Business Entity Taxation
Edition: 12
Copyright: 2021
Edition: 12
Copyright: 2021
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Business Entity Taxation rejects the traditional textbook method of providing the student with an onslaught of detail and complication. Rather, the focus is on a strong presentation of the fundamentals. To use a basketball analogy, a player must first develop a strong ability to pass, dribble and shoot. Once those skills are mastered, the student can readily adapt his or her skills to execute more advanced plays and sophisticated strategies presented by the coach. Similarly, when studying business entity taxation, a student must first learn the tax fundamentals relating to partnerships, C corporations, S corporations, and a few other areas. Details and complexities on the periphery can then be given proper attention in more advanced courses.
The following features highlight the approach of this text:
- Reader-friendly language
- Diagrams that aid the visual learner
- Simple math so the student can focus on the concept, not the math
- Shorter chapters to enhance retention and minimize reader fatigue
- Direct quotations from the Internal Revenue Code so the student becomes familiar with it
- Practical questions and problems
- Straightforward partnership, C corporation and S corporation tax return problems
- Discussion of tax returns and other forms
- Very little focus on insignificant dollar amounts and other insignificant items that Congress frequently changes
- Affordable text that provides enough material to cover a semester of study, but not so much that the instructor cannot effectively cover it all
Preface
About the Author
Introduction
PART 1 OVERVIEW OF BUSINESS ENTITIES AND THE ORGANIZATION OF THE INTERNAL REVENUE CODE
Chapter 1 Business Entities and Federal Income Taxes in General
A. Sole Proprietorship
B. General Partnership
C. Limited Partnership
D. Limited Liability Partnership (LLP)
E. Limited Liability Limited Partnership (LLLP)
F. Limited Liability Company (LLC)
G. Corporation
H. The “Check-the-Box” Regulations
I. Employer Identification Number (EIN)
Chapter 2 Organization of the Internal Revenue Code and Overview of Tax Research
A. Legislative Branch
B. Executive Branch
1. Treasury Regulations
2. Revenue Rulings, Revenue Procedures
3. Private Letter Rulings
4. Determination Letters
5. Technical Advice Memoranda
C. Judicial Branch
D. Tax Research Resources
E. Common Forms of Citation
1. Internal Revenue Code
2. Treasury Regulations
3. Revenue Rulings and Revenue Procedures
4. Private Letter Rulings and Technical Advice Memoranda
5. Court Cases
PART 2 PARTNERSHIP TAXATION
Chapter 3 Formation of the Partnership: Transfer of Property to a Partnership
A. What Is a Partnership?
B. Terminology: Amount Realized, Gain Realized, Gain Recognized
C. Gain or Loss Recognition on Transferring Property to a Partnership
D. A Partner’s Initial Tax Basis in the Partnership (i.e., “Outside Basis”)
E. The Partnership’s Initial Tax Basis in Its Assets (i.e., “Inside Basis”)
F. Holding Periods
G. A Partner’s Capital Account
Chapter 4 Formation of the Partnership: Transfer of Services to a Partnership
A. Receipt of a Capital Interest in Return for Services
B. Receipt of a Profits Only Interest in Return for Services
Chapter 5 Formation of the Partnership: Other Related Issues
A. Taxable Year
1. Majority Interest Test
2. Principal Partners Test
3. Least Aggregate Deferral Test
4. Other Possible Taxable Year
B. Method of Accounting
C. Costs Associated with Forming the Partnership
Chapter 6 The Pass-Through Nature of Partnerships: Allocating Profits and Losses
A. Partnerships Are Not Subject to Income Tax
B. Separately Stated Items
C. Partnership Ordinary Income
D. Mechanism for Reporting Income/Loss to Partners – Form 1065
E. Adjustments to Outside Basis (Ignoring Liabilities)
F. Adjustments to a Partner’s Capital Account
G. Loss Limitations
H. Taking into Account Precontribution Gain/Loss upon the Partnership’s Sale of an Asset
I. Limitation on Special Allocations
J. Self-Employment Taxes
K. Qualified Business Income Deduction
Chapter 7 Impact of Partnership Liabilities on Outside Basis Calculation
A. Recourse Liabilities
B. Nonrecourse Liabilities
Chapter 8 Guaranteed Payments and Other Transactions between a Partner and the Partnership
A. Guaranteed Payments
B. Other Transactions between a Partner and the Partnership
Chapter 9 Distributions from a Partnership
A. Nonliquidating (“Current”) Distributions
1. When the Partnership Distributes Money Only
2. When the Partnership Distributes Money and Other Property
3. Partner’s Tax Basis in the Property Distributed
B. Liquidating Distributions
1. When the Partnership Distributes Money Only
2. When the Partnership Distributes Money and Other Property
3. Partner’s Tax Basis in the Property Distributed
Chapter 10 Sale of a Partnership Interest
A. Determining Amount Realized
B. General Rule
C. Exception for “Hot” Assets
D. Partnership’s Optional Adjustments to Basis in Property
PART 3 C CORPORATION TAXATION
Chapter 11 Formation of the Corporation: Transfer of Property to a Corporation
A. What Is a C Corporation?
B. Terminology: Amount Realized, Gain Realized, Gain Recognized
C. Gain or Loss Recognition by Transferor
1. Property
2. Stock
3. Control
4. Impact of Liabilities
D. A Shareholder’s Initial Tax Basis in the Corporation’s Stock
E. The Corporation’s Gain or Loss Recognized
F. The Corporation’s Initial Tax Basis in its Assets
G. Holding Periods
H. Transfers to Existing Corporations
I. Transfer of Services to a Corporation
Chapter 12 Formation of the Corporation: Other Related Issues
A. Taxable Year
B. Method of Accounting
C. Costs Associated with Forming the Corporation
Chapter 13 Capital Structure of a C Corporation
A. Debt
B. Equity
C. Preferred Stock, Convertible Bonds and Even More Unique Financial Instruments
Chapter 14 Double-Tax Nature of a C Corporation
A. Income Tax Imposed on a C Corporation
B. Character of Income Does Not “Pass-Through”
C. Specific Items of Income, Gain, Expense, or Loss
1. Capital Gains/Losses
2. Dividends Received Deduction
3. Charitable Contributions
4. Net Operating Losses
5. Investor Losses
D. Affiliated Groups
Chapter 15 Distributions from a C Corporation
A. Dividends and Impact of Earnings and Profits (“E&P”)
B. Impact on the Corporation: Distributions of Money
C. Impact on the Corporation: Distributions of Property
1. Gain/Loss Recognized by Corporation
2. Tax Basis of Property to Shareholder
3. Impact on E&P
D. Constructive Dividends
Chapter 16 Stock Redemptions
A. Dividend vs. Sale
B. Section 302
1. Not Essentially Equivalent to a Dividend
2. Substantially Disproportionate Redemption
3. Complete Termination
4. Partial Liquidation
5. Redemption to Pay Death Taxes
C. Family Attribution Rules
Chapter 17 Liquidation of a C Corporation
A. General Rules
B. Parent-Subsidiary Exception
Chapter 18 Overview of Corporate Mergers and Acquisitions
A. Taxable Stock Acquisitions
B. Taxable Asset Acquisitions
C. Tax-Free Reorganizations
PART 4 S CORPORATION TAXATION
Chapter 19 Qualifying for S Corporation Status and Making the S Election
A. What Is an S Corporation?
B. Qualifying for S Corporation Status
1. Number of Shareholders
2. Ineligible Shareholders
3. Nonresident Aliens
4. One Class of Stock
C. Making the S Election
Chapter 20 The Pass-Through Nature of S Corporations: Allocating Income and Loss
A. S Corporations Are Generally Not Subject to Income Tax
B. Separately Stated Items
C. S Corporation Ordinary Business Income/Loss
D. Mechanism for Reporting Income to Shareholders – Form 1120S
E. Adjustments to Shareholder’s Tax Basis
F. Treatment of Losses
G. Possible Entity-Level Income Taxes
H. Fringe Benefits Paid to Shareholder–Employees
I. Qualified Business Income Deduction
Chapter 21 Distributions by an S Corporation and Liquidation of an S Corporation
A. Corporation Has No E&P from C Corporation Years
B. Corporation Has E&P from C Corporation Years
C. Distribution of Appreciated Property
D. Liquidation of an S Corporation
PART 5 STATE AND LOCAL TAXATION
Chapter 22 State and Local Taxation
A. Income Taxes
1. Nexus
2. Uniform Division of Income for Tax Purposes Act
3. Reporting Requirements
B. Taxes Other Than Income Taxes
1. Sales Tax
2. Use Tax
3. Property Tax
4. Other Taxes
PART 6 EXEMPT ENTITIES
Chapter 23 Exempt Entities
A. What Is an Exempt Entity?
B. Qualifying for Exempt Status: Types of Exempt Entities
C. Section 501(c)(3) Organizations
1. What is a “Charitable” Purpose?
2. Applying for Section 501(c)(3) Status – Form 1023
3. Public Charity vs. Private Foundation Status – Why Does It Matter?
i. Automatic “Public Charity” Status
ii. Public Support Test
4. Excess Benefit Transactions and Other Prohibited Transactions
D. Unrelated Business Income Tax
E. Other Issues for Nonprofit Organizations
1. Conflicts of Interest Policy
2. State Fundraising Regulation
3. Annual Reporting Requirements
PART 7 PAYROLL AND EMPLOYEE BENEFITS
Chapter 24 Payroll and Employee Benefits
A. Payroll
B. Employee Benefits
PART 8 INCOME TAXATION OF TRUSTS AND ESTATES
Chapter 25 Income Taxation of Trusts and Estates
A. What is a Trust?
B. What is an Estate?
C. “Income” and “Principal”
D. Classification of Trusts for Income Tax Purposes
1. Simple Trusts
2. Complex Trusts
3. Grantor Trusts
E. Determining Taxable Income
F. Reporting Requirements
Appendix of Forms
Index
Ryan H. Pace, M.Tax, J.D., LL.M., is currently a professor of taxation at Weber State University. He
teaches graduate and undergraduate courses in taxation and business law, including:
- Advanced Corporate Taxation
- Advanced Partnership Taxation
- Mergers, Acquisitions & Consolidations
- Advanced Individual Taxation
- International Taxation
- Tax Research & Communication
- Business Entity Taxation
- Legal Environment of Business
Mr. Pace also serves as the Director of both the Master of Accounting program and the Master of
Taxation program at Weber State. Prior to his teaching career, Mr. Pace was a full-time tax attorney
at large law firms in Arizona and Utah. Mr. Pace graduated from New York University with a Master
of Laws degree in taxation after receiving his Juris Doctor with honors from Washburn University
School of Law. He also received a Master of Taxation degree from Arizona State University and his
Bachelor of Science degree from the University of Utah. He is admitted to practice law before the
United States Supreme Court, The United States Tax Court, and is a member of the Utah State Bar
and State Bar of Arizona (inactive).
Mr. Pace has written several articles in the area of taxation including in the following journals:
- Journal of Legal Tax Research
- Tax Notes
- The Tax Adviser
- Business Entities
- The CPA Journal
In addition to this textbook, Mr. Pace has authored two other textbooks—Business Entity Taxation
and Legal Environment of Business, both published by Kendall Hunt Publishing. Mr. Pace
has also participated in many continuing education programs and academic conferences. He currently
lives in Morgan, Utah, with his wife and three children and enjoys reading and playing
basketball.
Business Entity Taxation rejects the traditional textbook method of providing the student with an onslaught of detail and complication. Rather, the focus is on a strong presentation of the fundamentals. To use a basketball analogy, a player must first develop a strong ability to pass, dribble and shoot. Once those skills are mastered, the student can readily adapt his or her skills to execute more advanced plays and sophisticated strategies presented by the coach. Similarly, when studying business entity taxation, a student must first learn the tax fundamentals relating to partnerships, C corporations, S corporations, and a few other areas. Details and complexities on the periphery can then be given proper attention in more advanced courses.
The following features highlight the approach of this text:
- Reader-friendly language
- Diagrams that aid the visual learner
- Simple math so the student can focus on the concept, not the math
- Shorter chapters to enhance retention and minimize reader fatigue
- Direct quotations from the Internal Revenue Code so the student becomes familiar with it
- Practical questions and problems
- Straightforward partnership, C corporation and S corporation tax return problems
- Discussion of tax returns and other forms
- Very little focus on insignificant dollar amounts and other insignificant items that Congress frequently changes
- Affordable text that provides enough material to cover a semester of study, but not so much that the instructor cannot effectively cover it all
Preface
About the Author
Introduction
PART 1 OVERVIEW OF BUSINESS ENTITIES AND THE ORGANIZATION OF THE INTERNAL REVENUE CODE
Chapter 1 Business Entities and Federal Income Taxes in General
A. Sole Proprietorship
B. General Partnership
C. Limited Partnership
D. Limited Liability Partnership (LLP)
E. Limited Liability Limited Partnership (LLLP)
F. Limited Liability Company (LLC)
G. Corporation
H. The “Check-the-Box” Regulations
I. Employer Identification Number (EIN)
Chapter 2 Organization of the Internal Revenue Code and Overview of Tax Research
A. Legislative Branch
B. Executive Branch
1. Treasury Regulations
2. Revenue Rulings, Revenue Procedures
3. Private Letter Rulings
4. Determination Letters
5. Technical Advice Memoranda
C. Judicial Branch
D. Tax Research Resources
E. Common Forms of Citation
1. Internal Revenue Code
2. Treasury Regulations
3. Revenue Rulings and Revenue Procedures
4. Private Letter Rulings and Technical Advice Memoranda
5. Court Cases
PART 2 PARTNERSHIP TAXATION
Chapter 3 Formation of the Partnership: Transfer of Property to a Partnership
A. What Is a Partnership?
B. Terminology: Amount Realized, Gain Realized, Gain Recognized
C. Gain or Loss Recognition on Transferring Property to a Partnership
D. A Partner’s Initial Tax Basis in the Partnership (i.e., “Outside Basis”)
E. The Partnership’s Initial Tax Basis in Its Assets (i.e., “Inside Basis”)
F. Holding Periods
G. A Partner’s Capital Account
Chapter 4 Formation of the Partnership: Transfer of Services to a Partnership
A. Receipt of a Capital Interest in Return for Services
B. Receipt of a Profits Only Interest in Return for Services
Chapter 5 Formation of the Partnership: Other Related Issues
A. Taxable Year
1. Majority Interest Test
2. Principal Partners Test
3. Least Aggregate Deferral Test
4. Other Possible Taxable Year
B. Method of Accounting
C. Costs Associated with Forming the Partnership
Chapter 6 The Pass-Through Nature of Partnerships: Allocating Profits and Losses
A. Partnerships Are Not Subject to Income Tax
B. Separately Stated Items
C. Partnership Ordinary Income
D. Mechanism for Reporting Income/Loss to Partners – Form 1065
E. Adjustments to Outside Basis (Ignoring Liabilities)
F. Adjustments to a Partner’s Capital Account
G. Loss Limitations
H. Taking into Account Precontribution Gain/Loss upon the Partnership’s Sale of an Asset
I. Limitation on Special Allocations
J. Self-Employment Taxes
K. Qualified Business Income Deduction
Chapter 7 Impact of Partnership Liabilities on Outside Basis Calculation
A. Recourse Liabilities
B. Nonrecourse Liabilities
Chapter 8 Guaranteed Payments and Other Transactions between a Partner and the Partnership
A. Guaranteed Payments
B. Other Transactions between a Partner and the Partnership
Chapter 9 Distributions from a Partnership
A. Nonliquidating (“Current”) Distributions
1. When the Partnership Distributes Money Only
2. When the Partnership Distributes Money and Other Property
3. Partner’s Tax Basis in the Property Distributed
B. Liquidating Distributions
1. When the Partnership Distributes Money Only
2. When the Partnership Distributes Money and Other Property
3. Partner’s Tax Basis in the Property Distributed
Chapter 10 Sale of a Partnership Interest
A. Determining Amount Realized
B. General Rule
C. Exception for “Hot” Assets
D. Partnership’s Optional Adjustments to Basis in Property
PART 3 C CORPORATION TAXATION
Chapter 11 Formation of the Corporation: Transfer of Property to a Corporation
A. What Is a C Corporation?
B. Terminology: Amount Realized, Gain Realized, Gain Recognized
C. Gain or Loss Recognition by Transferor
1. Property
2. Stock
3. Control
4. Impact of Liabilities
D. A Shareholder’s Initial Tax Basis in the Corporation’s Stock
E. The Corporation’s Gain or Loss Recognized
F. The Corporation’s Initial Tax Basis in its Assets
G. Holding Periods
H. Transfers to Existing Corporations
I. Transfer of Services to a Corporation
Chapter 12 Formation of the Corporation: Other Related Issues
A. Taxable Year
B. Method of Accounting
C. Costs Associated with Forming the Corporation
Chapter 13 Capital Structure of a C Corporation
A. Debt
B. Equity
C. Preferred Stock, Convertible Bonds and Even More Unique Financial Instruments
Chapter 14 Double-Tax Nature of a C Corporation
A. Income Tax Imposed on a C Corporation
B. Character of Income Does Not “Pass-Through”
C. Specific Items of Income, Gain, Expense, or Loss
1. Capital Gains/Losses
2. Dividends Received Deduction
3. Charitable Contributions
4. Net Operating Losses
5. Investor Losses
D. Affiliated Groups
Chapter 15 Distributions from a C Corporation
A. Dividends and Impact of Earnings and Profits (“E&P”)
B. Impact on the Corporation: Distributions of Money
C. Impact on the Corporation: Distributions of Property
1. Gain/Loss Recognized by Corporation
2. Tax Basis of Property to Shareholder
3. Impact on E&P
D. Constructive Dividends
Chapter 16 Stock Redemptions
A. Dividend vs. Sale
B. Section 302
1. Not Essentially Equivalent to a Dividend
2. Substantially Disproportionate Redemption
3. Complete Termination
4. Partial Liquidation
5. Redemption to Pay Death Taxes
C. Family Attribution Rules
Chapter 17 Liquidation of a C Corporation
A. General Rules
B. Parent-Subsidiary Exception
Chapter 18 Overview of Corporate Mergers and Acquisitions
A. Taxable Stock Acquisitions
B. Taxable Asset Acquisitions
C. Tax-Free Reorganizations
PART 4 S CORPORATION TAXATION
Chapter 19 Qualifying for S Corporation Status and Making the S Election
A. What Is an S Corporation?
B. Qualifying for S Corporation Status
1. Number of Shareholders
2. Ineligible Shareholders
3. Nonresident Aliens
4. One Class of Stock
C. Making the S Election
Chapter 20 The Pass-Through Nature of S Corporations: Allocating Income and Loss
A. S Corporations Are Generally Not Subject to Income Tax
B. Separately Stated Items
C. S Corporation Ordinary Business Income/Loss
D. Mechanism for Reporting Income to Shareholders – Form 1120S
E. Adjustments to Shareholder’s Tax Basis
F. Treatment of Losses
G. Possible Entity-Level Income Taxes
H. Fringe Benefits Paid to Shareholder–Employees
I. Qualified Business Income Deduction
Chapter 21 Distributions by an S Corporation and Liquidation of an S Corporation
A. Corporation Has No E&P from C Corporation Years
B. Corporation Has E&P from C Corporation Years
C. Distribution of Appreciated Property
D. Liquidation of an S Corporation
PART 5 STATE AND LOCAL TAXATION
Chapter 22 State and Local Taxation
A. Income Taxes
1. Nexus
2. Uniform Division of Income for Tax Purposes Act
3. Reporting Requirements
B. Taxes Other Than Income Taxes
1. Sales Tax
2. Use Tax
3. Property Tax
4. Other Taxes
PART 6 EXEMPT ENTITIES
Chapter 23 Exempt Entities
A. What Is an Exempt Entity?
B. Qualifying for Exempt Status: Types of Exempt Entities
C. Section 501(c)(3) Organizations
1. What is a “Charitable” Purpose?
2. Applying for Section 501(c)(3) Status – Form 1023
3. Public Charity vs. Private Foundation Status – Why Does It Matter?
i. Automatic “Public Charity” Status
ii. Public Support Test
4. Excess Benefit Transactions and Other Prohibited Transactions
D. Unrelated Business Income Tax
E. Other Issues for Nonprofit Organizations
1. Conflicts of Interest Policy
2. State Fundraising Regulation
3. Annual Reporting Requirements
PART 7 PAYROLL AND EMPLOYEE BENEFITS
Chapter 24 Payroll and Employee Benefits
A. Payroll
B. Employee Benefits
PART 8 INCOME TAXATION OF TRUSTS AND ESTATES
Chapter 25 Income Taxation of Trusts and Estates
A. What is a Trust?
B. What is an Estate?
C. “Income” and “Principal”
D. Classification of Trusts for Income Tax Purposes
1. Simple Trusts
2. Complex Trusts
3. Grantor Trusts
E. Determining Taxable Income
F. Reporting Requirements
Appendix of Forms
Index
Ryan H. Pace, M.Tax, J.D., LL.M., is currently a professor of taxation at Weber State University. He
teaches graduate and undergraduate courses in taxation and business law, including:
- Advanced Corporate Taxation
- Advanced Partnership Taxation
- Mergers, Acquisitions & Consolidations
- Advanced Individual Taxation
- International Taxation
- Tax Research & Communication
- Business Entity Taxation
- Legal Environment of Business
Mr. Pace also serves as the Director of both the Master of Accounting program and the Master of
Taxation program at Weber State. Prior to his teaching career, Mr. Pace was a full-time tax attorney
at large law firms in Arizona and Utah. Mr. Pace graduated from New York University with a Master
of Laws degree in taxation after receiving his Juris Doctor with honors from Washburn University
School of Law. He also received a Master of Taxation degree from Arizona State University and his
Bachelor of Science degree from the University of Utah. He is admitted to practice law before the
United States Supreme Court, The United States Tax Court, and is a member of the Utah State Bar
and State Bar of Arizona (inactive).
Mr. Pace has written several articles in the area of taxation including in the following journals:
- Journal of Legal Tax Research
- Tax Notes
- The Tax Adviser
- Business Entities
- The CPA Journal
In addition to this textbook, Mr. Pace has authored two other textbooks—Business Entity Taxation
and Legal Environment of Business, both published by Kendall Hunt Publishing. Mr. Pace
has also participated in many continuing education programs and academic conferences. He currently
lives in Morgan, Utah, with his wife and three children and enjoys reading and playing
basketball.