Question

Bob and Betty have a partnership that owns 18 clothing stores located in various states in the US. They are thinking converting their business into a corporation and then using some money they have accumulated to acquire a small chain of men's clothing stores located in Virginia or they might issue common stock from their new corporation to buy the other business. Explain the tax consequences of forming the corporation from the partnership. Explain the tax consequences of acquiring the chain of men's clothing stores

Answer 1

Bob and Betty have a partnership that owns 18 clothing stores located in various states in the US. They are thinking converting their business into a corporation and then using some money they have accumulated to acquire a small chain of men's clothing stores located in Virginia or they might issue common stock from their new corporation to buy the other business. Explain the tax consequences of forming the corporation from the partnership. Explain the tax consequences of acquiring the chain of men's clothing stores

Answer:-

An association or LLC can be consolidated three distinctive ways:

(1) An exchange of advantages and liabilities from the association or LLC to the enterprise in return for corporate stock and some other thought, trailed by the liquidation of the organization.

(2) A distribution of partnership or LLC assets and liabilities to its partners or members, who then transfer the assets and liabilities to the corporation in exchange for stock and other consideration.

(3) The contribution by the partners or members of their partnership or LLC interests to the corporation in exchange for corporate stock and other consideration.

The IRS has decided that the expense results with respect to association fuse are dictated by the technique that is utilized. (Rev. Rul. 84-111, 1984-2 C.B. 88). Fuse of a LLC that is saddled as an organization will be liable to similar standards. When in doubt, any of the techniques will result in tax-exempt consolidation, yet the strategy may influence the expense outcomes. Thus, practitioners must determine the tax implications at each step of the transaction.