Federal Taxes

Question 14-4

What is the purpose of Code Sec. 351 in regard to transfers to corporations?

The purpose of Code Sec. 351 is to allow investors the ability to avoid recognizing gains on transfers of assets to a corporation in return of property. The point is to discourage investors from contributing to corporations.

Question 14-20

What tax years are available to corporations? How do the options differ from other forms of business organizations?

A corporation may elect a calendar year, or a fiscal year, regardless of the tax years of its owners.

With a partnership it needs to have the same tax year as the principal partners.

S corporations are required to adopt the calendar year for tax purposes. However, it they can show and establish a legitimate business purpose, they can also have a fiscal year

As illustrated above corporations have greater flexibility when it comes to their tax year. Changing the tax year can greatly affect the amount of taxes being paid.

Question 14-22

What are the differences in the treatment of capital gains and capital losses of corporations and of individuals?

Corporations are allowed to net long-term capital gains or losses against short-term gains and losses to arrive at a net gain or loss. Net capital gains are taxed as ordinary income. Net capital losses, however, may not be deducted in the year incurred. They may only be deducted against net capital gains carried back 2 years with the remaining balance carried forward 20 years.

Individuals could claim up to $3,000 in capital losses using other forms of income.

Problem 14-55:

Susan Sweets is a 40 percent shareholder in Acclaim Inc., a theatrical supplies company. She transfers a fully depreciated car with a value of $2,000 to the corporation, but does not receive any consideration for it.

* a. What are the tax consequences to Susan?

There are no tax consequences at time of transfer. However, her basis in previously owned stock will be increased by...