Chapter 04 Homework Questions

1) Section 351: Since Individual will be in control (80%+ ownership) of future corporation, he will not incur a taxable event

Bingo Corporation incurred a net operating loss in 2012. If it carries the loss back, it must first carry the loss back to offset its 2011 taxable income and then it carries any remaining loss back to offset its 2010 taxable income.
 False

Section 362(e)(2) states that if the transferors adjusted basis of the property transferred is greater than the fair market value right after the transaction, then the basis of the property transferred should obtain a basis that does not exceed the fair market value right after the transfer. In any case, the transferor has the option to select an irrevocable election that allows them to apply the reduction to their stock basis received rather than to the transferee’s basis in the property received. This statute eliminates the transferee’s built-in loss and it does not allow the opportunity that the taxpayer and the corporation can undertake a transaction that results in a “duplicated loss.” Federal Tax Reg. §1.362-4 along with Section 362(e)(2) were established “to prevent the duplication of new loss in transfers undertaken under Section 351.” Subsequently, Congress also included Section 362(e)(2)(C) which permits the transferor and the corporation to make the election and reduce the tax basis rather than to the property received by the corporation. If Mrs. Zhee accepts this election, then the corporation would take the basis of $60,000 for the machine and Mrs. Zhee would then reduce her stock to the fair market value of $40,000. Nonetheless, Mrs. Zhee is not allowed to reduce her stock basis more than the current fair market value. If Mrs. Zhee and the corporation decide not to make the election, then the transaction will not be made pursuant to 362(e)(2) and 362(e)(2)(c). Additionally, the difference will not be recognized by both the transferor and transferee as provided under the duplication loss

The "transfer pricing" provision attempts to identify the taxable income had the transaction been between unrelated parties dealing at arm's length.

Section 351(c)(2) allows shareholders to dispose of all or part of the transfers stock without preventing the corporations Section 351 transaction from satisfying the “ control immediate after” requirement (4). Section 351(d) states that there are times when services, certain indebtedness, and accrued interest not treated as property as per James v. Commissioner, 53 T.C. 63 (1969); cf. Hospital Corporation of America v. Commissioner, 81 T.C. 520

True/False Indicate whether the statement is true or false. ____ 1. Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000. Even though § 351 applies, Tina may recognize her realized loss of $10,000. 2. To determine E & P, some (but not all) previously excluded income items are added back to taxable income. 3. Under certain circumstances, a distribution can generate (or add to) a deficit in E & P.

3. The requisites to vest were fulfilled. Revenue of $2 million, $5 million and $4 million was collected in

Individual A contributes cash of $50,000 and receives 10 shares of stock worth $50,000 in exchange for the cash contribution.

Section 743(a) disrupts Subchapter K’s goal of basis uniformity by leaving the basis in partnership assets unaffected by transfer of a partnership interest. The undisturbed basis most likely leaves the transferee partner with basis different from the seller and from that interest’s share of the partnership’s inside basis.

As we learned last week in Chapter 14, a taxpayer does not recognize a gain or loss on the transfer of property to a corporation as long as the transferors have control* of the corporation immediately following the exchange (IRC 351). The taxpayer can transfer virtually any type of property, including cash, inventory, intellectual property (such as a patent), or a building. It’s important, upon corporate formation, that accurate records are kept on what property was used to form the corporation and what its value is. This information is used to establish the shareholder’s basis in the stock as well as the corporation’s basis in the assets contributed, which has particular importance in a corporate liquidation. In theory, the value of the assets contributed will be equal to the value of the corporate stock received;

In Rel. Rul. 2003-51, there provides a successful example of Section 351 exchange that the transferor transfers property to a corporation in exchange stock and immediately after the transferor meets the requirement of in control of the corporation and involves the issue of the “pursuant to a binding agreement” with a third party before the exchange. Corporation W engages in businesses A, B, C. Another unrelated Corporation to W that is called Corporation X also engages in business A through X’s wholly owned domestic subsidiary, Y. At the same time, W and X wants to consolidated their business and form a new corporation from their operations in business A. In order to reach this goal and pursuant to a prearranged binding agreement, W then forms a Corporation called Z and transfers all of the assets from business A to Z to exchange Z’s stock that is their first transfer. Immediately thereafter, W transfers all of its Z stock to Y in order to exchange Y’s stock that is their second transfer. X then transfers $30x to Y to meet business A’s capital needs simultaneously that is the third transfer. After that, Y transfers the $30x from X and its assets from business A to Z that is the fourth transfer. W and X can own 40 percent and 60 percent outstanding stocks in Y after second and third transfers. Each of the first transfer, the combined second and third transfers and the fourth transfer qualifies to be Section 351 transaction. In the “Analysis” of Rel.

After that the second requirement as mentioned earlier in the general rule for section 351 is we must make sure that the exchange is only for stocks. These stocks include common or non-qualified preferred. A strong U.S. Federal court case was Minnesota Tea Company .v, Helvering. This case mentioned in the citation 4 was an argument weather cash received by a corporation in regards to a reorganization was subject to taxable gains on distribution. As a ruling the court stated "(1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but". By the transferor receiving stock this better guarantees that the person transferring

Internal Revenue Code (IRC) Section 368 contains the provisions for tax free reorganizations which defer the gain recognition in specified corporate acquisitions. Partnerships generally do not fall under these provisions. Generally, only the first three types or a variation of them are used in most acquisitions. Reorganizations are very complex with detailed rules to adhere to that ensures their tax free treatment. The items below address some not all of the basics for certain reorganizations.

Under section 6, a resident of the country is taxable for his incomes from all sources from all over the world.

Involves in business ac¬tiv¬i¬ties from which it generate revenues and incur expenses (including revenues and expenses relating to trans¬ac¬tions with other com¬po¬nents of the same entity).