Week 4: Homework Problems
14-4 The purpose of the nonrecognition of gains/losses upon transfers of property is to encourage corporate formation. Gains and losses are not recognized upon transfer of property to corporations because essentially the transferee has retained their investment in the property through a different form - stock. When the property is transferred for the stock, the transferee does not recognize a gain or loss and therefore there is no tax burden on the transfer.
14-20 Corporations have the flexibility of choosing their tax year. They can choose to run on the calendar year or a different fiscal year. In addition, their fiscal year does not have to match up to the same accounting periods as the owners of the corporation. In the beginning of a corporation’s life, there is usually a net loss and having a different accounting tax year than that of the owners can lead for a tax benefit for the owners when applying this net loss. ...view middle of the document...
Individuals generally get a preferential tax rate for capitals gains. When a capital loss occurs for corporations, unlike individuals, corporations do not get to deduct the amount of the loss in the year in which it incurs. Corporate capital losses can only be used against capital gains. When a corporate capital loss occurs, a corporation must carry the loss back for three years and apply it against any capital gain incurred in those years. If there is a remaining capital loss amount, the loss can be carried forward for five years to use against capital gains, but if after five years, there is still a remaining amount, the loss is lost forever.
14-55 a. There are no tax consequences to Susan because she did not receive any consideration for the transfer of the car. She will be able to recognize a loss on the car because she has not been given adequate consideration for the property. Section 351 states that no gain or loss can be recognized if the transferor receives the corporation’s stock in exchange for the property. It does not seem that this type of transfer has occurred. The car is fully depreciated and she owns less than 50% of the stock.
b. The corporation must recognize a gain on the exchange of property since they have not exchanged the car for $2,000 worth of stock to Susan. Section 351 requires that the transferor’s base in the stock be the same as the transferor’s base in the property - here $2,000. The gain on the exchange of the property will likely be reported as a capital gain and the corporation may have to pay tax on it, depending on the amount of capital losses they incur in the same period.
c. If Susan’s stock interest increased to 50 percent, Section 1239 would apply to this scenario. Section 1239 says that if a shareholder owns more than 50% of the corporation’s stock, then the transfer will be treated like an ordinary gain. She will not be able to claim a capital gain of the property for her own tax benefits.
14-62 The corporation’s $5,000 net long-term capital loss can not be deducted in the same year it is incurred. The $5,000 would be carried back to any previous capital gains incurred by the corporation. Since the loss can not be deducted in this year, the corporation’s taxable income from the information provided would be $62,000.