Taxes: Formation of a Corporation

Question 1

Taxes:
Formation of a Corporation
Recognition of Gain or Loss
Deferral

Answer 1

Recognition of Gain or Loss
- depends on ownership % of contributing owner
Deferral
- required for members of control club
- property must be contributed (not services)
- property given in exchange for stock
- immediately after transfer, transferors are in control (80% of voting and nonvoting stock)
- boot triggers gain but not loss
- if services, give some small property also equal to 10% of the services
- existing shareholder contributes, must be 10%+ value of stock owned

Question 2

Taxes:
Formation of a Corporation
Boot Received
Stock for Services

Answer 2

Boot Received
- lesser of:
- realized gain
- FMV of boot received
Stock for Services
- wage income equal to FMV of stock received
- corporation has salary deduction (unless organization expense)
Reminder
- corporation does not recognize and gain or loss on issuance of stock

Question 3

Taxes:
Formation of a Corporation
Basis Issues

Answer 3

Basis Issues
 - carryover basis
  - basis of transferor plus any gain recognized by transferor
- shareholders stock = adj basis of transfered property + gain recognized - boot recieved - liabilities assumed by corp
Key
FMV of property less gain deferred
Basis Adjustment for Loss Property
- basis adjusted down to FMV

Question 4

Taxes:
Formation of a Corporation
Debt Issues

Answer 4

Debt Issues

• gain recognized in two circumstances if corp assumes shareholder debt:
  1. shareholder gain recognized = liabilities assumed - basis of property transferred
  2. not valid business reason, all is boot, only to extent of realized gain

Question 5

Taxes:
Formation of a Corporation
Holding Period

Answer 5

Holding Period

• shareholders holding period may or may not include holding period of property given
  
  • sec 1231: holding period of property is added
  • all other property it does not
• corporations holding period always includes transferors