Tax Question
Please see the question in the attached document.
LESSON 3
ORGANIZATION OF A CORPORATION:
SECTION 351 and RELATED PROBLEMS
3B Boot; Basis; Debt; Midstream Issues
(1)(a) Section 351(a) applies. Upon exchange with X, (1) As amount realized is $100; (2) As gain realized is $60; (3) nothing is recognized, because of 351(a); (4) As basis in stock received is $40 under 358(a)(1); (5) As holding period in the stock tacks under 1223(1); (6) Xs basis in property is $40 under 362(a)(1); (7) Xs holding period for property received tacks under 1223(2); and (8) X would recognize $60 long-term capital gain on a sale of the property. On the separate sale of half the stock, A realizes and recognizes a capital gain of $30 and has a basis of $20 in the remaining 50 shares, which B takes a cost basis of $50 in the purchased shares. B&E 3.10,3.11. If the propertys basis were $200, loss would not be recognized under 351(a) (whether or not boot is received) and the losses will be built into the stock basis as well as the property basis inside the corporation. Then when A sells half the stock to B, A will recoup $50 loss, retaining a $100 basis in the other half of the stock. Thus, there is a full doubling of the $100 loss in the property (although the Service hates this result, since it forms the foundation for many tax shelter transactions). Running head: HOMEWORK QUESTION 1
HOMEWORK QUESTION 4
LESSON 3
ORGANIZATION OF A CORPORATION:
SECTION 351 and RELATED PROBLEMS
3A Requirements of 351 Nonrecognition
GENERAL COMMENTS: This is an introductory lesson intended to teach the basic principles before diving into the mechanics of 351 transactions. Therefore, many of the same issues are covered in Lesson 3B. Note that while the fiscal year, the accounting method, and other tax decisions that must be made upon incorporation are not discussed here, you may cover these topics in the lesson.
(1) The transfer is a sale or disposition under 1001.Awill realize $100 in amount and $50 in gain and will recognize the gain except as otherwise provided in this subtitle, because the general rule of the Code is that transfers for value are subject to tax.Xwill take a 1012 cost basis so that the $50 gain inherent in the land inAs hands cannot again be taxed. IfXexchanges its stock, that stock is property the fair market value of which normally is realized by the recipient under 1001(b), andXstill gets a cost basis of $100 in the land. Section 351 otherwise provides if various conditions to be studied herein are met, with the result thatAdoes not recognize the realized gain andXtakes a carryover basis in the land. Conceptually, this rule seems to have been adopted in part to facilitate the incorporation of assets without recognition of gain (thus, normally benefiting the transferor) or loss (thus, normally benefiting the government), and in recognition of the feeling that somehowAhas not cashed in becauseAs interest in the land continues in the form ofAs stock. Compare 721. B&E 3.01.
ANSWER
Under code 721, the general rule indicates that firms should not recognize gains or losses in carrying out a deal relating to any kind of partnership especially when contributing property to the partnership in order to acquire certain interests in the collaborations. In the scenario, the two firms are not partnering in the land and therefore the gains, $50, will be recognized in filling of taxes. However, the code has a special rule indicating that in a case where the gains are acquired as a result of transferring property to a given partnership, then the actions are considered as an investment decision and the firms will not be required to recognize the gains or losses.
However, the 721 code sets certain limitations to transferring of properties in situations of partnership in that it indicates the gains are not to be recognized if they are included in the gross income of a foreigner who is not a citizen of United states. On the other hand, there are no clear directions given regarding intangible assets such as stocks. Therefore, the transference of property, land, would necessitate the firm to fail to account for the gains while filling taxes if there was a set partnership between A and X. in addition, in case the gains were realized by an individual who is not a United States person, they would not be subject to taxation (Elliott, 2017). However, the transferor has to fill for tax relieve on the losses which are incurred.
Section 721 is different from code 1001 in its directions regarding filing taxes in scenarios of partnerships. Under code 1001, the firms gains would be subject to taxation whereas in section 721 they would be tax free if there was a partnership involved or the gains were included in the gross income of an individual who is not a citizen of America. These two sections, however, refer to other section in regard to intangible assets and only govern the transference of property that can be seen.
References
Elliott, W. D. (2017). The Tax Benefit Rule: A Common Law of Recapture. Sw. LJ, 39, 845. Retrieved from https://www.law.cornell.edu/uscode/text/26/721
