
o Flexibility in structuring economic rights (allocations)
o Loss pass-through to owners
o Basis credit for allocation of liabilities (significant in certain
industries such as real estate)
9

10. Choice of Entity
The C Corporation Question
• Corporate Double Taxation Example
AnyCo Corporation
Taxable Income
Tax @ 34%
Net after tax income
Shareholder
Dividend Income
Tax @ 23.8% (20 + 3.8)
Net after-tax cash
Net Effective Tax Rate
10
$1,000,000
(340,000)
$660,000 (Pay dividend to shareholders)
$660,000
(157,080)
$502,920
49.7% (Not including state tax)

11. Choice of Entity
The C Corporation Question
• Pass-through Example
AnyCo LLC
Taxable Income
Tax @ 39.6%
Net after tax income
Net Effective Tax Rate
$1,000,000
(396,000)
$604,000 (Pay dividend to shareholders)
39.6% (Not including state tax)
Note: The 3.8% Medicare tax does not apply to active trade or business
income. In the corporate example, the 3.8% Medicare tax applies to the
dividend payment.
11

12. Choice of Entity
The C Corporation Question
• Compare Corporate Double-tax with Pass-through Example
Taxable Income: $1,000,000
Entity Type
Cash
AnyCo LLC - net after-tax cash
$604,000
AnyCo Corporation – net after-tax cash $502,920
Difference
$101,080
Rate
39.6%
49.7%
10.1%
How low do corporate rates need to go before corporations become the first
choice for small businesses? (Current proposals: 25-28%. Low Enough?)
12

13. Choice of Entity
The C Corporation Question
• The Shift to Doing Business as a Corporation
– Don't forget these old friends:
o Accumulated Earnings Tax
o Personal Holding Company Tax
Note: AET and PHC generally apply if accumulating passive assets and
investment income (excess retained earnings)
 Other Considerations:
o International and cross-border operations
o State Taxes
o Changes to flow-through regimes (Camp proposal – Unified Passthrough)
13

14. Choice of Entity
The C Corporation Question
• Tax Planning and Control
 Dividend payments can be controlled and deferred
o Flow through income generally taxed when earned
 Shareholder employees can increase salary and
compensation deduction (within reason) to reduce
corporate taxable income
 Use of fiscal year-end (for non-PSC) may defer income
14

15. Choice of Entity
The C Corporation Question
• Corporate Entity Choice
– Exit Strategy Considerations
o C Corporation double-tax most significant to the
closely-held business owner when selling the business
 Buyers want to buy assets – Seller problem: Any
appreciated assets held in the corporation will be
subject to the corporate double-tax
Sellers want to sell stock – Buyer problem: No stepup in the asset basis (also, liability concerns)
15

16. Choice of Entity
The C Corporation Question
• Stay Tuned
– Corporations may be making a come back
– Current corporate double taxation is significant impediment to
choosing the corporate form of doing business for the closely held
business
– Changes in corporate tax rates may result in expanded structuring
possibilities of combining corporations and other pass-throughs to
minimize and/or defer the timing of tax
– There may be no one simple answer for the closely held business
choice of entity
– Comprehensive tax reform may change everything, full integration?
16

17. Recent Developments
and other
Corporate Tax Hot Topics
17

18. Asset Purchases
Purchase Price Allocation
• Section 1060 prescribes allocation rules for asset acquisition that
constitute an Applicable Asset Acquisition
• Applicable Asset Acquisition – Generally, defined as the taxable purchase of
assets comprising a trade or business
• Section 1060(a) provides that where parties to an asset acquisition agree in
writing, as to the allocation of any amount of consideration, or, as to the
FMV of any of the assets transferred, that agreement is binding on the
seller and buyer, unless the Commissioner determines that the allocation
or FMV is not appropriate
18

19. Asset Purchases
Purchase Price Allocation
• Section 1060 amended in 1990 to codify the "Danielson" rule
and bind the buyer and seller to any asset allocation
agreement (taxpayers must adhere to the form they choose)
• Section 1060 provides that where the parties do not agree in
writing, the so-called "residual method" applies, as set forth in
Section 338(b)(5)
• Allocation reported on IRS Form 8594 – seven asset classes "I VII”
19

20. Asset Purchases
Purchase Price Allocation
IRS Form 8594 – seven asset classes "I - VII” used for the "Residual Method"
Class I assets: cash and general deposit accounts
Class II assets: certificates of deposits, U.S. gov't securities, marketable securities, and foreign currency
Class III assets: accounts receivable, mortgages, and credit card receivables
Class IV assets: stock in trade of the taxpayer or other property of a kind which would be included in the
inventory of the taxpayer
Class V assets: all assets other than Class I, II, III, IV, VI, VII assets [plant, property & equipment]
Class VI assets: section 197 intangibles, as defined by section 197, except goodwill and going concern value
Class VII assets: goodwill and going concern value (whether or not the goodwill or going concern value qualifies
as a section 197 intangible). Treas. Reg. § 1.338-6(b).
Note: Purchase price is allocated to each of the purchased assets, within the respective asset
Classes I though VII based on the relative fair market values.
20

21. Asset Purchases
Purchase Price Allocation
• Purchase Price Allocation Cannot Be Changed – Post
Acquisition
• Peco Foods Inc. v. Comm., 522 Fed.Appx 840 (11th Cir. 2013)
– Acquirer of assets bound by purchase price allocation
– Eleventh Circuit Court of Appeals affirmed the Tax Court's
decision holding that a corporation was not entitled to
modify purchase price allocations in connection with postacquisition cost segregation study
– APA was clear and there was no mistake or unknown facts
– Court applied the rule of Danielson to bar a unilateral
change
21

22. Asset Purchases
Purchase Price Allocation
• Peco Foods Inc. v. Comm. – Holding relevant to:
 Asset purchases
o Regardless of entity type
 Partnership interest purchases
o Section 751 "Hot Asset" allocation considerations
 Rev. Proc. 99-6 Membership interest purchases
o Seller treats as sale of partnership interest
o Buyer treats as purchase of assets
22

23. Asset Purchases
Purchase Price Allocation
Revenue Ruling 99-6
Sellers' Treatment :
Sale of Partnership Interests
A
B
50%
50%
Target LLC
23
Buyer's Treatment :
Purchase of Target LLC Assets
Buyer
LLC Equity
100%
Target LLC
A
B
50%
50%
Target LLC
Buyer
100%
Target LLC

24. Asset Purchases
Purchase Price Allocation
• Peco Foods Inc. v. Comm. –
 Query: Should purchase agreements include purchase
price allocation agreements?
 Certainty and consistent reporting between buyer and
seller
 Must the Form 8594s filed by buyer and seller match?
 Corporate Purchase Allocation: Corporations do not have a
capital gains preference. Maybe precise allocation to
specific assets not so important?
24

25. Transaction Costs
and the Next Day Rule
• IRS General Legal Advice Memo ("GLAM") 2012-010 addresses the timing
of certain corporate deductions for transaction costs under the
consolidated return rules, including the next-day rule.
• FACTS: Acquiring corporation (Acquiring) acquired stock of the target
corporation (Target) when a subsidiary of Acquiring merged with and into
Target, with Target surviving (the Acquisition) – Reverse Triangular Merger.
Acquiring was the common parent of an affiliated group of corporations
that had elected to file a consolidated tax return for U.S. federal income tax
purposes (the Acquiring Group). Target became a member of the Acquiring
Group as a result of the Acquisition.
25

26. Reverse Triangular Merger (taxable)
aka, Reverse Cash Merger
GLAM 2012-010: Acquiring forms a “first-tier” subsidiary (Mergerco) that merges with and into
Target
Acquiring Shareholders
Acquiring
Target
Shareholders
MergerCo
Target
Merge
•
•
•
•
•
26
Acquiring is calendar year taxpayer and common parent of consolidated return group
Acquisition completed on November 30, 20XX
Target shareholders exchange their Target stock for cash
Target is the survivor
See Rev. Rul. 90-95 – similar transaction treated as taxable stock purchase

27. Transaction Costs
and the Next Day Rule
•
27
Target incurred certain deductible costs that the IRS assumed became deductible on the date
of the transaction (the Acquisition Date), including the following:
– Item 1: Stock Option Expense - Payments to Target’s employees for stock options and
stock appreciation rights due upon a change in control of Target and that became fixed
and determinable at the time of the Acquisition.
– Item 2: Investment Bank Success Fee - Payments to Target’s financial advisers and
investment banking firms for consulting advice rendered to Target in connection with the
Acquisition that were contingent on the successful closing of the Acquisition.
– Item 3: Bond Early Retirement Redemption Premium - Payments to retire certain debt
belonging to Target. Target paid certain bondholders a premium over the adjusted issue
price to retire certain of its outstanding bonds. The bondholders tendered the bonds two
days before the Acquisition date, though Target was not obligated to purchase the
tendered bonds. On the Acquisition date, but after the Acquisition had closed, Target
accepted the tendered bonds for reacquisition. Later that day, Target retired the bonds at
a premium, using its own funds or funds received from Acquiring.

28. Transaction Costs
and the Next Day Rule
• Consolidated Return End-of-Day Rule: The end-of-day rule under Treas.
Reg. Sec. 1.1502-76(b)(1)(ii)(A) generally provides that if a subsidiary
("Sub") becomes or ceases to be a member of a consolidated return group
during the year, the Sub becomes or ceases to be a member at the end of
the day on which its status changes, and its tax year ends for all federal
income tax purposes at the end of the day. End-of-day general rule
exception - the next-day rule.
• Consolidated Return Next-Day Rule: The next-day rule under Treas. Reg.
Sec. 1.1502-76(b)(1)(ii)(B) provides that if, on the day of the Sub’s change in
status as a group member, a transaction occurs that is properly allocable to
the portion of the Sub’s day after the event resulting in the change, the Sub
must treat the transaction as occurring at the beginning of the following
day.
28

29. Transaction Costs
and the Next Day Rule
• Rulings:
– Items 1: Stock Option Expense – Target's obligation to pay the amount of its liability
became fixed and determinable upon closing. Accordingly, the deductions relating to the
exercise of the Target shareholder's stock options should be taken into account on the
Target's standalone tax return for the short-year ending on the date of the acquisition.
– Item 2: Investment Bank Success Fee – Target's obligation to pay the amount of its
liability became fixed and determinable upon closing. Accordingly, the deductions
relating to the success fee payable to the investment banker should be taken into account
on the Target's standalone tax return for the short-year ending on the date of the
acquisition.
– Item 3: Bond Early Retirement Redemption Premium - Target’s costs under Item 3 may be
subject to the next-day rule and thus it may be reasonable to report the deduction on
Target’s return as part of the Acquired Group’s consolidated tax return. The IRS noted
that the deduction for retiring the bonds at a premium arose as a result of a postAcquisition payment made after closing.
29

30. Transaction Costs
and the Next Day Rule
• Observations:
– General Legal Advice Memorandum (GLAM) is "informal" advice and
may not be cited as precedent, however the guidance is useful to
understand the IRS's view on how certain deduction items should be
allocated between short tax periods
– Reasoning may be extended beyond consolidated return entity
structure
– The GLAM highlights that the IRS applies a narrow view of applying the
next day rule
– The deductions for transaction costs are often taken into account when
negotiating purchase and sale agreements. The GLAM and related
guidance highlights that there may be limitations on the ability to shift
items and deductions between buyers and sellers.
30

31. Qualified Stock Dispositions
Section 336(e)
§336(e) Election – Deemed Asset Sale
• Final regulations (T.D. 9619) issued May 15, 2013
• Election available effective May 15, 2013
• Similar treatment to Section 338(h)(10)
• "Qualified Stock Disposition"
31

32. Qualified Stock Dispositions
Section 336(e)
§336(e) Election – Deemed Asset Sale
• "Qualified Stock Disposition" is a transaction or
series of transactions in which target stock:
– Meeting an 80% vote and value test;
– Is either sold, exchanged or distributed, or any
combination thereof;
– By the seller in a disposition not resulting in a
carryover or substituted basis;
– During the 12-month disposition period.
32

33. Qualified Stock Dispositions
Section 336(e)
§336(e) Election – Deemed Asset Sale
• Acquirer does not have to be a corporation (unlike
elections under section 338) – LLCs or PE funds OK
• No requirement that stock be sold or distributed to a
single purchaser
33

34. Qualified Stock Dispositions
Section 336(e)
§336(e) Election – Deemed Asset Sale
• Domestic corporation or S corporation shareholder(s) that
dispose of domestic corporation stock may elect to treat the
disposition as a deemed asset sale
– All S corporation shareholders must consent
• Target is deemed to sell its assets to an unrelated person,
followed by a liquidation into the seller
• Election statement must be included with the return
34

35. Loss Importation Rules
Section 362(e) and Section 334(b)
• Sections 334(b)(1)(B) and 362(e)(1) are intended to prevent the
importation of loss in certain corporate nonrecognition exchanges.
– Sections 334(b)(1)(B) applies to the acquisition of loss property in
Section 332 liquidations
– Section 362(e)(1) applies to acquisition of loss property in Section 351
exchanges, contributions to capital and tax-free reorganizations
• Section 362(e)(2) is intended to prevent the duplication of loss in certain
corporate nonrecognition exchanges
– Applies to corporate acquisitions of property with a net built-in loss in
transactions described in Section 362(a) (i.e., Section 351 exchanges
and Section 118 contributions to capital)
– Transferee's basis in the loss property is reduced by the property's
allocable portion of the transferor's net built-in loss
– Election available to reduce basis exchanged stock instead of assets
35

36. Loss Importation Rules
Proposed Regulations
• Loss importation proposed regulations (REG 161948-05)
published under Sections 334(b)(1)(B) and 362(e)(1) on
September 6, 2013 intended to stop taxpayers from importing
losses in the U.S. by using tax-free transfers of loss property to
corporations that are subject to federal tax
• Loss importation rules generally apply to domestic and foreign
transactions
36

37. Loss Importation Rules
Proposed Regulations
• Definition of "Importation Property"
– If any gain or loss recognized on a disposition of the property:
o Would not be subject federal income tax in the hands of the
transferor immediately before the transfer (Subpart F not included)
o Would be subject to federal tax in the hands of he transferee
immediately after the transfer
 Acquirer, using a hypothetical sale analysis determines aggregate basis
in "importation property"
o Determined on aggregate basis – not item by item
o If aggregate basis > aggregate value, then "importation transaction"
o If aggregate basis < aggregate value, then loss importation rules do
not apply
o If importation transaction, then all importation property marked to
FMV
37

38. Loss Importation Rules
Example
•Transaction: FS Liquidates into US Parent under
Sec 332
US
Parent
•All property loss importation property
•Metrics
o Aggregate Value:
o Aggregate Basis:
Foreign
Sub (FS)
$140
$150
Liquidate FS
E&P = $200
• US Parent basis in each asset is as follows:
o Asset 1:
$90
o Asset 2:
$50
• US Parent must take the $200 of foreign E&P
into account pursuant to Reg. 1.367(b)-3(b)(3)
•Query: Should basis reduction reduce FS E&P?
Comments requested by Treasury.
38
Asset 1
Asset 2
AB = 70
FV = 90
AB = 80
FV = 50

39. Section 382 Aggregation/Segregation Regulations
• Section 382 limits a corporation’s use of its net operating losses if there is
an “ownership change”
• On October 22, 2013, the IRS issued final Regulations designed to ease the
administrative burden and complexity of the segregation rules
• The final regulations adopt the proposed regulations, with certain
amendments, published on November 23, 2011
• The final regulations are generally effective from October 22, 2013
39

40. Section 382 Aggregation/Segregation Regulations
• Final regulations provide three new exceptions to the current
segregation rules for small shareholders:
– Secondary transfer exception
– Small redemption exception
– Exception to the segregation rules for 5% entities
40

41. Section 382 Aggregation/Segregation Regulations
• Aggregation rules generally apply to shareholders who each
own less than 5% of a loss company
– Less than 5% shareholders can be assigned to a single
group
• Segregation rules operate to split up certain small
shareholders into separate groups
41

42. Section 382 Aggregation/Segregation Regulations
• The 5% Shareholder
• Any individual owning directly or indirectly 5% or more (based on value)
• Aggregate group of <5% shareholders can be treated as single 5% owner
Aggregate
< 5% S/H
Public
Group
X
10%
90%
LossCo
42

43. Section 382 Aggregation/Segregation Regulations
• Secondary transfer exception
– Transfer of LossCo stock by individuals of first-tier entities that directly
own 5% or more in LossCo to public does not create a new public group.
o Existing public groups deemed to acquire proportionate shares
instead of new segregated public group acquiring the shares.
• Small redemption exception
 Small redemptions will not cause a new public group to be created and
result in an ownership shift. Generally, small redemption is less than 10%
value of LossCo.
• Exception to the segregation rules for 5% entities
 Transactions involving public groups owning first-tier or higher-tier
entities will not create new segregated public group (with resulting
ownership shift) if the first-tier or higher-tier entity owns less than 10%
of Lossco.
43

44. IRS Private Letter Ruling Policy Change
•
44
Revenue Procedure 2013-32 - Reduced Scope of Corporate PLR requests
– IRS will restrict the scope of private letter rulings that address issues with
respect to transactions under Section 332, 351, 355, and Section 368
– No more full and comprehensive corporate rulings on complex transactions,
notably Section 368 reorganizations and Section 355 spin-offs
– The IRS will not longer rule on whether a transaction qualifies for
nonrecognition treatment
– The IRS will only address discrete "significant" issues
– Example: IRS will not rule on the general qualification of a Section 351
exchange, however, if there is a "significant issue" regarding the application of
Section 358 to basis determination, the IRS will rule on the Section 358 issue
– Extension of Revenue Procedure 2003-48, in which the IRS announced that,
with respect to Section 355 tax-free spin-offs, the agency would no longer issue
rulings addressing (1) business purpose, (2) device for distribution of E&P, or
(3) Section 355(e) anti-morris trust rules (step transaction)

45. Hot Topics in Corporate Tax Law
Thank You

46. Contact Information
Kevin W. Kaiser
Lindquist & Vennum LLP
4200 IDS Center
80 South Seventh Street
Minneapolis, MN 55402
Phone: (612) 371-2467
E-mail: kkaiser@lindquist.com