QUESTION
Assessment Traits
Benchmark
Requires Lopeswrite
Assessment Description
The purpose of this research paper is to introduce the various authorities of federal taxation. You will apply knowledge of applicable federal taxation concepts and laws to a real-world case scenario.
Using a memo format, prepare a professional response to the Tax Research Problem in your textbook: C:2-63.
- Facts about the case study, including a summary of the transaction.
- Provide a tax analysis of the potential transaction, including the applicable Internal Revenue Code section(s) related to the issues.
- Description of recommendations or implications to the tax manager on the consequences of the transaction to the company.
The memo should be between 400-600 words.
While APA style is not required for the body of this assignment, solid academic writing is expected, and documentation of sources should be presented using APA formatting guidelines, which can be found in the APA Style Guide, located in the Student Success Center.
This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.
You are required to submit this assignment to LopesWrite. A link to the LopesWrite technical support articles is located in Class Resources if you need assistance.
Benchmark Information
This benchmark assignment assesses the following programmatic competencies:
MS Accounting
3.1: Demonstrate knowledge and understanding of concepts and laws relating to federal taxation.
Assessment Traits
Benchmark
Requires Lopeswrite
Assessment Description
The purpose of this research paper is to introduce the various authorities of federal taxation. You will apply knowledge of applicable federal taxation concepts and laws to a real-world case scenario.
Using a memo format, prepare a professional response to the Tax Research Problem in your textbook: C:2-63.
- Facts about the case study, including a summary of the transaction.
- Provide a tax analysis of the potential transaction, including the applicable Internal Revenue Code section(s) related to the issues.
- Description of recommendations or implications to the tax manager on the consequences of the transaction to the company.
The memo should be between 400-600 words.
While APA style is not required for the body of this assignment, solid academic writing is expected, and documentation of sources should be presented using APA formatting guidelines, which can be found in the APA Style Guide, located in the Student Success Center.
This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.
You are required to submit this assignment to LopesWrite. A link to the LopesWrite technical support articles is located in Class Resources if you need assistance.
Benchmark Information
This benchmark assignment assesses the following programmatic competencies:
MS Accounting
3.1: Demonstrate knowledge and understanding of concepts and laws relating to federal taxation.
Answer
TO:
FROM:
DATE:
SUBJECT: Sec. 351 Tax-Free Treatment on Greta’s 100 White Corporation Stock and The Additional 25 Shares Right to Receive on Property-Patent
Case Facts and Transaction Summary
According to Sec 351, Transfer to a corporation controlled by the transferor, this exchange realized gain or loss is not recognized if a person transferring the property to the corporation only receives stocks in the particular company and immediately acquires control of the corporation. Unlike the first 100 shares, Greta’s twenty-five shares contingent to valuation does not qualify for a sec 351 because they are contingent to patent valuation. However, if the 25 underlying shares she received had no rights attached, they would qualify as taxable stocks under Sec. 351. The critical issue, in this case, is whether receiving the rights to the stocks can be equated to actual ownership and control of them for tax exemption under section 351. Greta does not own control rights of the 25 shares she has on her 100 White Corporation stock since their issuance depends on patent-property valuation.
Potential Transaction Tax Analysis and Relevant Internal Revenue Code Sections
A corporation or individual must satisfy two conditions to be eligible for tax-free treatment. For an individual or group to qualify for tax-free treatment, the underlying stocks received must be in exchange for the property transferred without any other form of remuneration, such as cash payment. Secondly, the transferor group or individual must immediately get control of the exchanged rights within the corporation. Only then does Sec. 351(a) requires the shareholders not to recognize a loss or gain when the property is transferred to a corporation in exchange for stock and ownership rights immediately after the exchange (Spiro, 2019). Section 368(c) discusses the criteria for obtaining control of the corporation. For the stock owner to have control of the corporation, they must own over 80% of the aggregate corporation stock number issued to them and 80% of the share’s voting powers.
Greta is eligible for the tax-free treatment under Section 351 if she receives 100 shares from White Corporation together with the extra 25 shares in exchange for her property patent. However, the corporation’s control is a challenge in her case. Greta does not need to satisfy the control test criteria under Section 368 (c) to qualify for tax-free treatment under Section 351 (Narotzki & McCoskey, 2018). She obtains 100 shares of the company's total capital, plus an additional 25 shares, as per the case. She should qualify for the tax-free treatment as long as she holds 80% of the voting power and 80% of the total shares of the White Corporation to be in control immediately after the exchange, as required by Sections 368(c) and 351.
Implications Or Recommendations of Transaction to The Company
There are tax consequences that the corporation and Greta will face. Since Greta cannot recognize loss or gain during her property-patent exchange, she could exchange her patent for the corporation’s stock while giving it time to evaluate her patent. Additionally, White Corporation cannot recognize any losses or gains 4 when exchanging its stocks for Greta’s property-patent, and the holding period for the property will include Greta's holding period. Therefore, Greta can have her patent evaluated before the exchange. An alternative recommendation for Greta is to obtain eighty percent of the corporation’s control rights after the exchange. Therefore, Greta will only be tax-exempt for the 100 shares transferred to her by the White corporation. Still, any income realized from the remaining 25 shares should be declared for the government will appropriately tax.