ACC610DiscussionsWeek 2 - Discussion 2- Taxes for Ownership

Week 2 - Discussion 2

Tammy and Barry formed Pheasant Corporation several years ago in a transaction that qualified under § 351. Both shareholders serve as officers and on the board of directors of Pheasant. In the current year, Pheasant Corporation redeemed all of Barry’s shares in the corporation with property distribution.

  In Chapter 4, we learned that the key to successful tax planning involving the transfer of corporate property is knowing whether or not to comply with Section 351. In addition, Section 6.2.1 of the Code states that “Generally, the transferee corporate entity takes a foundation in the property equivalent to the transferor shareholder, and the stockholder takes an equivalent basis in the stock did receive in the exchange (or adds such quantity to existing stock grounds in the particular instance of a capital contribution),” referring to the carryover basis that applies when transferring property. A carryover foundation transaction involving the transfer of lost property (fair market worth less than basis) might lead to double losses without particular restrictions.

• What are the tax issues for Barry and Pheasant?

Considering the preceding and the ideas presented in Chapter 6, it is clear that if Pheasant were to redeem Barry’s shares, the transaction would be viewed as a sale, and the corporation would be required to record a gain or loss. In addition, the effect of the redemption on the corporation’s earnings and profits (E&P) and expenses (expenses) would need to be evaluated. However, without a familial connection, Barry’s purchase would be seen as a complete redemption, raising concerns about his future involvement with the firm. The last tax ramification for Barry would be the effect of the basis being transferred to him for the property and shares.

• What are some of the issues you think an accountant would deal with in evaluating and communicating the impact of these transactions to the owners?

It’s possible that some or all of Barry’s transactions will be subject to taxation. If the business had net capital gains, he would also be struck. With that in mind, we must understand the potential financial ramifications for the industry. I made a mutually beneficial choice by considering the company’s tax ramifications.

References

Hoffman, W. H., Raabe, W. A., Smith, J. E., Maloney, D. M., & Young, J. C. (2016). South-western federal taxation 2016: Corporations, partnerships, estates and trusts (39th ed.). Mason, OH: Southwestern Cengage Learning