Slide D1-1
Next Class
Read pages 2-1 through 2-27 in the
Prentice Hall textbook
Examples for Chapter 2, Day 2
Chapter 2 Problems:
C2-32, C2-43, C2-44, C2-45
Chapter
2
Corporate Formations
and Capital Structure
(Day 1)
Transfers to Corporations
in Exchange for Stock
Taxable Exchanges
IRC §351 Exchanges
Slide D1-3
Transfers to Corporations in
Exchange for Stock
Taxable Exchanges
Slide D1-5
Shareholder/Transferor
Realized gains (losses)
Computation [IRC §1001(a)]
Separate properties approach
Amount realized [IRC §1001(b)]
Liability Assumed [Reg. §1001-2(a)]
Allocate on the basis of relative FMVs
Adjusted basis [IRC §1011(a)]
Slide D1-6
Shareholder/Transferor
Recognized gains (losses)
In general [IRC §1001(c)]
Separate properties approach
Losses/related taxpayers [IRC §267(a)]
Timing of test [Reg. §1.267(a)-1(a) ]
Character of gains (losses)
Capital, IRC §1231, or ordinary
Gains/related taxpayers [IRC §1239]
 Timing of test [Reg. §1.1239-1(c)(3)(ii) ]
Slide D1-7
Shareholder/Transferor
Basis of stock received
Cost [IRC §1012]
Cost of property is generally the sum of the
cash given up, the indebtedness incurred, and
the FMV of any other property given up
Slide D1-8
Corporation/Transferee
Gain (loss) not recognized [IRC §1032(a)]
Basis of property received is fair market
value of the stock transferred (not the fair
market value of the assets received)
[Reg. §1.1032-1(d); IRC §1012; and
Rev. Rul. 56-100]
Slide D1-9
Examples
Examples Day 1: Taxable Transfers
Problems
Solutions
Transfers to Corporations in
Exchange for Stock
IRC §351 Exchanges
IRC §351 Tests
Three tests for IRC §351 treatment:
Property transferred to corporation
Solely in exchange for corporation’s stock
Control requirement
Transferee corporation must not be an
Investment company [IRC §351(e)]
Slide D1-11
IRC §351 Tests – Property
Slide D1-12
Property generally includes cash and all
tangible and intangible assets
Property does not include the three items
listed in IRC §351(d)
IRC §351 Tests – Stock
Slide D1-13
Stock does not include nonqualified
preferred stock
Preferred stock is nonqualified if it meets any
one of the tests in [IRC §351(g)(2)]
Nonqualified preferred stock received as part of
an otherwise qualifying IRC §351 transaction is
treated like boot [IRC §351(g)(1)]
Stock does not include stock rights or stock
warrants [Reg. §1.351-1(a)(1)]
IRC §351 Tests – Control
Slide D1-14
Person or persons that transferred property
to the corporation in exchange for stock
must control the corporation after the
exchange [IRC §351(a)]
Control defined in IRC §368(c)
Control is determined immediately after the
exchange [IRC §351(a)]
IRC §351 Tests – Control
Slide D1-15
Existing shareholders may be included in
transferor group if they make additional
transfers in exchange for more stock
Amounts transferred must not be “relatively
small” in comparison to the value of the stock
already owned [Reg. §1.351-1(a)(1)(ii)]
For purposes of obtaining a PLR, “relatively
small” means 10% or less [Rev. Proc. 77-37]
IRC §351 Tests – Control
Slide D1-16
If stock is received in exchange for both
property and services, the entire amount of
stock may be included in the control test
Amounts transferred for property must not be
“relatively small” in comparison to the value of
all the stock received [Reg. §1.351-1(a)(1)(ii)]
For purposes of obtaining a PLR, “relatively
small” means 10% or less [Rev. Proc. 77-37]
Example – Control Test
Slide D1-17
Corporation X has 4,000 shares of common stock
outstanding and is worth $400,000 ($100 per
share). It is owned by four taxpayers as follows:
A 2,000 shares
B 1,000 shares
C
500 shares
D
500 shares
If Taxpayer E transfers property worth $100,000 in
exchange for 1,000 shares, is the control
requirement met?
No → 1,000/5,000 = 20%
Example – Control Test
Slide D1-18
How can the control requirement be met?
A 2,000 shares
B 1,000 shares
C
500 shares
D
500 shares
Have A transfer $20,000 in exchange for an
additional 200 shares and B transfer $10,000 in
exchange for an additional 100 shares
Control test: 4,300/5,300 = 81.13%
IRC §351 Tests – Control
Slide D1-19
Prearranged plans to dispose of stock will
disqualify the exchange [Rev. Rul. 79-70;
Rev. Rul. 79-194; and Rev. Rul. 2003-51]
Series of prearranged and integrated steps
treated as one transaction to disqualify the
exchange [Rev. Rul. 54-96]
IRC §351 Tests – Other
Slide D1-20
When more than one party is transferring
property, simultaneous exchanges are not
required [Reg. §1.351-1(a)(1)]
Stock acquired for cash via an underwriter
is a transfer of property in exchange for
stock (underwriters are disregarded)
[Reg. §1.351-1(a)(3)]