Question

gain or loss is recognized on the transfer of assets from one corporation to another for stock or securities of the transferee corporation as long as the transferor owns 80% of the transferee's stock after the transaction.

• Create a scenario where the transfer of property to a controlled corporation under Section 351 of the Internal Revenue Code (IRC) results in taxation to the transferor.
• Speculate as to the reasons that gain treatment in the current year may be preferred to the deferral of gain.
• Provide a tax-planning strategy.

Answer 1

ANSWER:

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Under sections (351) provides general rules stating no profit or loss is to be recognized in case of transfer of property to a corporation by one or more person solely for the purpose in exchange for stock. The corporation or persons gain power and control of such corporation after the exchange. This shows any property is transferred to corporation for the purpose of buying, control of that corporation is not liable to recognition of gain or loss.

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Scenario of (351) would be if X transferred property to Y in exchange for stock at fair market value. Both X and Y can choose to have a third party handle the processes between the two parties. Y could have also have other people within the stock with percentage. Once X transfer everything over Y would control 100% of the stockholding in the business. X should keep track and recognition any gain or losses on the transfers.

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Tax-planning strategy:

· Timing – deferring or accelerating taxable income & tax deductions

· Income shifting – shifting income from high to low tax rate taxpayers

· Conversion – converting income from high to low tax rate activities