Question

Sam has a sole proprietorship and wants to transfer his asset of (fair market value $1.8 million, adjusted basis $ 300,000) with the associated debt ($500,000) to a new corporation. What is the tax consequences of these transactions? Must include your sources (Example, IRC)

Answer 1

Given Sam was a sole proprietor and want to transfer his asset to a new corporation.

The fair market value of asset is $1.8 million on adjusted basis $300000

associated debt is $500000

The tax consequences of these transactions is as follows:

to answer this question, one must be aware of two internal revenue codes (IRC) sections. they are

• section 362(e)(2)(A)
• section 362(e)(2)(C)

if we decide to contribute, sell, lease or transfer the capital assets to the corporation, those assets become the property of the corporation. Under applying IRC rues, we must set a fair market value on the capital asset when we tranfer them to the corporation so the basis for the asset and any stock received in exchange can be used for tax purposes.

The above 2 sections is taken as reference only when fair market value is less than its adjusted basis at the time of the transfer.

This IRC rules allows you and the corporation the option of choosing one of these IRC sections (not both) to determine which values to apply to the property and the stock being exchanged.

The reason for the tax rules regarding property transferred with a lower fair market value than its adjusted basis is to limit the amount of loss that can be deducted when such property is disposed off.