1. Two individuals, A and B want to form a new business venture, invest $5,000 each in it, and raise additional capital of $10 million from either a handful or thousands of investors. Discuss the C Corporation and S Corporation alternatives for taxing the business income that might be earned by such venture. Which of these requires the business entity to pay tax on the income earned by the business? Which of these requires the entity's owners to pay tax on the income earned by the entity? Discuss and consider tax rates, distributions, operating losses and A and B shareholder loans under each alternative.
2. C and D organize a Delaware Corporation for their business, but continue to operate the business under its pre-incorporation name, "C&D Enterprises," continue to use the pre-incorporation bank account, make contracts for the incorporated business in their own names as individuals, and generally ignore the incorporation except for depositing receipts in a corporate bank account and paying themselves "salary" (but with no employment contract or board resolution) and filing a corporate income tax return as a C Corporation. Could the IRS assess A and B individually for tax on the "corporate income"? Should it do so? Discuss and analyze the cases of Moline Properties and Roubik (set forth in Bittker, Chapter 1.05(1)(b) and Chapter 1, footnote 65) as they apply to these facts.
3. It is important to determine whether an interest in a corporation is treated as debt or equity. In the absence of black letter law, the courts and the IRS have set forth various evidentiary factors to be considered when classifying debt versus equity. Discuss the various objective factors to be considered and further discuss the various tax consequences to the holder of debt, the holder of stock and the issuing corporation. For example, dividends versus interest payments, taxation upon sale of debt instrument and sale of stock, worthless securities and applicable bad debt deduction treatments.
4. A corporate distribution is includible in a shareholder's gross income to the extent that it is a "dividend." Please set forth the definition of a dividend and discuss the distribution rules as set forth in Code Section 301 with an example. Contrast the Section 301 distribution rules with the redemption rules under Section 302 and provide an example of a redemption under the 50%/80% test of Section 302(b)(2) setting forth the tax consequences to the shareholder of meeting this test and, in the alternative, failing this test.