Chapter 8 Flashcards
What occurs when a shareholder transfers property to the corporation for stock?
It is treated as a taxable sale from the shareholder to the corporation.
How is gain or loss computed when transferring property to a corporation?
By subtracting the transferor’s adjusted basis in property exchanged from the amount realized in the exchange.
What does IRC Section 1001 determine?
The amount and recognition of gain or loss.
What is included in the computation of the amount realized?
- Cash received
- Fair market value of property received
- Liabilities assumed by transferee on transferred property
- Selling expenses
- Liabilities assumed by the transferor on transferred property
What is the adjusted basis of property transferred?
- Acquisition basis
- Plus: Capital Improvements
- Less: Accumulated depreciation / Cost recovery
When does recognition of gain or loss occur?
When it is included in taxable income, not exempted or deferred by tax law.
What is the purpose of §351?
It offers deferral of gain on transfers of property to a corporation solely in exchange for stock, where the transferor is in control immediately after the transfer.
What must transferors meet to qualify for Section 351 treatment?
- One or more shareholders must transfer property to a corporation.
- Shareholders must receive stock in exchange.
- Transferors must be in control of the corporation immediately after the transfer.
What happens in a simple §351 transaction when no boot is received?
No gain or loss is recognized to the shareholder.
What is the adjusted basis of stock when no boot is received?
It equals the adjusted tax basis of the property transferred less liabilities assumed by the corporation.
What triggers gain recognition when boot is received?
The recognized gain is the lesser of realized gain or fair market value of boot received.
In the example of a shareholder contributing an asset with a basis of $100k for stock and cash, what is the recognized gain?
$3,000.
What is the adjusted basis of stock in the corporation under §358(a)(1) when boot is received?
- Adjusted basis of property transferred
- Plus: Gain recognized
- Less: FMV of boot
- Less: Liabilities assumed by corp
What is the tax basis of the asset received by the corporation?
Tax basis of asset contributed by the shareholder plus gain recognized by the shareholder.
What happens when liabilities are transferred to the corporation?
The transferor must reduce their basis in the stock received.
What are §1244 stocks?
Stocks from small corporations that allow shareholders to deduct ordinary losses up to $50k ($100k for married filing jointly).
What is the difference between taxable and tax-deferred corporate acquisitions?
Taxable acquisitions allow stepping up the tax basis of assets, while tax-deferred acquisitions keep the carryover value.
What are the requirements for a Type A Asset Acquisition to be tax-deferred?
- Continuity of interest
- Continuity of business
- Business purpose
What is a complete liquidation of a corporation?
When a corporation exchanges its assets for its stock and ceases to do business.
How do noncorporate shareholders compute capital gain or loss in a complete liquidation?
By subtracting the stock’s tax basis from the money and FMV of property received.
What is a nontaxable liquidating distribution?
Distribution to an 80% corporate shareholder where gain or loss is not recognized.
What must be filed to inform the IRS of a corporation’s intention to liquidate?
Form 966.
What is the Business Purpose Test in corporate acquisitions?
The acquiring corporation must show a significant non-tax avoidance purpose for the transaction.
