TAX: Formation of a Corporation

Question 1

What is the transaction to form a corporation?

Answer 1

Property Transaction.

Property goes in, stock interest comes out

Question 2

No gain or loss on the formation of a CORP will not be recognized if these three conditions are met:

Answer 2

1) The only received back is stock
2) Stock is received in exchange for property or cash
3) The group transferring property collectively own at least 80% of the voting power, and nonvoting class of stock

Question 3

If stock is exchanged for services, what happens?

Answer 3

Transferor will recognize wage income

Corp will have a salary expense reduction

Question 4

If anything other than stock is received, this is called?

Answer 4

Boot

Question 5

If boot is received, what needs to happen?

Answer 5

Recognize a gain, the lower of:

• Realized Gain
• FMV of the boot received

Question 6

How do you determine the realized gain for a transfer of assets to a corp?

Answer 6

Amount realized (FMV of stock received or boot)
- Basis in asset given up
= Realized Gain

Question 7

For a corporation formation, are debt assumptions considered boot?

Answer 7

NO!

If the liability > basis than you do recognize a gain for the difference

Question 8

How do you calculate the shareholder basis (MEMORIZE)

Answer 8

Basis of property transferred to corp
\+ Gain recognized by the shareholder 
- Boot Received 
- Liabilities assumed by the corp 
= Basis

Question 9

What basis does the corporation have in the property received? (MEMORIZE)

Answer 9

Basis of the property transferred
+ Gain recognized by the shareholder
= Basis

Question 10

What holding period have in the stock from the corporation?

Answer 10

Depends on the property transferred:

• Capital Asset or 1231 asset- Tacks onto the HP of the stock
• Ordinary income property- Does not tack onto the stock

What holding period does the corporation:
- Always gets to include the holding period on the transfer