REG 4 - Corporate Formation

Question 1

How many owners do the following entities have?

• Corporation
• Limited Liability Company
• Limited Partnership
• Partnership
• Sole Proprietorship

Answer 1

• Corporation = 1 or more owners
• Limited Liability Company = 1 or more owners
• Limited Partnership = 2 or more owners
• Partnership = 2 or more owners
• Sole Proprietorship = 1 owner

Question 2

Which entities have protection from being sued? Which entities don’t have protection from being sued?

• Corporation
• Limited Liability Company
• Limited Partnership
• Partnership
• Sole Proprietorship

Answer 2

Protection from getting sued:

• Corporation
• Limited Liability Company
• Only limited partners in partnership
• S Corporation

NO Protection from getting sued:

• General partners in partnership
• Sole proprietors

Question 3

When is there no gain or loss recognized for a C corporation when getting property by shareholders?

Answer 3

No gain or loss is recognized for a corporation issuing stock in exchange for property in following transactions:

1) Formation - issuance of common stock
2) Reacquisition - purchase of treasury stock
3) Resale - sale of treasury stock

Question 4

What is the basis of property received to the C corporation from shareholders?

Answer 4

Basis of property received to the C corporation from shareholders is the greater of:

1) Shareholder’s original basis + cash paid
OR
2) Debt assumed by corporation

Question 5

When is there no gain or loss recognized for a shareholder when giving property to C corporations?

Answer 5

No gain or loss is recognized by shareholder contributing property if BOTH conditions are met:

1) 80 percent control (either single person or group)

2) No receipt of boot
- Cash withdrawn (e.g. shareholder takes out money to even out other shareholder’s basis)
- Excess debt (e.g. shareholder gives building NBV of $100,000 and mortgage of $300,000)

Question 6

What is the basis of property given to the C corporation from shareholders for common stock?

Answer 6

The basis of common stock to the shareholder will be:

1) Cash - amount contributed
2) Property - (NBV - Debt) *basis is zero if basis is negative
3) Services - FMV

Question 7

What is the event, income, and basis for property and services?

Answer 7

Property -
Event = Nontaxable
Income = None
Basis = (NBV - Debt) *basis is zero if basis is negative

Services -
Event = Taxable
Income = FMV
Basis = FMV

Question 8

Calculate the following:

1) Shareholder’s gain
2) Shareholder’s basis
3) Corporation’s basis

Tim wants 1/3 share in ABC Company. He contributes a building worth $500,000. His basis is $100,000. There is a mortgage of $225,000.

Answer 8

1) Shareholder’s gain

Tim’s gain is $125,000 (100,000 - 225,000)

2) Shareholder’s basis

Tim’s basis is 0 (because the basis is negative)

3) Corporation’s basis

Corporation’s basis is $225,000 (greater of shareholder’s original basis of 100,000 vs. debt assumed 225,000)

Question 9

Calculate the following:

1) Gain realized by shareholder
2) Gain recognized by shareholder
3) Basis of stockholder
4) Basis of corporation

Tim forms a corporation and contributed property with a basis of $140,000 and a $60,000 mortgage. The FMV is $260,000.

Answer 9

1) Gain realized by shareholder

Tim’s gain realized is $120,000 (260,000 - 140,000)

2) Gain recognized by shareholder

Tim’s gain recongized is $0 (because liabilities do not exceed basis (no excess debt)

3) Basis of stockholder

Tim’s basis is $80,000 (140,000 - 60,000)

4) Basis of corporation

The corporation’s stock basis is $140,000 (greater of liabilities assumed or original shareholder’s basis (60,000 vs. 140,000)