M1-Corporate Formation Flashcards
A corporation’s basis in property acquired through contribution is the same basis as the person contributing the property. (true or false)
true
ex: Lindy contributes building with adjusted basis of $40,000 and FMV of $82,000. There is also a $10,000 mortgage on the building. What is the Corporation’s basis in the building?
Answer: $40,000.
The debt assumed by the corp does not affect the basis of the building to the corp.
A contributor computes his/her basis as the basis of property and cash contributed, less the amount of any debt he/she is relieved of. (true or false
true
ex: Lindy contributes building with adjusted basis of $40,000 and FMV of $82,000. There is also a $10,000 mortgage on the building. What is Lindy’s basis in the corp’s stock?
Answer: $30,000.
40,000-10,000
This can also be thought as giving Lindy a basis equivalent to the amount of equity he had in the contributed building
Partners who transferred or contributed property to a Corp, has no taxable income or gain. (true or false)
true
However, a partner that contributes services is not “property” and so the receipt of stock is taxable.
In a tax-free incorporation, the percentage for “control” is 80% (i.e., control exists if the transferor/shareholder owns at least 80% of the total voting power and at least 80% of the total number of shares of all other classes of stock). (true or false)
true
In a corporate formation, the corporation’s basis in the transferred assets is the carryover adjusted basis from the shareholder. (true or false)
true
As a general rule, a shareholder who contributes property to a corporation in exchange for common stock will not recognize gain or loss if immediately after the transaction when the transferring shareholders (there can be more than one transferor) own at least 80% of the corporation and the shareholder does not receive any boot. (true or false)
true
If the 80% is met, the corporation takes the basis in the property as the adjusted basis from the shareholder.
If the 80% test is not met, then it is a taxable transaction and the corporation take the FMV of the basis in the property from the shareholder.
A C corporation has considerable flexibility in choosing an accounting period. A C corporation generally has the same choice of accounting periods as do individual taxpayers. (true or false)
true
C Corps has the most flexibility in choosing an accounting period.
An S Corp must adopt the calendar year unless a valid business purpose for a different taxable year is established.
A partnership is significantly limited in what accounting period (taxable year) it can select. Generally a calendar year is required, unless the partnership meets a set of rules or unless the partnership can establish a valid business purpose for a different taxable year.
A personal service corporation must generally use a calendar year unless a valid business purpose for a different taxable year is established. There are also other restrictions
There is no gain or loss to the corporation issuing stock in exchange for property for the issuance of stock. The general rule is that the basis of the property received from the transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the transferor/shareholder of (2) debt assumed by the corporation. (true or false)
true
While the cash basis of accounting is used by most taxpayers for tax purposes, the accrual basis method of accounting for tax purposes is required for the following:
- The accounting for purchases and sales of inventory,
- Tax shelters,
- Certain farming corporations, and
- C Corporations, trust with unrelated trade or business income, and partnerships having a C corporation as a partner provided the business has greater than $5 million average annual gross receipts for the three-year period ending with the tax year.
IRC Section 351 controls the taxation of transfers to controlled corporations. No gain or loss is recognized to the transferors/shareholders on the property transferred if certain conditions are satisfied. For section 351 to apply, what needs to happen?
The shareholders contributing property, including cash, must own, immediately after the transaction, at least 80% of the voting stock and at least 80% of the nonvoting stock of the corporation.
A shareholder who contributes only services is not counted as part of the control group.
A C corporation (a regular corporation) must pay federal income tax. A C corporation is not a pass-through entity like a partnership, and S Corp. (true or false)
true
