Tax Corporation Consequences - Assignment Example

Tax Corporation Consequences To: Kelly Jackson tax manager From: Quincy Jefferson Date: 16 January 2019 Subject: Tax consequence The underlying 25 shares are hence considered for the stock purposes of section 351. This is due to the fact that section 351 applies to all the transfer of properties to that of an existing corporation. For all the exchange made to be free of tax, there must be some necessary control for the overall corporation after the exchange is made. Greta is therefore not in control since he only owns 75 shares out of the 125 shares or simply the 60% of the north stock. Therefore the requirements of section 351 are not met at all cost. For one to qualify under the 351 section, Greta can, therefore, ensure the transfer of enough property so that it will be in a position to acquire 200 shares total amount of the 250 shares of the outstanding shares. In this particular situation, Greta would own an exact percentage of 80% of the north stock. Due to this, there is a requirement for a less expensive alternative which is for Greta to transfer all the property which is equal to $10,000 that is considered as a transferor for the main purposes of the control test. A corporation usually recognizes no loss or gain when it ensures the issuance of the stock in exchange for the property or all the services under the 1032 section. This usually applies even when the transaction does not get a qualification under the 351 section. Some sets of circumstances may also require that there be a recognition of the gains when there is a transfer of liabilities. There are some assumptions made on regard to the liabilities All the liabilities are usually assumed by a corporation that is controlled and are also considered to be boot if the main purpose f the portion transfer of some of the liabilities is avoiding tax or in cases where there is no bona fide and the major purpose exists for the transfer. Also, if the total amount of all the transferred liabilities to a corporation which is controlled becomes more then the total amount that is adjusted of all the transferable properties. Then in case that happens, then the excess is treated as a profit or gain that is taxable to the transferor with no regard as to whether he had realized the gain or loss. Then the transferor recognizes gain but the liabilities which are excess fails to be considered to be a boot. This is according to section 357(c) which states avoiding a negative stock basis. If the total basis for corporation adjustment exceeds all the total properties then the total FMV must be deducted by this increase or excess. This rule usually eliminates the double loss for the property with a loss which is built in and transferred to a corporation. A corporation can also avoid the property loss reduction on the basis if there is elect shareholders and also the corporation at large (Rupert, 2018). All the affected shareholders on the stock basis will end up being reduced with the held property by the overall amount by which the corporation would have required so as to reduce on the basis. Also, the holding period of the corporation includes the whole period which the property was finally held by the transferor. If the limitation rule of the loss applies, then the holding period will begin on the very first day after the exchange is made. Since there is no recognition of any gain, then the basis of the transferor carries all over to the corporation. The basis of the corporation is that of $10,000 and the equipment has $25,000. There are some other assumptions of the liabilities which are first considered by determining the realized gains. For the main purpose of calculating the basis of stock of the transferor, then the corporation usually assumes that all the liabilities are treated as the received money and due to this they reduce the stock basis (Rappaport, 2018). For the major purpose of determining the recognition of gain, then the assumption of the corporation of the liabilities in section 351 is therefore not considered to be equivalent to the money receipt under the 357 section. The assumption of the corporation does not usually result in the gain recognition. Due to this, there are some impacts which follow on the liabilities. This is that the assumption of the mortgage of $10,000 of the corporation is taken into consideration by determination of the amount that is realized and the gain is also realized. Tax avoidance All the liabilities which are controlled and assumed by a corporation which is controlled are usually to be considered to be on the basis of money that is received by the transferor. This results in tax avoidance or in cases where the transferred liability has no bona fide on the purpose of a business. All the liabilities that are incurred immediately before any transfer is made usually falls under the anti-avoidance and the measures can either be some of the obligations such as the mortgage. All the trained liabilities are usually treated like a boot. The excess liability is treated in cases where if the total amount of the transferred liabilities exceeds the total property basis adjusted, then the excess liabilities will be taxed as a transferor gain. The recognized gain character usually depends upon the transferred property nature. This is due to the basis of the transferor as stock received. Section 357 usually prevents a negative stock basis. Section 357 states that the liabilities are not booted. It also states that the gain is recognized even where the transferor recognizes no such gains. The cash basis Section 357 usually applies to the taxpayers' cash basis. The term liability does not usually include any single amount that would result in an increase to the deduction when it is paid off (Asali, 2018). For instance the accounts payable for a taxpayer on a cash basis. If section 351 of the exchange is termed to be completely nontaxable, then no depreciation is usually recaptured. This is in situations where the transfer is partially taxable this is due to the fact that the transferor usually recognizes some of the recapture depreciation. The obligations of debt There are deductible business bad debts since they are treated as ordinary losses with no limitation when they become partially worthless. The non-business bad debts are also deductible as those of short terms loss of capital when they are worthless which is found under section 166. Also, a loss which is sustained by a shareholder who guarantees a loan that is from a third party is usually treated as a noon- business bad debt. References Asali, L. J., Howlett, A. L., Zhang, K. H., & Zimmerman, D. W. (2018). IRS Expands Scope of Private Letter Ruling Program for Spin-offs. Journal of Taxation of Investments, 35(2). Rappaport, M. E. (2018). Analyzing Fill-Up Allocations of Boot: The Implications Might Surprise You. Journal of Taxation of Investments, 35(3). Rupert, T.J., & Anderson, K., (2019). Pearson's federal taxation 2019 corporations, partnerships, estates & trusts (32th ed.). New York, NY: Pearson. Read More