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Nancy and her daughter, Kathleen, have been working together in a cattery called “The Perfect Cat.”...

Nancy and her daughter, Kathleen, have been working together in a cattery called “The Perfect Cat.” Nancy formed the business in 2001 as a sole proprietorship, and it has been very successful. Assets have a fair market value of $450,000 and a basis of $180,000. On the advice of their tax accountant, Nancy decides to incorporate “The Perfect Cat.” Because of Kathleen’s participation, Nancy would like her to receive shares in the corporation. What are the relevant tax issues?

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Nancy can issue a shares of $(450000 - 180000) = $270000 to her daughter kathleen and book the assets at the Market value of $450000.

The relevant tax issues are (a) On the perfect cat , the $270000 is treated as its income and tax has to paid at the requisite Marginal rate. (b) On kathleen, she has to bear the tax implication reducing the tax deducted by the firm.

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