Corporate Formation

Question 1

What are the 3 instances where there is no gain/loss recognized by the corporation issuing stock in exchange for property?

Answer 1

formation - issuance of common stock

reacquisition - purchase of treasury stock

resale - sale of treasury stock

Question 2

The basis of the property received by a corporation from the transferor/shareholder is the greater of:

Answer 2

the transferor/shareholder’s adjusted basis (NBV) of the property plus any gain recognized by the transferor/shareholder

OR

the debt assumed by a corporation

if the basis of property contributed to a corporation exceeds the FMV of the property, the corporation’s basis is limited to the FMV (this prevents transfer of property with built-in losses)

Question 3

When does a shareholder contributing property in exchange for common stock have no gain/loss?

Answer 3

These 2 conditions of IRC 351 have to be met:

immediately after the transaction, those transferors/shareholders contributing property must own at least 80% of the voting and nonvoting stock

transfer of property must be solely in exchange for stock

Question 4

What items represent boot (taxable) and will trigger gain recognition by the transferor/shareholder?

Answer 4

cash withdrawn and receipt of debt securities (bonds)

this is not boot per se, but it does generate gain: the amount of liabilities assumed by the corporation that exceeds the adjusted basis of the total assets transferred to the corporation; the recognized gain increases stock basis to prevent negative basis

Question 5

The shareholder’s basis in common stock received from the corporation will be the total of:

Answer 5

cash (amount contributed)

property (adjusted basis - NBV)

services (taxable - FMV)

a shareholder who only contributes services is not counted as part of the 80% control group test under IRC Section 351