Corporate Tax I Outline
§ 351 Transactions
a) The form of the taxpayer’s investment is changed, not the nature and we do not want taxes to be an impediment to a good economic transaction (tax neutrality).
§ 351 →
a) Applies to newly formed corporations and already existing corporations.
b) It is Not elective.
c) Must defer the recognition of gain and loss.
§ 1001(c) →
a) Realized gain must be recognized unless a non-recognition provision applies.
a. Gain realized is a sale or disposition triggering realized gain equal to AR – AB (§ 1001(b)).
b) If § 351 applies, transferors recognize no gain or loss.
c) If § 351 does not apply, all realized gains and losses are recognized.
3 Requirements for Non-Recognition of Gain or Loss under § 351
1) One or more persons must transfer property to a corporation.
2) The exchange must be solely in exchange for stock of the corporation.
3) The transferors must be in control of the corporation immediately after the exchange.
I. One or more persons must transfer property to a corporation (transferors).
a. A person can be individuals, corporations, partnerships, trusts, and estates per § 1.351-1(a)(1).
b. Property can be:
i. Tangible or Intangible
ii. Personal or Real
c. The only thing that does not count for property is services per § 351(d).
1. If a person puts in property in addition to services, all of the stock counts for purposes of control.
a. The property transferred along with services can’t be of nominal or token value (§ 1.351-1(a)(i),(ii), and 2 Ex.3).
2. The stock received in exchange for services must be included in the individual’s income.
II. The exhange must be solely in exchange for stock of the corporation.
a. If you get something other than stock it is called boot.
i. Stock is permitted property; everything else is boot.
III. Transferors must be in control of the corporation immediately after the exchange.
a. § 358(c)
i. 80% or more of the voting power of the corporation, and
ii. 80% or more of the value of the non-voting shares.
iii. Revenue Ruling 59-259 says 80% of each class of stock.
b. “Immediately After the Exchange”
i. Does not require a simultaneous exchange.
ii. Can encompass multiple transactions as long as they are part of a single integrated plan.
Tax Consequences to Shareholder under § 351
Defers recognition of built-in gain or loss inherent in the property.
Basis – § 358
The basis in the stock is an exchanged basis (basis of property transferred).
i. Decrease by cash received.
1. § 358(d) liabilities are boot.
2. § 357(c)(3) liabilities are not boot.
ii. Decrease by FMV of other boot.
iii. Increase by gain recognized.
Part Tacked, Part New Holding Periods
i. If both capital and non-capital assets are transferred, there is a split holding period based on the relative FMV of the properties transferred in (RR 85-164).
Holding Period – § 1223(1)
New Holding Period
Tacked Holding Period
i. The shareholder gets to add on to the holding period of the newly acquired stock the holding period of the property transferred.
ii. 2 Requirements
1. Must have an exchanged basis in stock recognized in whole or in part, and
2. The asset exchange must be a capital asset or quasi-capital asset.
a. Quasi-Capital Asset
i. Depreciable property or realty used in the taxpayer’s trade or business and held for more than 1 year.
Determined by the value of what you get.
For a newly formed corporation, the value of the stock is equal to the value of the assets.
Character of the Gain
Determine the character of the gain by reference to the character of the gain inherent in the asset that produced it.
If there is boot and more than one asset transferred, determine gain and loss on an asset-by-asset basis.
Treatment of Boot
i. The nature of the investment is changed along with the form of the investment.
Realized gain is recognized up to the value of the boot received.
Recognized gain is the lesser of realized gain or FMV of boot received.
Loss is not recognized in a § 351 transaction, even if there is boot!
Basis in Stock – § 358
i. Exchanged Basis of Property Transferred
1. Decreased by the FMV of any property received other than cash.
2. Decreased by the amount of cash received.
3. Increased by the amount which was treated as a dividend.
4. Increased by the amount of gain recognized on the exchange.
Check Figure → Realized Gain = Recognized Gain + Built-In Gain (FMV of Stock – Adjusted Basis)
i. Recognize the gain currently at the time of the transaction unless you have received an installment note from the corporation.
Determine realized and recognized gain on an asset-by-asset basis (RR 68-55).
i. 2 Requirements:
1. More than 1 asset transferred in, and
2. Boot is received.
Tax Consequences to Corporation under § 351
a. No gain or loss recognized on the issuance of its own stock (§ 1032).
a. It doesn’t matter if § 351 if applies.
b. Basis – § 362
a. Transferred basis under § 362 if § 351 applies.
1) § 362(e)(2)
a. Only applies to a net built-in loss.
b. § 351 applies to a transfer and there is a built-in loss in the property, the corporation takes a FMV basis rather than a transferred basis.
c. § 362(e)(2)(B) → Basis reduction is allocated to the loss properties in proportion to the relative losses inherent in each property.
c. If § 351 does not apply, the corporation gets a cost basis.
§362(e)(2) Example: 3 properties to be transferred to a corporation in exchange for stock.
Adjusted basis FMV
Swamp 100K 300K
Golf Course 200K 100K (100)
Mansion 600K 200K (400)
erties with the following adjusted bases and fair market values (all representing 000’s of dollars):
Transfers to X Receives from X
AB FMV Shares Cash
A – Cash 50 50 50
B – Land . 10 30 30
B – Bldg 40 70 70
C – Inventory 10 20 20
D – Machinery 10 30 20 10
E – Trucks 30 20 10 10
150 220 200 20
(a) As to each transferor, what is: (1) the amount of his realized gain or loss; (2) the amount, if any, and character (capital, ordinary, etc.) of his recognized gain or loss; and (3) his adjusted basis and holding period for shares of stock received?
(b) As to X what is the amount, if any, of its recognized gain or loss, and what is its basis and holding period for the respective assets acquired by it?
Transferor’s Tax Consequences
D → Receipt of Boot and Calculating Basis
Cash (Boot) 10
Total AR 30
Less: AB of Property
Realized Gain 20
Recognized Gain 10 (Recognized gain is the lesser of realized gain or boot received.)
AB of Property Transferred 10
Less: Amount of Cash Received (10)
Plus: G/L Recognized 10
Total Basis in D Stock 10
E: Receipt of Boot and Calculating Basis in Stock
Cash (Boot) 10
Total AR 20
Less: AB of
Property Transferred (30)
Realized Loss (10)
Recognized Loss 0 (Loss is not recognized in a § 351 transaction, even when there is boot!)
AB of Property Transferred 30
Less: Amount of Cash Received (10)
Plus: G/L Recognized 0