CAN I INCORPORATE MY BUSINESS

@Q01

                  ÚÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ¿
                  ³  CAN I INCORPORATE MY BUSINESS  ³
                  ³    IN A TAX-FREE TRANSACTION?   ³
                  ÀÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÙ

If you transfer money or other property to a controlled corporation
in exchange for stock of the corporation, either to capitalize a new
corporation or to add to the capital of a corporation that already has
assets, the general rule is that you will not recognize any taxable
gain or loss on the transaction.  However, for such a transfer to
qualify, the tax law requires that the person or persons who transfer
the property or money must control AT LEAST 80% of the voting stock of
the corporation and at least 80% of the shares of any other classes of
stock, immediately after the exchange occurs.

  QUESTION:  Will you, together with any other transferors in the same
             transaction, own at least 80% of the voting stock and 80%
             of each other class of stock of the corporation, immedi-
             ately after the proposed exchange of assets for stock?
@YN
01\Q03
02\Q02

@Q02

CONCLUSION:  Your transfer of assets to the corporation will not
technically qualify as non-taxable.

However, note that you won't necessarily have to recognize taxable
gain if the only kinds of assets you transfer to the corporation in
exchange for the stock or securities you receive are the following:

                . Money; or

                . assets that do not have a value in excess of
                  their tax basis; or,

                . a combination of the above.

@STOP

@Q03

So far, so good.  It appears that your transfer of assets to your
corporation for stock (and possible for notes, bonds or other
securities to be issued by the corporation) should qualify as "non-
taxable" under Section 351 of the Internal Revenue Code.

However, things are rarely that simple under our tax system.  Your
"non-taxable" transaction may still be taxable, at least in part, if
you receive anything other than stock of the corporation in exchange
for the assets you transfer into the corporation (such as promissory
notes, other securities, cash, or other property).  Anything you
receive back from the corporation in the transaction, other than its
own common or preferred stock, will be considered "boot," and any
"unrealized gains" on property transferred to the corporation will
be taxable, in an amount equal to the smaller of:  (a) such unrealized
gain, or (b) the amount of "boot" received.

  QUESTION:  Will you receive any "boot" (money or any other kind of
             property, other than stock issued by the corporation in
             question) on the transaction?
@YN
01\Q04
02\Q07

@Q04

CONCLUSION:  Then you may have to pay tax on this so-called "non-
taxable" transfer of assets to your corporation.  But NOT if the only
assets you transfer to the corporation are the following:

  . Cash; and/or

  . Assets which have tax basis equal to or greater than fair
    market value at the time of the transfer.  (You can usually
    ignore accounts receivable of a cash-basis business, even
    though they have a zero tax basis, although this can get
    somewhat technical in some cases.)

  QUESTION:  Will you be transferring any property to the corporation
             (other than accounts receivable of a cash-basis business)
             that has a value greater than its tax basis?

@YN
01\Q05
02\Q06

@Q05

FURTHER CONCLUSION:  Then it appears you will have to recognize some
or all of the "unrealized appreciation" as taxable gain on the incor-
poration or transfer of assets to your corporation, in this so-called
"non-taxable" transfer.

Note that the maximum amount of gain you must recognize, regardless
of how much "boot" you receive, will not exceed the amount of your
"unrealized gain" on the property (i.e., the amount, if any, by which
the value of any item or items of property exceeds the tax basis of
such items).

This may not be entirely bad, however, since the corporation will ob-
tain a "step-up" in its tax basis for any assets on which you have to
report taxable gain on the transfer.

                ÚÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ¿
                ³ EXAMPLE:  If you report a $1,000 tax-³
                ³ able gain on  transfer of  a computer³
                ³ to the  corporation,  the corporation³
                ³ will be allowed  to increase its "tax³
                ³ basis"  for the  computer  by $1,000,³
                ³ which will give it additional deprec-³
                ³ iation deductions  over the period in³
                ³ which it depreciates the computer.   ³
                ÀÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÙ

@STOP

@Q06

FURTHER CONCLUSION:  Then there appears to be virtually no possibility
that you will have any taxable gain to recognize on the transfer of
assets to your corporation, since there is no gain to recognize where
you have no appreciated assets (assets with a value in excess of tax
basis) that you are transferring in the transaction.

CAUTION:  You should still consult a competent tax professional be-
fore you transfer any assets to a corporation.  Even if the transfer
itself is non-taxable, there can be other ramifications which might
make such a transfer hazardous to your financial health!

FURTHER CAUTION:  If, as part of the transaction, you receive some of
the stock in the corporation IN EXCHANGE FOR SERVICES (prior services,
or to be rendered in the future), then you will have to report as in-
come the value of the stock received for such services.  Tax-free
treatment is only allowed for transfers of PROPERTY to a controlled
corporation in exchange for stock, not for transfers of SERVICES.

@STOP

@Q07

CONCLUSION:  Even though you will receive no "boot" on the proposed
transfer of assets to your corporation in exchange (only) for its
stock, you still aren't necessarily home free.  If you are transferring
any asset to the corporation that is subject to a debt that exceeds its
its tax basis, then the excess of the amount of the debt assumed by the
corporation (or taken "subject to" by the corporation) over the tax
basis of the asset is taxable gain.

For example, if you transfer a piece of land with a cost of $30,000 to
the corporation, subject to a mortgage of $35,000, and with a current
value of $50,000, you would recognize a taxable gain of $5,000 ($35,000
- $30,000), regardless of the value of the land.  However, if you had
placed the mortgage on the property just before the transfer, for TAX
AVOIDANCE PURPOSES, the entire $35,000 mortgage would be treated like
"boot" and you would recognize the full $20,000 gain ($50000 - $30000.)

  QUESTION:  Does the debt on any property to be transferred to the
             corporation exceed its "tax basis," or was any debt placed
             on the property in advance for "tax avoidance purposes"?
@YN
01\Q08
02\Q09

@Q08

FURTHER CONCLUSION:  Then you will probably incur taxable gain, to at
least the extent by which the debt exceeds the tax basis of the asset
in question, and perhaps an even larger gain if the IRS and the courts
decide that you took on the debt for tax avoidance purposes before it
was transferred to the corporation.

@STOP

@Q09

FURTHER CONCLUSION:  Then it appears that you should be able to do the
transfer of assets to your corporation on a non-taxable basis, without
recognizing either gain or loss on the transaction.  However, because
the tax law in this area is quite technical and complex, with many
potential ramifications and traps for the unwary, it is STRONGLY
recommended that you consult a good tax advisor before you transfer
any kind of assets to a corporation.

CAUTION:  If, as part of the transaction, you receive some of the
stock in the corporation IN EXCHANGE FOR SERVICES (prior services, or
to be rendered in the future), then you will have to report as income
the value of the stock received for such services.  Tax-free treatment
is only allowed for transfers of PROPERTY to a controlled corporation
in exchange for stock, not for transfers of SERVICES.

@STOP

@HELP

@H\01

Note that the  Internal Revenue Service
and at  least one  federal  court  have
held that,  in addition to the 80% con-
trol requirement, there must be a valid
business  purpose in order for a trans-
fer  to  a  controlled  corporation  to
qualify for tax-free treatment.

(Note also that even if a transfer does
not qualify as "non-taxable,"  there is
no  taxable gain  to recognize  if only
cash is transferred to the corporation,
or assets that have  not appreciated in
value beyond their "tax basis.")

@H\02

Note also, that where "control" is ab-
sent,  as you have indicated  would be
the case in your situation, you may be
able to even recognize a taxable loss,
if you  exchanged an asset  that has a
tax basis  that is  greater than  fair
market value.

@H\03
Until  October 3, 1989,  you could re-
ceive  "securities" (bonds,  long-term
notes and the like)  from the corpora-
tion also, but since then any such se-
curities are treated like "boot."

(Note  that if you  transfer  property
having a tax basis of only $3,000, but
worth $10,000, to a controlled corpor-
tion,  you would have $7,000 of poten-
tially taxable "unrealized gain."   If
you receive  $2,000 of boot in the ex-
change of assets  for stock  and boot,
you will have  taxable gain, but limi-
ted to the amount of the boot--$2000.)

@H\04

Cash (U.S. money)  always has a tax ba-
sis equal  to its value,  so no gain is
possible,  if all  you transfer  to the
corporation is money.

Similarly,  if you only  transfer other
kinds of property that you would have a
loss on if sold for current fair market
value,  there is no  taxable gain to be
recognized,  even if you receive "boot"
on the transaction.  (However, you will
not be  allowed to  recognize the loss,
if any, on the exchange.)

@H\05

"Unrealized appreciation" is simply the
amount by  which the value  of an asset
transferred to  the corporation exceeds
its tax basis.  This "unrealized appre-
ciation" remains "unrealized" (untaxed)
in transfers to  a controlled  corpora-
tion,  unless there is  "boot" received
on the transaction,  or liabilities are
taken on by the corporation that exceed
the tax basis of assets transferred, or
liabilities are taken on by the corpor-
ation  that were  created by the trans-
feror for tax avoidance motives.

@H\07

CAUTION:   Even if you  don't  feel you
took  on a  debt  (that is being trans-
ferred to the  corporation)  for a  tax
avoidance  purpose,  you should realize
that the IRS will  probably consider it
as  tax avoidance  if you  incurred the
debt within  a year or  less before the
transfer  (or  perhaps  even  longer in
some instances).

@END