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Corporate Formations and Capital Structure Corporations 2-45 C:2-60 Eric Wright conducts a dry cleaning business as a sole proprietorship. The business oper- ates in a building that Eric owns. Last year, Eric mortgaged for $150,000 the building and the land on which the building sits. He used the money for a down payment on his per- sonal residence and college expenses for his two children. He now wants to incorporate his business and transfer the building and the mortgage to a new corporation, along with other assets and some accounts payable. The amount of the unpaid mortgage balance will not exceed Eric's adjusted basis in the land and building at the time he transfers them to the corporation. Eric is aware that Sec. 357(b) could impact the tax consequences of the transaction because no bona fide business purpose exists for the mortgage transfer, which the IRS might consider to have been for a tax avoidance purpose. However, Eric refuses to acknowledge this possibility when you confront him. He maintains that many taxpay- ers play the audit lottery and that, in the event of an audit, invoking this issue could be a bargaining ploy. Required: What information about the transaction must be provided with the trans- feror and transferee's tax returns for the year in which the transfer takes place? Discuss the ethical issues raised by the AICPA's Statements on Standards for Tax Services No. 1, Tax Return Positions (which can be found in Appendix E) as it relates to this situation. Should the tax practitioner act as an advocate for the client? Should the practitioner sign the return? 2-61 TAX RESEARCH PROBLEMS Anne and Michael own and operate a successful mattress business. They have decided to take the business public. They contribute all the assets of the business to newly formed Corporate Formations and Capital Structure Corporations 2-45 C:2-60 Eric Wright conducts a dry cleaning business as a sole proprietorship. The business oper- ates in a building that Eric owns. Last year, Eric mortgaged for $150,000 the building and the land on which the building sits. He used the money for a down payment on his per- sonal residence and college expenses for his two children. He now wants to incorporate his business and transfer the building and the mortgage to a new corporation, along with other assets and some accounts payable. The amount of the unpaid mortgage balance will not exceed Eric's adjusted basis in the land and building at the time he transfers them to the corporation. Eric is aware that Sec. 357(b) could impact the tax consequences of the transaction because no bona fide business purpose exists for the mortgage transfer, which the IRS might consider to have been for a tax avoidance purpose. However, Eric refuses to acknowledge this possibility when you confront him. He maintains that many taxpay- ers play the audit lottery and that, in the event of an audit, invoking this issue could be a bargaining ploy. Required: What information about the transaction must be provided with the trans- feror and transferee's tax returns for the year in which the transfer takes place? Discuss the ethical issues raised by the AICPA's Statements on Standards for Tax Services No. 1, Tax Return Positions (which can be found in Appendix E) as it relates to this situation. Should the tax practitioner act as an advocate for the client? Should the practitioner sign the return? 2-61 TAX RESEARCH PROBLEMS Anne and Michael own and operate a successful mattress business. They have decided to take the business public. They contribute all the assets of the business to newly formed

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