Jonathan has owned and operated a golf driving range for a number of years. The sole proprietorship
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Based on this advice, Jonathan transfers the business assets (fair market value $1 million, adjusted basis $200,000) along with the associated debt ($325,000) to the newly formed corporation. As far as he is concerned, nothing has really changed in his relationship with the creditor bank: he still feels personally obligated to pay off the debt. In fact, before the debt is assigned to the newly formed corporation, the bank insists that Jonathan remain secondarily responsible for its payment (i.e., he guaranteed the debt). Even though the proprietorship's liabilities transferred exceed the basis of the assets transferred,
Jonathan regards the transaction as tax-free because:
• Nothing has changed with his business other than its form of operation.
• A business justification exists for changing its form to that of a corporation.
• He has enjoyed no personal gain from the transaction.
• He is still obligated with respect to the debt.
Determine whether Jonathan is justified in his position. If you believe the transaction as currently planned would be taxable, identify strategies that could be used to eliminate or reduce gain recognition.
Partial list of research aids:
§ 357(c).
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Related Book For
South Western Federal Taxation 2015
ISBN: 9781305310810
38th Edition
Authors: William H. Hoffman, William A. Raabe, David M. Maloney, James C. Young
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