Question

A currently conducts a computer software manufacturing business as a sole proprietorship. With the assistance of B, a wealthy investor, A plans to incorporate and then expand the business. A will contribute the assets and liabilities of her proprietorship and B will invest enough cash to give him a 49% interest in the corporation. After numerous appraisals, lengthy negotiations and considerable expense, A and B have agreed that the net worth of A's proprietorship is $510,000, B thus will contribute $490,000 cash for his 49% interest.

To what extent do the following expenses incurred in connection with the incorporation constitute organizational expenditures that are either currently deductible or amortizable under §248.

(a) $3,000 in fees paid by A for appraisals of her proprietorship for purposes of the negotiations with B.

(b) Is there any difference in (a), if the appraisal fees are paid by the corporation?

(c) Legal fees paid by the corporation for the following services:

(i) Drafting the articles of incorporation, by laws and minutes of the first meeting of directors and shareholders.

(ii) Preparation of deeds and bills of sale transferring A's assets to the corporation.

(iii) Application for a permit from the state commissioner of corporations to issue the stock and other legal research relating to exempting the stock from registration under federal securities laws.

(iv) Preparation of a request for a §351 ruling from the Internal Revenue Service.

(v) Drafting a buy-sell agreement providing for the repurchase of shares by the corporation in the event A or B dies or becomes incapacitated. (d) Same as (c), except the legal fees are all paid by A.

(i) Drafting the articles of incorporation, by laws and minutes of the first meeting of directors and shareholders.

(ii) Preparation of deeds and bills of sale transferring A's assets to the corporation.

(iii) Application for a permit from the state commissioner of corporations to issue the stock and other legal research relating to exempting the stock from registration under federal securities laws.

(iv) Preparation of a request for a §351 ruling from the Internal Revenue Service.

(v) Drafting a buy-sell agreement providing for the repurchase of shares by the corporation in the event A or B dies or becomes incapacitated.

Answer 1

Expenses related to incorporation are deductible only which is directly related to the incorporation of business. For current year $5,000 are allowable to deduct qualifying startup cost and balance to the extent up to $50,000 be amortized in over 180 months. If startup cost exceeds $5,0000 than initial deduction of $5,000 would be reduced by such excess amount of $50,00. Below are the answer to the questions:

1. $3,000 in fee paid by A for appraisal of her proprietorship for purpose of the negotiation with B is not deductible nor amortizable as it is not an organizational expenditure related to incorporation of business.
2. No, no any difference whether appraisal fee paid by corporation or not as it not affect and change characteristics of the expenses incurred.
3. Legal fee paid by the corporation for the following services would be either deductible or amortizable:

1. Drafting the article of incorporation by law and minutes of the first meeting of directors and shareholders.
2. Application for a permit from the state commissioner of corporations to issue the stock and other legal research relating to exempting the stock from registration under federal securities law.
3. Preparation of request for a 351 ruling from the Internal Revenue Services.
4. Drafting a buy sell agreement providing for the purchase of share by the corporation in the event A or B dies or become incapacitated. And, however
5. Preparation of deeds and bills of sale transferring A’s assets to the corporation are not qualified as a organizational expenses and would be capitalized.