Reference no: EM133266670
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Cite all references.
Assumptions:
Use a flat corporate tax rate of 21% for all problems. For individuals assume a tax rate of 15% for all dividends and capital gains.
Assume there is no Alternative Minimum Tax for this problem.
Assume that all entities are US domestic corporations, taxed under Subchapter C of the IRC unless otherwise noted. The internal revenue code.
Question 1
On June 1, 2021, Rusty and Grayson formed Thunder Corporation (a new entity).
Rusty contributed a patent for new weather prediction equipment in return for a 50% interest in Thunder Corporation. Rusty purchased the patent on March 1, 2018, for 50,000.
Grayson contributed manufacturing equipment with a fair market value of 200,000 and a basis of 100,000 in return for a 50% interest in Thunder Corporation. The equipment was secured by loan for 50,000 - which was assumed by Thunder Corporation. Grayson took out the loan on May 20, 2021. He purchased the equipment on January 1, 2017.
- Does this transaction qualify for non-recognition treatment under IRC Sect. 351? Why or why not? Explain your answer fully.
- What are the tax consequences to Rusty as a result of this transaction?
- What are the tax consequences to Grayson as a result of this transaction?
- What are the tax consequences to Thunder Corporation as a result of this transaction?
- Would you answer to Parts A and B change if Rusty had developed know-how that he contributed (unpatented) specifically for Thunder Corporation? If so, why? And if so, how?
Given the original facts, and ignoring Part E above, would your answer to Part C change if the loan was taken out to purchase the equipment back in 2017? If so, why? And if so, how?
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