In Example 4, it would certainly appear that there is no bona fide business reason for F to assume the personal loan. This is the reason Sec. Thus, it would appear that Sec. But, if Sec. Because only the assumption of the personal loan had a bad purpose, it would seem that only it would be treated as boot. This makes a great deal of sense, but under Regs. This regulation vastly contorts the result of the Sec.
In the comparison of taxpayers A and B from Examples 3 and 4 above in the exhibit at below, each transferred an identical asset in a Sec. This seems both odd and unfair; the sole reason that B is treated as receiving boot is because Sec. The language of subsection b , relating to assumption of liability for tax avoidance purpose has been changed in one respect from existing law.
Where such a tax avoidance purpose exists, the total amount of the liabilities assumed will be considered as money received by the taxpayer and not merely a particular liability with respect to which the tax avoidance purpose existed. This change is intended to merely clarify existing law. As was noted, absent consideration for the tax effect, both A and B are in the same economic position following the Sec.
The transaction is treated as if you sold property to the corporation in return for cash. The difference between the stock value received and the tax basis in the property transferred to the corporation will result in a gain or loss. Concern about a tax liability as the result of incorporating your currently unincorporated business could act as a barrier to incorporation. Consequently, years ago, Congress enacted Section to remove this barrier to incorporation of an unincorporated business.
The idea was to allow unincorporated businesses to develop, unimpeded by any immediate tax consequence resulting from the exchange of property for stock. In other words, Congress thought that any gain on an exchange of property for stock should be deferred put off until a future time, such as when the stock received in the exchange was eventually disposed of by the shareholder.
Transferor group: If you, along with others, transfer property into a corporation, your group is referred to as a transferor group. Nonqualified Preferred Stock: This is stock in which the holder of the stock has the right to require the issuer to redeem or buy it back or the issuer is required to redeem or buy it back. Also, the dividend rate on such stock varies with reference to interest rates, commodity prices, or similar indices. The second rule for getting tax-free treatment in an exchange is the extent of your control or the control of you and others in the transferor group after the exchange.
What is meant by control? Section c defines control :. The control requirement applies to both tax-free and partially taxable exchanges. Attach a statement to your tax return. Both the corporation and any person involved in a nontaxable exchange of property for stock must attach to their income tax return a complete statement of all facts pertinent to the exchange.
The Secretary may prescribe regulations that, under appropriate circumstances, treat any asset described in clauses i through v as not so listed. B if and only if the transferor receives stock other than nonqualified preferred stock — i subsection b shall apply to such transferor; and.
B Limitations Clauses i , ii , and iii of subparagraph A shall apply only if the right or obligation referred to therein may be exercised within the year period beginning on the issue date of such stock and such right or obligation is not subject to a contingency which, as of the issue date, makes remote the likelihood of the redemption or purchase. C Exceptions for certain rights or obligations i In general A right or obligation shall not be treated as described in clause i , ii , or iii of subparagraph A if— I it may be exercised only upon the death, disability, or mental incompetency of the holder, or.
II any other corporation if such exchange is part of a transaction or series of transactions in which such corporation is to become a corporation described in subclause I.
B Related person A person shall be treated as related to another person if they bear a relationship to such other person described in section b or b. Amendments —Subsec. Effective Date of Amendment Amendment by Pub. Effective Date of Amendment Pub.
Effective Date of Amendments Amendment by Pub. This paragraph shall not apply to any agreement, ruling request, or public announcement or filing unless it identifies the acquirer of the distributing corporation or any controlled corporation, or the transferee, whichever is applicable. The preceding sentence shall not apply where the corporation meets the requirements of section a 2 of the Internal Revenue Code of with respect to the transferee corporation and where the transfer is not part of a plan pursuant to which the transferor subsequently fails to meet such requirements.
The following state regulations pages link to this page.
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