R4 Corporation Taxation
M1 Corporation formation
-Section 351(a) provides that no gain or loss shall be recognized if property is transferred to a
corporation by one or more persons solely in exchange for stock in such corporation and
immediately after the exchange such person or persons are in control of the corporation.
-
Corporation Tax consequences
 General rule: no gain/loss recognized
 Basis of property: The greater of adjusted NBV (basis) of the property + gain
recognized or debt assumed by corporation
 Exception: If the aggregate adjusted basis of property contributed to corporation
by transferor/shareholder exceeds FMV of property transferred, corporation’s
basis is limited to aggregate FMV of property (prevents transfer of property with
“built in losses” to corporation)
-
Shareholder Tax consequences
 Shareholder contributing PROPERTY in exchange for corporation’s common stock
has no gain or loss if:
 shareholder has 80% control
 No Boot involved
 Gains are recognized if: Boot is involved (taxable)
(1) Cash
(2) Cancellation of Debt (C.O.D.): Liabilities > NBV Assets transferred into
corporation
 Basis of common stock (to shareholder): Cash + NBV Property + FMV Services
o Cash = amount contributed
o Property = adjusted basis (NBV)
 Adjusted basis of property is reduced by any debt (C.O.D.)
 Add: taxable boot (excess liabilities) to bring stock basis to zero
Note: A shareholder who contributes only services is not counted as part of
the control for purposes of the 80 percent control