Full Pages 100 Original Work: An Introduction To Tax Treatie

2 Full Pages 100 Original Workan Introduction To The Tax Treatment O

2 FULL PAGES, 100% ORIGINAL WORK An Introduction to the Tax Treatment of Various Business Entities Incorporation of Plummet Company Plummet Company is created with the following asset contributions. John and Jill are equal owners in this new business venture. Shareholder Assets Basis Fair Market Value John Cash Services $100,000 50,000 $100,000 50,000 Jill Land 40,000 The land is subject to a liability in the amount of $50,000 that the Company assumes. Questions: Does the above transaction qualify as a Sec. 351 exchange? Show your computations. Compute shareholder basis in the shares received in the exchange. Prepare a tax balance sheet for Plummet Company. Are there any benefits to the owners and company if this transaction is considered to fall under Sec. 351? SLP Assignment Expectations Answer all questions and support your answers with computations. The discussion and analysis should be 2-3 pages long with references in APA format.

Paper For Above instruction

The introduction of the tax treatment of business entities is paramount in understanding how various organizational structures influence taxation. Among these, the incorporation process and the associated tax implications, particularly under Internal Revenue Code (IRC) Section 351, are critical for entrepreneurs to comprehend. Section 351 provides significant tax benefits, such as the deferral of gain or loss recognition when property is transferred to a corporation solely in exchange for its stock, provided certain requirements are met. This paper examines the application of Section 351 in the context of the formation of Plummet Company, analyzing whether the transaction qualifies as a Section 351 exchange, calculating shareholder bases, constructing a tax balance sheet for the company, and evaluating the potential benefits for the owners and the corporation under this section.

Plummet Company’s formation involves contributions from two shareholders, John and Jill, each contributing assets of different types and values. John contributes cash and services, while Jill contributes land encumbered with a liability that the company assumes. To determine if this transaction qualifies under IRC Section 351, it is essential to assess whether the shareholders receive stock solely in exchange for assets transferred, with control of the corporation immediately after the exchange. According to the law, for a transaction to qualify, the shareholders must collectively own at least 80% of the corporation’s stock immediately after the transfer, and the transfer must be solely in exchange for stock.

Analysis of Qualification Under Section 351

In this case, John and Jill are the only shareholders, owning equal parts of the corporation. Both contribute assets directly or indirectly in exchange for stock. John’s contribution of cash and services, and Jill’s transfer of land subject to liabilities, satisfy the requirement that assets are exchanged for stock. The fact that Jill’s land is subject to a $50,000 liability, which the company assumes, complicates the valuation but does not negate qualification as long as the transferor’s basis and the fair market value are properly accounted for. Since the shareholders acquire at least 80% of the stock immediately after the transfer, and the exchange involves only property for stock, the transaction generally qualifies as a Section 351 exchange.

Computations of Shareholder Bases

Calculating the basis of shares received requires evaluating each contribution separately. For John, who contributes cash and services, the basis of his stock is the sum of his basis in the property transferred, which in the case of services, is generally the fair market value (FMV) of the services, assuming the company does not recognize income at the time of receipt. John’s basis in cash is $100,000, and for services, the FMV is $50,000; thus, total basis equates to $150,000. However, since services are not capital assets, their transfer usually results in ordinary income recognition, but for the purpose of basis calculations, the focus is on the FMV of the services used to value the stock.

Jill’s basis in the land she contributes is its basis of $40,000. The land is taken subject to a liability of $50,000, which the corporation assumes. According to the rules, when property is transferred subject to liability, the liability is considered a part of the transferred property’s value, and the basis in the stock is adjusted accordingly. Therefore, Jill’s transaction effectively involves a transfer of land with a basis of $40,000, but with liabilities of $50,000 assumed, which needs to be considered in the overall valuation and basis calculations.

Tax Balance Sheet for Plummet Company

Creating a tax balance sheet involves listing the company’s assets and liabilities at their fair market values, adjusted for the assumed liabilities. Assets contributed include cash of $100,000 and land with a fair market value of $40,000, totaling $140,000. The liability assumed by the company is $50,000, which reduces the net value of assets available to the company. Therefore, the balance sheet reflects assets of $140,000 offset by liabilities of $50,000, resulting in net assets of $90,000. Equity accounts are established based on the contributions and their respective basis calculations.

Benefits of Section 351 Classification

Classifying this transaction as a Section 351 exchange confers several advantages for the owners and the company. Primarily, it allows the transfer of property to occur without immediate recognition of gain or loss, deferring taxation until a subsequent disposition of stock. This deferral enables the company to preserve capital and reinvest in operational activities. Additionally, the owners benefit from the stepped-up or stepped-down basis in their stock, which impacts future gain or loss calculations. Moreover, the company’s ability to assume liabilities during formation can facilitate growth and investment, all while enjoying favorable tax treatment under the provisions of IRC Section 351. This facilitates a more efficient formation process and can promote entrepreneurship by reducing immediate tax burdens.

Conclusion

The formation of Plummet Company through the transfer of assets by John and Jill qualifies as a Section 351 exchange, given the ownership structure, asset contributions, and immediate control. The computed basis in shares reflects the attributed values of contributed property, adjusted for liabilities assumed and service valuation where applicable. The company’s tax balance sheet illustrates the net assets after liabilities and provides insights into the financial standing at formation. Lastly, electing for Section 351 treatment offers substantial tax deferral benefits, supporting entrepreneurial growth and organizational efficiency. Understanding these tax implications is essential for effective business planning and compliance, highlighting the importance of strategic structuring in business formation.

References

• Chambers, J. M. (2020). Federal Income Taxation of Business Entities. Routledge.
• Erickson, S., & Lee, J. (2019). Tax Planning for Business Structures. Journal of Taxation, 130(4), 45-59.
• Internal Revenue Service. (2022). Publication 542: Corporations.
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• Smith, A. (2018). Introduction to Corporate Taxation. Oxford University Press.
• U.S. Government Publishing Office. (2023). Internal Revenue Code Sections 351 and 357.
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