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This article is based on a talk given by Mr. Jensen at the Texas CPA Tax Institute. Multiple Problems Multiple Corporations of The Revenue Act of 1964 provided important new rules for the taxation of the income of related corporations. These provisions resulted from the Treasury Department's desire to tax related corporations as though they were one economic unit. As a result of the corporate rate reduction, involving a change in the surtax rate from 22% to 30%, the maximum automatic tax saving for each separate surtax exemption would have increased from $5,500 to $7,000 for 1964 and to $6,500 for 1965. The changes made by Congress with respect to related corporations prevented this increase in the potential tax benefit from being available to multiple corporations and tightened the provisions generally. The principal changes relating to multiple corporations made by the Revenue Act of 1964 may be summarized as follows: 1. The 2% penalty for filing consolidated returns was eliminated. 2. Members of an affiliated group (parent and subsidiaries) not filing consolidated returns may receive intercorporate dividends tax free under certain circumstances. 3. Members of a controlled group of corporations are limited to one surtax exemption unless they elect to utilize multiple surtax exemptions and pay a penalty tax. 4. Section 1551, which disallows the surtax exemption where one corporation has transferred property to a controlled corporation, was broadened and tightened up. by Wallace M. Jensen Limitations on Multiple Corporations Under Prior Law: Prior to 1964 the statutory provisions available to the Government as a weapon against the use of multiple corporate surtax exemptions may be summarized as follows: 1. Since 1943, Section 269 has covered the acquisition of direct or indirect control of a corporation where the principal purpose is avoidance of tax by securing the benefit of a multiple exemption. Although it did not seem to be clearly intended when the statute was enacted, the Treasury has been supported in applying Section 269 to the division of a corporation into two or more corporations for the purpose of obtaining additional surtax exemptions.1 2. Since 1951, Section 1551 has specifically denied the surtax exemption to the transferee corporation if property, other than money, was transferred by a corporation to a controlled corporation unless the securing of the exemption was not a major purpose of the transfer. 3. Section 482 gives the Commissioner power to allocate deductions, credits, or allowances between affiliated corporations and has been used by the Internal Revenue Service to reallocate income between controlled corporations. In applying these sections, there has been considerable difficulty in distinguishing between bona fide business purpose and tax avoidance motive and, as a result, there has been much controversy and litigation in this area. 22 THE QUARTERLY
Object Description
Title |
Multiple problems of multiple corporations |
Author |
Jensen, Wallace M. |
Subject |
Consolidation and merger of corporations -- Taxation Business enterprises -- Taxation |
Personal Name |
Jensen, Wallace M. |
Portrait |
Jensen, Wallace M. |
Office/Department |
Touche, Ross, Bailey & Smart. Detroit Office |
Citation |
Quarterly, Vol. 10, no. 4 (1964, December), p. 22-27 |
Date-Issued | 1964 |
Source | Originally published by: Touche, Ross, Bailey & Smart |
Rights | Copyright and permission to republish held by: Deloitte |
Type | Text |
Format | PDF image with OCR under text, scanned at 400dpi |
Collection | Deloitte Digital Collection |
Digital Publisher | University of Mississippi. Digital Accounting Collection |
Date-Digitally Created | 2009 |
Language | eng |
Identifier | Quarterly_1964_December-p22-27 |