New case says note avoids gain for liabilities upon incorporation

Article Abstract:

Taxpayers do not recognize gain or loss in transferring assets and liabilities of a sole proprietorship to a wholly owned corporation, provided the liabilities do not exceed the adjusted basis the transferred assets. Under Section 357(c), the excess over the adjusted basis of the assets is recognized as a taxable gain from the exchange of assets. The Second Circuit has ruled that a taxpayer can avoid recognizing the gain on liabilities in excess by providing the corporation with a promissory note for the difference. Section 351(a) holds that no gain is recognized in the transferal of property to a corporation as long as the person is in control after the exchange. In the Lessinger case, the Court ruled that taxpayers will be granted nonrecognition treatment if the taxpayer was in control both before and after the transaction. Taxpayers following the Second Circuit decision should issue a note bearing the proper amount of interest to substantiate the taxpayers obligation. Shareholders are liable for the full face amount and therefore do not benefit from the transaction and do not report income.

Accounting and auditing, Tax administration and procedure, Tax administration

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Punitive awards may be taxed, but compensatory payments retain their tax-free status

Article Abstract:

The Revenue Reconciliation Act of 1989 has removed the exemption for punitive damages awarded in cases that do not involve sickness or physical injury, and which now must be included in the taxpayer's gross income. Compensatory damages remain excludable, regardless of whether the case involved sickness or physical injury. Damages awarded in account of sickness or personal injury are still excludable for the taxpayer's gross income, but the payment must be related to a claim on a tort or tort-type action. Determinations of whether damages are received for personal injury are based on an examination of facts and circumstances and not the taxpayer's allegations. Punitive damages awarded for those cases involving sickness or physical injury will continue to be excluded from gross income for amounts received after 10 Jul 1989.

Taxation, Exemplary damages, Punitive damages

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Gain on foreclosure sales of realty need not be recognized

Article Abstract:

Foreclosure of realty can have different tax consequences. The type of liability, the level of accrued interest and the future payment of any residue deficiency all act as determinants of the possible tax outcome of foreclosures. Foreclosure-generated tax results are often different for taxpayers who choose to negotiate a deed transfer instead of property foreclosure. Under this arrangement, the complete face amount of liability becomes the determinant of the tax outcome. Although transfer of deeds may be counterproductive tax-wise, the financial advantage of avoiding foreclosure records on the credit history and evading foreclosure costs far outweigh the additional tax. Based on these, taxpayers should carefully assess their situation before choosing to make a foreclosure or a transfer of deed.

Laws, regulations and rules, Real estate, Real property, Foreclosure, Real property tax, Real property taxes

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