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Corporate Taxation
University of Connecticut School of Law
Mason, Ruth

Formation of a C

Transfers to C: Transferring Property into Corp in Exchange for Shares

i. §351(a) Nonrecognition for shareholder: 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.
1. Requirements
a. One or more persons (including individuals, corporations, partnerships, and other entities) must transfer “property to the corporation; [services is not property, you can’t get stock in exchange for services and be under 351, and this can screw up everyone for the control part. Rev Ruling 77-37 if you get stock for services you have to put up cash = to at least 10% of the value of the stock i.e. get $150,000 worth of stock then you have to put up $15,000] b. The Transfer must be solely in exchange for stock of the corporation; [nonqualified preferred stock treated as boot §351(g)] and
c. The transferor or transferors, as a group must be in “control” of the corporation “immediately after the exchange.”
2. §368(c) Control Defined: 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. [transferors of property as a group own 80% of stock] ii. §358(a)(1) Basis of Stock for Shareholder: The basis of the property permitted to be received under such section §351 without the recognition of gain or loss shall be the same as that of the property exchanged. *Stock basis is the same as the basis of what they gave
1. B shall be the same as that of the property exchanged:
a. Decreased by:
i. FMV of any other property (except $) received by TP
ii. Amount of any $ received by TP, and
iii. Amount of loss to the TP which was recognized on such exchange (always 0)
b. Increased by:
i. Amount which was treated as a dividend
ii. Amount of G to the TP which was recognized on such exchange
iii. §1032(a) Nonrecognition for Corp: No gain or loss shall be recognized by a corporation on the receipt of money or other property in exchange for stock of such corporation.
iv. §362(a) Basis of Property received by Corp: For basis of property acquired by corporation in connection with a §351 exchange, the basis shall be the same as it would be in the hands of the transferor. *Basis is the same as what shareholder had. *look at each thing the corp gets separately. Each asset will have a basis, same as shareholders basis + gain recognized
v. §1223 Holding Period of Property: The taxpayer’s holding period for property received in an exchange shall include the period for which he held the property exchanged. *Corp will take over the holding period for property exchanged under §351

Non-qualified preferred stock

i. §351(g): in cash w/ nonqualified preferred stock, the SH can cash out any time
1. So you are taxable on this kind of stock

Treatment of Boot

i. §351(b): If an exchange otherwise would have qualified under §351(a) but for the fact that transferor received “other property or money (boot)” in addition to stock, then the transferor’s realized gain must be recognized to the extent of the boot received
1. Gain (if any) to the recipient shall be recog, not in excess of:
a. Amount of money received, plus
b. FMV of such property received; and
c. No loss shall be recognized
2. 351 Handout has examples
ii. §351(b)(2): No loss to recipient shall be recognized
iii. §358(a)(1) Basis for Shareholder: Basis will be the same as that of property exchanged increased by the recognized gain on the transfer and decreased by the fair market value of the boot.
1. 351 Handout examples
iv. §362(a) Basis for Corp: For basis of property acquired by corporation in connection with a §351 exchange, 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. *If shareholder gets boot later, then corp’s basis is increased later (when shareholder recognizes gain)
v. If boot is given over time, then divide total amount of gain recognized over total amount of boot

Assumption of Liabilities/Debt Relief

i. §357(a): The assumption of a liability by a transferee corporation in a §351 exchange will neither constitute boot nor prevent the exchange from qualifying under §351.
ii. §358(d) Basis for Shareholder: The assumption of liability shall be treated as money received by the taxpayer on the exchange.

st basis: That portion of the distribution which is not a dividend shall be applied against and reduce the adjusted basis of the stock
iv. §301(c)(3) Amount in excess of basis: That portion which is not a dividend, to the extent that it exceeds the adjusted basis of the stock, shall be treated as gain from the sale of or exchange of property

Earnings and Profits: Measuring device used to determine the extent to which a distribution is made from a corporation’s economic income as opposed to its taxable income or paid in capital. (Net real profit the C has made)

i. §312 Effect on Earnings and Profits: On the distribution of property by a corporation with respect to its stock, the earnings and profits of the corporation shall be decreased by the sum of-
1. (a)(1) the amount of money
2. (a)(2) the principal amount of the obligations of such C, or
3. (a)(3) the adjusted B of the property
ii. §312(b) Distributions of Appreciated Property:
1. The earnings and profits of the C shall be increased by the amount of such excess (amount FMV is greater than AB), and
2. (a)(3) will be applied by substituting FMV for AB

Distributions of Cash

i. Cash distributions are taxable as a dividend to the extent of the distributing corporation’s current or accumulated earnings and profits. [§301(c)(3)] ii. Amounts distributed in excess of available earnings and profits are first applied against and reduce the basis of the shareholders stock. [§301(c)(2)] iii. To the extent the distributions exceed the shareholder’s basis, they are treated as gain from the sale or exchange of stock. [§301(c)(3)] iv. When there are insufficient current e&p available to cover all cash distributions made during the year, e&p must be allocated to the distributions in order to determine dividend status under the following rules.