Tax Question

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. A will 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. X will take a § 1012 cost basis so that the $50 gain inherent in the land in A’s hands cannot again be taxed. If X exchanges its stock, that stock is property the fair market value of which normally is realized by the recipient under § 1001(b), and X still 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 that A does not recognize the realized gain and X takes 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 somehow A has not “cashed in” because A’s interest in the land continues in the form of A’s 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 firm’s 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