Avoiding Gain While Transferring Property and Liability to a Controlled Corporation

1752 Words May 24th, 2013 8 Pages
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Avoiding Gain While Transferring Property and Liability to a Controlled Corporation
Summary Internal
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Stuffing transactions are those where taxpayers attempt to take advantage of the fact that the gain recognized by IRC 357(c) is applied to the liability in excess of the aggregate adjusted basis of all the property transferred – not just the basis of the property items that have liabilities. Taxpayers will stuff additional property items into the transfer to raise the aggregate basis up to or in excess of the liabilities transferred.

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They describe that stuffing transactions can be legitimate. As long as the additional property items transferred have valid business uses, the stuffing transaction will be legal and no gain will be recognized. They point out too that some stuffing transactions are deemed abusive by the Internal Revenue Service (IRS), such as when a taxpayer conducts a transaction that creates assets with high tax basis and low fair market value and transfers the assets to the corporation without gain recognition. Step approach transactions are another method that taxpayers use to attempt to avoid IRC 357(c). The common way to do this is the taxpayer borrows cash from a third party and adds the cash to the property basis to meet or exceed the liabilities assumed by the corporation. The corporation then uses the cash to purchase the taxpayer’s note from the third party. The IRS will likely collapse these steps and claim the taxpayer has contributed his own note to the corporation just to avoid a taxable gain. The note will be deemed

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