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Chapter 4 presentation

  1. 1. Chapter 4 Corporations: Organization and Capital Structure
  2. 2. The Big Picture (slide 1 of 3) <ul><li>Emily has operated her business for 10 years as a sole proprietorship, but has decided to incorporate the business. </li></ul><ul><ul><li>She understands that the corporate form offers several important nontax advantages (e.g., limited liability). </li></ul></ul><ul><ul><li>Also, the incorporation would enable her husband, David, to become a part owner in the business. </li></ul></ul><ul><li>Emily expects to transfer her business assets in exchange for her corporate interest, while David will provide services for his interest. </li></ul>
  3. 3. The Big Picture (slide 2 of 3) <ul><li>Emily’s sole proprietorship assets available for transfer to the new corporation are: </li></ul><ul><li>Adjusted Fair Market </li></ul><ul><li>Basis Value </li></ul><ul><li>Accounts receivable $ –0– $ 25,000 </li></ul><ul><li>Building 50,000 200,000 </li></ul><ul><li>Other assets 150,000 275,000 </li></ul><ul><li>$200,000 $500,000 </li></ul>
  4. 4. The Big Picture (slide 3 of 3) <ul><li>Aware of the double taxation problem associated with operating as a regular corporation, Emily is considering receiving some corporate debt at the time of incorporation. </li></ul><ul><ul><li>The interest expense on the debt will then provide a deduction for the corporation. </li></ul></ul><ul><li>Emily’s main concern, however, is that the incorporation will be a taxable transaction. </li></ul><ul><ul><li>Can her fears be allayed? </li></ul></ul><ul><li>Read the chapter and formulate your response. </li></ul>
  5. 5. Corporation Formation Transaction
  6. 6. Formation Example <ul><li>Ron will incorporate his donut shop: </li></ul><ul><li>Asset Fair Mkt </li></ul><ul><li>Tax Basis Value . </li></ul><ul><li>Cash $10,000 $ 10,000 </li></ul><ul><li>Furniture & Fixtures 20,000 60,000 </li></ul><ul><li>Building 40,000 100,000 </li></ul><ul><li>Total $70,000 $170,000 </li></ul><ul><li>Without § 351: gain of $100,000. </li></ul><ul><li>With § 351: no gain or loss. Ron’s economic status has not changed. </li></ul>
  7. 7. Consequences of §351 (slide 1 of 2) <ul><li>In general, no gain or loss to transferors: </li></ul><ul><ul><li>On transfer of property to corporation </li></ul></ul><ul><ul><li>In exchange for stock </li></ul></ul><ul><ul><li>IF immediately after transfer, transferors are in control of corporation </li></ul></ul>
  8. 8. Consequences of §351 (slide 2 of 2) <ul><li>If boot (property other than stock) received by transferors </li></ul><ul><ul><li>Gain recognized up to lesser of: </li></ul></ul><ul><ul><ul><li>Boot received or </li></ul></ul></ul><ul><ul><ul><li>Realized gain </li></ul></ul></ul><ul><ul><li>No loss is recognized </li></ul></ul>
  9. 9. Issues re: Formation (slide 1 of 7) <ul><li>Definition of property includes: </li></ul><ul><ul><li>Cash </li></ul></ul><ul><ul><li>Secret processes and formulas </li></ul></ul><ul><ul><li>Unrealized accounts receivable (for cash basis taxpayer) </li></ul></ul><ul><ul><li>Installment obligations </li></ul></ul><ul><li>Code specifically excludes services from definition of property </li></ul>
  10. 10. Issues re: Formation (slide 2 of 7) <ul><li>Stock transferred </li></ul><ul><ul><li>Includes common and most preferred stock </li></ul></ul><ul><ul><ul><li>Does not include nonqualified preferred stock which possesses many attributes of debt </li></ul></ul></ul><ul><ul><li>Does not include stock rights or stock warrants </li></ul></ul><ul><ul><li>Does not include corporate debt or securities (e.g., corporate bonds) </li></ul></ul><ul><ul><ul><li>Treated as boot </li></ul></ul></ul>
  11. 11. The Big Picture – Example 4 Stock Transferred (slide 1 of 2) <ul><li>Return to the facts of The Big Picture on p. 4-2. </li></ul><ul><li>Assume the proposed transaction qualifies under § 351 </li></ul><ul><ul><li>i.e., The transfer of property in exchange for stock meets the control test </li></ul></ul><ul><ul><li>However, Emily decides to receive some corporate debt along with the stock. </li></ul></ul>
  12. 12. The Big Picture – Example 4 Stock Transferred (slide 2 of 2) <ul><li>If she receives stock worth $450,000 and corporate debt of $50,000 in exchange for the property transferred, </li></ul><ul><ul><li>Emily realizes gain of $300,000 [$500,000 (value of consideration received) – $200,000(basis in the transferred property)]. </li></ul></ul><ul><ul><li>However, because the transaction qualifies under § 351, only $50,000 of gain is recognized—the $50,000 of corporate debt is treated as boot. </li></ul></ul><ul><ul><li>The remaining realized gain of $250,000 is deferred. </li></ul></ul>
  13. 13. Issues re: Formation (slide 3 of 7) <ul><li>Transferors must be in control immediately after exchange to qualify for nontaxable treatment </li></ul><ul><ul><li>To have control, transferors must own: </li></ul></ul><ul><ul><ul><li>80% of total combined voting power of all classes of stock entitled to vote, and </li></ul></ul></ul><ul><ul><ul><li>80% of total number of shares of all other classes of stock </li></ul></ul></ul>
  14. 14. Issues re: Formation (slide 4 of 7) <ul><li>“ Immediately after” the transfer </li></ul><ul><ul><li>Does not require simultaneous transfers if more than one transferor </li></ul></ul><ul><ul><li>Rights of parties should be outlined before first transfer </li></ul></ul><ul><ul><li>Transfers should occur as close together as possible </li></ul></ul>
  15. 15. Issues re: Formation (slide 5 of 7) <ul><li>After control is achieved, it is not necessarily lost upon the sale or gift of stock received in the transfer to others not party to the initial exchange </li></ul><ul><li>But disposition might violate §351 if prearranged </li></ul>
  16. 16. Issues re: Formation (slide 6 of 7) <ul><li>Transfers for property and services </li></ul><ul><ul><li>May result in service provider being treated as a member of the 80% control group </li></ul></ul><ul><ul><ul><li>Taxed on value of stock issued for services </li></ul></ul></ul><ul><ul><ul><li>Not taxed on value of stock received for property contributions </li></ul></ul></ul><ul><ul><ul><ul><li>All stock received by the person transferring both property and services is counted in 80% test </li></ul></ul></ul></ul><ul><ul><li>To be considered a member of the 80% control group </li></ul></ul><ul><ul><ul><li>The service provider should transfer property having more than “a relatively small value” </li></ul></ul></ul>
  17. 17. Issues re: Formation (slide 7 of 7) <ul><li>Subsequent transfers to existing corporation </li></ul><ul><ul><li>Tax-free treatment still applies as long as transferors in subsequent transfer own 80% following exchange </li></ul></ul>
  18. 18. The Big Picture – Example 9 Transfers for Property and Services (slide 1 of 2) <ul><li>Return to the facts of The Big Picture on p. 4-2. </li></ul><ul><li>Assume Emily transfers her $500,000 of property to the new corporation and receives 50% of its stock. </li></ul><ul><li>David receives the other 50% of the stock for services rendered (worth $500,000). </li></ul>
  19. 19. The Big Picture – Example 9 Transfers for Property and Services (slide 2 of 2) <ul><li>Both Emily and David have tax consequences from the transfers. </li></ul><ul><ul><li>David has ordinary income of $500,000 because he does not exchange property for stock. </li></ul></ul><ul><ul><li>Emily has a taxable gain of $300,000 </li></ul></ul><ul><ul><ul><li>$500,000 (fair market value of the stock in the new corporation) - $200,000 (basis in the transferred property). </li></ul></ul></ul><ul><ul><ul><li>As the sole transferor of property, she receives only 50% of the corporation’s stock. </li></ul></ul></ul>
  20. 20. The Big Picture – Example 10 Transfers for Property and Services (slide 1 of 2) <ul><li>Assume the same facts as in Example 9 except that David transfers property worth $400,000 (basis of $130,000) in addition to services rendered to the corporation (valued at $100,000). </li></ul><ul><li>Now David becomes a part of the control group. </li></ul><ul><ul><li>Emily and David, as property transferors, together receive 100% of the corporation’s stock. </li></ul></ul>
  21. 21. The Big Picture – Example 10 Transfers for Property and Services (slide 2 of 2) <ul><li>Consequently, § 351 is applicable to the exchanges. </li></ul><ul><ul><li>As a result, Emily has no recognized gain. </li></ul></ul><ul><ul><li>David does not recognize gain on the transfer of the property </li></ul></ul><ul><ul><ul><li>He does recognize ordinary income to the extent of the value of the shares issued for services rendered. </li></ul></ul></ul><ul><ul><ul><ul><li>David has current taxable income of $100,000. </li></ul></ul></ul></ul>
  22. 22. Assumption of Liabilities (slide 1 of 2) <ul><li>Assumption of liabilities by corp does not result in boot to the transferor shareholder for gain recognition purposes </li></ul><ul><ul><li>Liabilities are treated as boot for determining basis in acquired stock </li></ul></ul><ul><ul><ul><li>Basis of stock received is reduced by amount of liabilities assumed by the corp </li></ul></ul></ul>
  23. 23. Assumption of Liabilities (slide 2 of 2) <ul><li>Liabilities are not treated as boot for gain recognition unless : </li></ul><ul><ul><li>Liabilities incurred for no business purpose or as tax avoidance mechanism </li></ul></ul><ul><ul><ul><li>Boot = Entire amount of liability </li></ul></ul></ul><ul><ul><li>Liabilities > basis in assets transferred </li></ul></ul><ul><ul><ul><li>Gain recognized = Excess amount (liabilities - basis) </li></ul></ul></ul>
  24. 24. Formation with Liabilities Example (slide 1 of 2) <ul><li>Property transferred has: </li></ul><ul><li>Fair market value = $150,000 </li></ul><ul><li>Basis = 100,000 </li></ul><ul><li>Realized Gain = $ 50,000 </li></ul>
  25. 25. Formation with Liabilities Example (slide 2 of 2) <ul><li>Liabilities assumed by corp. (independent facts): </li></ul><ul><ul><li>Business Business No Business </li></ul></ul><ul><ul><li>Purpose Purpose Purpose </li></ul></ul><ul><li>Liability: $80,000 $120,000 $120,000 </li></ul><ul><li>Boot None $ 20,000 $120,000 </li></ul><ul><li>Gain </li></ul><ul><li>Recognized None $20,000 $ 50,000* </li></ul><ul><ul><li>*(Gain is lesser of $50,000 realized gain or boot) </li></ul></ul>
  26. 26. Basis Computation for §351 Exchange (slide 1 of 2) <ul><li>Shareholder’s basis in stock: </li></ul><ul><li>Adjusted basis of transferred assets </li></ul><ul><ul><li>+ Gain recognized on exchange </li></ul></ul><ul><ul><li>- Boot received </li></ul></ul><ul><ul><li>-Liabilities transferred to corporation </li></ul></ul><ul><ul><li>-Adjustment for loss property (if elected) </li></ul></ul><ul><ul><li>= Basis of stock received by shareholder </li></ul></ul>
  27. 27. Basis Computation for §351 Exchange (slide 2 of 2) <ul><li>Corporation’s basis in assets: </li></ul><ul><li>Adjusted basis of transferred assets </li></ul><ul><ul><li>+ Gain recognized by transferor shareholder </li></ul></ul><ul><ul><li>- Adjustment for loss property (if required) </li></ul></ul><ul><ul><li>= Basis of assets to corporation </li></ul></ul>
  28. 28. Basis in Stock in Last Example <ul><li>Adjusted Basis of transferred assets: $100,000 </li></ul><ul><li>Liabilities assumed by corp. (independent facts): </li></ul><ul><li> Business Business No Business </li></ul><ul><li>Purpose Purpose Purpose . </li></ul><ul><li>Liability: $ 80,000 $120,000 $120,000 </li></ul><ul><li>Basis in assets </li></ul><ul><li>Transferred $100,000 $ 100,000 $100,000 </li></ul><ul><li>+ Gain recognized None 20,000 50,000 </li></ul><ul><li>- Liab. Transferred (80,000) (120,000) (120,000) </li></ul><ul><li>Basis in stock $ 20,000 -0- $ 30,000 </li></ul>
  29. 29. Corporation’s Basis in Assets Received in Last Example <ul><li>Liabilities assumed by corp. (independent facts): </li></ul><ul><li> Business Business No Business </li></ul><ul><li> Purpose Purpose Purpose </li></ul><ul><li>Liability: $ 80,000 $120,000 $120,000 </li></ul><ul><li>Basis of trans- </li></ul><ul><li>ferred assets: $100,000 $100,000 $100,000 </li></ul><ul><li>Gain recognized </li></ul><ul><li>by shareholder None 20,000 50,000 </li></ul><ul><li>Basis to Corp. $100,000 $120,000 $150,000 </li></ul>
  30. 30. Basis Adjustment for Loss Property (slide 1 of 2) <ul><li>When built-in loss property is contributed to a corporation </li></ul><ul><ul><li>Aggregate basis in property may have to be stepped down so basis does not exceed the F.M.V. of property transferred </li></ul></ul><ul><ul><ul><li>Necessary to prevent parties from obtaining double benefit from losses involved </li></ul></ul></ul>
  31. 31. Basis Adjustment for Loss Property (slide 2 of 2) <ul><li>Step-down in basis is allocated among assets with built-in loss </li></ul><ul><ul><li>Alternatively, if shareholder and corporation both elect, the basis reduction can be made to the shareholder’s stock </li></ul></ul><ul><li>Built-in loss adjustment places loss with either the shareholder or the corporation but not both </li></ul>
  32. 32. Stock Issued for Services Rendered <ul><li>Corporation may be able to deduct the fair market value of stock issued in exchange for services as a business expense </li></ul><ul><ul><li>e.g., Performance of management services </li></ul></ul><ul><ul><li>May claim a compensation expense deduction under §162 </li></ul></ul><ul><li>If the services are such that the payment is characterized as a capital expenditure (e.g., legal services in organizing the corporation) </li></ul><ul><ul><li>Must capitalize the amount as an organizational expenditure </li></ul></ul>
  33. 33. Holding Period <ul><li>Holding period of stock received </li></ul><ul><ul><li>For capital assets or §1231 property, includes holding period of property transferred to corporation </li></ul></ul><ul><ul><li>For other property, begins on day after exchange </li></ul></ul><ul><li>Corp’s holding period for property acquired in the transfer is holding period of transferor </li></ul>
  34. 34. Recapture Considerations <ul><li>In a § 351 transfer where no gain is recognized, the depreciation recapture rules do not apply </li></ul><ul><ul><li>Recapture potential associated with the property carries over to the corporation </li></ul></ul>
  35. 35. Capital Contributions (slide 1 of 3) <ul><li>No gain or loss is recognized by corp on receipt of money or property in exchange for its stock </li></ul><ul><ul><li>Also applies to additional voluntary pro rata contributions of money or property to a corp even though no additional shares are issued </li></ul></ul>
  36. 36. Capital Contributions (slide 2 of 3) <ul><li>Capital contributions of property by nonshareholders </li></ul><ul><ul><li>Not taxable to corporation </li></ul></ul><ul><ul><li>Basis of property received from nonshareholder is -0- </li></ul></ul>
  37. 37. Capital Contributions (slide 3 of 3) <ul><li>Capital contributions of cash by nonshareholder </li></ul><ul><ul><li>Must reduce basis of assets acquired during 12 month period following contribution </li></ul></ul><ul><ul><li>Any remaining amount reduces basis of other property owned by the corp </li></ul></ul><ul><ul><ul><li>Applied in the following order to depreciable property, amortizable property, assets subject to depletion, and other remaining assets </li></ul></ul></ul>
  38. 38. Debt vs. Equity (slide 1 of 2) <ul><li>Debt </li></ul><ul><ul><li>Corporation pays interest to debt holder which is deductible by corporation </li></ul></ul><ul><ul><li>Interest paid is taxable as ordinary income to individual or corporate recipient </li></ul></ul><ul><ul><li>Loan repayments are not taxable to investors unless repayments exceed basis </li></ul></ul>
  39. 39. Debt vs. Equity (slide 2 of 2) <ul><li>Equity: </li></ul><ul><ul><li>Corporation pays dividends which are not deductible </li></ul></ul><ul><ul><ul><li>Taxable to individuals at low capital gain rates to extent corp has E & P </li></ul></ul></ul><ul><ul><ul><li>Corporate shareholder may receive dividends received deduction </li></ul></ul></ul>
  40. 40. Reclassification of Debt as Equity <ul><li>If corp is “thinly capitalized,” i.e., has too much debt and too little equity </li></ul><ul><ul><li>IRS may argue that debt is really equity and deny tax advantages of debt financing </li></ul></ul><ul><ul><li>If debt has too many features of stock, principal and interest payments may be treated as dividends </li></ul></ul>
  41. 41. Thin Capitalization Factors (slide 1 of 2) <ul><li>Debt instrument documentation </li></ul><ul><li>Debt terms (e.g., reasonable rate of interest and definite maturity date) </li></ul><ul><li>Timeliness of repayment of debt </li></ul><ul><li>Whether payments are contingent on earnings </li></ul>
  42. 42. Thin Capitalization Factors (slide 2 of 2) <ul><li>Subordination of debt to other liabilities </li></ul><ul><li>Whether debt and stock holdings are proportionate </li></ul><ul><li>Use of funds (if used to finance initial operations or to acquire capital assets, looks like equity) </li></ul><ul><li>Debt to equity ratio </li></ul>
  43. 43. Losses on Investment in Corporation (slide 1 of 5) <ul><li>Stock and security losses </li></ul><ul><ul><li>If stocks and bonds are capital assets, losses from worthlessness are capital losses </li></ul></ul><ul><ul><ul><li>Loss is treated as occurring on last day of tax year in which they become worthless </li></ul></ul></ul><ul><ul><ul><li>No loss for mere decline in value </li></ul></ul></ul>
  44. 44. Losses on Investment in Corporation (slide 2 of 5) <ul><li>Stock and security losses </li></ul><ul><ul><li>If stocks and bonds are not capital assets, losses from worthlessness are ordinary losses (e.g., broker owned) </li></ul></ul><ul><ul><li>Sometimes an ordinary loss is allowed for worthlessness of stock of affiliated company </li></ul></ul>
  45. 45. Losses on Investment in Corporation (slide 3 of 5) <ul><li>Business versus nonbusiness bad debts </li></ul><ul><ul><li>General rule: Losses on debt of corporation treated as business or nonbusiness bad debt </li></ul></ul><ul><ul><li>If noncorporate person lends as investment, loss is nonbusiness bad debt </li></ul></ul><ul><ul><ul><li>Short-term capital loss </li></ul></ul></ul><ul><ul><ul><li>Only deductible when fully worthless </li></ul></ul></ul>
  46. 46. Losses on Investment in Corporation (slide 4 of 5) <ul><li>Business versus nonbusiness bad debts (con’t) </li></ul><ul><ul><li>If corporation is lender, loss is business bad debt </li></ul></ul><ul><ul><ul><li>Ordinary loss deduction </li></ul></ul></ul><ul><ul><ul><li>Deduction allowed for partial worthlessness </li></ul></ul></ul><ul><ul><ul><li>All bad debts of corporate lender qualify as business bad debts </li></ul></ul></ul>
  47. 47. Losses on Investment in Corporation (slide 5 of 5) <ul><li>Business versus nonbusiness bad debts (con’t) </li></ul><ul><ul><li>Noncorporate lender may qualify for business bad debt treatment if: </li></ul></ul><ul><ul><ul><li>Loan is made in some capacity that qualifies as a trade or business, or </li></ul></ul></ul><ul><ul><ul><li>Shareholder is in the business of lending money or of buying, promoting, and selling corporations </li></ul></ul></ul>
  48. 48. §1244 stock (slide 1 of 4) <ul><li>Treatment of §1244 stock: </li></ul><ul><ul><li>Ordinary loss treatment for loss on stock of “small business corporation” (as defined) </li></ul></ul><ul><ul><li>Gain still capital gain </li></ul></ul>
  49. 49. §1244 stock (slide 2 of 4) <ul><li>§1244 stock: </li></ul><ul><ul><li>Applies to the first $1 million of corp.'s stock </li></ul></ul><ul><ul><ul><li>If > $1 million of stock issued, entity designates which shares qualify for § 1244 treatment </li></ul></ul></ul><ul><ul><ul><li>Property received in exchange for stock is valued at its adjusted basis, reduced by any liabilities assumed by the corporation </li></ul></ul></ul><ul><ul><ul><ul><li>The fair market value of the property is not considered </li></ul></ul></ul></ul>
  50. 50. §1244 stock (slide 3 of 4) <ul><li>Annual loss limitation: </li></ul><ul><ul><li>$50,000 or </li></ul></ul><ul><ul><li>$100,000 if married filing joint return </li></ul></ul><ul><ul><li>Any remaining loss is a capital loss </li></ul></ul><ul><li>Only original holder of §1244 stock (whether an individual or a partnership) qualifies for ordinary loss treatment </li></ul><ul><ul><li>Sale or contribution of stock results in loss of §1244 status </li></ul></ul>
  51. 51. §1244 stock (slide 4 of 4) <ul><li>If §1244 stock is issued for property with basis > fair market value </li></ul><ul><ul><li>For determining ordinary loss, stock basis is reduced to fair market value on date of exchange </li></ul></ul>
  52. 52. Gain from Qualified Small Business Stock (slide 1 of 2) <ul><li>Noncorporate shareholders may exclude 50% of gain from sale or exchange of such stock </li></ul><ul><ul><li>Must have held stock for > 5 years and acquired stock as part of original issue </li></ul></ul><ul><ul><li>50% exclusion can be applied to the greater of: </li></ul></ul><ul><ul><ul><li>$10 million, or </li></ul></ul></ul><ul><ul><ul><li>10 times shareholder’s aggregate adjusted basis of qualified stock disposed of during year </li></ul></ul></ul>
  53. 53. Gain from Qualified Small Business Stock (slide 2 of 2) <ul><li>Qualified Small Business Corp </li></ul><ul><ul><li>C corp with gross assets not greater than $50 million on date stock issued </li></ul></ul><ul><ul><li>Actively involved in a trade or business </li></ul></ul><ul><ul><ul><li>At least 80% of corporate assets are used in the active conduct of one or more trade or businesses </li></ul></ul></ul><ul><li>Under ARRTA of 2009, the exclusion increases to 75% for qualified stock acquired after February 17, 2009, and before 2011 </li></ul><ul><li>From legislation in 2010, the exclusion increases to 100% for qualified stock acquired after September 27, 2010, and before 2012 </li></ul>
  54. 54. The Big Picture – Example 35 Selecting Assets To Transfer (slide 1 of 2) <ul><li>Return to the facts of The Big Picture on p. 4-2. </li></ul><ul><li>If Emily decides to retain the $25,000 of cash basis accounts receivable rather than transferring them to the newly formed corporation </li></ul><ul><ul><li>She will recognize $25,000 of ordinary income upon their collection. </li></ul></ul>
  55. 55. The Big Picture – Example 35 Selecting Assets To Transfer (slide 2 of 2) <ul><li>Alternatively, if the receivables are transferred to the corporation as the facts suggest, the corporation will recognize the ordinary income. </li></ul><ul><ul><li>However, a subsequent corporate distribution to Emily of the cash collected could be subject to double taxation as a dividend </li></ul></ul><ul><li>Given the alternatives available, Emily needs to evaluate which approach is better for the parties involved. </li></ul>
  56. 56. Refocus On The Big Picture (slide 1 of 5) <ul><li>Emily, the sole property transferor, must acquire at least 80% of the stock issued by the new corporation in order for the transaction to receive tax-deferred treatment under § 351. </li></ul><ul><ul><li>Otherwise, a tremendous amount of gain (up to $300,000) will be recognized. </li></ul></ul><ul><li>As a corollary, David must not receive more than 20% of the corporation’s stock in exchange for his services. </li></ul>
  57. 57. Refocus On The Big Picture (slide 2 of 5) <ul><li>However, even if § 351 is available, any corporate debt issued by the corporation will be treated as boot and will trigger gain recognition to Emily. </li></ul><ul><ul><li>Therefore, she must evaluate the cost of recognizing gain now versus the benefit of the corporation obtaining an interest deduction later. </li></ul></ul>
  58. 58. Refocus On The Big Picture (slide 3 of 5) <ul><li>What If? </li></ul><ul><li>Can the § 351 transaction be modified to further reduce personal and business tax costs, both at the time of formation and in future years? </li></ul><ul><ul><li>Several strategies may be worth considering. </li></ul></ul><ul><li>Instead of having the corporation issue debt on formation, Emily might withhold certain assets. </li></ul><ul><ul><li>If the building is not transferred, for example, it can be leased to the corporation. </li></ul></ul><ul><ul><ul><li>The resulting rent payment would mitigate the double tax problem by producing a tax deduction for the corporation. </li></ul></ul></ul>
  59. 59. Refocus On The Big Picture (slide 4 of 5) <ul><li>What If? </li></ul><ul><li>An additional benefit results if Emily does not transfer the cash basis receivables to the corporation. </li></ul><ul><ul><li>This approach avoids a tax at the corporate level and a further tax when the receipts are distributed to Emily in the form of a dividend. </li></ul></ul><ul><ul><li>If the receivables are withheld, their collection is taxed only to Emily. </li></ul></ul>
  60. 60. Refocus On The Big Picture (slide 5 of 5) <ul><li>What If? </li></ul><ul><li>No mention is made as to the existence of any accounts payable outstanding at the time of corporate formation. </li></ul><ul><ul><li>If they do exist, which is likely, it could be wise for Emily to transfer them to the corporation. </li></ul></ul><ul><ul><li>The subsequent corporate payment of the liability produces a corporate deduction that will reduce any corporate tax. </li></ul></ul><ul><li>Double taxation can be mitigated in certain situations with a modest amount of foresight! </li></ul>
  61. 61. <ul><li>If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: </li></ul><ul><li>Dr. Donald R. Trippeer, CPA </li></ul><ul><li>[email_address] </li></ul><ul><li>SUNY Oneonta </li></ul>