Formation of a Corporation

Question 1

What are 3 conditions that must be met in order for gains/losses to NOT be recognized to the shareholders or corporation?

Answer 1

1. The only property received from the corporation is stock (NOT include stock rights, warrants, or debt).
2. The stock is received in exchange for property or cash (i.e. not services).
3. The group (can be more than one person) transferring property and receiving stock as part of this exchange collectively own at least 80% of (a) the voting power, and (b) each nonvoting class of stock.

Question 2

If stock is received in exchange for services, what would be the value of wage income and basis in the stock? What’s the impact on the corporation? Exception?

Answer 2

Wage income: FMV of the stock received.
Basis: equal to the amount above.

Corporation will have a salary expense deduction (unless the services rendered were an organizational expense - must be capitalized).

Question 3

What is the item called, if anything other than stock is received by shareholders?

Answer 3

Boot.

Question 4

If boot is received, what must be recognized, by who, and how is the value determined?

Answer 4

Gain by shareholders.
Lower of;
realiized gain or the FMV of the boot received.

Question 5

Example:
A solo owner of a corporation transferred a building: the adjusted tax basis: $35,000, FMV: $100,000.
In exchange, he received $40,000 cash and common stock w/ FMV: $60,000.
What amount of gain recognized?

Answer 5

Amount realized = 40,000+60,000 = 100,000 - 35,000 (adjusted basis) = 65,000.

Recognized gain is lower of recognized gain (65,000) or FMV of boot received (40,000).

Gain recognized = 40,000.

Question 6

If property transferred has liability attached (assumed by the corporation), is it considered to be boot in general?

Answer 6

Not in the case of corporation (yes for individuals).

Question 7

In which case, must gain recognized when corporation assumes liability of the transferred property? How is the gain determined?

Answer 7

When the total liabilities assumed by the corporation exceed the total adjusted basis of property.

Gain recognized = liabilities assumed - basis of property transferred.

Question 8

Question:
TP transferred land; adjusted basis $20,000, FMV: $56,000, liability: $26,000 for stock: FMV $30,000.
What is the amount of recognized gain?

Answer 8

Amount realized (30,000+26,000) - Adjusted basis (20,000) = Realized gain (36,000) - because there is no boot, there is no gain recognized IF the below situation didn’t apply.

Debt assumed (26,000) - Adjusted basis of asset (20,000) = Recognized gain (6,000).

Question 9

How is the shareholder’s basis in the stock received from the corporation determined?

Answer 9

Basis of all property transferred to the corporation
\+ Gain recognized by shareholder
- Boot received by shareholder
- Liabilities assumed by corporation
= Shareholder's basis in the stock

Question 10

How is the corporation’s basis in the property received determined?

Answer 10

Shareholder’s basis in the property
+ Gain recognized by the shareholder
+ Any cash transferred to corporation

Question 11

Holding period for shareholders for stock received?

Answer 11

If capital asset or Sec. 1231 asset was transferred, the holding period of those asset will tack on.
If ordinary asset, it begins on day after transfer.

Question 12

Holding period for corporation for property received?

Answer 12

Always the holding period of the asset will tack on.

Question 13

If property is contributed to corporation by shareholders, but no stock is received, what is the implication for corporation and shareholder?

Answer 13

No gain or loss to a corporation.

Shareholder’s basis in stock is increased by basis of property contributed.

Question 14

If property is contributed to corporation by non-shareholders, but no stock is received, what is the implication for corporation?

Answer 14

No gain or loss to the corporation.

Basis to corporation in property is 0.

Question 15

What is this non recognition provision called?

Answer 15

Sec. 351 provision.

Question 16

When a shareholder sells the stocks for $35,000, and the original basis was $80,000 and FMV $60,000, what is the amount of gain/loss recognized and its character?

Answer 16

Since Nancy acquired her stock in a tax-free asset transfer under Sec. 351, her stock’s basis is $80,000 and the sale of the stock for $35,000 results in a loss of $45,000. However, the property that Nancy transferred in exchange for the stock had an adjusted basis ($80,000) in excess of its fair market value ($60,000), the stock’s basis must be reduced by the excess ($20,000) for purposes of determining the amount that can be treated as an ordinary loss. Thus, the amount of ordinary loss is limited to $60,000 − $35,000 = $25,000, with the remaining loss ($45,000 − $25,000 = $20,000) treated as a capital loss.