South-Western Federal Taxation, 2009 Edition

Comprehensive Volume
ISBN: 0324660529

Chapter 17
Corporations: Introduction and Operating Rules
Affiliated group. A parent-subsidiary group of corporations that is eligible to elect to file on a consolidated
basis. Eighty percent ownership of the voting power and value of all of the corporations must be achieved on
every day of the tax year, and an identifiable parent corporation must exist (i.e., it must own at least 80 percent
of another group member without applying attribution rules).
C corporation. A separate taxable entity, subject to the rules of Subchapter C of the Code. This business form
may create a double taxation effect relative to its shareholders. The entity is subject to the regular corporate tax
and a number of penalty taxes at the Federal level.
Check-the-box regulation. A business entity can elect to be taxed as a partnership, S corporation, or C
corporation by indicating its preference on the tax return. Legal structure and operations are irrelevant in this
regard. Thus, by using the check-the-box rules prudently, an entity can select the most attractive tax results
offered by the Code, without being bound by legal forms. Not available if the entity is incorporated under state
law.
Controlled group. A controlled group of corporations is required to share the lower-level corporate tax rates
and various other tax benefits among the members of the group. A controlled group may be either a brothersister or a parent-subsidiary group.
Dividends received deduction. A deduction allowed a shareholder that is a corporation for dividends received
from a domestic corporation. The deduction usually is 70 percent of the dividends received, but it could be 80 or
100 percent depending upon the ownership percentage held by the recipient corporation. 243246.
Domestic production activities deduction (DPAD). See production activities deduction (PAD).
FAS 109.Guidance issued by the Financial Accounting Standards Board concerning how the tax expense of an
enterprise is to be reported in the balance sheet, income statement, and associated footnotes. Permanent booktax differences affect the enterprise's effective tax rate. Temporary book-tax differences create a deferred tax
asset or a deferred tax liability on the balance sheet.
FIN 48.An interpretation of FAS 109 relating to when a tax benefit should be reported in an enterprise's
financial statements. A tax benefit should be recorded for book purposes only if it is more likely than not that
the taxpayer's filing position will be sustained after an audit, administrative appeal, and the highest applicable
judicial review.
Limited liability company (LLC). A form of entity allowed by all of the states. The entity is taxed as a
partnership in which all members or owners of the LLC are treated much like limited partners. There are no
restrictions on ownership, all members may participate in management, and none has personal liability for the
entitys debts.
Limited partnership. A partnership in which some of the partners are limited partners. At least one of the
partners in a limited partnership must be a general partner.

Organizational expenditures. Items incurred early in the life of a corporate entity that are eligible for a $5,000
limited expensing (subject to phaseout) and an amortization of the balance over 180 months or more.
Organizational expenditures exclude those incurred to obtain capital (underwriting fees) or assets (subject to
cost recovery). Typically, eligible expenditures include legal and accounting fees and state incorporation
payments. Such items must be incurred by the end of the entitys first tax year. 248.
Parent-subsidiary controlled group. A controlled or affiliated group of corporations, where at least one
corporation is at least 80 percent owned by one or more of the others. The affiliated group definition is more
difficult to meet.
Passive loss. Any loss from (1) activities in which the taxpayer does not materially participate or (2) rental
activities (subject to certain exceptions). Net passive losses cannot be used to offset income from nonpassive
sources. Rather, they are suspended until the taxpayer either generates net passive income (and a deduction of
such losses is allowed) or disposes of the underlying property (at which time the loss deductions are allowed in
full). One relief provision allows landlords who actively participate in the rental activities to deduct up to
$25,000 of passive losses annually. However, a phaseout of the $25,000 amount commences when the
landlords AGI exceeds $100,000. Another relief provision applies for material participation in a real estate
trade or business.
Personal service corporation (PSC). A corporation whose principal activity is the performance of personal
services (e.g., health, law, engineering, architecture, accounting, actuarial science, performing arts, or
consulting) and where such services are substantially performed by the employee-owners. The 35 percent
statutory income tax rate applies to PSCs.
Regular corporation. See C corporation
Related corporation. See controlled group.
S corporation. The designation for a small business corporation. See also Subchapter S.
Schedule M1. On the Form 1120, a reconciliation of book net income with Federal taxable income. Accounts
for timing and permanent differences in the two computations, such as depreciation differences, exempt income,
and nondeductible items. On Forms 1120S and 1065, the Schedule M1 reconciles book income with the
owners aggregate ordinary taxable income.
Schedule M3. An expanded reconciliation of book net income with Federal taxable income (see Schedule M
1). Applies to corporations with total assets of $10 million or more.