Module 1: Corporate Formation

Question 1

Corporation

Answer 1

1 or more owners

Articles of incorporation

Legal entity separate from owners

Owners = shareholders

Question 2

Limited Liability Company

Answer 2

1 or more owners

Articles of organization

Legal entity separate from owners

Owners = members

Can be taxed as corporation, partnership, or sole propietorship

Question 3

Limited partnership

Answer 3

2+ owners

Written agreement & file certificate

Question 4

Partnership

Answer 4

2+ owners

Written or oral agreement

No requirement to formally organize

Question 5

Sole proprietorship

Answer 5

1 owner

Not a legal entity separate from owner

No requirement to formally organize

Question 6

When is there no gain/loss to the corp issuing stock in exchange for property?

Answer 6

1. Formation - issuance of C/S
2. Reacquisition - purchase of T/S
3. Resale - Sale of T/S

Question 7

Basis of property rec’ve by corp from transferor/shareholder

Answer 7

The greater of:

1. Adjust basis (NBV) of transferor (plus any gain recognized by the transferor); or
2. Debt assumed by corp (transferor may recognize gain to prevent negative basis)

Question 8

What is the corp’s basis in property contributed by transferor when the aggregate adjusted basis in a tax-free incorporation exceeds the aggregate FMV of the property transferred?

Answer 8

Basis is limited to the aggregate FMV of the property (to avoid built-in losses to corp)

Question 9

When would the shareholder contributing property in exchange for corp c/s have no gain or loss?

Answer 9

If the following 2 conditions of IRC 351 have been met:

1. 80% control - Immediately after transaction, those transferor/shareholders (control group) own at least 80% of each, voting stock & non-voting stock
2. No receipt of boot

Question 10

What items would represent boot and trigger gain recognition?

Answer 10

1. cash withdrawn

2. receipt of debt securities

Question 11

What happens if the amount of liabilities assumed exceeds the adjusted basis of the total assets transferred?

Answer 11

NBV assets

= Excess liability = Gain

Question 12

What is the basis of c/s to the shareholder?

Answer 12

Cash (Amount contributed)
+ Property (Adjusted basis reduced by debt on property assumed by corp plus gain recognized)
+ Services (FMV as ordinary income)

Question 13

When is the accrual basis method for tax purposed required?

Answer 13

1. Accounting for purchases & sales of inventory
2. Tax shelters
3. Certain farming corps
4. C Corps, trusts w/unrelated trade/business income, and partnerships having C corp as partner provided the business has greater than $5M avg. annual gross receipts for the 3 year period ending w/the tax year