ItвЂ™s the same reason weвЂ™re allowed to swap property for property tax-free in a like-kind exchange under Section 1031 or sell the stock or assets of a corporation in exchange for stock of the purchasing corporation in a tax-free reorganization under Section 368. Instead, we are simply continuing that investment in the property in a different form i.e., through the corporation we now control. Why are we given such a substantial break? In the eyes of the IRS, if we transfer appreciated property to a corporation in exchange for stock constituting control in that corporation, we havenвЂ™t вЂњcashed outвЂќ our investment in the property. As a result, there has been a version of what is now Section 351 in the law for the last century, providing an exception to the general rule of Section 1001 and allowing transfers of appreciated property to a corporation - if a number of requirements are met - to go currently untaxed. And generally speaking, Congress tries to make it easy for a business to change its form (except for LEAVING corporate status, because of the need for double taxation). If this were the case upon the transfer of assets to a corporation in exchange for stock, however, incorporating an ongoing business would be awfully painful from a tax perspective.

In this case, you gave up assets with a basis of $400,000 and got back stock worth $1,000,000, so youвЂ™re in the same place as if you had sold for cash: youвЂ™ve got gain of $600,000. Check out Section 1001(b): the amount realized on a sale is not just cash received, but the fair market value of any property you get in the exchange. Even though youвЂ™re not getting cash, the result is the same. Nothing tricky here.Д«ut say, instead, you transfer those same assets to a corporation in exchange for stock worth $1,000,000. If a buyer comes along and pays you $1 million cash for the assets, the result is clear: under Section 1001, you will recognize gain for the difference between the amount realized ($1M) and the tax basis of the sold assets ($400,000), or $600,000. So letвЂ™s do what we do in this space.letвЂ™s lay it all out and learn some stuff.ДЄssume your assets - tangible and intangible - are worth a total of $1,000,00 and have a tax basis of $400,000. As a result the effective federal corporate rate is pretty much equal as a C corporation when compared to an S corporation or partnership for many business owners, causing them to consider converting to a C corporation in pursuit of some of the non-tax benefits of operating in that capacity, a move that would have been largely unthinkable three years ago. In addition, while the Tax Cuts and Jobs Act also added a 20% deduction for owners of flow-through businesses, many business owner - think: doctors, lawyers, accountants, actors, and athletes - arenвЂ™t eligible for the deduction. Why?ДЇor starters, thereвЂ™s a new 21% corporate rate - down from 35% - and the potential to exclude all gain from the sale of stock five years down the road under Section 1202 that is specific to a C corporation. AFP PHOTO / Brendan Smialowski (Photo credit should read BRENDAN SMIALOWSKI/AFP via Getty Images) AFP via Getty ImagesД«ut like bad mustaches and Toto, C corporations have returned to prominence.

Hearing documents are seen before a hearing of the House Rule Committee on tax reform legislation on. Then, as part of the 1986 reform, Congress repealed the General Utilities doctrine, reinstating double taxation upon liquidation of a corporation and relegating the вЂњCвЂќ to the entity choice of last resort. In the early part of the 1980вЂ™s, C corporations were everywhere. The lesson, of course, is that all things eventually come back into vogue, and the tax world is no different. And most egregious of all, to capitalize on the younger generationвЂ™s fascination with all things 80вЂ™s, Hollywood saw fit to make another Top Gun film, when the most memorable part of the FIRST film was the camera trickery used to make us believe that a 5вЂ™7вЂќ Tom Cruise could spike a volleyball on a regulation net.

My daughter asked for a Polaroid for Christmas. And while like most people my age, the showвЂ™s references to Ghostsbusters and New Coke brought me back to a happier time, the whole thing should have ended there. I blame Stranger Things for kicking off this recent wave of 80вЂ™s nostalgia.

Irc 351