inventory

[TAX]

Client converted from Sole to S corp as of 04/01/2005.

Here are some facts.

(1) Sole: Jan 1 - March 31 05:
Inventory as of 03/31/2005: $25000
Recrod on sch "C": End inv = $25,000

(2) S -corp:
Inventory as of 12/31/2005: $32000
Record $32,000 as ending inv on S corp

(2.1) Also record, on scorp, loan from share holder $25,000 because that was the value of beg. inventory as of conversion date. Can some please help. Does this sound right.

(3) All other assets are owned by 7/11 company.

(4) On B/S all beg bal should be zero for scorp.

(5) Any other things to watch out for conversion?

Thanks.

[JON]

351incorporation.

Tax free incorporation you need to look it up. You can get in trouble with note payable stockholder as 351 is for the transfer of the equity tax free. Issuance of stock for the transfer of equity was fine-it seems there were business purposes needed for the transfer of debt. If you are not looking for 351-and here does not seem be any tax shelter if everything is as easy as you listed, then who cares. Except for those seeing 0 equity corporation.

[TAX]

Tax free incorporation you need to look it up. You can get in trouble with note payable stockholder as 351 is for the transfer of the equity tax free. Issuance of stock for the transfer of equity was fine-it seems there were business purposes needed for the transfer of debt. If you are not looking for 351-and here does not seem be any tax shelter if everything is as easy as you listed, then who cares. Except for those seeing 0 equity corporation.

There is no liability. Just inventory is the main thing.

Do I need to file an election for sec 351 or is it automatic?

Thanks!

[Bees Knees]

TTB, page 18-6, "Both the corporation and any person involved in a Section 351 transfer must attach a statement to their income tax returns."

[Bees Knees]

The statement should contain the following:

SECTION 1.351-3. RECORDS TO BE KEPT AND INFORMATION TO BE FILED.

(a) Every person who received the stock or securities of a controlled
corporation, or other property as part of the consideration, in exchange
for property under section 351, shall file with his income tax return for
the taxable year in which the exchange is consummated a complete statement
of all facts pertinent to such exchange, including--

(1) A description of the property transferred, or of his interest in
such property, together with a statement of the cost or other basis
thereof, adjusted to the date of transfer.

(2) With respect to stock of the controlled corporation received in
the exchange, a statement of--

(i) The kind of stock and preferences, if any;

(ii) The number of shares of each class received; and

(iii) The fair market value per share of each class at the date
of the exchange.

(3) With respect to securities of the controlled corporation received
in the exchange, a statement of--

(i) The principal amount and terms; and

(ii) The fair market value at the date of exchange.

(4) The amount of money received, if any.

(5) With respect to other property received--

(i) A complete description of each separate item;

(ii) The fair market value of each separate item at the date of
exchanges; and

(iii) In the case of a corporate shareholder, the adjusted basis
of the other property in the hands of the controlled corporation
immediately before the distribution of such other property to
the corporate shareholder in connection with the exchange.

(6) With respect to liabilities of the transferors assumed by the
controlled corporation, a statement of--

(i) The nature of the liabilities;

(ii) When and under what circumstances created;

(iii) The corporate business reason for assumption by the
controlled corporation; and

(iv) Whether such assumption eliminates the transferor's primary
liability.


(b) Every such controlled corporation shall file with its income tax
return for the taxable year in which the exchange is consummated--

(1) A complete description of all the property received from the
transferors.

(2) A statement of the cost or other basis thereof in the hands of
the transferors adjusted to the date of transfer.

(3) The following information with respect to the capital stock of
the controlled corporation--

(i) The total issued and outstanding capital stock immediately
prior to and immediately after the exchange, with a complete
description of each class of stock;

(ii) The classes of stock and number of shares issued to each
transferor in the exchange, and the number of shares of each
class of stock owned by each transferor immediately prior to and
immediately after the exchange, and

(iii) The fair market value of the capital stock as of the date
of exchange which was issued to each transferor.

(4) The following information with respect to securities of the
controlled corporation--

(i) The principal amount and terms of all securities outstanding
immediately prior to and immediately after the exchange,

(ii) The principal amount and terms of securities issued to each
transferor in the exchange, with a statement showing each
transferor's holdings of securities of the controlled
corporation immediately prior to and immediately after the
exchange,

(iii) The fair market value of the securities issued to the
transferors on the date of the exchange, and

(iv) A statement as to whether the securities issued in the
exchange are subordinated in any way to other claims against the
controlled corporation.

(5) The amount of money, if any, which passed to each of the
transferors in connection with the transaction.

(6) With respect to other property which passed to each transferor--

(i) A complete description of each separate item;

(ii) The fair market value of each separate item at the date of
exchange, and

(iii) In the case of a corporate transferor, the adjusted basis
of each separate item in the hands of the controlled corporation
immediately before the distribution of such other property to
the corporate transferor in connection with the exchange.

(7) The following information as to the transferor's liabilities
assumed by the controlled corporation in the exchange--

(i) The amount and a description thereof,

(ii) When and under what circumstances created, and

(iii) The corporate business reason or reasons for assumption by
the controlled corporation.


(c) Permanent records in substantial form shall be kept by every taxpayer
who participates in the type of exchange described in section 351, showing
the information listed above, in order to facilitate the determination of
gain or loss from a subsequent disposition of stock or securities and
other property, if any, received in the exchange.

[TAX]

SECTION 1.351-3. RECORDS TO BE KEPT AND INFORMATION TO BE FILED.

(a) Every person who received the stock or securities of a controlled
corporation, or other property as part of the consideration, in exchange
for property under section 351, shall file with his income tax return for
the taxable year in which the exchange is consummated a complete statement
of all facts pertinent to such exchange, including--

(1) A description of the property transferred, or of his interest in
such property, together with a statement of the cost or other basis
thereof, adjusted to the date of transfer.

(2) With respect to stock of the controlled corporation received in
the exchange, a statement of--

(i) The kind of stock and preferences, if any;

(ii) The number of shares of each class received; and

(iii) The fair market value per share of each class at the date
of the exchange.

(3) With respect to securities of the controlled corporation received
in the exchange, a statement of--

(i) The principal amount and terms; and

(ii) The fair market value at the date of exchange.

(4) The amount of money received, if any.

(5) With respect to other property received--

(i) A complete description of each separate item;

(ii) The fair market value of each separate item at the date of
exchanges; and

(iii) In the case of a corporate shareholder, the adjusted basis
of the other property in the hands of the controlled corporation
immediately before the distribution of such other property to
the corporate shareholder in connection with the exchange.

(6) With respect to liabilities of the transferors assumed by the
controlled corporation, a statement of--

(i) The nature of the liabilities;

(ii) When and under what circumstances created;

(iii) The corporate business reason for assumption by the
controlled corporation; and

(iv) Whether such assumption eliminates the transferor's primary
liability.


(b) Every such controlled corporation shall file with its income tax
return for the taxable year in which the exchange is consummated--

(1) A complete description of all the property received from the
transferors.

(2) A statement of the cost or other basis thereof in the hands of
the transferors adjusted to the date of transfer.

(3) The following information with respect to the capital stock of
the controlled corporation--

(i) The total issued and outstanding capital stock immediately
prior to and immediately after the exchange, with a complete
description of each class of stock;

(ii) The classes of stock and number of shares issued to each
transferor in the exchange, and the number of shares of each
class of stock owned by each transferor immediately prior to and
immediately after the exchange, and

(iii) The fair market value of the capital stock as of the date
of exchange which was issued to each transferor.

(4) The following information with respect to securities of the
controlled corporation--

(i) The principal amount and terms of all securities outstanding
immediately prior to and immediately after the exchange,

(ii) The principal amount and terms of securities issued to each
transferor in the exchange, with a statement showing each
transferor's holdings of securities of the controlled
corporation immediately prior to and immediately after the
exchange,

(iii) The fair market value of the securities issued to the
transferors on the date of the exchange, and

(iv) A statement as to whether the securities issued in the
exchange are subordinated in any way to other claims against the
controlled corporation.

(5) The amount of money, if any, which passed to each of the
transferors in connection with the transaction.

(6) With respect to other property which passed to each transferor--

(i) A complete description of each separate item;

(ii) The fair market value of each separate item at the date of
exchange, and

(iii) In the case of a corporate transferor, the adjusted basis
of each separate item in the hands of the controlled corporation
immediately before the distribution of such other property to
the corporate transferor in connection with the exchange.

(7) The following information as to the transferor's liabilities
assumed by the controlled corporation in the exchange--

(i) The amount and a description thereof,

(ii) When and under what circumstances created, and

(iii) The corporate business reason or reasons for assumption by
the controlled corporation.


(c) Permanent records in substantial form shall be kept by every taxpayer
who participates in the type of exchange described in section 351, showing
the information listed above, in order to facilitate the determination of
gain or loss from a subsequent disposition of stock or securities and
other property, if any, received in the exchange.

Thanks for detail answer. In this situation, there is only one shareholder who runs business as a sole prop. of seven eleven store. The Seven Eleven franchisor "owned" all assets, does payroll etc. Since Client "did not own" any asset but all he is doing is changing his legal structure from sole to Scorp, I do not think that he needs to file sec351 election. Seven Eleven franchisor will still own all "Assets" and has all libilities after conversion. I thought that sec351 election is necessary only if the "sole owner" converted to Scorp and then has to prove that he "STILL" controls 80% or more ownership.

Please let me know if I am right?

Thanks.

[Bees Knees]

The Section 351 election has to do with transferring appreciated assets to the corporation in exchange for stock in a tax free transaction. If Section 351 did not apply, then any appreciated assets would produce taxable gain on the transfer.

In your case, it appears the only assets of the corporation would be the cash in the checking account. If that is all, there is no appreciated assets, thus, Section 351 is a moot point.

[Unregistered]

In your case, it appears the only assets of the corporation would be the cash in the checking account. If that is all, there is no appreciated assets, thus, Section 351 is a moot point.[/QUOTE]

Thank you for your time.