Assignment Help-Corporate Accountancy Short Answer questions

1. Why is the IRS concerned with the corporate debt to equity ratio?

Investments in companies can be by two ways (1.) By equity and (2.) By debt. Equity earns dividend if the company earns profits and debt earns interest irrespective of profit earning by the company.

Dividend by companies is doubly taxed once at corporate tax point and the other at the investor as dividend income tax. Debt on the other hand is taxed only once at the interest receiver.

In view of this difference in taxation, there may be attempt by some companies and investors to show their investment in debt rather than in equity. Such companies will be thinly capitalised and debt-equity ratio would be high. IRS would then rechristen some debt as disguised equity.

IRS is thus concerned about debt-equity ratio because disguised capital may appear as debt.

2. Relative to corporate formation, how one can contribute appreciated property without gain recognition to the Transferor?

Relative to corporate formation, the corporate can contribute appreciated property without gain to the transferor by issuing company’s stock to the transferor so that he can have control in the affairs of the company. Nothing else should be given by the company to the transferor.

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