1. What is the impact on a transferor if a Sec. 351 exchange involves the assumption of the shareholder's liabilities by the corporation?
2. What conditions need to be met to avoid IRS classification of loans from shareholders as equity (contributions to capital)?
3. What is the tax treatment of losses from worthless stock or securities?
4. What is the tax consequence if an eligible entity elects to change from being treated as a corporation to being treated as a partnership or proprietorship?
5. If losses are suspended as a result of the lack of basis in S corporation stock, do the losses expire when the S election terminates?
6. When does a partner recognize gain on a contribution of property to a partnership?
7. What is the partnership's basis in property contributed to the partnership by a partner?
8. When is a partnership considered terminated?
9. What are the IRS rules for determining the tax year of a partnership?
10. How are start-up expenses and organization expenses handled for a new partnership?
Impact on transferor
When a corporation takes up a shareholder's liability, the transferor is subject to receive distributions owing to him to a limited extent. He will receive any distributions owed to him less the amount the corporation incurred.
Conditions to avoid classification of shareholders loans as equity
When classifying shareholders it is important to consider when the loan was made and whether there is a genuine intention that the loan will be paid back. In order to classify advances from shareholders, a company must prove that they are committed to repaying the amounts transferred. It can accomplish this by opening a liability account referred to as shareholder loan. By creating a liability account, shareholders loans are classified as company obligations and not shareholders equity (Rabkin & Johnson, 1949).
Shareholders loans should have valid debt characteristics and if possible, should be made by all shareholders in the same proportion as their stock ownership. In order to have proper debt characteristics, shareholders loans should provide repayment terms which includes the rate of interest charged on the loan and the repayment period. The company should make valid efforts to repay the loan by repaying the loan in installments. The shareholders debt should clearly provide the maturity period, repayment schedule, interest charged and the security offered.
Tax treatment for worthless securities
An owner having worthless securities can take tax deductions on his returns as a loss. However, tax deduction is only allowable for the tax period in which the securities became completely worthless. While filing taxes it is required to show that the securities are completely worthless and they have no value now or in the future. His worthless securities are treated as capital assets. This is because the securities are viewed as investments aimed at generating income. During the sale of a capital assets, either a gain is made or loss. Losses due to capital loss are subject to tax deductions thus reducing amount payable to IRS. Worthless securities are treated as capital loss while filling Form 1040, Schedule D. the ...
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