The tax manager of the accounting firm you are working for has two clients who have operated their small manufacturing business as a partnership. Now that the new corporate tax rate has been reduced to a flat 21 percent, these clients, who have become more concerned about protecting themselves with limited liability, wish to operate as a corporation.

They have asked the manager for tax planning so that they do not suffer any unnecessary adverse tax consequences upon contributing their assets to the new corporation. The manager asks you to prepare a memorandum that addresses whether a Section 351 tax-deferred exchange is appropriate.

You are specifically asked to discuss all of the important issues that can arise under Section 351 including: 1/ the basic requirements and the underlying policy of this provision, 2/ how will the basis in the stock received by each transferor be computed, and 3/ the tax effect on the clients if the corporation issues “boot” in addition to stock for the assets.

The manager also tells you that one of the clients is thinking about contributing land that is subject to a mortgage of $100,000 and has a basis of $80,000. The mortgage was incurred for a valid business purpose. The manager wants a discussion of the tax impact of Section 357 concerning the transfer of liabilities to a corporation, including how basis in the stock may be affected.

Use sections 351, 351(b), 357(b & c) and 358 to support your answer.

Answer rating: 100% (QA)

1 A Section 351 taxdeferred exchange is an appropriate mechanism for a client who wishes to convert an operating business from a partnership to a corporation The change in tax law which reduced the co... View the full answer