Bruce and Bob organize Black LLC on May 10 of the current year. What is the entity’s default tax classification?
The default taxation for this company would be a partnership for federal income tax purposes.
Are any alternative classification(s) available?
An alternative tax classification can be an association which is taxable as a corporation or S corporation.
If so, (1) how do Bruce and Bob elect the alternative classification(s) and (2) what are the tax consequences of doing so?
In order to change the businesses tax election they must file a form 8832 (Entity Classification Election) with the IRS. This form has to be signed by any partner in the business that can make the election. The signature must be dated for the specific date in which the election will be changed. The date cannot be more than 75 days before or 12 months after the entity files form 8832, and a copy of the form must be attached to the tax return for that elections year.
One of the consequences of changing the tax classification elections is the business cannot change elections for 5 years after the initial change date. (A newly formed corporation that elects to change its tax classification on the date of formation is not subject to the limitations of having to remain at that tax classification for 5 years after the election has been changed.) Another consequence is the assets of the business are distributed to the partners who then have to contribute these assets to the corporation in a nontaxable exchange of stock.
1 Does the transaction satisfy the requirements of Sec. 351?
Sec 351 is satisfied because the requirements are met with Transferors Alice, Bob and Carla owning 88.2% of the Bear Stock (750/850 = 0.882)
2 What are the amount and character of the gains or losses recognized by Alice, Bob, Carla, Dick, and Bear?
A) Alice will recognize a 10k gain, the amount by which the 60k mortgage assumed by bear exceeds the 50k basis of all assets transferred by Alice (12k + 38k = 50k)
B) Bob will recognize a 10 k gain as well. The gain however is ordinary income that is recaptured under Sec. 1245. (The lesser of his realized gain of 15k of the boot received of 10k) C) Carla will no recognize a gain nor will she recognize a loss regardless of the fact that she received cash since she realized a 5k loss. D) Dick will recognize 10k in ordinary income as compensation for his services. E) Bear Corporation does not recognize a gain or loss on the issuing of stock or the issuing of the note.
3 What is each shareholder’s basis in his or her Bear stock? When does the holding period for the stock begin?
Alice’s basis in her stock is -0- the holding period for her stock includes the holding period for the land. Therefore each share of stock has a split holding period. Formula (12k + 38k – 60k liabilities + 10k gain.)
Bob’s basis is 25k the holding period for his stock includes the holding period for the equipment. Formula (25k + 10k gain – 10k boot)
Carla’s basis for her stock is 10k and the holding period for the stock includes the van. Formula (15k – 5k boot)
Dick’s basis for his stock is 10k and his holding period begins the day after the exchange.
4 What is Bear’s basis in its property and services? When does the holding period for each property begin?
Bear corporation basis on the assets received is
I. Land - 15k [12k + (.30 x 10k)[
II. Building - 45k [38k + (.70 x 10k)]
[The gain is allocated between the land and the building according to the two assets’ relative FMVs as is suggested by Sec. 357 Regulations.] The holing period for the land and building include the time Alice held these properties. III. Equipment - 35k (25k + 10k)
The holding period includes the time Bob owned the properties. IV. Van - 15k
The holding period includes the time that Carla held the property. V. Accounting Service - Bear Corp if incurred after operations have begun deducts accounting Services – these...
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