[chuck]

Can someone please help me understand the difference between realized and recognized gains (and hoe to calculate them) in the following types of transactions:

1. for owner and entity upon formation of a C-Corp

2. for owner and entity upon complete liquidation of a C-Corp

3. for owner and entity upon nonliquidating distribution in a C-Corp

Thank you so so much for any help. I have failed reg with a 74 THREE times now. Trying to thoroughly understand every detail of the new AICPA blue print this time.

[Anonymous]

1. No gain or loss is recognized when assets are transferred to form a Corporation. This is what we call a section 351 gain. It is deferred. This means if you have an sset with basis of $100 and at the time of transfer to the corporation the value is $150, that $50 gain is not realized (taxed). So in effect your basis in the corporation is $100, if you were to sell your share in the corporation then you would both recognize (meaning book entry) and realize the gain (you get taxed on it)

2. Complete liquidation is similar to sale in essence, you would recognize gain/loss to the extent of your basis. When you liquidate you RECOGNIZE (book entry) and REALIZE (taxed/economic means). Realizing it just means you can really see the effect in your pocket. Recognize means you make the book entry.

3. Non liquidating distribution – a bit more than the two above. First you need to find out if the corporation has current earnings and profits (E&P). If the distributing corporation has current E&P, then you have dividends (REALIZED), you pretty much got the cash, if no current E&P then look to accumulated E&P which if the distributing corp has then you would (REALIZE) the cash received. If neither of the two apply, then the distribution is return of basis anything above your basis is considered taxable. So if your basis is $100 and you get $200 and the company has no E&P current or accumulated, then $100 (BASIS) is reduced to $0 (you recognize this on your books), the additional $100 is taxable (REALIZED).

I really hope that helps. Sorry for the long explanation I'm in tax, please feel free to ask if you need further help

[Anonymous]

My reg score isn't great but for 4 days of reading becker and only doing MCQ's once. I think it's great. I put the least amount of effort as I work int he field daily

[KaliKingz]

hmmm… a 351 exchange requires you to transfer property solely for stock AND for you to be in control immediately after the exchange.
Also, a recognized gain is the taxable amount.

[Anonymous]

yes, I used that to explain the basis difference and how you recognize and realized gains occur. Whether you are in control or not a distribution is recognized and realized. This is huge for US comp with CFCs. The transferor has a basis in the asset before transfer and after transfer. Since if you contribute cash the value is what it is, I've never seen cash appreciate in the sense where I have a $1 today and you are willing to buy that $1 for more. This happens with property hence why I used the 351 transfer to expalin the basis difference and how that leads to recognized (book entry) and realized (as the IRS calls the where with all to PAY)

But feel free to explain it better and different manner, as long as the person is able to understand and pass REG then I'm all good

[livealittle]

according to Becker lecture – Realized gain is what REALLY happens in the REAL world. Recognized gain is what you must account/pay tax on when filing the tax return.

BEC - 8/8/16
REG - 66, 77
AUD - 81
FAR - 9/8/16

[Author]

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