StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Organizational Tax and Planning - Research Paper Example

Cite this document
Summary
The paper "Organizational Tax Research and Planning " states that it is essential for the client to avoid rendering services as a means of substitution of assets for stock.  Rendering service especially to a subsidiary in exchange for a stock may attract an IRS audit on related party transactions…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER92.9% of users find it useful
Organizational Tax Research and Planning
Read Text Preview

Extract of sample "Organizational Tax and Planning"

Organizational Tax Research and Planning - Transfers to a Corporation al affiliation methods of transfers likely trigger a taxable event and how to present this information to a client A transfer of cash and assets to a company exclusively in trade for stock in the company, the exchange is not taxable if the transferor has full control of the company. In addition, the type of stock exchanged should not be nonqualified preferred stock. This taxation rule applies to an individual and groups who wish to reassign assets to a company. The same rule applies regardless of an existing corporation or a new corporation is being formed (Hall, 2006). Tax exemption rule with regards to substitution of assets for stock does not hold in the following circumstances. The stock is obtained in exchange for the company’s debt (except for a security) or interest accruing from the company’s liability, which accrued while the transferor held the liability. The property is transferred due to bankruptcy, and/ or comparable transaction in substitution of stock utilized to pay the company creditors. The taxation rule also does not hold given that the company is an investment company. An individual or group who are party to property exchange for stock has to attach returns on their income and a complete statement of facts relevant to the exchange. Categories and ways of transfers likely to generate taxable events Control of the corporation For an individual or group to have entire control of the business after the exchange, they must own a minimum of 80% of all shares of every class of shares that is allowed to vote. The transferor must also own 80 percent of the existing shares of every category of company’s nonvoting stock. The number of shares determines the voting power, and this implies that the transferor or group of transferors must have the majority control. Having less than 80 percent control thus triggers taxation. Illustration Client, jean and john purchase property for $ 1million. They both arrange for a corporation with $20 million fair market value. Client and jean reassign the assets to the company for its entire authorized stock that has a book value of $20m. No transaction party; that is Client, jean, john or the corporation recognizes gain. Illustration 2 Client, jean and john transfer property worth $8M to a company in substitution for stock whose fair market value is $24M. This represents a 60% of every stock class in the corporation. Supposing the other 40% of the company’s stock was sold off to someone else, then the taxable gain that Client, jean and john recognize is $16M from the exchange as they do not have the majority control. Provision of services With regards to substitution of assets for stock, service is not considered as property. Therefore, the value of stock to be received as a result of rendering a service will be considered as income to the stock recipient. Therefore, rendering service in exchange for stock will trigger a taxable event as illustrated below. Client, jean and john transfer property worth $0.9M and offer services worth $0.1M to a company in exchange for stock worth $1M. Supposing that Client, jean and john have the majority ownership in that corporation, no gain on earnings will be included in the property exchange. Nevertheless, the Client, jean and john recognize 0.1M income from the services they provided to the company and this will be taxable income. Low value property Property transfer in exchange for stock will be deemed as diminutive amount given that value calculated in fair market value terms is10% or less of the fair market worth of the stock and shares a corporation owns or to be acquired for services rendered by (client, jean and john); the transferors (IRS, nd). For illustration, Client, jean and john will not be taxed if they transfer property with a relative market worth $ 25M in substitution for stock whose relative market worth is $30M as this already meets the 10% requirement. Stock obtained in discrepancy to assets reassigned A transfer of property by a group of people does not imply that every individual will obtain stock in a fraction of the value of the property each transferred. If Client, jean and john decide to apportion stock on the basis of each person’s property value, this will be taken as if the stock was received equally, with then a quantity of it utilized to compensate services, as well as to meet the transferors’ requirements (IRS, nd). Obtaining funds or other assets If a transferor gets property or money other than stock, the gain has to be recognized. For instance, if client, john and jean receive property and money on top of stock, the taxable gain equals to the sum of cash obtained and the fair market price of the other asset obtained. Nonqualified preferred stock Offering property in exchange for nonqualified stock is taken as property rather than stock. Nonqualified stock results in taxable gains as the possessor has the mandate to necessitate the issuer to purchase the stock. The rate of dividend on nonqualified stock varies with interest rates and other similar indices. As a result, it may result in gains, which are taxable. Liabilities If the company takes on the debts of Client, jean and john on property exchange for stock, exchange is not taken as if the three received property of cash. There are exclusions to liability treatment. If the debt that the company takes on exceeds the adjusted basis in the assets transferred, taxable gain is recognized only on the difference. Nonetheless, zero profit is acknowledged if the debt assumed results in a reduction when paid. If there is no justifiable reason for the company to assume the transferors’ debts; or if the reason for exchange is to evade income tax (IRS, nd). Illustration Client, jean and john transfer property in exchange for stock. The three attain control soon after the transfer. They also receive $ 1.3M in the transaction. Their adjusted basis in the reassigned asset is $ 2.1M. The stock they obtain supposedly has a fair market price of $1.5M. The company also assumes $ 0.6M credit on the asset in which the three are liable. The taxable gain resulting from the transaction is calculated using the following method. Fair marketplace price of the stock obtained $1.5M Money received $1.3M Credit assumed by the company $0.6M Total obtained $ 3.4 Less adjusted basis of transferred property $ 2.1M Realized gain $1.3M Recognized gain $1.0M 2. Kinds of reassigns likely to add to the possibility of an audit by IRS, as well as the influence on the given advice Non cash charitable donations Transferring donations for charity, which are not in the form of cash increases chances of an IRS audit. The reason is that the donations may be overestimated in a bid to reduce taxable gain on the part of the corporation. Transfers from or to a subsidiary corporation If the client owns another company, which may be treated as a subsidiary to the present ones, any transfer of property or cash from the corporation might attract IRS audit. The reason is that transfers may be viewed as means of increasing expenses, and thus a means of reducing taxable amount. Home office donations Some businesses transfer some of their funds on the basis that they have home offices. Majority of people do a little work at homes and claim tax benefits that are not deserved. Therefore, Client and his partners should be careful with home office transfers as IRS can make them prove “exclusive use” of home office for business purpose. In the case client home deductions are found to be a mere business use, the corporation may be fined as this might be viewed as a means of evading tax liability. Business entertainment Transfer of funds for purposes of company related trips and entertainment are viewed as a source of expense overstatement. Overstating business expenses results in the reduction of profits available for taxation. As such, business entertainment and transfer of such may increase risks of IRS audit (Reeves, 2013). 3. The most beneficial kinds and ways of assets and service reassigns to reduce every tax burden and audit risk The most significant methods of transfer that result in minimal tax liability and less IRS audit are the majority ownership method and transfer of high value property. Control of a corporation after the exchange arises if the value of the property exchanged becomes more than 80 percent of all classes of shares that a corporation owns. Having more than eighty percent ownership leaves the entire control in hands of the transferor, and the exchange is always non-taxable. Transfer of property whose value is relatively high, exceeding the 10% rule does not give rise to taxation. It is essential for the client to avoid rendering services as a means of substitution of assets for stock. Rendering service especially to a subsidiary in exchange for a stock may attract IRS audit on related party transaction (UN.ORG, nd). For illustration, suppose Client, jean and john render services in substitution for stock in company XY Company. The transaction may increase the risk of audit as transaction parties are related. As such, they compromise on some issues in a bid to minimize tax liability. References Hall, C.W. (2006). Tax considerations of transfers to and distributions from the C or S Corporation. Retrieved on 8 July 2013 from IRS. (nd). Property exchanged for stock. Retrieved on 8 July 2013 from < http://www.irs.gov/publications/p542/ar02.html#en_US_2011_publink1000257749>. Reeves, J. (2013). Five tax mistakes most likely to spur an IRS audit. Retrieved on 8 July 2013 from . UN.ORG (nd). Transfer pricing methods. Retrieved on 8 July 2013 from < http://www.un.org/esa/ffd/tax/2011_TP/TP_Chapter5_Methods.pdf> Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Organizational Tax Research and Planning - Transfers to a Corporation Paper”, n.d.)
Organizational Tax Research and Planning - Transfers to a Corporation Paper. Retrieved from https://studentshare.org/finance-accounting/1622513-organizational-tax-research-and-planning-transfers-to-a-corporation
(Organizational Tax Research and Planning - Transfers to a Corporation Paper)
Organizational Tax Research and Planning - Transfers to a Corporation Paper. https://studentshare.org/finance-accounting/1622513-organizational-tax-research-and-planning-transfers-to-a-corporation.
“Organizational Tax Research and Planning - Transfers to a Corporation Paper”, n.d. https://studentshare.org/finance-accounting/1622513-organizational-tax-research-and-planning-transfers-to-a-corporation.
  • Cited: 0 times

CHECK THESE SAMPLES OF Organizational Tax Research and Planning

The Aspect of Quality Assurance and Control Measures

n other words, a comprehensive and detailed outline of the research planning shall be provided in this paper with due consideration to the research problem, research questions, and the research methodology to be followed in the study.... The research study proposed in this paper shall emphasize this aspect of quality assurance and control measures as considered by the oil and gas companies.... Further description of this paper will thereby focus on identifying the particulars of the research process intended to be executed....
14 Pages (3500 words) Dissertation

Organisational management change

1) These lines are not only mere an illusion of some research scholars but contextually reflecting the true picture behind organizational change.... Organisational Change Management Changing organizations is as messy as it is exhilarating, as frustrating as it is satisfying, as muddling-through and creative a process as it is a rational one - Palmer, Dunford and Akin (2005, p....
3 Pages (750 words) Essay

Organizational Tax Research and Planning - Tax Reform

This research paper example "Organizational Tax Research and Planning - Tax Reform" intends to examine the current state of the taxing system and formulate a plan of policy reform recommendation which will aim at the improving of tax organization system.... Based on my research, the proposal that I believe to be the most viable and financially attractive to America's economy and to the taxpayersis the temporary tax relief to create jobs.... In order to restore the economy of America, different tax provisions to bring about development, job creation and growth of the economy have been made....
8 Pages (2000 words) Research Paper

Organizational Tax Research and Planning - Estate Tax

In order to effectively bequeath the property to their descendants when they die, the couple should exercise proper estate planning, and particularly focus on matters of he estate tax.... Estate tax is the tax that is charged against any estate or inherited property receiver by descendants or legal heir.... Estate tax is the same as gift tax, only that gift can be granted during the givers lifetime while estate changes hand only after the giver dies....
10 Pages (2500 words) Research Paper

The learning organization can never be achieved in reality

Further, the learning organization concept is found to be rooted in organizational development specifically in 'action research methodology' and organic organizational theory.... owden (2001), in an effort to trace the learning organization to its founding disciplines recognizes that the concept of the learning organization is not new and can trace its roots in organizational learning (Argyris & Schon, 1978) as well as being derived from action learning (Revans, 1983)....
6 Pages (1500 words) Essay

Planning for Change in Organisation: The Case of NHS of UK

This essay "planning for Change in Organisation: The Case of NHS of UK " discusses important issue facing governments in the UK, and elsewhere as the improvement in the performance of public service organisations (Boyne 2003, Ingraham and Lynn 2004).... This paper discusses some critical determinants of public service performance, and in particular the planning for and implementation of change in organisation that may be necessary.... he Plan was overhasty, drawn up in four months by Regional Hospital Boards with little experience of, and skills in, long-term planning....
11 Pages (2750 words) Essay

Financial Management: Research focuses AMAREX Corporation

This research will basically study the Finance Management in ARAMEX, and how it affects the planning and decision taking processes in the organization.... These are important concepts that define organisations' values, competencies and are quite useful in the strategic planning and management of the organisation (Soyer & Asan 2007).... The research focuses on AMAREX Corporation....
23 Pages (5750 words) Essay

HMR and Corporate Strategy in Taxation Office

The success of a country to provide adequate services to its people depends on the ability of the taxation office to collect a sustainable tax.... On the other hand, the taxation department must train and develop the skills of the employees so that they can develop better techniques of collecting the tax.... Australian Taxation Office is a government office developed by the Australian government to perform the function of collecting tax on its behalf....
8 Pages (2000 words) Case Study
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us