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2-1 Discussion: Forming a Corporation Discussion Topic
Starts Aug 17, 2019 11:59 PM
For this discussion, consider how the provisions of IRC Section 351 apply to a scenario, and select a strategy that addresses taxpayer concerns while yielding the best financial results for the taxpayer.
A thorough understanding of all the tax regulations that apply when forming a corporation can impact the financial benefits derived from such a move. Section 351 determines the tax consequences of the transfer of property to a corporation. Its impact on the individual and entity can differ depending on whether Section 351 applies to a given situation.
Referring to the textbook reading, select the best option for the taxpayer in the following scenario, and justify your answer.
Amber, the sole property transferor, must acquire at least 80% of the stock issued by the new corporation in order for the transaction to qualify for tax-deferred treatment under § 351. Otherwise, she will recognize $325,000 of taxable gain as a result of the transfer. Even if the requirements of § 351 are met, any corporate debt issued by the corporation will be treated as boot and will result in at least some gain recognition to Amber. Therefore, she must evaluate the cost of recognizing gain now versus the benefit of the corporation obtaining an interest deduction later. Describe which of the following strategies you would recommend to Amber, and justify your answer:
- Have Amber transfer some property along with the services rendered to the corporation.
- Instead of having the corporation issue debt on formation, Amber should withhold certain assets. For example, she could withhold the building and let the corporation lease it.
- Have Amber not transfer the cash basis receivables to the corporation.
- Transfer to the corporation any accounts payable outstanding held by Amber’s sole proprietorship.