Questions and Comments, Popkin text pp. 74-75

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ACCY 272 Session 03 Chapter 2 (D,E) Formation of
a Corporation Text (Lind 6e), pp.
85-115 Problems, pp. 99-100,110-111 Cases, pp.
85-96Peracchi, 101-104Hempt
Bros., 111-114Black Decker Revenue Ruling,
pp. 104-107RR 95-74 by Your name here
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Chapter 2 85-115 Table of Contents

• D. Assumption of Liabilities 81-100
• Case Peracchi v. Commissioner 143 F.3d 487
  85-96
• Problems 99-100
• E. Special Problems 100-115
• Incorporation of a Going Business 100-111
• Case Hempt Brothers, Inc. v. United States 95
  S.Ct. 44 (1974) 101-104
• Revenue Ruling 95-74 104-107
• Problems 110-111
• Contingent Liability Tax Shelters 111-114
• Case Black Decker Corp. v. United States
  111-114
• Intentional Avoidance of 351 114-115

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D. Assumption of Liabilities 81-100
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D. Assumption of Liabilities 81-100Case
Peracchi v. Commissioner 143 F.3d 487 85-96

• Code
• Issue
• Facts
• Law and Analysis
• Holding

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D. Assumption of Liabilities 81-100Problems
99-100

• 1. A organized X Corporation by transferring the
  following inventory with a basis of 20,000 and
  a fair market value of 10,000 and unimproved
  land held for several years with a basis of
  20,000 a FMV of 40,000 and subject to a
  recourse debt of 30,000. In return, A received
  20shares of X stock (FMV 20,000) and X took the
  land subject to the debt.
• (a) Assuming no application of 357(b), how much
  gain, if any, does A recognize and what is A's
  basis and holding period in the stock?

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D. Assumption of Liabilities 81-100Problems
99-100

• 1. A organized X Corporation by transferring the
  following inventory with a basis of 20,000 and
  a fair market value of 10,000 and unimproved
  land held for several years with a basis of
  20,000 a FMV of 40,000 and subject to a
  recourse debt of 30,000. In return, A received
  20shares of X stock (FMV 20,000) and X took the
  land subject to the debt.
• (a) Assuming no application of 357(b), how much
  gain, if any, does A recognize and what is A's
  basis and holding period in the stock?
• (b) What result in (a), above, if the basis of
  the land were only 5,000?

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D. Assumption of Liabilities 81-100Problems
99-100

• 1. A organized X Corporation by transferring the
  following inventory with a basis of 20,000 and
  a fair market value of 10,000 and unimproved
  land held for several years with a basis of
  20,000 a FMV of 40,000 and subject to a
  recourse debt of 30,000. In return, A received
  20shares of X stock (FMV 20,000) and X took the
  land subject to the debt.
• (a) Assuming no application of 357(b), how much
  gain, if any, does A recognize and what is A's
  basis and holding period in the stock?
• (b) What result in (a), above, if the basis of
  the land were only 5,000?
• (c) In (b), above, what is the character of A's
  recognized gain under Reg. 1.357-2(b)?
• Does this result make sense?
• How else might the character of A's gain be
  determined?

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D. Assumption of Liabilities 81-100Problems
99-100

• 1. A organized X Corporation by transferring the
  following inventory with a basis of 20,000 and
  a fair market value of 10,000 and unimproved
  land held for several years with a basis of
  20,000 a FMV of 40,000 and subject to a
  recourse debt of 30,000. In return, A received
  20shares of X stock (FMV 20,000) and X took the
  land subject to the debt.
• (d) In (b), above, what is X Corporation's basis
  in the properties received from A?

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D. Assumption of Liabilities 81-100Problems
99-100

• 1. A organized X Corporation by transferring the
  following inventory with a basis of 20,000 and
  a fair market value of 10,000 and unimproved
  land held for several years with a basis of
  20,000 a FMV of 40,000 and subject to a
  recourse debt of 30,000. In return, A received
  20shares of X stock (FMV 20,000) and X took the
  land subject to the debt.
• (a) Assuming no application of 357(b), how much
  gain, if any, does A recognize and what is A's
  basis and holding period in the stock?
• (b) What result in (a), above, if the basis of
  the land were only 5,000?
• (e) What might A have done to avoid the
  recognition of gain in (b) above?

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D. Assumption of Liabilities 81-100Problems
99-100

• 2. B organized Y Corporation and transferred a
  building with a basis of100,000 and a fair
  market value of 400,000. The building was
  subject to a first mortgage of 80,000 which was
  incurred two years ago for valid business
  reasons. Two weeks before the incorporation of Y,
  B borrowed 10,000 for personal purposes and
  secured the loan with a second mortgage on the
  building. In exchange for the building, Y
  Corporation will issue 310,000 of Y common stock
  to B and will take the building subject to the
  mortgages.
• (a) What are the tax consequences to B on the
  transfer of the building to Y Corporation?

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D. Assumption of Liabilities 81-100Problems
99-100

• 2. B organized Y Corporation and transferred a
  building with a basis of100,000 and a fair
  market value of 400,000. The building was
  subject to a first mortgage of 80,000 which was
  incurred two years ago for valid business
  reasons. Two weeks before the incorporation of Y,
  B borrowed 10,000 for personal purposes and
  secured the loan with a second mortgage on the
  building. In exchange for the building, Y
  Corporation will issue 310,000 of Y common stock
  to B and will take the building subject to the
  mortgages.
• (b) What result if B did not borrow the
  additional 10,000 and, instead, Y Corporation
  borrowed 10,000 from a bank and gave B 310,000
  of Y common stock, 10,000 cash and will take the
  building subject to the 80,000 first mortgage?

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D. Assumption of Liabilities 81-100Problems
99-100

• 2. B organized Y Corporation and transferred a
  building with a basis of100,000 and a fair
  market value of 400,000. The building was
  subject to a first mortgage of 80,000 which was
  incurred two years ago for valid business
  reasons. Two weeks before the incorporation of Y,
  B borrowed 10,000 for personal purposes and
  secured the loan with a second mortgage on the
  building. In exchange for the building, Y
  Corporation will issue 310,000 of Y common stock
  to B and will take the building subject to the
  mortgages.
• (a) What are the tax consequences to B on the
  transfer of the building to Y Corporation?
• (b) What result if B did not borrow the
  additional 10,000 and, instead, Y Corporation
  borrowed 10,000 from a bank and gave B 310,000
  of Y common stock, 10,000 cash and will take the
  building subject to the 80,000 first mortgage?
• (c) Is the difference in results between (a) and
  (b), above, justified?

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D. Assumption of Liabilities 81-100Problems
99-100

• 2. B organized Y Corporation and transferred a
  building with a basis of100,000 and a fair
  market value of 400,000. The building was
  subject to a first mortgage of 80,000 which was
  incurred two years ago for valid business
  reasons. Two weeks before the incorporation of Y,
  B borrowed 10,000 for personal purposes and
  secured the loan with a second mortgage on the
  building. In exchange for the building, Y
  Corporation will issue 310,000 of Y common stock
  to B and will take the building subject to the
  mortgages.
• (d) When might there be legitimate business
  reasons for a C assuming a transferor's debt or
  taking property subject to debt?

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E. Special Problems 100-1151. Incorporation of
a Going Business 100-111
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E. Special Problems 100-1151. Incorporation of
a Going Business 100-111Case Hempt Brothers,
Inc. v. United States 95 S.Ct. 44 (1974) 101-104

• Code
• Issue
• Facts
• Law and Analysis
• Holding

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E. Special Problems 100-1151. Incorporation of
a Going Business 100-111Revenue Ruling 95-74
104-107

• Code
• Issue
• Law Analysis
• Ruling

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E. Special Problems 100-1151. Incorporation of
a Going Business 100-111Problems 110-111

• Architect, a cash basis TP, has been conducting a
  business as a sole proprietorship for several
  years. Architect decides to incorporate, and on
  July 1 of the current year he forms Design, Inc.,
  to which he transfers the following assets
• Assets AB FMV
• Accounts Receivable 0 60,000
• Supplies 0 20,000
• Unimproved Land 60,000 120,000
• 60,000 200,000
• The land was subject to contingent environmental
  liabilities that Architect had not taken into
  account (i.e., had not deducted or capitalized)
  for tax purposes at the time of the
  incorporation. The supplies were acquired nine
  months ago and their cost was immediately
  deducted by Architect as an ordinary and
  necessary business expense.
• In exchange, Architect receives 100 shares of
  Design common stock with a FMV of 100,000. In
  addition, Design assumes 70,000 of accounts
  payable to trade creditors of Architect's sole
  proprietorship and a 30,000 bank loan incurred
  by Architect two years ago for valid business
  reasons, and it assumed the environmental
  liabilities associated with the land.
• Design elects to become a cash method, calendar
  year TP.
• During the remainder of the current year, it pays
  30,000 of the accounts payable and collects
  40,000 of the accounts receivable transferred by
  Architect.
• In the following taxable year, Design paid
  20,000 in environmental remediation expenses
  that qualified for a current deduction when paid
  or accrued under Section 162.

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E. Special Problems 100-1151. Incorporation of
a Going Business 100-111Problems 110-111

• What are the tax consequences (gain or loss
  recognized, basis and holding period) of the
  incorporation to Architect and Design, Inc.?

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E. Special Problems 100-1151. Incorporation of
a Going Business 100-111Problems 110-111

• (b) Who will be taxable upon collection of the
  accounts receivable Architect, Design or both?

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E. Special Problems 100-1151. Incorporation of
a Going Business 100-111Problems 110-111

• (c) When Design pays the accounts payable assumed
  from Architect and incurs the environmental
  remediation costs, may it properly deduct these
  expenses?

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E. Special Problems 100-1151. Incorporation of
a Going Business 100-111Problems 110-111

• Assume that Architect is in the highest marginal
  individual tax bracket and Design, Inc.
  anticipates no significant TI for the current
  year
• What result, if Architect decides to pay (and
  deduct) personally all the accounts payable. and
  transfers the accounts receivable to the C?

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E. Special Problems 100-1151. Incorporation of
a Going Business 100-111Problems 110-111

• (e) Would your answers be any different if
  Architect had been an accrual method TP?

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E. Special Problems 100-1151. Incorporation of
a Going Business 100-111Problems 110-111

• (f) Is Design, Inc. limited in its choice of
  accounting method (i.e., cash or accrual) or
  taxable year? See 441 448.

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E. Special Problems 100-1152. Contingent
Liability Tax Shelters 111-114Case Black
Decker Corp. v. United States 111-114

• Code
• Issue
• Facts
• Law and Analysis
• Holding

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3. Intentional Avoidance of 351 114-115
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