Transfers of Property to a Corporation In Exchange for Stock

Transfers of Property to a Corporation In Exchange for Stock Denver Business Attorney

A Denver tax attorney and business attorney at The McGuire Law Firm can assist clients with the formation and structure of corporations.  The article below outlines the tax implications when contributing property to a corporation in exchange for stock.

Many business owners inquire as to their gain or loss recognition when contributing property to a corporation in exchange for stock, as well as the implications to the corporations.  While certain business transactions may require the recognition of gain or loss, it is possible for gain or loss to be avoided.

 

In general, a corporation does not recognize gain or loss upon the issuance or sale of its own stock under IRC Section 1032.  Although, IRC Section 1001 treats the transfer of property for stock in a corporation as a sale where gain or loss is recognized under IRC Section 1002, IRC Section 351 may be able to avoid this gain recognition.

 

For IRC Section 351 to apply one or more persons must transfer property to a corporation; the transfer must be solely in exchange for stock in such corporation; and, the transferors must control the corporation immediately after the transfer and “control” is defined as 80% or more under IRC Section 368(e).  If Section 351 does not apply, gain or loss will be recognized under Section 1001.  Furthermore, Section 351 is mandatory and not an election.

 

The statute does not define “property” but “property” includes cash as well as tangible and intangible property.  Regarding intangible property, if the property has value separate and apart from the existence of the business, it is considered property.  It is important to note that services are not considered property; however, the stock issued for the performance of services does not necessarily cause the transfer to fail to qualify as a Section 351 transfer.  Under such circumstances the person receiving the stock for the performance of services is not counted or considered when the 80% control requirement is calculated.

 

If non-qualified preferred stock is issued by the corporation, this non-qualified preferred stock is treated as “boot” for purposes of gain when received in exchange for property that is transferred to a controlled corporation.

 

The Receipt of “Boot”

 

If a shareholder (transferor) receives money or property in addition to the stock, this money or property is considered “boot.”  If a shareholder does receive boot through the transaction, gain is recognized at the lesser amount of the realized gain or the boot received.   The receipt of a short term note or certain stock rights and warranties would be considered boot, but debt is not considered boot although it would lower basis.

 

Contact a tax attorney and business attorney at The McGuire Law Firm to assist you with the formation and structure of business entities as well as the tax implications to the business & business owners.

 

You can schedule a free consultation with a small business attorney in Denver by contacting The McGuire Law Firm.    John@jmtaxlaw.com

 

 

Year End Tax Planning by Tax Attorney

Year End Tax Planning Denver Tax Attorney

Time moves fast, especially this time of year.  Soon we will be gathering for Thanksgiving feasts, and in what would seem like the following day, be celebrating the holidays and bringing on 2014.  Although, the up and coming holiday season makes many busy, this can also be a wonderful time of year to plan for your tax returns due in 2014.  Below are just a few considerations from a Denver tax attorney and estate planning attorney at The McGuire Law Firm.

Gifting and Charitable Giving:

If you are concerned about a taxable estate, this time of year can be a great time to gift to family members and take advantage of the annual gift tax exclusion while lowering your taxable estate.  You can gift up to $13,000 to each individual without creating any gift tax issues and/or lowering your lifetime ability to gift property.  If gifting certain property, you may still want to file a gift tax return, which allows the clock to begin ticking on the time available for the IRS to audit the return and question the fair market value of the gift.  Furthermore, you may wish to look at your year-end tax position and consider donating to your favorite charity or creating a charitable trust.  However, depending upon the outlook of 2014, maybe you should wait for such charitable contributions.  The key is to make these considerations now and look at the tax implications before it is too late.  Do not wait until 2014 and find yourself outside looking in on what you should have done in 2013.

 

College Funding:

Take advantage of the state income tax deduction and make a contribution to a child’s or grandchild’s 529 college savings plan.  Not only does this 529 savings plan contribution have current tax benefits, it is a wonderful way to help provide financial assistance for the education of your loved ones.

 

Take Advantage of Certain Capital Losses Now:

Many investors have witnessed capital gains with the increases in the stock market.  If you have loss property, now may be a good time to consider the sale, transfer or disposition of such loss property to offset other capital gains in 2013.  Capital losses can offset capital gains and an additional $3,000 of ordinary income.  Further, these capital losses can be carried forward to offset capital gains in following years, or $3,000 of ordinary income each year in the years to follow.  Thus, ask yourself if it is time to cut bait on certain investments and take advantage of the loss now depending upon your other circumstances.

A Denver tax attorney and estate planning attorney at The McGuire Law Firm can assist you with year-end tax planning and tax planning at anytime depending upon a client’s circumstances, questions and issues.

Contact The McGuire Law Firm to schedule a free consultation with a tax attorney in Denver!

Partnership Basis by Denver Tax Attorney and Business Attorney

Partnership Basis Denver Tax Attorney

A Denver business attorney at The McGuire Law Firm can assist business owners in understanding their ownership interest in their business and how such value can impact their tax consequences upon sale or transfer.  The article below has been drafted by a business attorney to discuss a partner’s basis in their partnership interest.

Just as your basis in a share of stock is important for determining gain or loss upon the sale of that stock, a partner’s basis in their partnership interest is important in determining gain or loss after sales, exchanges or distributions, and also when computing certain basis adjustments.

A partner’s basis in a partnership interest acquired by contribution is the sum of the money contributed and the adjusted basis of any property contributed.  However, if gain is recognized, the partner does not receive an income in basis for the amount of the gain recognized under Internal Revenue Code Section 731.  The contribution of promissory note by a partner does not increase the partner’s basis because Under IRC Section 722, the partner has a basis of zero in the note.  When losses or deductions are passed through from the partnership to the individual partners, a partner’s distributive share of the partnership loss or deduction is deductible only to the extent of their basis at the end of the taxable year under IRC 704(d).  If a partner has disallowed losses, these losses are carried forward until the partner has sufficient basis to take the loss, which is stated under Regulation 1.704-1(d).

A partner’s basis within the partnership is adjusted as the partnership operates and income & losses are distributed to the partner.  A partner’s basis will increase under IRS Section 705 by the sum of the distributive share for the taxable year and prior taxable years regarding the following items: taxable income to the partnership; income of the partnership exempt from tax; the excess of the deduction for depletion over the basis of the property subject to depletion; and, additional capital contributions.  A partner’s basis will decrease under IRC Section 705(a)(2) (but not below zero) by distributions from the partnership (property or monies) and by the sum of the partner’s distributive share for the taxable year and prior taxable years for losses of the partnership and expenditures of the partnership not deductible in computing taxable income & not properly chargeable to capital (meals & entertainment).

When individuals are considering forming a partnership and contributing money and/or property, it is advised that the partners or the partnership consult a tax attorney or business attorney regarding the importance of basis and adjustments to basis.  Because a partner’s basis “follows” the partner it is important to correctly and accurately track each partner’s basis, and for the partner’s to understand how certain transactions can impact their basis.

A Denver business attorney and tax attorney at The McGuire Law Firm can assist clients regarding partnership transactions and partnership issues including: formation, contribution of property, partnership taxation, allocation of partnership items, purchase or sale of partnership interests and other transactional matters.

Schedule a free consultation with a business attorney by contacting The McGuire Law Firm!

 

Liquidating Distributions & Shareholder Gain or Loss by Denver Business Attorney

Liquidating Distributions & Shareholder Gain or Loss Denver Tax Attorney

At The McGuire Law Firm, a Denver business attorney and tax attorney can assist you with all types of business transactions from formation to sale.  The article has been drafted by a tax attorney to discuss liquidating distributions from a corporation and tax consequences to the individual shareholders.

When a corporation liquidates, generally the monies due to the corporation are collected, corporate debts are paid and then cash and/or property is distributed to shareholders per their ownership interest in the corporation.  These distributions of cash and/or property are considered liquidating distributions and are likely to receive different treatment than if distributed to a shareholder when the corporation was operating and intended to continue such operation.

Under IRC § 331(a), the amounts received by a shareholder through the complete liquidation of a corporation are treated as full payment in exchange for the shareholder’s stock.  Therefore, the shareholder is afforded capital gains treatment regarding the liquidating distribution(s) assuming the stock is a capital asset under IRC § 1221, which it usually is.

As a capital gain, the amount of gain or loss will be determined by the shareholder’s basis in his or her stock, and whether the gain or loss is short term or long term will depend upon the shareholder’s holding period.  If a shareholder owes a debt to the corporation and the debt is cancelled through the liquidation, the amount of debt owed by the shareholder is also treated as a liquidating distribution.  The shareholder’s gain or loss must be computed on a per-share basis and therefore, gain or loss is calculated separately when stock was acquired a different times and for different prices.

When a shareholder receives multiple liquidating distributions, the shareholder can apply all of their basis first before reporting gain or loss.  Therefore, shareholders may be able to defer the recognition of gain for multiple tax periods or years when they receive multiple liquidating distributions.  In regards to recognizing a loss through multiples distributions, the loss is not recognized until the final distribution is received by the shareholder.  If a shareholder is receiving payments from a third party note received by the corporation in a liquidating sale, the shareholder may be able to use the installment method when reporting gain.

The shareholder’s gain or loss will be the difference between the adjusted basis of their stock and the fair market value of the liquidating distribution.  While the fair market value of cash distributed to a shareholder in a complete liquidation may be easily ascertained, issues arise when property is distributed to a shareholder through a complete liquidation.  Appraisals may be necessary for certain tangible assets, but appraising certain intangibles may prove futile.  If the value of certain assets cannot be ascertained with reasonable accuracy, the calculation with respect to these assets is left open until the assets are sold to a third party or an ascertainable value is available.

A Denver, CO tax attorney and business attorney at The McGuire Law Firm can assist clients regarding the liquidation of corporations and tax treatment.

Contact The McGuire Law Firm to schedule a free consultation with a Denver tax attorney or business attorney!

Receiving a Partnership Interest in Exchange for Services

Receiving a Partnership Interest in Exchange for Services Denver Business Attorney

Many partners receive a partnership interest for services they have performed on behalf of the partnership.  A Denver tax attorney and business attorney at The McGuire Law Firm assists partners and the partnership in understanding the tax implication upon receipt of the interest and other issues to consider.

When an interest in the capital of a partnership is received in exchange for services performed, the transfer is treated as a transfer of property under IRC Section 83.  Under IRC Section 83, property that is transferred in connection with the performance of services is taken into account when the property becomes substantially vested.  Property is considered to have a substantial risk of forfeiture if the rights to the property are based upon a future condition or future performance of some service or services.

When property is received for the performance of services, the fair market value of the property received is included in income.  A taxpayer can make the IRC 83(b) election whereby the taxpayer can elect to include the value of the property in income upon receipt at the fair market value when the property is subject to a risk of substantial forfeiture. Our Denver business attorneys and tax attorneys feel that making this election can benefit the taxpayer if the property appreciates because the future appreciation and gain would be taxed to the taxpayer as a capital gain as opposed to ordinary income.

 

An individual receiving an interest in a partnership for services performed should discuss this issue with their tax attorney or business attorney in order to understand the tax implications and their options regarding the transaction.

Speak with a Denver tax attorney and business attorneys at The McGuire Law Firm regarding the formation of partnerships, partnership taxation, partner taxation and other partnership transactions and issues.

You can contact The McGuire Law Firm to schedule your free consultation with a tax attorney and business attorney.

Corporate Income Tax & Undistributed Corporate Income

Corporate Income Tax and Undistributed Corporate Income Business Attorney

Corporate income tax and undistributed corporate income are issues for business owners and their tax attorney and/or business attorney.

Corporations have been taxed by the United States government since 1909 under the Payne-Aldrich Tariff Act.  Internal Revenue Code Section 77010(a)(3) includes associations and joint stock companies within the definition of “Corporation.”  Thus, federal corporate income tax is imposed on corporations that do not constitute a corporation under state law.  Certain corporations known as S Corporations that are pass-through entities are not taxed at the corporate level, but rather at the shareholder level as profits, losses and other items are passed through to the individual shareholders.

Although, exceptions exist, a corporation’s taxable income is computed in very similar fashion to that of an individual.  Generally, the major difficulties do not arise in computing a corporation’s taxable income or tax liability, but because, distributed income is taxable to the shareholder(s) and undistributed is not; an exchange of stock or securities may or may not lead to the recognition of gain; certain sales may actually be a dividend (disguised dividends); and, considerations regarding arm’s length transactions between a corporation and the corporation’s shareholders.  These are issues that should be discussed with your tax attorney or business attorney.

The Internal Revenue Code treats corporations as independent taxpayer’s and therefore a corporation is taxed on corporate income as it is received or accrued.  However, the shareholders of the corporation are taxed only when (and if) corporate distributions are made, or stock is sold.  Therefore, at times, it could have been beneficial to operate as a corporation as opposed to a sole proprietorship or other entity if the corporate tax rates were less than the individual tax rates.

More current laws have increased the corporate income tax rate, and under certain sections of the Internal Revenue Code, the IRS has a variety of means by which to exploit corporate income that has been insulated or undistributed to shareholders.  I.R.C. Section 482 allows the IRS to reallocate gross income, deductions, credits and other allowances between 2 or more business entities or organizations that are under common control so that income is clearly reflected.  Furthermore, I.R.C. Section 531 allows an accumulated earnings tax to be imposed by the IRS on undistributed corporate income, when the failure to distribute income is deemed for the purpose of avoiding tax.  Generally, the IRS would look to see if the corporation had accumulated earnings beyond the reasonable need of the corporation.  Additionally, I.R.C. Section 541 imposes personal holding company (PHC) tax on undistributed income within a PHC.

Due to changes of tax rates and the above code sections, use of the C Corporation can make less sense depending upon the taxpayer’s overall circumstances.  Often the choice to operate as a C Corporation is by default because the entity must operate in the C Corporate form, and/or is ineligible to make the S Election with Form 2553 and operate as an S Corporation.

When deciding upon your choice of entity, or if you have questions regarding entity taxation, please feel free to contact a Denver tax attorney or business attorney at The McGuire Law Firm.

Schedule a free consultation with a Denver tax attorney at The McGuire Law Firm!

Foreign Account Tax Compliance Act (FATCA)

Foreign Account Tax Compliance Act (FATCA) Denver Tax Attorney

As a Denver tax attorney, John McGuire works with clients to ensure their compliance with the Foreign Account Tax Compliance Act.  The article below outlines compliance issues and considerations.

The Foreign Account Tax Compliance Act and related provisions became law in 2010.  The act targets United States taxpayer who may be using foreign accounts and not reporting income or gain from these foreign accounts and therefore not complying with the Internal Revenue Code.  Under the Internal Revenue Code and federal law, United State citizens are taxed on world-wide income.  Although, credits exist from foreign earned income, all income must be properly reported and accounted for on the 1040 Individual Income Tax Return.

The primary focus of FATCA is to encourage United States citizens to report certain foreign financial accounts and foreign assets.  Further, FATCA focuses on reporting by foreign financial institutions to report financial accounts held by United States taxpayers and/or foreign entities in which United States taxpayers hold a substantial economic interest.  Therefore, the provisions of FATCA impact individuals holding foreign accounts or assets, in addition to economic interest in certain foreign entities.

Individual taxpayers must report foreign accounts and other offshore assets on Form 8938, and attach Form 8938 to their 1040 Individual Income Tax Return.  If a taxpayer’s total foreign assets are below a threshold, the individual does not need to file Form 8938.  If an individual’s value of foreign assets is $50,000 or less at the end of the tax year, and never exceeded $75,000 during the tax year, the individual does not have to file Form 8938.  This threshold may be higher for individuals who live outside the United States, and the threshold can change depending upon a taxpayer’s filing status.  It is important to note that the reporting requirement for Form 8938 is different than the reporting requirement to comply with the FBAR rules (Report of Foreign Bank and Financial Accounts).  The Internal Revenue Service is also expecting to issue regulations that would require an entity holding foreign financial assets above the threshold to file Form 8938.  However, until these regulations are issued by the Internal Revenue Service, the reporting requirement under Form 8938 only applies to individuals.

The Internal Revenue Service has initiated voluntary disclosure programs for individuals to disclose foreign assets and accounts, whereby the penalties that can be assessed to the individual are significantly lessened.

Contact The McGuire Law Firm to discuss FATCA issues with a tax attorney.

Compensation Planning: Types of Qualified Plans by Denver Tax Attorney

Compensation Planning: Types of Qualified Retirement Plans Denver Business Attorney

Compensation planning can be very important for business owners both individually and as a means by which to maintain the services of employees.  As a Denver business attorney and tax attorney, John McGuire works with businesses to create and implement compensation plans.  A Denver tax attorney can also assist you with the tax implications of certain plans and other tax issues.

There are multiple types of qualified retirement plans that can be submitted to the IRS for qualification.  A qualified plan is a plan that has met the requirements of the code, regulations and other pronouncements to receive tax exempt status.  The most important tax advantages of a qualified plan are: 1) the employee does not include in their gross income their interest in the employer contribution or the income earned by the trust fund until the employee receives funds from the plan; 2) the employer may deduct contributions to the plan; 3) the earnings of the plan are exempt from tax while held in the trust; 4) certain distributions may be eligible for special income tax treatment.

Defined Benefit Plans

Defined benefit pension plans are plans where the employer provides payment of definite and determinable benefits to employees over a period of years.  Usually benefits are paid to employees for their life after retirement.  The benefits received by the employees in retirement are usually measured by factors such as years of service to the employer and compensation received by the employer.  There are three general types of defined benefit plans: 1) Fixed benefit formula providing a fixed amount of benefits that is unrelated to years of service by the employee or the employee’s earnings and compensation 2) Flat benefit formula providing retirement benefits equal to a fixed percentage of the employee’s salary regardless of the time of services; and 3) Unit benefit formula that provides the employee with retirement benefits at a specific percentage of each years average or actual compensation paid to the employee multiplied by the years of service.

Under ERISA the employer is usually required to make annual payments into the trust that would be necessary to fund the benefits.  The benefits of the plan are partially guaranteed by the Pension Benefits Guaranty Corporation.  Defined benefit plans promise employees very specific benefits at retirement.  No individual accounts are created for the individual employees and no assets are separated from within the plan.

Defined Contribution Plans

Defined contribution plans hold individual accounts for each participant in the plan and for benefits based on the amount the participant contributes to their account.  There are three types of defined contribution plans: 1) Profit sharing plans are established and maintained by employers providing a share of the employer profits with employees.  Contributions can be determined by the employer or based upon a fixed equation or formula.  The plan must provide a specific pre-determined equation or formula for the allocation of contributions that are made to the plan by the plan participants; 2) Stock bonus plans are established and maintained by the employer providing similar benefits to a profit sharing plan, but the benefits are distributable in stock of the employer company; 3) Money purchase plans are a defined contribution plans with individual accounts similar to profit sharing plans.  The amount of the annual contribution is determined by applying a specific equation or formula.

Employers considering the creation of a qualified retirement plan should consult with their business attorney and tax attorney regarding their obligations to the plan and the tax implications to their business.

Contact The McGuire Law Firm to speak with a business attorney or tax attorney

 

The Varying Interest Rule & IRC 706

The Varying Interest Rule and I.R.C. § 706 Denver Tax Attorney

            If you are considering transferring a partnership interest or admitting a new partner to a partnership, considerations need to be made regarding the allocation of each partner’s distributive share.  A Denver tax attorney we assist you and your partnership in understanding the Varying Interest Rule and other partnership issues.  Although, such issues are discussed briefly below, it is recommended that you contact your tax attorney or business attorney to discuss these issues and how they relate to your circumstances.

 

If a partner transfers their partnership interest, or a partnership admits a new partner(s) based upon the new partner’s contribution of capital, a shift in the partner’s interest will occur.  This shift in interest creates issues regarding the closing of the partnership’s taxable year, the allocation of partnership items between the transferor and transferee, and retroactively allocating items to the incoming or “new” partner.  The closing of the partnership taxable year is governed by I.RC. § 706(c) and § 706(d), the varying interest rule, governs the allocation of each partner’s distributive share.  Although, the substantial economic effect doctrine under I.R.C. § 704(b) can also impact the allocation of a partner’s distributive share, the substantial economic effect doctrine and related issues will not be discussed in this article.

 

Under §706(c)(1), except upon the termination of the partnership, the partnership’s taxable year does not close upon the death or entry of  a partner, the sale or exchange of a partner’s interest or the liquidation of a partner’s interest.  However, under 706(c)(2), the taxable year of a partnership does close with respect to a partner whose entire interest in the partnership terminates due to death, liquidation or another reason.

 

When partners interest in the partnership change during a taxable year, the partner’s distributive share of partnership income, gain, loss or deduction are determined by taking into account the partner’s varying interest in the partnership during the taxable year.  I.R.C. §706(d) applies to changes amongst partner’s interest during the taxable year.  These changes include sales, partial sales, gifts and reductions in the partner’s interest.  Under the code, cash basis partnerships are also forbidden from deferring certain payments for deductible items until the end of the year.  For example, if a new partner was admitted on December 1st, and rent for the entire year was paid December 15th, the newly admitted partner may not be able to receive the benefit of the entire years rent payment as they were only a partner for one month of the taxable year.  Additionally, under I.R.C. 706(d)(2)(D), when items are attributable to periods of time prior to the beginning of the tax year and are later assigned to the first day of the taxable year thereafter, such items should be allocated to the partners who were partners during the period of time each item is attributable.  If any partner is not a partner when the item is being allocated, this partner’s portion of the item should be capitalized by the partnership and allocated to the basis of the partnership assets under I.R.C. §755.

As a Denver tax attorney and business attorney, John McGuire works with partners and partnerships regarding the issues discussed above and other partnership issues.  Please feel free to take advantage of our free consultation at anytime.

Schedule a free consultation with a business attorney by contacting the McGuire Law Firm.

Stock v. Debt Classification Issues

Stock v. Debt: Classification Issues

Denver Business Attorney

Classification issues commonly exist regarding debt versus stock treatment.  John McGuire, as a Denver business attorney and tax attorney assists individual investors and businesses regarding this issues.  Hopefully, the article below provides useful information.

Substance over form is used in determining whether an instrument received by an investor in exchange for property contributed to a corporation is treated as stock or debt.  Thus, the title of “stock” or “debt” alone by the corporation or individual is not necessarily determinative or controlling of the treatment for income tax purposes.

Currently there is no definition in the Internal Revenue Code to determine when an interest in a corporation constitutes debt and when an interest constitutes stock.  Therefore, determining how an interest should be labeled and the tax implications is derived through case law as the courts attempt to determine if the investment or instrument more closely resembles a true debt interest or true equity interest.

A debt interest is defined as: a written unconditional promise to pay a principal amount, on demand or before a fixed maturity date, within a reasonable time in the future, with interest payable in all events and no later than maturity.  An equity interest is defined as: an investment which places the funds contributed by the investor at the risk of the business, provides for a share of future profits of the business, and gives rights to control or mange the business.

Although courts has established a number of factors and criteria to determine and differentiate between debt and equity interests, no single factor or set of factors allows for a completely accurate and universal determination.  Thus, the factors only aid in the interpretation.  Each case must be analyzed separately by weighing the facts & circumstances of the case.

Thinness

The “thinness” of a corporation’s capital structure refers to the ratio of debt to equity.  When far more debt has been invested than equity, a corporation is referred to as “thin” and lacking equity contributions from shareholders.  Due to the fact a debt to equity ratio can be viewed somewhat subjectively and mechanically, it has been used to create statutory rules that would disallow interest deductions.  Issues however, remain such as should only shareholder held debt be included when calculating the ratio, and regarding equity, is market value or tax basis used?

I.R.C. Section 385

Enacted in 1969, IRC Section 385 authorized the U.S. Treasury Department to promulgate regulations governing the determinations of stock v. equity interests in corporations.  The Treasury issued proposed regulations multiple times that were to become final, but after criticism, the regulations were never finalized and have yet to be.  It appears that boiling down this complex matter into working rules and regulations is a daunting task, and the Treasury, for the time being has moved on to other issues and interests.

I.R.C. Section 163(e)

IRC Section 163 applies to a debt instrument issued at a large discount and thus reflects an unreasonably high interest rate.  The large or excessive portion of the discount is deemed and treated as a dividend, and not interest to the investor/recipient and the payor (corporation/entity) is disallowed a deduction for the excessive amount.

At The McGuire Law Firm a Denver business attorney and tax attorney can assist you with the formation and structure of your entities including debt & equity issues.

Contact The McGuire Law Firm to speak with a business attorney or tax attorney.