The IRS disallowed the deductions under I.R.C. § 197(a).Key Issues: Whether Corp. is entitled to the amortization deductions under I.R.C. § 197(a)?Primary Holdings: Yes, in part, because: (1) Corp’s issuance and immediate redemption of 1,875,000 common shares had no economic substance and should be disregarded under the step transaction doctrine, with the cash and the deferred payment right treated as additional consideration for the assets Corp. acquired from P’ship; (2) the parties agree that I.R.C. § 351 governs the tax consequences of the transactions at issue and accordingly, P’ship recognized gain in the transaction to the extent of the $2.7 million cash it received and the fair market value of its right to the additional $300,000 payment; this increases the basis of the assets transferred to Corp.; and (3) when assets transferred in an I.R.C. § 351 exchange with taxable boot constitute a trade or business, the residual method of allocation prescribed by I.R.C. § 1060 can appropriately be used to allocate the boot among the transferred assets; consequently, P’ship’s gain in amortizable I.R.C. 197 intangibles, and the corresponding increase in asset bases allowed to Corp., is determined by subtracting from the agreed total asset value the estimated values of those assets other than amortizable I.R.C. § 197 intangibles.Key Points of Law:Section 197(a) allows taxpayers amortization deductions in respect of intangible assets that qualify as “amortizable section 197 intangible[s].”

Here the contribution might involve the target's assets rather than its equity if the buyer is concerned with the target's operating history and unknown liabilities.The corporate holding company formation equity rollover transaction (an IRC § 351 exchange). The IRC § 351 exchange is a common rollover transaction structure employed to take advantage of an IRC § 351 tax-free exchange as the vehicle for obtaining tax-free treatment for the target's rollover equity.

While this nonrecognition rule is a useful instrument in the tax practitioner’s toolbox, the rule’s glamor often overshadows an important exception. Under I.R.C. § 721(b), the general nonrecognition rule will not apply to gain realized on a transfer of property to a partnership that would be treated as an investment company (within the meaning of I.R.C. § 351) if the partnership were incorporated.This reference to I.R.C. § 351 shifts the analysis to the transfer rules for corporations to determine if the transferee partnership qualifies as an investment company (i.e., an investment partnership).

If the business is operating as an LLC or other tax partnership form, the key will be that the fair market value of the property contributed to a newly-formed corporation doesn't exceed the $50 million limit (an IRC § 1202 requirement). If the partnership's assets are contributed to an existing corporation, both the contributed assets and the then-current assets of the C corporation must be taken into account in the calculation and the contribution won't be tax-free under IRC § 351 unless the contributors hold an 80% interest in the corporation after the contribution. The outstanding stock of a converted S corporation cannot be QSBS, but stock subsequently issued by the C corporation can qualify as QSBS.

If the business is operating as an LLC or other tax partnership form, the key will be that the fair market value of the property contributed to a newly-formed corporation doesn't exceed the $50 million limit (an IRC § 1202 requirement). If the partnership's assets are contributed to an existing corporation, both the contributed assets and the then-current assets of the C corporation must be taken into account in the calculation and the contribution won't be tax-free under IRC § 351 unless the contributors hold an 80% interest in the corporation after the contribution. The outstanding stock of a converted S corporation cannot be QSBS, but stock subsequently issued by the C corporation can qualify as QSBS.

Reg. Sec. 1.61-12(a). We’ve already seen how it may result in a gift to the other shareholders if they are the natural objects of the contributing shareholder’s bounty. IRC Sec. 351(d)(2). Such a debt is not treated as “property” within the meaning of IRC Sec. 351.

Obviously, the selected structure varies from deal to deal based on the parties' respective identities from a tax standpoint (i.e., C corporation, S corporation or pass-through LLC), the entity selected through which to operate the acquired business (C corporation or pass-through LLC), and the relative size of the parties.Tax aspects – structuring taxable rolloversA fully taxable rollover transaction generally involves the taxable purchase of 100% of a target company's assets or stock, followed by the rollover participants' reinvestment in the buyer's equity on an after-tax basis. A taxable rollover transaction might also involve a stock or asset purchase where the transaction fails to qualify as an IRC §§ 351 or 721 exchange, or merger or other reorganization where a portion of the purchase consideration is paid in the form of buyer equity, but the transaction fails to qualify as an IRC § 368 tax-free reorganization.The rollover-related tax issues are straightforward in a fully taxable transaction.

If founders desire their stock to qualify for QSBS treatment, they should be careful to document their cash or property (tangible or intangible) contributions to the issuer in exchange for the QSBS. If intangible assets or goodwill is used to pay for QSBS, make sure that it qualifies as "property" for purposes of IRC § 351(a).QSBS can be issued upon the exercise of nonqualified incentive options or non-compensatory options or warrants or through the conversion of convertible debt. The holding period will commence and the determination of whether the issuing corporation is a qualified small business will be made at the time of the issuance of the QSBS, not when the convertible debt instruments, options or warrants were issued.

That’s because they will have to use some of the cash received to satisfy the tax liability arising from the exchange for equity in the HC. IRC Sec. 761, Reg. Sec. 301.7701-3. IRC Sec. 351 and Sec. 368(c). “Control” is defined as ownership of stock possessing at least 80-percent of the total combined voting power of all classes of stock entitled to vote and at least 80-percent of the total number of shares of all other classes of stock of the corporation.

ted taxes. Assume a 37% federal rate plus a 10.3% N.Y. rate. We’re assuming these individuals are not NYC residents. For what it’s worth, some folks – in my experience, mostly non-U.S. persons – describe taxable entities as being “opaque” and refer to passthrough entities as “transparent.” For tax purposes, the conversion to corporate status could have been accomplished by filing IRS Form 8832 – the “check the box” election. There are state law and “business” reasons for changing the actual legal form of the entity.See also Rev. Rul. 84-111. In a discussion with the principals of the start-up, they were unable to articulate the reasoning behind this. Hell of a way to make a decision.The established business also used the statutory conversion.Presumably, they were told that investor entities with tax-exempt or foreign members preferred to invest in C corporations. (I guess there was no discussion about these potential investors using a “blocker” to make their investment instead.) Under IRC Sec. 351, the application of which is mandatory if its conditions are satisfied. Some well-advised taxpayers will try to avoid the application of Sec. 351 in order to utilize their losses against the gain realized in the exchange. See Reg. Sec. 301.7701-3(g). See IRC Sec. 381. Even in a Sec. 351 exchange between two corporations, such tax attributes do not carry over unless the exchange is also described in IRC Sec. 368. You may recall that the Democrats have been proposing to increase the federal income tax rate on corporations to 35%. Let’s see what happens with the 2024 elections. If there is a rate hike, the corporation and its shareholders may be able to avoid double taxation by electing to be treated as an “S” corporation – assuming they are eligible; see IRC Sec. 1361 – though they will have to contend with the 5-year (at least for now) recognition period for the federal built-in gain tax. IRC Sec. 1374. (As an active business, the corporation and its shareholders won’t have to worry ab