Question

In: Accounting

Background: You are a senior manager at a large public accounting firm located in Reno, Nevada.   ...

Background:

You are a senior manager at a large public accounting firm located in Reno, Nevada.    One of your clients, Joel Nash, also a resident of Reno, Nevada, calls you with a tax question.   Joel has operated his business as a sole proprietorship for many years but has decided to incorporate the business in order to limit his exposure to personal liability.

One problem with this plan is that the liabilities of his sole proprietorship exceed the basis of the assets to be transferred to the corporation by $700,000 ($2,000,000 liabilities - $1,300,000 assets). Therefore, even though the transaction will qualify for tax-free incorporation under the nonrecognition provisions of Code Section 351, Joel would still be required to recognize a gain of $700,000 (the extent to which the liabilities transferred exceed the aggregate basis of assets transferred).

Joel is not pleased with this result and asks you about the effect of drawing up a $700,000 note that he would then transfer to the corporation. Joel wants to know whether the note, which promises a future payment from himself to the corporation in the amount of $700,000, will enable him to avoid recognition of the gain.   

Question:

In this case would the note allow Joel to avoid recognition of the gain?

Solutions

Expert Solution

As the taxation requires that Joel can recognize such a gain but to incorporate the business he is also required to present assets and liabilities equal so that the incorporation can take place.

As the situation is :

One of your clients, Joel Nash, also a resident of Reno, Nevada, calls you with a tax question. Joel has operated his business as a sole proprietorship for many years but has decided to incorporate the business in order to limit his exposure to personal liability.


He have certain plans as :

One problem with this plan is that the liabilities of his sole proprietorship exceed the basis of the assets to be transferred to the corporation by $700,000 ($2,000,000 liabilities - $1,300,000 assets). Therefore, even though the transaction will qualify for tax-free incorporation under the nonrecognition provisions of Code Section 351, Joel would still be required to recognize a gain of $700,000 (the extent to which the liabilities transferred exceed the aggregate basis of assets transferred).

Joel is not pleased with this result and asks you about the effect of drawing up a $700,000 note that he would then transfer to the corporation. Joel wants to know whether the note, which promises a future payment from himself to the corporation in the amount of $700,000, will enable him to avoid recognition of the gain.

So, in this case would the note allow Joel to avoid recognition of the gain.
Yes, the note would allow Joel


Related Solutions

Background Information Langley Mason Health (LMH) is located in North Reno County, the largest public health...
Background Information Langley Mason Health (LMH) is located in North Reno County, the largest public health care district in the state of Nevada, serving an 850 square mile area encompassing seven distinctly different communities. The health district was founded in 1937 by a registered nurse and dietician who opened a small medical facility on a former poultry farm. Today the health system comprises Langley Medical Center, a 317-bed tertiary medical center and level II trauma center; Mason Hospital, a 107-bed...
You are engaged as an audit senior in the public accounting firm of Millie and Partners....
You are engaged as an audit senior in the public accounting firm of Millie and Partners. As part of the planning process for the audit of Maxie Ltd for the financial year ended 30 June 2018, you requested the minutes of the Board of Directors meetings for the financial year and noted the following: Date of Meeting Extract from Board of Directors Meetings for the year 2017-18 1/9/2017 The board agreed that in order to attract new customers and therefore...
Background You are an audit manager at Oscar Edwards Vance (OEV), an accounting firm with offices...
Background You are an audit manager at Oscar Edwards Vance (OEV), an accounting firm with offices throughout regional Australia in major centres such as Bathurst, Goulburn, Coffs Harbour and Armidale in NSW, Warwick in Queensland and Bendigo in Victoria. OEV is a medium-sized auditing firm by national standards and most of its clients operate within the manufacturing and service industries. During early July 2019, you met with the audit senior of OEV, Jack Higgins, to discuss a range of findings...
Background You are an experienced audit manager at Samway Baker Fitzgerald (SBF), an accounting firm with...
Background You are an experienced audit manager at Samway Baker Fitzgerald (SBF), an accounting firm with offices in Orange, Wagga Wagga, Tamworth, Port Macquarie and Albury in NSW, Toowoomba in Queensland and Ballarat in Victoria. Although a medium-sized firm by national standards, SBF includes Australia’s largest regionally-based auditing practice. Most of SBF’s audit clients are in the manufacturing and service industries. SBF recently acquired a major new audit client, Dudley Health Limited (DHL), which fully owns: • St Neville's, a...
You work for a large accounting firm KMPG as a Senior Accountant. Your client Bear plc...
You work for a large accounting firm KMPG as a Senior Accountant. Your client Bear plc acquired shares in Wolf plc several years back and you are responsible for the preparation of the year end work. The following are the Statements of financial position for Bear plc and Wolf plc as at 31 March 2020, together with the additional information provided below. Bear plc Wolf plc £ £ Non-Current Assets Land and buildings 975,000 220,000 Plant and equipment 245,000 75,000...
Q1. You are an audit manager of Morline & Co, a Public Accounting firm. The audit...
Q1. You are an audit manager of Morline & Co, a Public Accounting firm. The audit engagement partner, Joe Tan, has called you into his office to discuss a new audit client. You have been assigned to take charge of the audit for the financial year end, 31 December 2019 of Crown Hotel Group Bhd. (Crown Group) a listed company. The Group operates a chain of luxury hotels across Malaysia. As part of the expansion strategy, Crown Group has recently...
you are the senior on an audit of Teleko, a large public company. the company recently...
you are the senior on an audit of Teleko, a large public company. the company recently completed an acquisition of its fifth largest competitor. the competitor is known for historical accounting manipulations related to purchasing such as under- or over-statement of liabilities and expenses. list at least 6 most relevant analytical procedures that can be used to test purchasing-related accounts. what potential misstatements are indicated by each of these analytical procedures?
You are a senior manager of a firm in Florida that manufactures a range of toys...
You are a senior manager of a firm in Florida that manufactures a range of toys locally only. Your revenues come from two products- plastic toys with no moving parts, requiring simple assembly, and electric toys with moving parts, requiring precision & skilled assembly. Your CEO has made a recent trip to Asia and has discovered the wonderful world of low labor cost South East Asian countries. She concludes that the company should shift production of part of their products...
You are an audit senior at the accounting firm of Court & Partners in Sydney. The...
You are an audit senior at the accounting firm of Court & Partners in Sydney. The firm has recently won the audit of a small manufacturing firm located in Bankstown and you have been given the job. The audit partner in the planning meeting tells you not to worry about the controls because the firm is quite small, and based on his experience of firms of this size, controls are mostly poor and it is not even worth looking at...
Factual Background Congratulations. You have just been promoted to a Senior Manager position in the Finance...
Factual Background Congratulations. You have just been promoted to a Senior Manager position in the Finance Department. You now supervise five (5) employees who process payroll for a large successful publishing company. You have worked for the company for six (6) years and you’ve worked alongside the employees you now supervise the entire time. You consider these coworkers who are now your subordinates as some of your closest friends. You often socialized after work, attended events together, and truly got...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT