Why would a transferor want to avoid the nonrecognition of gain under Sec. 351? How can the nonrecognition provision of Sec. 351 be avoided?
What will be an ideal response?
A transferor may want the corporation to have a higher basis in the property transferred. A higher basis would allow greater depreciation deductions and reduce the gain recognized if the corporation sells the property. The increased depreciation and/or reduced gain may be an advantage because the corporation may be in a higher tax bracket than the transferor. A transferor's gain also may be a capital gain that is reduced by a capital loss so as to be tax-free.
Nonrecognition can be avoided by selling the property to the corporation for cash or cash and debt. The 80% control test may be intentionally avoided by issuing property for services. Also, by using debt in an amount that exceeds the transferor's basis or by having debt assumed or acquired without a business purpose, the transferor can be required to recognize gain.
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