Question

Nancy and her daughter, Kathleen, have been working together in a cattery called “The Perfect Cat.” Nancy formed the business several years ago as sole proprietorship, and it has been very successful. Assets currently have a fair market value of $450,000 and a basis of $180,000. On the advice of their tax accountant, Nancy decides to incorporate” The Perfect Cat.” Because of Kathleen’s participation, Nancy would like her to receive shares in the corporation. What are the relevant tax issues?

Answer 1

1.

What Kathleen will transfer to the corporation in exchange for the stock, and what possible gain Kathleen will be taxed on.

2.

If Kathleen is not a transferor of property, how will her stock be treated for tax purposes?

3.

If Kathleen does not transfer any property and receives stock from the corporation, will the transaction preclude § 351 treatment for Nancy?

4.

What will be their basis in the stock ?

5.

What will be the amount of income recognized by Kathleen?

6.

The deduction allowed if the transfer of stock to Kathleen is for her services rendered?

7.

What will be the gift tax consequences if the transfer of stock is a gift

8.

Will the transfer be subject to the tax-deferred treatment of § 351.