Corporate Formations
Tx 8120
Goals to Achieve
You should be able to:
1.
2.
3.
4.
Calculate ____ or ____ from transfers to
controlled corporations,
Explain _____ and _______ period implications
from such transfers,
Determine tax consequences of contributions to
________, and
Explain deductibility of ______________
expenditures and ________ costs.
Fundamental Tax Issues
Transfers to Controlled Corporations
Shareholders
Control
Property
Stock
Corporation
Shareholder (_________) Issues
1. How much gain or loss do shareholders
_______________?
2. What _______ do shareholders take in
______ received?
3. When does the ___________ period begin
in the _________ received?
Corporation (__________) Issues
1. How much gain or loss does the corporation
____________?
2. What _______ does the corporation take in
the __________ received?
3. When does the corporation’s __________
period begin in the ___________ received?
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Section 1001
(a) Computation of gain or loss.
The gain from the sale or other disposition of property shall be
the excess of the amount realized … over the adjusted basis …,
and the loss shall be the excess of the adjusted basis …over the
amount realized.
…
(c) Recognition of gain or loss.
Except as otherwise provided in this subtitle, the entire amount
of the gain or loss … on the sale or exchange of property shall be
recognized.
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Section 351(a)
(a) General rule.
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 (as defined
in section 368(c)) of the corporation.
Rationales:
(1) Continuation of
(2) Re gains,
(3) Re losses,
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Section 367(a)(1)
(a) Transfers of property from the United States.
(1) General rule. If, in connection with any exchange
described in section 332, 351, 354, 356, or 361, a United
States person transfers property to a foreign corporation,
such foreign corporation shall not, for purposes of
determining the extent to which gain shall be recognized
on such transfer, be considered to be a corporation.
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Property condition
What Is Property?
•
•
•
•
•
•
Cash
Accounts receivable
Inventory
Equipment
Real estate
Intangibles
No gain results from transferring
cash. So, does it matter whether cash
is considered “property”?
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Property condition
Hempt Brothers, Inc. v. US
(CA-3, 1974)
A ___ method partnership incorporated under §351, transferring accounts
receivable with a ___ basis. Taxpayer insisted such receivables are not
“______” under §351 and, thus, represent gross income to the partnership
when transferred or collected. Alternatively, the taxpayer argued that the
assignment of income doctrine controls. The IRS countered that
receivables are ______ for which the corporation takes a transferred basis
of ____ and become gross income to the new corporation when collected.
Partnership
100%
Shares
Hempt
Bros., Inc.
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Property condition
Hempt Brothers, Inc. v. US
(CA-3, 1974)
In siding with the gov’t, the court found no reason to narrowly construe
“_______” and believed that the §351 purpose to facilitate the
incorporation of ongoing businesses trumps any assignment of income
concerns. Further, the court noted that §358 did not increase the basis of
shares received because of the ____ basis receivables. Thus, gross income
attributable to the receivables is merely deferred.
Partners
100%
Shares
Hempt
Bros., Inc.
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Property condition
Section 351(d)
(d) Services, certain indebtedness, and accrued interest
not treated as property.
For purposes of this section, stock issued for-(1) services,
(2) Indebtedness of the transferee which is not evidenced
by a security, or
(3) Interest on indebtedness of the transferee corporation
which accrued on or after the beginning of the
transferor’s holding period for the debt,
shall not be considered as issued in return for property.
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Property condition
Example: Stock for Services
Bart drafts and files articles of incorporation for Al’s business
and bills Al $3,000. Al transfers his business assets to the new
corporation. Of 100 authorized shares, Bart receives 10 for his
work, and Al receives 90. What are the tax consequences to
each individual? Would the results change if Bart and Al
receive 25 and 75 shares, respectively?
Al (owner)
Bart (attorney)
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Property condition
How Much Property?
• For §351 to apply, “_________” must
control the corporation afterwards.
• Generally, a person contributing property
and services is a “_________” whose total
shares count toward control requirement.
• So, why not have service providers
contribute ________ property?
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Property condition
How Much Property?
(continued)
• Nominal property transfers used ________
to qualify other transferors under §351 are
________, Reg. §1.351-1(a)(1)(ii).
• Transfers avoid nominal label if FMV of
contributed property ≥ ___% of FMV of
stock previously owned and received for
________, Rev. Proc. 77-37, §3.07.
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
What Is Stock?
• Can be _____ or _________
• Can be ______ or _________
• Does not include:
– Stock ______
– Long-term _____ securities
– ___________ preferred
Shareholders
Control
Property
Stock
Corporation
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Nonqualified Preferred, §351(g)
• Preferred stock
– Limited and preferred as to ___________
– Doesn’t significantly participate in _______
• Nonqualified
– Holder has right to require ___________,
– Issuer is required to ________ shares,
– Issuer has right to ________ and, on issuance
date, is more likely than not to ________, or
– Dividend rate ______
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Section 351(b)
(b) Receipt of property.
If subsection (a) would apply to an exchange but for the
fact that there is received, in addition to the stock permitted to
be received under subsection (a), other property or money,
then-(1) gain (if any) to such recipient shall be recognized, but
not in excess of-(A) the amount of money received, plus
(B) the fair market value of such other
property received; and
(2) no loss to such recipient shall be recognized.
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Receipt of Boot
Shareholders
Stock
plus Boot
Property
Corporation
____ of stock and boot received
- Adjusted
of property transferred
_________ gain
_________ gain = Smaller of:
(a)
(b)
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Rev. Rul. 68-55
Corp X
Asset I
Asset II
Asset III
FMV
Basis
$ 22
33
55
$ 40 LTCL
20 STCG
25 §1245
(shareholder)
Other
Y stock (FMV
$100) and $10
Corp Y
(newly organized)
Issues
1. Does X calculate gain on ______
or ___________ basis?
2. If determined on _______ basis,
how does X determine what it
receives for each _______?
Y stock
(FMV $20)
$20
Individual A
(shareholder)
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Rev. Rul. 68-55
(continued)
Corp X
FMV
Asset I
Asset II
Asset III
Basis
(shareholder)
Other
$ 22 $ 40 LTCL
33
20 STCG
55
25 §1245
$110 - $85 = $25 gain
Y stock (FMV
$100) and $10
Corp Y
(newly organized)
Overall or Separate?
Each asset is ________ exchanged:
a. No _______ of gains and losses
b. _______________ analysis
Y stock
(FMV $20)
$20
Individual A
(shareholder)
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Rev. Rul. 68-55
(continued)
Corp X
Asset I
Asset II
Asset III
FMV
Basis
$ 22
33
55
$ 40 LTCL
20 STCG
25 §1245
(shareholder)
Other
Y stock (FMV
$100) and $10
Corp Y
(newly organized)
Amount Realized?
Y stock
(FMV $20)
$20
Need amount realized for each asset:
a. Based on _________ ____
b. Compute _____ and ____ separately
Individual A
(shareholder)
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Rev. Rul. 68-55
(continued)
FMV of asset
Percent of total
Total
Asset
I
Asset
II
Asset
III
$110
$22
$33
$55
FMV of:
Y stock received
Cash received
Amount realized
Basis of asset
Gain (loss) realized
Gain (loss) recognized
Thus, Corp X recognizes $__
short-term capital gain and
$__ ordinary income.
Corp X
(shareholder)
Asset I
Asset II
Asset III
FMV
$ 22
33
55
Basis
$ 40
20
25
Other
LTCL
STCG
§1245
Y stock (FMV
$100) and $10
Corp Y
(newly organized)
Y stock
(FMV $20)
$20
Individual A
(shareholder)
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Section 357(a)
(a) General rule.
Except as provided in subsections (b) and (c), if-(1) the taxpayer receives property which would be
permitted to be received under section 351 … without the
recognition of gain if it were the sole consideration, and
(2) as part of the consideration, another party to the
exchange assumes a liability of the taxpayer,
then such assumption shall not be treated as money or other
property, and shall not prevent the exchange from being
within the provisions of section 351 ….
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Section 357(b)
(b) Tax avoidance purpose.
(1) In general. If … it appears that the principal purpose of
the taxpayer with respect to the assumption described in
subsection (a)-(A) was a purpose to avoid Federal income tax on the
exchange, or
(B) if not such purpose, was not a bona fide business
purpose,
then such assumption (in the total amount of the liability
assumed …) shall, for purposes of section 351 …, be
considered as money received by the taxpayer on the
exchange.
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Attempted Bail Out
Objective: Pete needs $100. He
owns unencumbered realty (FMV
$100, basis $25) he’d like to sell, but
he doesn’t want to recognize gain.
Strategy: Borrow $100 on
nonrecourse mortgage, transfer
encumbered realty to 100%-owned
corporation, and let the corporation
pay off the mortgage.
BANK
Pete
100%
Corporation
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Section 357(c)(1)
(c) Liabilities in excess of basis.
(1) In general. In the case of an exchange-(A) to which section 351 applies …
if the sum of the amount of the liabilities assumed exceeds
the total of the adjusted basis of the property transferred
pursuant to such exchange, then such excess shall be
considered as a gain ….
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Debt Heavy Transfers
Castle Corp
100%
Serf Corp
How much gain does Castle recognize?
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Peracchi v. CIR
(CA-9, 1998)
An insurance corporation needed capital to meet state premium-to-asset
ratios. So, its sole owner contributed encumbered realty for which the debt
_________ the realty’s basis. To avoid §357(c) _____, the shareholder
also gave the corporation his promissory note, asserting the note’s _____
equaled its face value. The IRS insisted on a _____ _____ for the note.
Don Peracchi
Realty’s basis
$ 980,000
Mortgages
1,550,000
Promissory note 1,060,000
100%
NAC
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Peracchi v. CIR
(CA-9, 1998)
The court noted ________ ________ ______ since, in bankruptcy, hostile
creditors could recover from the shareholder. Also, the transaction was
economically equivalent to the shareholder _________ cash, _________ it to the
corporation, and the corporation using the cash to ____ Don’s note from the
creditor. Finally, attributing a _____ basis to the note would force the corporation
to recognize “________ ____” if it later sold the note. The court _________ the
Tax Court, which believed the debt was not genuine, and held for the taxpayer.
Don Peracchi
Realty’s basis
$ 980,000
Mortgages
1,550,000
Promissory note 1,060,000
100%
NAC
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Section 357(c)(3)
(c) Liabilities in excess of basis.
(3) Certain liabilities excluded.
(A) In general. If a taxpayer transfers, in an exchange to
which section 351 applies, a liability the payment of
which … would give rise to a deduction … then … such
liability shall be excluded in determining the amount of
liabilities assumed.
(B) Exception. Subparagraph (A) shall not apply to any
liability to the extent that the incurrence of the liability
resulted in the creation of, or an increase in, the basis of
any property.
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Rationale of §357(c)(3)
Creditors
Cash Basis
Proprietor
Assets: FMV $700
Basis 100
Payables
500
Cash Basis
Proprietor
100%
100%
Shares: FMV $200
Corporation
Assets: FMV $700
Basis 100
Shares: FMV $200
Cash
500
Corporation
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Cash Basis Transferors
Liabilities
Accrued wages
Accounts payable for heavy machinery
Repair services received but not paid
Bank loan for working capital
Utilities used but not yet paid
Inventory bought on credit
Mortgage securing land
Not Liabilities
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Rev. Rul. 95-74
The manufacturing business of P, an accrual basis corporation, operated
on land that hazardous waste had contaminated, resulting in _________
environmental liabilities. Under §351, P transferred the manufacturing
business (including the land and its associated liability) to newly-created
S, a 100%-owned, accrual basis corporation. Two years later, S began soil
and groundwater remediation efforts, involving §___ and §___
expenditures.
Issues
1.
Are the contingent liabilities _______ or ________ under §357(c)?
2.
Can S ______ or ________ expenditures related to these liabilities?
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Rev. Rul. 95-74
(continued)
Holding on Issue 1
In determining whether liabilities __ ________ of transferred assets,
liabilities for which P has received ___ deduction or _______ increase are
ignored. Otherwise, P recognizes gain for which it receives no ___
______.
Holding on Issue 2
As incurred, S can _______ under §162 or __________ under §263 any
soil and groundwater remediation costs it incurs.
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Solely for stock condition
Mapping of Liabilities
• Liabilities transferred to corporations are not
treated as ______ received.
• Exceptions:
– Tax _________ motive
– Lack of __________ purpose
– Liabilities __ basis in transferred assets
• Subsidiary to tax ______ and _______ purpose tests
• Liability ignored if transferor has not ______ or _______ item
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Control condition
Section 368(c)
(c) Control defined.
… [T]he term “control” means the ownership of stock
possessing at least 80 percent of the total combined voting
power of all classes of stock entitled to vote and at least 80
percent of the total number of shares of all other classes of
stock of the corporation.
Shareholders
Control
Property
Stock
Corporation
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Control condition
Intermountain Lumber Co. v. CIR
(TC, 1976)
Milo Wilson
182 S&W
shares in
escrow
Installment
note
Dee Shook
Sawmill
site
364 S&W
shares
S&W Sawmill
(later acquired by
Intermountain)
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Control condition
American Bantam Car Co. v. CIR
(TC, 1948, aff’d per curiam CA-3, 1949)
June 3, 1936
“Associates” transferred assets of bankrupt auto company to
new corporation in return for voting _________.
June 8, 1936
Associates and underwriters reached fee agreement
regarding public offering of voting ___________.
Aug. 1936
Associates placed all _________ in escrow, pending
outcome of public offering.
Oct. 1937
Associates transferred _________ stock (> 20%) to
underwriters as compensation for public offering.
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Control condition
American Bantam Car Co. v. CIR
(TC, 1948, aff’d per curiam CA-3, 1949)
Issue:
Did associates have control on incorporation date?
Holding:
Control _______, so §351 applies. Taxpayer ______.
Reasoning:
No binding, written agreement existed with underwriters
_______ incorporation.
Underwriters received common only if sales ______ met.
Placing common in _________ indicated ownership.
Contemplating steps under general plan does not invoke
______ ___________ doctrine.
Implication:
Corporation can deduct depreciation only on the §362
____________ basis, which is lower than ____ basis.
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Control condition
D’Angelo Associates, Inc. v. CIR
(TC, 1978)
June 21
Dad contributed $15,000 to new corporation, and
corporation issued 10 shares each to Mom and 5 kids.
June 30
Mom and Dad “sold” depreciable assets to corporation in
return for $15,000, mortgages assumed, and demand note
payable to Dad.
Taxpayer Position
Dad never had ______.
June 30 transaction was a ____.
Sec. 351 ___________.
Corporation takes __________ basis.
Gov’t Position
_____ ___________ doctrine applies.
Single “__________” transfer exists.
Sec. 351 ________.
Only _________ basis is depreciable.
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Control condition
D’Angelo Associates, Inc. v. CIR
(TC, 1978)
Issue:
Did Dad have control on incorporation date?
Holding:
_______ existed, so ______ applies. Taxpayer ________.
Reasoning:
Equivalent to incorporation with depreciable assets
followed by ______ of shares to family members.
Incorporation and “sale” occurred almost ____________,
and formed ________ parts of a single plan; incorporation
was ______________ without later “sale.”
No ____________ reason evident for separate transfers.
Implication:
Taxpayer can deduct depreciation only on the §362
________ basis, which is lower than _____ basis.
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Control condition
Corp X
(Y’s parent)
Rev. Rul. 2003-51
Transfers #2 and #3
occur simultaneously.
Corp Y
Corp W
Corp Z
(business A)
(businesses A, B, C)
(formed to run
combined business A)
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Control condition
Rev. Rul. 2003-51
Corp X
Corp W
(businesses B and C)
60%
40%
Corp Y
100%
Corp Z
(combined business A)
Rev. Rul. 2003-51
Corp X
(Y’s parent)
Transfers #2 and #3
occur simultaneously.
Corp Y
Corp W
Corp Z
(business A)
(businesses A, B, C)
(combined A)
“Courts have held that the control requirement of §351
is not satisfied where, pursuant to a _______ ________
entered into by the transferor _____ ___ the transfer of
property …, the transferor [Corp _] loses control of the
corporation [Corp _] by a ______ ____ of … that stock
to a third party who does not also transfer property ….”
However, “a transfer of
property that is followed by a
___________ _________ of
the stock received … is not
necessarily inconsistent with
the purposes of §351.”
Rev. Rul. 2003-51
Corp X
(Y’s parent)
Y shares
$30
HOLDING: _______ transfer falls
under §351 since transaction can be
recast to clearly meet requirements.
Business A
Corp Y
Corp W
Corp Z
(business A)
(businesses A, B, C)
(formed to run
combined business A)
Y shares
Business A and $30
All Z shares
Transfers to controlled corporations
Shareholder issues
Gain or loss recognized
Control condition
Collapse Steps If
• Legally bound to complete later steps
– Rationale in __________ _________
– Missing in _________ ________ ____
• Separate transfers lack business reason
– Point of _________ ___________
• Transferee later disposes of shares in
prearranged, taxable sale
– Taxable sale absent in ____ ____ _______
Transfers to controlled corporations
Shareholder issues
Basis of stock received
Basics on Basis
• Two ways to increase basis
– Invest ________
– Recognize _______
• Two ways to decrease basis
– Withdraw ________
– Take _________
Transfers to controlled corporations
Shareholder issues
Basis of stock received
Section 358(a)
(a) General rule.
In the case of an exchange to which section 351 … applies-(1) Nonrecognition property. The basis of the property permitted to be
received … without the recognition of gain or loss shall be the same as that
of the property exchanged-(A) decreased by-(i) the fair market value of any other property (except money)
received by the taxpayer,
(ii) the amount of any money received by the taxpayer, and …
(B) increased by-(ii) the amount of gain to the taxpayer which was recognized
on such exchange ….
(2) Other property. The basis of any other property (except money)
received by the taxpayer shall be its fair market value.
Transfers to controlled corporations
Shareholder issues
Basis of stock received
Section 358(a)
Basis of ________ _______ to corporation
- Boot _______
- Liabilities transferred (i.e., same as _____)
+
recognized
Basis of _______ received from corporation
Shareholders
Property
and Liabilities
Control
Corporation
Stock
and Boot
Transfers to controlled corporations
Shareholder issues
Basis of stock received
Rev. Rul. 68-55
(extended)
Total
FMV of asset
Percent of total
$110
Asset
I
Asset
II
$22 $33 $55
20% 30% 50%
FMV of:
Y stock received
$100 $20
Cash received
10
2
Amount realized
$110 $22
Basis of asset
40
Gain (loss) realized
$-18
Gain (loss) recognized
$ 0
$30
3
$33
20
$13
$ 3
What is X’s basis in stock received?
Basis relinquished
Boot received
Gain recognized
Basis of stock received
Corp X
Asset
III
(shareholder)
Asset I
Asset II
Asset III
$50
5
$55
25
$30
$ 5
FMV
$ 22
33
55
Basis
$ 40
20
25
Other
LTCL
STCG
§1245
Y stock (FMV
$100) and $10
Corp Y
(newly organized)
Y stock
(FMV $20)
$20
Individual A
(shareholder)
Transfers to controlled corporations
Shareholder issues
Holding period of stock received
Section 1223(1)
For purposes of this subtitle-(1) In determining the period for which the taxpayer has held
property received in an exchange, there shall be included the
period for which he held the property exchanged if … the
property has, for the purpose of determining gain or loss from
a sale or exchange, the same basis in whole or in part in his
hands as the property exchanged, and … the property
exchanged at the time of such exchange was a capital asset as
defined in section 1221 or property described in section 1231.
Transfers to controlled corporations
Shareholder issues
Basis of stock received
Rev. Rul. 68-55
(extended)
Total
FMV of asset
Percent of total
$110
Asset
I
Asset
II
Corp X
Asset
III
$22 $33 $55
20% 30% 50%
(shareholder)
Asset I
Asset II
Asset III
FMV
$ 22
33
55
Basis
$ 40
20
25
Other
LTCL
STCG
§1245
Y stock (FMV
$100) and $10
Recall that X takes an $83 exchanged
basis in Y shares received.
Corp Y
When does X’s holding period begin in
these shares?
Per Rev. Rul. 85-164, each share receives a
“____ ________ _____” allocated
according to relative _____ of assets
relinquished.
Thus, __% of each share receives its holding
period from Asset I, __% from Asset II,
and __% from Asset III.
(newly organized)
Y stock
(FMV $20)
$20
Individual A
(shareholder)
Transfers to controlled corporations
Corporate issues
Gain or loss recognized
Section 1032(a)
(a) Nonrecognition of gain or loss.
No gain or loss shall be recognized to a corporation on the
receipt of money or other property in exchange for stock
(including treasury stock) of such corporation.
Shareholders
Control
Property
Stock
Corporation
Transfers to controlled corporations
Corporate issues
Basis of property received
Section 362(a)
(a) Property acquired by issuance of stock or as paid-in surplus.
If property was acquired … by a corporation-(1)
(2)
in connection with a transaction to which section 351 … applies, or
As paid-in surplus or as a contribution to capital,
then the basis shall be the same as it would be in the hands of the transferor,
increased in the amount of gain recognized to the transferor on such transfer.
Shareholders
Property
Stock
Corporation
Transfers to controlled corporations
Corporate issues
Basis of property received
Section 362(e)(2)
(2) Limitation on transfer of built-in losses in section 351 transactions.
(A) In general. If-(i) property is transferred by a transferor in [a 351 exchange], and
(ii) the transferee’s aggregate adjusted bases of such property so
transferred would (but for this paragraph) exceed the fair market
value of such property immediately after such transaction,
then, … the transferee’s aggregate adjusted bases of the property so
transferred shall not exceed fair market value of such property
immediately after such transaction.
Shareholders
Control
Property
Stock
Corporation
Transfers to controlled corporations
Corporate issues
Basis of property received
Section 362(a)
Shareholders
Property
Control
Stock
Corporation
Prior basis of _______ to shareholder
+
shareholder recognizes
Basis of ______ corporation receives
Transfers to controlled corporations
Corporate issues
Basis of property received
Rev. Rul. 68-55
(extended)
Total
FMV of asset
Percent of total
$110
Asset
I
$30
3
$33
20
$13
$ 3
Corp X
Asset
III
$22 $33 $55
20% 30% 50%
FMV of:
Y stock received
$100 $20
Cash received
10
2
Amount realized
$110 $22
Basis of asset
40
Gain (loss) realized
$-18
Gain (loss) recognized
$ 0
Basis of asset to X
Gain recognized by X
Y’s transferred basis
Asset
II
(shareholder)
Asset I
Asset II
Asset III
$50
5
$55
25
$30
$ 5
FMV
$ 22
33
55
Basis
$ 40
20
25
Other
LTCL
STCG
§1245
Y stock (FMV
$100) and $10
Corp Y
(newly organized)
Y stock
(FMV $20)
$20
Individual A
(shareholder)
Transfers to controlled corporations
Corporate issues
Holding period of property received
Section 1223(2)
For purposes of this subtitle-(2) In determining the period for which the taxpayer has held
property however acquired there shall be included the period
for which such property was held by any other person, if
under this chapter such property has, for the purpose of
determining gain or loss from a sale or exchange, the same
basis in whole or in part in his hands as it would have in the
hands of such other person.
Shareholders
Control
Property
Stock
Corporation
Lind et al., pp. 62-63
Realized
Gain <Loss>
A
B
C
D
E
Cash $25,000
25 shares
Inventory: FMV $10,000
Basis
5,000
10 shares
Unimproved Land: FMV $20,000
Basis 25,000
20 shares
Equipment: FMV $25,000*
Basis
5,000
X
Corp
(new)
25 shares
Installment Note: FMV $20,000**
Basis 2,000
20 shares
*Prior depreciation was $20,000.
**Received for land ($2,000 basis) sold last year and payable over 5
years, beginning in 2 years, at $4,000 annually plus market interest
rate.
Recognized
Gain <Loss>
Basis of
Shares Received
Holding
Period Tacks
Lind et al., pp. 62-63
A
B
C
D
E
Cash $25,000
25 shares
Inventory: FMV $10,000
Basis
5,000
10 shares
Unimproved Land: FMV $20,000
Basis 25,000
20 shares
Equipment: FMV $25,000*
Basis
5,000
X
Corp
(new)
25 shares
Installment Note: FMV $20,000**
Basis 2,000
20 shares
*Prior depreciation was $20,000.
**Received for land ($2,000 basis) sold last year and payable over 5
years, beginning in 2 years, at $4,000 annually plus market interest
rate.
Basis of
Property Received
Holding
Period Tacks
N/A
N/A
Lind et al., pp. 62-63
Realized
Gain <Loss>
A
Cash $25,000
25 shares
Services: FMV $12,000
B
C
D
E
10 shares + $2,000 cash
Unimproved Land: FMV $50,000 *
Basis 25,000
20 shares
Equipment: FMV $35,000**
Basis
5,000
X
Corp
(new)
25 shares + $10,000 cash
Services: FMV $17,000
Cash
3,000
20 shares
*X Corp assumes a nonrecourse mortgage of $30,000.
**Prior depreciation was $20,000.
Recognized
Gain <Loss>
Basis of
Shares Received
Holding
Period Tacks
Lind et al., pp. 62-63
Transferor
Recognized
A
Cash $25,000
$
25 shares
0
Basis of
Property Received
Holding
Period Tacks
N/A
N/A
N/A
N/A
Services: FMV $12,000
B
C
D
E
10 shares + $2,000 cash
Unimproved Land: FMV $50,000 *
Basis 25,000
20 shares
Equipment: FMV $35,000**
Basis
5,000
X
Corp
(new)
25 shares + $10,000 cash
Services: FMV $17,000
Cash
3,000
20 shares
*X Corp assumes a nonrecourse mortgage of $30,000.
**Prior depreciation was $20,000.
N/A
N/A
Lind et al., p. 71
Realized
Gain <Loss>
Jan 2
Mar 2
A
B
Recognized
Gain <Loss>
Basis of
Shares Received
Holding
Period Tacks
Property: FMV $50,000
Basis 10,000
50 common shares
Property: FMV $10,000
Basis
1,000
Newco
Inc.
(new)
10 nonvoting preferred shares
NOTES:
A and B are unrelated.
Their transfers are not part of integrated plan.
B’s shares aren’t nonqualified preferred.
Basis of
Holding
Property Received Period Tacks
From A
From B
Lind et al., p. 71
Realized
Gain <Loss>
Jan 2
Mar 2
A
B
Recognized
Gain <Loss>
Basis of
Shares Received
Holding
Period Tacks
Property: FMV $50,000
Basis 10,000
50 common shares
Property: FMV $10,000
Basis
1,000
Newco
Inc.
(new)
10 nonvoting preferred shares
NOTES:
A and B are unrelated.
Their transfers are part of integrated plan.
B’s shares aren’t nonqualified preferred.
What if A gifts 25 shares to her daughter on March 5?
Basis of
Holding
Property Received Period Tacks
What if A gifts 25 shares to her daughter on January 5?
From A
What if A sold 15 shares to E on May 2 under a binding,
preexisting agreement without which A would not have
formed Newco?
From B
Fundamental Tax Issues
Contributions to Capital
Transferors
Property
Corporation
Transferor Issues
1.
2.
3.
How much gain or loss do shareholders
recognize?
How does contribution affect basis of
shareholder’s _________ shares?
How much gain or loss do
______________ recognize?
Corporation (Transferee) Issues
1. How much gain or loss does the corporation
recognize?
2. What _____ does the corporation take in the
property received?
3. When does the corporation’s holding period
_______ in the property received?
Contributions to capital
Transferor issues
Investment or Gift
• For shareholder transfers in
nature of additional investment
– No gain or loss
– Increase basis of _______ shares
for ______ in contributed property
Transferors
Property
Corporation
• For nonshareholder transfers in
nature of gift (or inducement),
___ gain or loss
Contributions to capital
Transferor issues
Gain or loss recognized
CIR v. Fink
(S.Ct., 1987)
To attract new ______, two stockholders voluntarily surrendered
common shares, receiving no consideration and slightly
diminishing their ______. Thus, their net worth declined.
Taxpayers claimed an ordinary loss deduction for basis in
relinquished shares. Gov’t viewed surrender as _________
__________ to capital.
Peter & Karla
Shares
surrendered
Fell from 72.5%
to 68.5%
Travco Corp
(motor homes)
Contributions to capital
Transferor issues
Gain or loss recognized
CIR v. Fink
(S.Ct., 1987)
The court adopted the “______ view,” that a stockholder’s
holding should be treated as ____ _______ investment. One
cannot tell whether such a surrender results in a loss until the
stockholder eventually ________ remaining shares. To rule
otherwise would allow stockholders in sinking companies to
convert ______ losses into _______ deductions at will.
Peter & Karla
Shares
surrendered
Fell from 72.5%
to 68.5%
Travco Corp
(motor homes)
Held: When a controlling shareholder voluntarily
surrenders shares, __ ____ is deductible. The court
did not decide whether to treat surrenders resulting
in ___ of _________ differently.
Contributions to capital
Corporate issues
Gain or loss recognized
Section 118(a)
(a) General rule.
In the case of a corporation, gross income does not include
any contribution to the capital of the taxpayer.
Transferors
Property
Corporation
Contributions to capital
Corporate issues
Basis of property received
Section 362(a)
(a) Property acquired by issuance of stock or as paid-in surplus.
If property was acquired … by a corporation-(1)
(2)
in connection with a transaction to which section 351 … applies, or
As paid-in surplus or as a contribution to capital,
then the basis shall be the same as it would be in the hands of the transferor,
increased in the amount of gain recognized to the transferor on such transfer.
Transferors
Property
Corporation
Contributions to capital
Corporate issues
Basis of property received
Section 362(c)(1)
(c) Special rule for certain contributions to capital.
(1) Property other than money. Notwithstanding subsection
(a)(2), if property other than money-(A) is acquired by a corporation … as a contribution to capital,
and
(B) is not contributed by a shareholder as such, then the basis
of such property shall be zero.
Transferors
Property
Corporation
Contributions to capital
Corporate issues
Basis of property received
Section 362(c)(2)
(c) Special rule for certain contributions to capital.
(2) Money. Notwithstanding subsection (a)(2), if money-(A) is received by a corporation … as a contribution to capital,
and
(B) is not contributed by a shareholder as such, then the basis
of any property acquired with such money during the 12-month
period beginning on the day the contribution is received shall
be reduced by the amount of such contribution. The excess (if
any) … shall be applied to the reduction … of the basis of any
other property held by the taxpayer.
Contributions to capital
Corporate issues
Holding period of property received
Section 1223(2)
For purposes of this subtitle-(2) In determining the period for which the taxpayer has held
property however acquired there shall be included the period
for which such property was held by any other person, if
under this chapter such property has, for the purpose of
determining gain or loss from a sale or exchange, the same
basis in whole or in part in his hands as it would have in the
hands of such other person.
Transferors
Property
Corporation
Organizational Expenditures
• Must be incurred before end of ___ _____
• Elections
– Deduct up to $_____ and phase out if > $50,000
– Amortize remainder over ____ months
Includes expenses of:
____ and accounting fees
_________ directors
____________ meetings
State _____ fees
Excludes expenses of:
______ stock or securities
__________ assets
Start-Up Costs
• Must be incurred before ____ business begins
• Elections
– Deduct up to $_____ and phase out if > $50,000
– Amortize remainder over ____ months
Includes expenses of:
Business ___________
Business _________
Operational nature _____
business starts
Excludes expenses of:
_____ attempts to acquire
a specific business
________ business
Classifying Expenditures
Aug. 1
May 1
3 months
Form
Corporation
Dec. 31
5 months
Begin
Operations
End of Short
Taxable Year
Incur Organizational Expenditures
Amortize
Incur Start-Up Costs
Amortize
Compare and Contrast
Organizational
Expenditures
Start-Up Costs
Ordinary and
Necessary
Business Expenses
When Incurred
_________ new
corporation
_________ new
business
__________
business
When Deducted
Up to $____ now;
rest over __ years
Up to $____ now;
rest over __ years
_____ or incurred
How Elected
Statement
attached to return
Statement
attached to return
Not applicable
Relevant Statute