(Jan C. Ting. – Spring 2017)
The Corporate Income Tax
Section 11- Imposes corporate tax rate
Section 63(a) – defines taxable income – gross income – allowable deductions
No “personal deductions” (standard, etc)
Section 162 is key to Corp – ordinary and necessary
Personal limitations are also not applicable
Cap gains treated differently re carryovers
One key distinction – Corps can deduct 70% of dividends received
Formation of a Corporation
Section 351(a) – no gain or loss should be recognized if property is transferred solely in exchanged for its stock if the transferor of property is in “control” of the corporation immediately after the exchange.
Applies to both new and preexisting corporations
Section 1032(a) – a corporation shall not recognize gain or loss on receipt of money or other property in exchange for its stock.
Money is property – Rev Rul. 69-357
(realized gain not recognized)
Policy consideration – mere change of form of investment – don’t want to discourage business formations
1 or more persons must transfer “property” to the corporation
Must be solely in exchange for stock
Transferors, as a group, must be in “control” of the corporation “immediately after the exchange”
“control” – Section 368(c) – the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.
Shareholder basis and holding period – If 351 applies, carryover basis
Section 358(a)(1) – basis of the stock received in a 351 exchange shall be the same as the basis in the property transferred by the shareholder to the corporation.
Reg. 1.358-2 – allocate basis among different stock received
Section 1223(1) – holding period includes period during which transferor held property if the property is a capital asset or 1231 asset – otherwise, period begins on date of exchange.
Tax Consequences to the Transferee Corporation
Section 1032 – No gain or loss to corp
Steps into shoes of transferor
Section 362(a) – transferred basis
Section 1223(2) – if there is a transferred basis – holding period also carries over
Limitations on Trans
patents and certain intangible assets
Section 351(d)(1) – stock issued for services is not treated as return for property. (should be section 61 and 83)
Service provider is not considered transferor and not considered in group
But, if someone provides property and services, all stock is considered
Regs 1.351-1(a)(1)(ii) – de minimis – stock will not be treated as having been issued for property if the primary purpose of the transfer is to qualify the exchange of other property for transferors for nonrecognition and if the stock issued to the nominal transferor is “of relatively small value” in comparison to the value of the stock already owned or to be received for services by the transferor.
Rev. Proc. 77-37 – not considered to be of relatively small value if the FMV of the property transferred is equal to or in excess of 10% of the FMV of stock already owned or to be received for services to the transferor.