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Partnership for tax purposes

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Introduction

Partnership business model is often a tricky business venture when it comes to paying taxes. For instance, a general partnership is often seen as a ploy to evade taxes because the partners share unlimited personal liability for partnership debts. A general partnership is formed automatically by law whenever two people like John and Jill agree to do business together and share losses and profits. These types of partnership are often not taxed directly by the Internal Revenue Service. The formation of Plummet Company by John and Jill to partnership makes the company eligible for nonpayment of taxes. The IRS allows these companies to feel taxes as individuals and not company because the law does not permit them to pay taxes. The essay will discuss the formation of Plummet Company by Jill and John. Determine if the partnership is tax-free, compute the basis of units received as well as preparation of tax balance sheet for the Plummet company.

Partnership for tax purposes

The formation of Plummet Company can either be a general or limited partnership. However, it is not stated when the partnership will be dissolved, and hence, the company would be a general partnership (Daskal, 2008). Under section 351 of the tax laws, it is clear that the partnership would not pay the taxes since John and Jill would transfer 100% of the stock to Plummet company for the exchange of 100% of the Plummet Company stock. Under the general tax principles, if John and Jill transfer their appreciated property to Plummet Company for any reason, the transfer can trigger a gain and loss unless it is otherwise excluded by the statutory provision (Daskal, 2008). The section 351 allows the taxpayer to contribute to the appreciated property to a corporation in exchange for the corporation’s stock without recognizing gain.

Furthermore, John and Jill is the primary stakeholder who holds more than 100% between both of them. In this case, between John and Jill, they have more than 100% of the Plummet Company’s stock. Hence, it means that John or Jill as a single person contributes an appreciated property to the Plummet Company in exchange for 50% of the stock. Since all of them provide a net worth of 100% of the company’s stock. Thus, John and Jill, under section 351, on combined basis control the Plummet Company after the transfer (Daskal, 2008).

John and Jill are the main transferor under the section 351 and therefore, they will be required by the law to recognize gain the transfer of the appreciated property to the company. The inclusion of the appreciated property makes them liable to pay taxes (Internal Revenue Service, 2013). If the transfer of liability together with property to the Plummet Company, under section 357 (c), John and Jill should recognize the gain to the extent of the excess. However, in this case, John and Jill are not eligible for paying taxes since it is a general partnership. John and Jill must recognize all the units transferred to the company (Internal Revenue Service, 2013).

Under section 351 (a) of the Internal Revenue Code, John and Jill are not allowed to pay taxes. It is because John and Jill would be the controller of the Plummet Company. The code under the code of general rule section 351(a), no gain or loss as stated earlier, John and Jill should recognize if the property is transferred to the Plummet Company and they would be in control of the corporation (Internal Revenue Service, 2013). The amount gained or lost should also be recognized under section 351 (b) is referred to as “boot within gain” rule. Thus, John and Jill should recognize gains and losses to the extent of the lesser cash received and the amount gained.

Computation of Partners’ basis in the Units received in the exchange

No Figures provided.

Tax balance sheet for Plummet Company

References

Daskal, M. (2008). Limited Liability Companies (LLCs). . Agency Sales,, 38(1), 42-43,45-46.

Internal Revenue Service. (2013). Publication 541 (2013), Partnerships. Washington, DC: U.S. Retrieved 2016, from Government Printing Office. : http://www.irs.gov/publications/index.html