Entities - C Corporations - Entity / Owner transactions

Question 1

Corporate formations - how does a corporation account for the property that is received?

Answer 1

The corporation uses the stockholder’s basis for the property

Question 2

Corporate formations - how does a shareholder account for their stock basis when they give property to the corporation

Answer 2

The shareholder stock basis is equal to the basis of the property given up

Question 3

If an individual transfers property AFTER formation of the corporation in exchange for ownership, how should the CORPORATION account for the property

Answer 3

Property at FMV

Question 4

If the transferor or shareholder receives boot in addition to stock, how does the CORPORATION account for the property

Answer 4

transferor’s basis in the property

+ value of the boot the transferer received (what the corporation gave)

Question 5

If the transferor or shareholder receives boot in addition to stock, how does the SHAREHOLDER account for the property

Answer 5

Recognize a gain that is the lesser of the boot received or the realized gain

Question 6

For a cash distribution, how do you determine how much is a dividend, return of capital or a capital gain

Answer 6

• A distribution is a dividend as long as it is made from current or accumulated earnings and profit
• Anything above E&P and Acc E&P - is considered to be a return of capital (which lowers shareholder’s basis)
• Anything above the shareholder’s basis is a capital gain

Question 7

When a company distributes property in a non-liquidating dividend what is the basis of the property distributed

Answer 7

Property dividend is equal to it’s FMV on the date of the distribution

Question 8

What is the effect (gain / loss) of the property dividend on the shareholder

Answer 8

The distribution is equal to the FMV of the property on the date of the distribution

• First the distribution is treated as a dividend to the extent of E&P. Distributions in excess of E&P are treated as a tax-free return of capital to the extent of basis
• Distributions in excess of a shareholder’s basis are treated as a capital gain

Question 9

What is the effect (gain/loss) of the property dividend on the corporation

Answer 9

• The corporation treats it as if it sold the property to its shareholders for the property’s FMV
• The corporation recognizes a gain (but not a loss) on the distribution
• Gain = FMV - adjusted basis
  However, if the property distributed is subject to a liability, then the FMV of the property cannot be less than the liability for gain determination purposes

Question 10

When a company gives a property dividend and there is a loss, how does the company account for the loss

Answer 10

There are no losses when a company distributes property

Question 11

What is the shareholder’s basis of the property that is distributed as a dividend

Answer 11

FMV of the property
If a liability is assumes in connection with the distribution, if the liability is greater than the FMV of the property - the liability amount becomes the shareholder’s basis in the property

Question 12

If a corporation sells property to a shareholder for less than the FMV - how is this accounted for by the shareholder

Answer 12

The shareholder is considered to have received dividend income equal to the difference

Question 13

When is issuance of stock in exchange for property a non-taxable event?

Answer 13

it is a non-taxable event ONLY if all contributions of cash and property has more than 80% control. (calculation does not included services contributed)

Question 14

How are services contributed accounted for by the corporation?

Answer 14

Service contributed is not included in the 80% control calculation

Question 15

How do you calculate shareholder’s basis in the stock (non-taxable)

Answer 15

Carryover basis

= basis in stock

Question 16

How do you determine corporations basis in the property received? (non-taxable)

Answer 16

Shareholder’s old basis

Question 17

How is property treated when transfered but it is a taxable event

Answer 17

It is treated as a sale of property at FMV

Question 18

what is the gain recognized and taxable for the shareholder (taxable event)

Answer 18

FMV

= gain recognized

Question 19

What is the shareholder’s basis in the stock when it is a taxable event

Answer 19

Carryover basis

Gains recognized
= Basis for stock

Question 20

What is the corporation’s basis for the property when it is a taxable event?

Answer 20

Carryover basis
+ gain recognized
= basis for property

Question 21

How is it accounted for when the mortgage debt exceeds the shareholder’s adjusted basis in the property?

Answer 21

Gain is recognized on the amount of excess liability such that the shareholder’s basis in the stock is 0 and not negative

Question 22

What is the shareholder’s gain that is taxable and their basis in the stock when there is a mortgage debt that exceeds the adjusted basis of the property?

Answer 22

Mortgage debt

= gain recognized

Carryover basis

gain recognized
= basis for stock = 0

Question 23

What is the corporation’s basis for the property when there is a mortgage that exceeds the basis

Answer 23

Carryover basis

= basis for property

Question 24

What happens when the shareholder receives boot?

Answer 24

the gain is taxable
The gain is recognized and taxable at the LOWER of
1) gain realized
2) boot received

Question 25

What is the shareholder’s basis when they recieve cash

Answer 25

Carryover basis

Gain recognized

= basis for stock

Question 26

What is the corporation’s basis for the property when they give cash to a shareholder

Answer 26

Carryover basis
+ gain recognized
= Basis for property

Question 27

What happens when the carryover basis is more than FMV of the property

Answer 27

The property will have builtin losses to avoid transfer of property with built-in loss

Question 28

What is the corporations basis for property when FMV is less than carry over basis

Answer 28

FMV = basis for property

Question 29

When there is a complete liquidation and distributes property, how does the corporation account for it?

Answer 29

• Treat property distributions as sale at FMV
• Corporation will have a recognized gain = FMV - corporations basis (or a loss)
• The gain or loss will be a capital loss
• If liabilities are assumed by the recipient and the liability is greater than the FMV of the property, the corporation recognizes a gain
• gain = liability amount - corporation’s basis in the property

Question 30

How does the shareholder account for a liquidation of property?

Answer 30

• recognize a gain or loss on the distribution to the extent that the money and FMV of the property received (less liabilities subject to or assumed) differ from the basis in the stock
• The basis of property received is FMV

Question 31

What type of gain is it when a complete liquidation terminates their ownership

Answer 31

Capital gain

Question 32

what is the gain realized versus recognized

Answer 32

Gain realized is just FMV - basis - this does not include cash or liabilities. it is purely just what is on the property