The life cycle of a C corporation: tax-free formation under section 351, the flat 21% rate, special deductions, earnings and profits, dividends and redemptions, liquidations, penalty taxes, controlled groups and Form 1120 compliance. The SEE favors short computations of boot, the dividends-received deduction, the charitable limit and dividend amounts.
Business Entities and Considerations·5 min read·7 sections
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Must-know for the exam
✓Section 351 needs transferors of property to own at least 80% of voting power and 80% of each other class immediately after; service-only contributors do not count (IRC 351(a), 368(c)).
✓In a 351 exchange, gain is recognized up to boot received, and to the extent liabilities assumed exceed the basis of property transferred (IRC 351(b), 357(c)).
✓The dividends-received deduction is 50% (under 20% owned), 65% (20% to under 80%) or 100% (affiliated group) (IRC 243; Pub. 542).
✓Corporate charitable deductions are capped at 10% of taxable income before the charitable deduction and DRD; excess carries forward 5 years; the 1% floor starts in 2026 (IRC 170(b)(2)).
✓Corporate capital losses offset only capital gains, carried back 3 and forward 5 years as short-term (IRC 1211(a), 1212(a)).
✓A distribution is a dividend to the extent of current E&P, then accumulated E&P; then return of basis; then capital gain (IRC 301(c), 316(a)).
✓A redemption is an exchange if substantially disproportionate: under 50% of voting stock after and below 80% of the prior percentage (IRC 302(b)(2)).
✓Distributing appreciated property triggers corporate gain at FMV; losses are not recognized in nonliquidating distributions (IRC 311(a)-(b)).
✓Accumulated earnings tax is 20%, with a $250,000 minimum credit ($150,000 for certain personal service corporations) (IRC 531, 535(c)(2)).
✓Corporate estimated tax is due on the 15th of months 4, 6, 9 and 12 if expected tax is $500 or more (IRC 6655; Pub. 542).
▸On this page · 7 sections
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Traps that cost marks
→Using a 50% control test.
→Using the pre-2018 70% rate.
→Applying individual AGI limits to corporations.
→Applying the individual $3,000 rule to corporations.
→Using the individual January installment.
→Letting large corporations use last year's tax for every installment.
→Using book retained earnings to measure dividends.
→Treating every partial redemption as a dividend.
Why it matters on the exam
A C corporation is a separate taxpayer at a flat 21% rate (IRC 11(b)), and its income is taxed again when distributed. The SEE tests each point where value crosses between the corporation and its shareholders: formation, dividends, redemptions and liquidation. Most questions give a few numbers and ask for gain, a deduction or the dividend portion.
Pub. 542 in the source set is the January 2024 revision; the rules cited here were unchanged for 2025.
Formation under section 351
1
Control test — Property transferors together own 80% of voting power and 80% of other classes right after the exchange.
2
Realized gain — FMV received minus basis of property transferred.
3
Recognized gain — Smaller of realized gain or boot (cash and other property).
4
Liabilities — Not boot, except gain to the extent liabilities exceed total basis (IRC 357(c)).
IRC 351, 357, 358; Pub. 542 (Rev. 01-2024).
•Boot example: equipment with $60,000 basis and $100,000 value for $80,000 of stock and $20,000 cash. Realized gain $40,000, recognized $20,000; stock basis $60,000.
•Liability example: a building with $30,000 basis subject to a $50,000 mortgage the corporation assumes produces $20,000 of gain.
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•Organizational costs: deduct up to $5,000, reduced dollar for dollar above $50,000, and amortize the rest over 180 months. $53,000 of costs from July 1 gives $2,000 + $51,000 / 180 x 6 = $3,700 (IRC 248).
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