March 2, 2010
Tax Code 362 Research Case
Can the sole owner of a corporation successfully avoid taxes on the liquidation of appreciated assets by contributing depreciated property to the corporation, selling the property soon thereafter, and then waiting two years before adopting the plan to liquidate? Facts:
J is an individual who solely owns Average Corporation
Average Corporation’s assets have appreciated in value despite low profitability J will contribute depreciated property to Average, then sell it soon after to an unrelated party He will then wait two years and one month before adopting a plan to liquidate Average Corp Average will distribute the appreciated property to J
J’s plan is to use the capital loss carryover from the property he contributed to offset the gain on the distribution Analysis:
According to code section 362(c) (2) (a), property that is transferred to a corporation as contributed capital, to which section 351 applies (no gain/loss recognition if property is transferred solely for stock), and the aggregate basis of the property exceeds its aggregate value immediately after the transaction, then the transferee corporation’s basis in the property can not exceed the fair market value of the property.
When this section is applied, with respect to 351, the depreciated property transferred to Average Corporation has a basis equal to fair market value of the property on the transfer date. When Average sells the property soon after the transfer at fair market value no loss will be realized. Therefore, J’s plan will not succeed as there will be no capital loss available to carry over and offset the gain on the liquidation of Average Corporation’s appreciated assets, two years after the sale was made.
Code section 362 (e) (2) (c) provides a way for J’s plan to potentially work. The transferee and transferor can make a joint election to reduce the transferor’s basis in the stock received from the property...