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Tax Accounting

In: Business and Management

Submitted By tania1624
Words 288
Pages 2
In this case Jonathan who owns a sole proprietorship has transferred business assets of $1 million to a new corporation. He also transferred $325,000 of debt and adjusted basis of $200,000. Jonathan has no taxable gain or loss; he is justified in the extent that he is under section 351. The rule for section 351 is that no gain or loss should be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control of the corporation.
In this case, Jonathan is receiving stock from the corporation, like the rule states. However under section 357(a), the liability assumed by the acquiring corporation is not boot to the transferor. Also under this rule, another party in the exchange has to assume liability of the taxpayer, which still applies to Jonathan. The fact that the corporation has assumed the liabilities does not make it a taxable event. Section 357 (b) does not apply to Jonathan, but section 357 (c) does. Under 357(c), if the sum of the amount of the liabilities assumed exceeds the total of the adjusted basis of the property transferred, then the excess should be considered as a gain from the sale or exchange and is a taxable gain. This changes everything because this applies to Jonathan considering he came out ahead by $125,000, $325,000 was assumed and the adjusted basis was only $200,000. If there were no excess then Jonathan wouldn’t have a gain and there would be no taxable income, but since there was a difference in the amounts Jonathan now has a taxable gain.

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