SMALL C & S CORPORATIONS (T/G 205) covers the characteristics of a bona fide corporation with annual gross receipts under $5,000,000; accounting consistency and methods; the omens of undercapitalization; importance of balance sheets and C vs. S treatment of retained earnings; those expenditures which are expressly not deductible; and establishing the "tax basis" in each share of stock held. Also covered:

• Election and termination of S corporation status
• The 4 "Dexsil tests" regarding officer compensation
• Designation of 1st $1,000,000 as "Sec. 1244 stock"
• The 100% penalty for misuse of payroll withholdings
• Foreign accounts questions & PHC status
• Issuance goal (10 times assets) when "going public"

Small C & S Corporations
Book: 205

Table of Content

1.  CORPORATION BONA FIDES                      1-1
        
    The Liability Limitation Issue              1-2
    Articles of Incorporation                   1-3
    Why Incorporate in Delaware?                1-6
    Adoption of Bylaws                          1-7
    Shares & Share Certificates                 1-8
    Shareholder Meetings & Minutes              1-12
    What Constitutes “True” Minutes             1-13
    Dilemma When No Minutes                     1-14
    Inquiries the IRS Makes 
    1-17                    
2.  ELECTION OF S STATUS                        2-1

    Subchapter S Overview                       2-2
    How S Status Defined                        2-4
    Counting the Shareholders                   2-6
    Unanimous Consent Required                  2-8
    Timing of the Election                      2-9
    Elect on Form 2553                          2-10
    Revocation by Majority Vote                 2-13
    Reinstatement after Termination             2-15

3.  FORMS 1120 AND 1120S                        3-1

    Introductory Differences                    3-2
    Income & Deduction Blocks                   3-4
    Pages 2 and 3 Compared                      3-5
    Capital Gains & Losses                      3-9
    How Tax Items Compare                       3-11
    How Tax Rates Compare                       3-12
    Schedule K-1 (Form 1120S)                   3-14
    Schedule L:  Balance Sheet                  3-18

4.  COMPENSATION OF OFFICERS                    4-1

    Business Necessity Essential                4-2
    Active Business Requirement                 4-5
    What is a “Reasonable” Salary?              4-6
    General Factors for Decisions               4-8
    Special Factors for Scrutiny                4-10
    The “Dexsil” Appeals Case                   4-12
    The “Leonard Pipeline” Case                 4-14
    Treatment of Excess Compensation            4-16

5.  WHEN UNDERCAPITALIZED                       5-1

    What is Expected of You                     5-2
    Stockholder Reluctance                      5-4
    Below-Market Loans                          5-5
    Section 1244 Stock                          5-8
    Conditions for 1244 Stock                   5-9
    Payroll Withholdings & Taxes                5-13
    The 100% Trust Fund Penalty                 5-14
    Responsible Person Defined                  5-16
    Scrutiny of Employee Benefits               5-18
    Immediate Assessment Authority              5-19

6.  METHODS OF ACCOUNTING                       6-1

    Selection of Tax Year                       6-2
    Change of Tax Year                          6-4
    Dominance of Section 446                    6-5
    Must Clearly Reflect Income                 6-7
    Cash vs. Accrual Methods                    6-9
    Inventory Capitalization                    6-10
    Valuing Ending Inventory                    6-12

7.  BALANCE SHEET BALANCING                     7-1

    Clarification of Bad Debts                  7-2
    Asset Listing Review                        7-3
    Now, the Liabilities Side                   7-6
    Stockholders’ Equity                        7-7
    Accumulated Earnings                        7-9
    Treasury Stock Explained                    7-11
    Schedule M-1: Reconciliations               7-13
    Schedule M-2: C Corporations                7-15
    Schedule M-2: S Corporations                7-17        

8.  CAUTIONS RE PHC STATUS                      8-1

    S Corporations Unaffected                   8-2
    Avoid Confusion with PSC                    8-3
    Overview of PHC Statutes                    8-5
    PHC Income Defined                          8-6
    Adjusted Ordinary Gross Income              8-7
    The 60% PHC Income “Test”                   8-9
    The 50% Ownership Test                      8-11
    Constructive Ownership of Stock             8-12
    Overview of Schedule PH                     8-13
    Computing Undistributed PHC Income          8-16
    Cheaper to Distribute                       8-17

9.  FOREIGN ACTIVITY QUESTIONS                  9-1

    The Most Common Question                    9-2
    Form TD F 90-22.1                           9-4
    The Next Common Question                    9-7
    Commentary on Foreign Trusts                9-8
    C Corporations: Question A                  9-11
    If “Yes” to Question A: Form 5471           9-13
    C Corporations: Question B                  9-14
    Concluding Commentary                       9-16

10. ITEMS NOT DEDUCTIBLE                        10-1
    
    Starting at the Top                         10-2
    When Business Purpose Not Shown             10-3
    Life Insurance Premiums                     10-5
    Using the Corporation as Intermediary       10-7
    Company Sponsored Entertainment, Etc.       10-8
    Example: Clear Business Purpose             10-11
    Executive Travel Expenses                   10-12
    Luxury Autos, Boats, Planes                 10-15
    Personal Use Affidavits                     10-17

11. BASIS IN STOCK HELD                         11-1

    Shareholders Ledger Not Relevant            11-2
    Contributions to Capital                    11-3
    When Services Exchanged                     11-6
    Founder Shares:  Basis In                   11-8
    Additional Stock for Cash                   11-10
    Taxable Stock Dividends                     11-11
    Nontaxable Distributions Reduce Basis       11-13
    Basis in Gifted Stock                       11-15
    Basis in Inherited Stock                    11-17
    
12. SELL, MERGE, OR GO PUBLIC                   12-1
    
    Preliminary Decisions to Make               12-2
    Instructions to Committee                   12-4
    Effect of Sale on Shareholders              12-5
    Effect of Sale on Corporation               12-7
    Treatment as “Sale of Assets”               12-9
    Stock-for-Stock Exchanges                   12-11
    Types of Reorganizations                    12-12
    The Merger Process Exemplified              12-14
    Precautions When “Going Public”             12-16
    Tax Law Statement                           12-18
    Issuance Goal:  10 Times Assets             12-19