2-1 Discussion: Forming a CorporationDiscussion Topic

Starts Aug 17, 2019 11:59 PM

Forthis discussion, consider how the provisions of IRC Section 351 applyto a scenario, and select a strategy that addresses taxpayer concernswhile yielding the best financial results for the taxpayer.

Athorough understanding of all the tax regulations that apply whenforming a corporation can impact the financial benefits derived fromsuch a move. Section 351 determines the tax consequences of the transferof property to a corporation. Its impact on the individual and entitycan differ depending on whether Section 351 applies to a givensituation.

Referring to the textbook reading, select the best option for the taxpayer in the following scenario, and justify your answer.

Scenario
Amber,the sole property transferor, must acquire at least 80% of the stockissued by the new corporation in order for the transaction to qualifyfor tax-deferred treatment under § 351. Otherwise, she will recognize$325,000 of taxable gain as a result of the transfer. Even if therequirements of § 351 are met, any corporate debt issued by thecorporation will be treated as boot and will result in at least somegain recognition to Amber. Therefore, she must evaluate the cost ofrecognizing gain now versus the benefit of the corporation obtaining aninterest deduction later. Describe which of the following strategies youwould recommend to Amber, and justify your answer:

1. Have Amber transfer some property along with the services rendered to the corporation.
2. Instead of having the corporation issue debt on formation, Ambershould withhold certain assets. For example, she could withhold thebuilding and let the corporation lease it.
3. Have Amber not transfer the cash basis receivables to the corporation.
4. Transfer to the corporation any accounts payable outstanding held by Amber’s sole proprietorship.