Tax Factors in Business Decisions

Course Number 1488

Baker Foundation Professor Henry B. Reiling
Fall, 29 Sessions
Exam

Educational Objectives

The student should come away with a considerable amount of substantive knowledge about U.S. income and wealth taxation, including key concepts and the policy considerations inherent in those concepts. One should come to appreciate the reasons for mechanical precision in certain areas and the reasons for slowly evolving ambiguities in other areas. We will use the legal framework encountered at the outset of LCA - Holmes' Prediction Theory of the Law - to forecast likely outcomes and reverse engineer actual decisions to better appreciate the pros and cons of cautious and aggressive tax policies. To properly integrate tax factors with other business factors, information will be provided about selected areas of corporate, securities, property and trust law. For example, it will be important to understand what a trust is and how they are used in one's business and personal life. Several rather sophisticated transactions will be analyzed in order to better understand the integration and weighing of tax considerations with other business considerations. U.S. taxation is the focus of the course, but most of the high level issues that arise in other tax systems and many of the implementing concepts are the same, although differing terms are frequently used. However, time constraints preclude any detailed comparison of U.S. with other tax systems.

Career Focus

Historically, the course has been useful to a diverse group including prospective entrepreneurs, those interested in corporate finance from the corporate, advisor and private equity perspectives, plus those going into wealth management. Others have taken the course because, as informed citizens, they wanted to know something about the important subject of taxation, and they recognized that it is a subject where later self-education is particularly time-consuming and difficult.

Background and Training

The course is targeted at students who have not previously had significant exposure to law in general or taxation in particular. Lawyers, JD/MBAs and those with prior professional work will encounter some duplication. Since there are many electives in the EC, these people should weigh their alternatives very carefully before enrolling.

Content and Organization

The organizing theme of the course is the life cycle of a person and business. An individual begins a business as a sole proprietorship, evolves into a closely held business, then to a publicly traded corporation which encounters many of the events common to such firms. Eventually the person retires and later transfers the residue of his/her accumulated wealth to loved ones and charities.

Since time constitutes a severe constraint, we are able to consider only areas where tax law has a significant impact on decisions and policy. Examples of topics to be considered are as follows:

• The definition of income.
• Tax vs. financial accounting.
• The criteria for deductions.
• Executive compensation policies, including tax sheltered investments and abusive tax shelters.
• The choice of form of business organization, including the use and abuse of the corporate entity.
• Capital structure and the occasionally vague boundary lines between debt and equity.
• Corporate distribution, including cash, property, stock dividends, redemptions and liquidations.
• Corporate combinations, including "tax-free" mergers, stock and asset acquisitions and recapitalizations.
• Wealth transfers, including the use of trusts and transfer taxes, i.e., gift taxes and estate taxes.

Assignments will consist of both law and business cases. There will be no paper or midterm exam.