Debate the following proposition: All corporate formation transactions should be taxable events.

Expert Solution

Pro

1.A corporate formation is an exchange transaction; therefore, parties to the exchange should
recognize gains and losses.
2. Making a corporate formation a taxable event increases tax revenues.
3. Simplification is achieved by eliminating one of the two options - whether a transaction is
taxable or not. This change will make administration of the tax laws easier.

4. This change eliminates the need for taxpayers to structure transactions to avoid Sec. 351 to
recognize gains and/or losses.

CON (No change should occur to current law):
1. A change in current law would hurt start-up corporations by reducing their capital through
the income tax paid by transferors on an asset transfer.
2. No economic gains or losses are realized. Just a change in the form of ownership (direct vs.
indirect) has occurred. Therefore, it is not appropriate to recognize gains and losses at this
time.
3. With taxation, corporations will have to raise more capital because transferors of noncash
property will have less capital to invest and because money must be diverted to pay taxes.
4. Taxpayers are prevented from recognizing losses under the current system, thereby
increasing revenues to the government

ekkarill92 answered 2 years ago

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