Question

Carson transfers equipment to a corporation in exchange for 100% of the outstanding stock. The market value of the equipment is $20,000 and he has a basis of $30,000. Refer to the questions/suggestions in the notes and write a one paragraph memo to Carson advising him what steps to take concerning his stock basis and the corporate stock basis in the equipment. (4 points)

Comment 1: What does the word “immediately” mean in Section 362(e)(1)(B)(ii)?

Comment 2: Is the corporation’s basis still limited to market value if the corporation has no plans for “immediate” sale of the equipment? See Section 362(e)(2)?

Comment 3: Does Carson care what the corporate basis in the equipment is? Would he prefer a higher corporate basis in the equipment or a higher personal basis in his stock? Is it likely that he will sell the stock soon? As for the equipment, think about depreciation. See Section 362(e)(2)(C). What advice would you give?

Answer 1

Comment 1: What does the word “immediately” mean in Section 362(e)(1)(B)(ii)?

The provision of Sec.362(e)(1)(B) have been incroproated in law to curb benefits obtained for built in loss transaction. The section provided that where the adjusted tax basis of property transferred is lower than fair market value of property transferred the basis allowable to corporation will be "fair market value" as if immidiatley after transfer of property the gain or loss which arises & in such situation what would have been the basis for corporation

Comment 2: Is the corporation’s basis still limited to market value if the corporation has no plans for “immediate” sale of the equipment? See Section 362(e)(2)?

Yes - as explain in response to question 1 the basis of corporation will be equivalent to market value to curb the "built in loss" transaction and the purpose whether to sale immidiately or subsequently is not to be considered

Comment 3:

a) Does Carson care what the corporate basis in the equipment is?

Ans : Yes Carson would be interested in corporate basis of equipment since he is controlling shareholder hence the profit earnt by corporation ultimately belongs to shareholder

b) Would he prefer a higher corporate basis in the equipment or a higher personal basis in his stock?

Ans : It depends on his intention. If he wants to invest long in the corporation he will try to keep higher basis in corporation so that tax burden can be reduced through depreciation in near future. However if his intention is to sell the stock, he will keep higher basis so that he has to pay lower taxes

c) Is it likely that he will sell the stock soon? As for the equipment, think about depreciation. See Section 362(e)(2)(C). What advice would you give?

Since the business is just started, it will be difficult for him to sell the business. As discussed in earlier portion as he wants to invest longer period, his strategy should be to pass on higher basis to coproation so that depreciation can be used against operational inocme of corproation hence in this circumstance Carlson & his corporation should choose the option of Sec.362(e)(2)(c) through that they can have corporationg tax basis of 30,000 and in such case carlso basis would be 20,000