How to Solve Taxation Case Study Homework Effectively : Approach using Example
Dave is in process of acquiring RTC and he is interested in decreasing its tax liability due to this transaction. In order to do that he will have to understand that for C- Corp, only a taxable transaction can be established, when all the money paid after Acquiring is in cash as per our Taxation homework help experts. Suppose after receiving, a part of the payment is made in terms of stock of what is received, and then IRS classify the transaction as a tax-free bond where Shareholders do not need to pay tax on the receipt of Acquiring stock.
He must understand that two elemental conditions which must be satisfied for a transaction to be tax-free are: firstly, of the total consideration paid to Shareholders, minimum 40% of that should be in terms of stock of received products or in stock of a parent of received products (wherever required). Or we can say the “boot” (the non-stock consideration) cannot pass 60% of the total consideration. In case the boot will pass 60%, instead of a tax-free reorganization, there will be a more complex structure, which is discussed below7, with almost same output, is possible. Secondly, reorganization always requires, for taxation purposes, that the RTC should be a corporation.
A tax-free reorganization which includes addition of partnerships is not possible when the RTC is a partnership, but if the primary conditions with a corporate RTC are contended, then one could get other corporate partners of partnership in tax-free reorganizations. Also, for a party it is impossible to transfer assets to any other corporate RTC, and similarly it is impossible for those assets to be a part of a tax-free reorganization after achieving the RTC. Those assets would be treated as sent directly from transferor to receiver in a taxable transaction by the well-known ideology “step transaction” rather than a part of the reorganization which has RTC.
Thirdly, reorganization may consider unattainable if RTC will retain a considerable amount of assets that will be sent to Shareholders instead of receiver. There are some types of reorganizations which allow RTC to transfer some of its assets to Shareholders before target is achieved, such transactions are usually taxable to Shareholders and RTC both. Alternatively, a tax-free reorganization can be formed when the RTC is limited liability company (LLC) which was elected previously by a so-called “check the box” election and is considered as a corporation for a federal income tax purposes.
Similarly, RTC can be regarded as a “Subchapter C” or “C” corporation, which can be seen as a firmly held corporation that looks after various conditions and is treated equivalently to a partnership for tax purposes as analyzed by our taxation assignment help team. The owners of the business which comes under the category of S corporation gets a big advantage over to a partnership or LLC that they can “sell out” on a tax-free basis through a reorganization and they can even receive pass-through treatment of income on an ongoing criteria. Even when there is a possibility of formation of a tax-free reorganization, the question that whether its formation will yield the desirable output in any particular case is always there.
The Shareholders who interchange their RTC stock for the Acquiring stock, gets the real advantage of reorganization, as they are not taxed currently on their interchange. Moreover in this case, RTC is not subject to tax, even when any kind of reorganization (as discussed in Part IV.C below) is considered as a transfer of assets by RTC to receiver followed by eradication of RTC. The relief for the Shareholders in terms of paying tax on the receipt of Acquiring stock can be considered as a timing benefit. Every Shareholder receives the same tax basis in the Acquiring stock as that was present in the RTC stock.
Therefore, the profit which is not taxed on that interchange will be taxed afterwards when the Acquiring stock is sold out. There is a possibility that this profit can be more than the timing benefit. The holding interval of the Acquiring stock of a Shareholder includes the Shareholder’s holding span of the RTC stock surrendered. So, if at the time of terminating a transaction, the Shareholder has a holding interval of less than one year in the RTC stock, a taxable sale of the stack will come out in form of short term capital gain, which is taxable at normal income tax rates.
A tax-free interchange can permit the holding interval of the RTC stack to be carried over to the holding interval of the receiving stock. Thus, when the total holding interval passes one year, sale of the Acquiring stock will result in long term capital gain, which is currently taxable to an individual at a maximum rate of 15% as per US Taxation Assignment Help experts. Hence, all these point must be considered and used to decrease tax liability for Dave while acquiring RTC.