Question

1) Debate the following proposition:All coroporate formation transactions should be taxable event. 2) John and Mary each exchange property worth 50,000 for 100 shares of New Corporation Stock, Peter exchanges services for 98 shares of the New stock and $1,000 in cash for two shares of New stock. Are the Section 351 of tax regulations requirements met? Explain why or why not. What advice would you give the shareholders? 3) what areorganigational expenditures? How are they treated for tax purposes? 4) What are start-up expenditures? How are they treated for tax purposes? 5) What coroporation must pay estimated taxse? When are the estimated tax payments due?

Answer 1

1.

Note that the current law holds that a corporate formation
transaction should not be taxable event.

The underlying rational is

• A corporation formation transaction results in realized no gain or
loss. There is only a change of ownership in a corporation
formation. Hence, no gain or loss is recognized.

• A corporation formation usually occurs in establishing a new
corporation. Taxation to it will be an obstacle for the corporation
to run. Hence, the overall economy will be negatively influenced.

2.

Section 351 states that no gain or loss is recognised by either the contributing shareholders or receipient corporation, if three following conditions are satisfied:

1. There is transfer of property (and not services)
2. Solely in exchnage of corporation stock, and
3. After the exchange contributig shreholder is in control of corporation.

thus, In case of john and merry Section 351 is met as it complied condition 1 and 2 (assumed condition 3 is also complied in the absence of any information)

But in case of Peter, Section 351 is not met as it does not comply with condition 1.Exchange of Service and 2.Partly in cash

3.

Organizational Expenditures are those expenditures that are incurred for formation and launch of the firm for example attorney's fees etc.

Start-up expenses are amounts paid or incurred for:

1. Investigating the creation or acquisition of a business, or
2. Creating an active trade or business, or
3. Activities engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of the activities becoming an active trade or business and which would have been deductible if paid by an existing trade or business.

Expenses incurred in the preparation to open a new business can be deducted over a period of 180 months, rather than taking deduction of all the expenses at once as they would be if the business were already operating.

4.

Start-up expenditure is an ordinary and necessary business expense when a corporation is created, which involves • Investigating the activity’s creation, • Creating an active business, and • Conducting activities in the profit generation before the business is active. For tax purposes, the corporation could amortize start-up expenditures.

Under Section 195, the corporation could claim a deduction for the first $5,000 amount of the start-up expenditures, and then amortizes the remaining amount over a 180-month period. Under Regulation Section 1.195-1, this process is automatically made when the corporation is created.

5.

Corporations that must pay estimated taxes are corporations whose
tax liabilities are over five hundred dollars.

If the corporate taxpayer elects a calendar year for its tax year,
then the estimated tax payments are due

• April 15,

• June 15,

• September 15, and

• December 15.

If the corporate taxpayer elects a fiscal year for its tax year,
then estimated tax payments are due

• The forth month’s 15^th day,

• The sixth month’s 15^th day,

• The ninth month’s 15^th day, and

• The twelfth month’s 15^th day.

If the due day is a weekend or a holiday, then the due day is
postponed to the following business day.