Ch 18 Flashcards
Chapter definitions for South-Western Federal Taxation 2015: Comprehensive, 38th Edition
Built-in loss property
Property contributed to a corporation under ? 351 or as a contribution to capital that has a basis in excess of its fair market value. An adjustment is necessary to step down the basis of the property to its fair market value. The adjustment prevents the corporation and the contributing shareholder from obtaining a double tax benefit. The corporation allocates the adjustment proportionately among the assets with the built-in loss. As an alternative to the corporate adjustment, the shareholder may elect to reduce the basis in the stock.
Capital contribution
Various means by which a shareholder makes additional funds available to the corporation (placed at the risk of the business), sometimes without the receipt of additional stock. If no stock is received, the contributions are added to the basis of the shareholder’s existing stock investment and do not generate gross income to the corporation. ? 118.
Control
Holding a specified level of stock ownership in a corporation. For ? 351, the new shareholder(s) must hold at least 80 percent of the total combined voting power of all voting classes of stock and at least 80 percent of the shares of all nonvoting classes. Other tax provisions require different levels of control to bring about desired effects, such as 50 or 100 percent.
Investor losses
Losses on stock and securities. If stocks and bonds are capital assets in the hands of the holder, a capital loss materializes as of the last day of the taxable year in which the stocks or bonds become worthless. Under certain circumstances involving stocks and bonds of affiliated corporations, an ordinary loss is permitted upon worthlessness.
Liabilities in excess of basis
On the contribution of capital to a corporation, an investor recognizes gain on the exchange to the extent contributed assets carry liabilities with a face amount in excess of the tax basis of the contributed assets. This rule keeps the investor from holding the investment asset received with a negative basis. ? 357(c).
Nonbusiness bad debt
A bad debt loss that is not incurred in connection with a creditor’s trade or business. The loss is classified as a short-term capital loss and is allowed only in the year the debt becomes entirely worthless. In addition to family loans, many investor losses are nonbusiness bad debts. ? 166(d).
Property
Assets defined in the broadest legal sense. Property includes the unrealized receivables of a cash basis taxpayer, but not services rendered. ? 351.
Qualified small business corporation
For purposes of computing an exclusion upon the sale of qualified small business stock, a C corporation that has aggregate gross assets not exceeding $50 million and that is conducting an active trade or business. ? 1202.
Qualified small business stock
Stock in a qualified small business corporation, purchased as part of an original issue after August 10, 1993. The shareholder may exclude from gross income 50 (or 75 or 100) percent of the realized gain on the sale of the stock if he or she held the stock for more than five years. ? 1202.
Section 1244 stock
Stock issued under ? 1244 by qualifying small business corporations. If ? 1244 stock becomes worthless, the shareholders may claim an ordinary loss rather than the usual capital loss, within statutory limitations.
Securities
Generally, stock, debt, and other financial assets. To the extent securities other than the stock of the transferee corporation are received in a ? 351 exchange, the new shareholder realizes a gain.
Thin capitalization
When debt owed by a corporation to the shareholders becomes too large in relation to the corporation’s capital structure (i.e., stock and shareholder equity), the IRS may contend that the corporation is thinly capitalized. In effect, some or all of the debt is reclassified as equity. The immediate result is to disallow any interest deduction to the corporation on the reclassified debt. To the extent of the corporation’s earnings and profits, interest payments and loan repayments on the reclassified debt are treated as dividends to the shareholders.
