9.1 - Corporate Tax Special Topics - Formation

Question 1

What is section 351?

Answer 1

A mandatory nonrecognition treatment requiring that no gain or loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and, immediately after the exchange, such person or persons control the corporation.

Question 2

Define control?

Answer 2

Ownership of 80% or more of the voting power of stock and 80% or more of the shares of each class of nonvoting stock of the corporation.

Question 3

Is stock exchanged for services counted toward the 80% ownership limitation?

Answer 3

No – the FMV of the stock is GI to the shareholder & the shareholder’s basis in the stock exchanged for services is its FMV

Question 4

How is non-qualified preferred stock treated?

Answer 4

As boot rec’d and is not counted as stock toward the 80% ownership test

Question 5

Does Section 351 mandatory nonrecognition still apply if the shareholder receives some boot (money or property) in the exchange if the exchange is solely for stock in the corporation?

Answer 5

Yes

Question 6

Can section 351 apply to an exchange after formation?

Answer 6

Yes

Question 7

Can section 351 apply to contributions of property even if the corporation issues no stock in the exchange (e.g. capital contribution by a sole shareholder who receives no stock in exchange for the contribution?

Answer 7

Yes

Question 8

Does section 351 apply when the corporation exchanges treasury stock?

Answer 8

Yes

Question 9

Is disparate value (inequality of FMV of the stock and property exchanged) relevant in section 351?

Answer 9

No – not in itself

Question 10

True or False&raquo_space;> the shareholder may have GI if the disparity represents an (unstated) additional transaction, e.g. payment of compensation, a constructive dividend.

Answer 10

True

Question 11

How is section 351 effected if the corporation assumes the shareholder’s liability or takes property subject to a liability in the exchange?

Answer 11

Section 351 nonrecognition still applies

Question 12

Does the corporation recognize gain on exchange of its stock for property (including money)?

Answer 12

No

Question 13

What is the control group shareholder’s basis in the stock of a corporation?

Answer 13

The AB in contributed property adjusted for the boot rec’d and the gain recognized.

Question 14

Calculate basis in stock of issuing corporation.

Answer 14

AB in contributed property – Boot rec’d + Gain recognized (by shareholder)

Question 15

How are liabilities treated when computing stock basis?

Answer 15

As boot

Question 16

How is the holding period treated in a transaction where property is exchanged for stock?

Answer 16

The holding period of the property exchanged is added to the holding period of the stock

Question 17

How is the holding period treated for capital assets and other assets (section 1231 property) that are contributed when incorporating a business?

Answer 17

Each share rec’d in the exchange has a split holding period

Question 18

What is the basis of shareholder in boot?

Answer 18

FMV

Question 19

What is the corporation’s initial carryover basis in property exchanged by a control group shareholder for its stock?

Answer 19

Adjusted carryover basis

Question 20

Calculate basis in property to corporation.

Answer 20

AB in property to shareholder + Gain recognized by shareholder

Question 21

Do the “Basis in property to corporation” apply when the shareholder receives nothing in return?

Answer 21

Yes

Question 22

How is allowable depreciation apportioned?

Answer 22

Based on the number of months the corporation owned the asset

Question 23

What is the initial depreciable basis in exchanged property?

Answer 23

An adjusted carryover basis or basis in property to corporation

Question 24

How is holding period adjusted for exchanged property?

Answer 24

The holding period is tacked (the holding period of the item exchanged for the property is added to the holding period of the newly acquired property)