From an asset protection perspective, it seems to me that having more than one corporation affords far more protection than just having one. If one corporation is sued and loses, the assets of the other corporation are not exposed unless the second corporation is directly owned by the first. Thus, two corporations provide greater asset protection when assets owned by a non-operating corporation are leased to an operating corporation. 

As for the tax benefits of "upstreaming" corporate profits to a Nevada corporation (where there is no state income tax), I'm not aware of any uniform state laws that would effectively prohibit this. "Upstreaming" is a concept where a Nevada corporation provides administrative services to an affiliated corporation in another state and charges fees to the non Nevada corporation to effectively transfer most of the profits from the non Nevada corporation into the Nevada corporation. 

The multi-state tax formula used by most states is based on tances before adopting any ideas that are discussed in this article.

However, if most of the profits of the corporate group are in the Nevada corporation (where there is no corporate income tax), the taxable income of the other corporations would be lower. Thus, the multi-state formula would be ineffective in preventing a shifting of corporate income to a state with no corporate income tax. 

This is the same strategy that many multi-national corporations have been using with respect to the U.S. corporate income tax. To combat it, the Congress gave the IRS virtual carte blanche authority (with tax code section 482) to reallocate items of income and deductions between controlled taxpayers. According to Commerce Clearing House, "Whether or not the ... businesses are .. organized in the United States ... is irrelevant to the IRS's power to reallocate." The IRS uses this code section to encourage multi-national corporations to enter into transfer pricing agreements with them. Thus, the strategy of diverting profits from a U.S. corporation to a foreign corporation in a low tax or tax free jurisdiction is not effective if the allocation of profits is challenged by the IRS. 

In addition to the problem of income allocation among corporations, the U.S. tax law imposes a current income tax on the shareholders of a controlled foreign corporation (CFC). Generally, that includes all shareholders with more than a 10% share of the corporate stock. However, if no five U.S. shareholders own 50% or more of the foreign corporation, then the corporation is not a CFC. For example, if a foreign corporation has 11 U.S. shareholders with an equal ownership of the stock, then each shareholder only owns 9.09% of the stock and any five shareholders would only own 45.45% of the stock. Thus, this foreign corporation would not be treated as a CFC. Also, where a foreign person owns 50% or more of a foreign corporation, no U.S. shareholder would be subject to current taxation under the CFC rules. Where a foreign corporation is treated as a CFC, the allocation of profits from a U.S. corporation to the foreign corporation would not result in any savings of U.S. corporation income taxes. 

Among the various states in the U.S., some state is likely to pass a law similar to the U.S. laws applicable to income allocation and CFCs. Then it will be up to the U.S. Supreme court to determine how to resolve the issue. Until then, "upstreaming" profits from a state with a state corporate income tax to a corporation in a low tax or zero tax state seems to be workable. It basically has no effect on the total taxable income of all the affiliated corporations, which are basically taxed at the federal level as if they were one company. Caution: To make this work, the Nevada Corporation needs to be a bone fide corporation doing business in Nevada.

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NOTICE: This Information is intended only for educational purposes and may be regarded as controversial by some legal experts. Readers should consult with a qualified  professional who is familiar with their specific financial and tax circumsÜ¥e

About the author:

Vernon Jacobs is a CPA/CLU who works as a tax author and consultant.  He  sponsors and moderates a free discussion group on asset protection and offshore topics.  His email address is vkj@rpifs.com.  He can be reached by phone or fax at (913) 362-9667.

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