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Corporate Tax Research
Under section b, there would be a gain recognized if the transferor were to make an exchange that involved more than just stock, for example property or money. Such a transaction would be the transferring of property by the transferor in exchange for both stock and cash. In that situation, the gain would be recorded on the excess of the fair market value of property plus the money. That is to say if the transferor were to gain more than what the property was worth, then a gain is recorded for tax purposes.
I would consider this to be a fair transaction. When assets are transferred, they should be transferred at fair value. If they are not transferred at fair value, then this should incur taxation. To avoid taxation, the transfer should be done at fair market value. Under rule 351, a transfer that is done entirely in stock, where the transferee ends up with control over the entity, there would not be any tax accrued, so that is one way that tax can be avoided in future transactions of this nature.
There is a case to be made when there is a loss, and that loss is one that an independent appraiser would deem to be reasonable if the transaction was arms-length, that this should be allowable. It is by the IRS, but not under GAAP. Under GAAP, the net result on that transaction would be to reduce the net income, if...
In theory this reduces tax burden, but the IRS already accepts this. There is definitely a case to be made that GAAP can reflect the lower net income level, since for taxation purposes that lower income level has already been noted and accepted.
2. The assignment of income doctrine in this situation would reflect that this is a cash basis business, and thus viewed as a sole proprietorship. The IRS would in this case look at the dissolution and deem that the value of that flows through to the owner of the company for tax purposes The client has the right to choose his/her/its own method of accounting, but the IRS has methods that it accepts and those that it does not (Schnee, 2007). In this case, the IRS may be pursuing to have its methods utilized. The client will need to demonstrate that the client's own methods have validity, in order to avoid the IRS insisting that the accounting for this transaction be done differently. The client may need to demonstrate that his/her own method is consistent was normal industry practice, and was not chosen for the purpose of reducing tax burden.
A section IRC 338 liquidation has the benefit of the immediate taxation. This can be a benefit if the transaction is done in the same year that the company is incurring the costs associated with reorganizing the company. The…
References
26 CFR 1.1502-21A - Consolidated net operating loss deduction generally applicable for consolidated return years beginning before January 1, 1997. Retrieved May 8, 2016 from https://www.law.cornell.edu/cfr/text/26/1.1502-21A
26 CFR 1.1563-1 - Definition of controlled group of corporations and component members and related concepts. Retrieved May 8, 2016 from https://www.law.cornell.edu/cfr/text/26/1.1563-1
26 U.S. Code § 351 - Transfer to corporation controlled by transferor. Retrieved April 30, 2016 from https://www.law.cornell.edu/uscode/text/26/351
Practical Law (2016). Section 338(h) (10) election. Practical Law. Retrieved April 30, 2016 from http://us.practicallaw.com/9-382-3203
Schnee, E. (2007). Clear reflection of income. Journal of Accountancy. Retrieved April 30, 2016 from http://www.journalofaccountancy.com/issues/2007/feb/clearreflectionofincome.html
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