REG entity-planning coverage for formation, stock-for-property exchanges, liquidations, mergers, and comparative tax effects.
This chapter covers planning decisions that arise when entities are formed, restructured, or liquidated. The exam focus is on how different transaction forms shift recognition, basis, and owner-level versus entity-level tax consequences.
Formation and exit questions usually test who bears the tax cost and when. A contribution, stock sale, asset sale, liquidation, merger, or partnership restructuring can produce different results for the entity, owners, and continuing basis in property or ownership interests.
| Transaction issue | What to identify first | Common REG trap |
|---|---|---|
| Contribution or exchange | Whether nonrecognition applies and what basis carries over. | Assuming every property transfer to an entity is immediately taxable. |
| Corporate liquidation or stock sale | Whether tax occurs at the shareholder, corporate, or both levels. | Confusing a stock sale with an asset liquidation. |
| Partnership liquidation or merger | How basis, liabilities, hot assets, and continuing interests affect the result. | Applying corporate liquidation logic to partnership facts. |
| Entity comparison | Which structure produces the better combined tax and business outcome. | Choosing only the lowest immediate tax without considering basis and later exit. |
| Step | REG question to ask | Tax effect |
|---|---|---|
| 1. Identify the transaction form | Is the taxpayer contributing property, receiving stock or partnership interest, selling assets, selling ownership, or liquidating? | Transaction form determines which nonrecognition and recognition rules apply. |
| 2. Determine who is taxed | Does the consequence occur at the entity level, owner level, or both? | Entity planning often turns on locating the tax burden. |
| 3. Track basis and liabilities | What basis carries over, steps up, or is adjusted for debt, boot, or distributions? | Basis consequences affect later gain, loss, depreciation, and distributions. |
| 4. Apply entity-specific rules | Does corporate, S corporation, partnership, or merger treatment change the result? | Applying the wrong entity model can reverse the answer. |
| 5. Compare immediate and future effects | Which structure best balances current tax, future exit, cash flow, and business objective? | REG planning rewards the best overall structure, not only current-year tax reduction. |
| Checkpoint | Ask before recommending | Tax-planning effect |
|---|---|---|
| Transaction form | Is the taxpayer contributing property, selling stock, selling assets, liquidating, merging, or restructuring? | Form determines the recognition rule and who is taxed. |
| Taxpayer level | Does the consequence arise at the entity level, owner level, or both? | Planning often turns on locating the tax burden. |
| Basis consequence | Does basis carry over, step up, substitute, or adjust for boot, liabilities, or distributions? | Basis controls later gain, loss, depreciation, and distributions. |
| Entity model | Does C corporation, S corporation, partnership, or merger treatment control? | Applying the wrong entity framework changes the answer. |
| Future exit | What later sale, liquidation, distribution, or cash-flow result follows from today’s choice? | The best structure balances current and future consequences. |