Corp Tax
Colombo
Spring 2015
1. Formation of the corporation (§§ 351, 358, 362, 1032)
a. Step #1 → What is each SH’s g/l under basic tax principles of § 1001?
b. Step #2 → Analysis under § 351(a) (ONLY SHs)
i. “control of corporation” → “Who is in the control group?”
1. “What constitutes control?” → (§ 368(c)) → 80% of value stock and voting stock (interpreted as owning each of the non voting classes)
2. “When does the transaction begin and end?” (“Immediately after the exch. such person or person are in control”)
a. STEP Transaction doctrine
i. mutual interdependence test → must be obtained by 1 or more transferors of property who act in concert under a single integrated plan (business sense applied to steps of a transaction in reaching a business goal (criticality of steps))
1. NEED NOT BE SIMULTANEOUS
2. SATISFIED IF (§ 1.351-1(a)(1)) → (1) parties’ rights are previously defined AND (2) agreement proceeds with an expedition consistent with orderly procedure (referring to single integrated plan)
ii. Intermountain Lumber Co. → test is to look at the control group when the deal is complete (were those involved in the transaction in control at the end of the transaction?)
iii. Prearranged dispositions of stock (Rev. Ruling 2003-51)
1. NO CONTROL → if at the time of transfer the transferor (SH) irrevocably foregoes or relinquishes at that time the legal right to determine whether to keep the shares
b. Reg. 1.351-1(a)(1) – exception to immediately after when trasferor is a corp who distributes part or all of the stock rec. in the exch. to its shareholders
c. REg. 1.351-1(b) → stock rec. by sh transferring prop in exch. is NOT required to be proportionate to teh interest in the prop immediately prior to transfer.
ii. “Transfer of property” → “who is transferring property?”
1. “What is property?” (Reg. 1.351-1(a)(1)(ii))
a. General rule → broadly construed, but under § 351(d)(1) stock issued for services shall not be considered as issued in return for property
b. Types of property
i. Tangible → cash, cap. assets, inventory, A/R
1. installment obligations generally suffice as tangible property
2. unsecured installment obligations are not recognized by some states when given in exch. for stock
ii. Intangible → patents, and, in certain circumstances other intangible assets such as nonexclusive licenses and industrial know-how
c. Both property and services in exchange for stock (REG § 1.351-1(a)(1)(ii)) → all that SH stock is recognized for the 80% requirement
i. not recognized IF the primary purpose of the transfer is to qualify for nonrecognition AND if stock issued to nominal transferor is of relatively small value in comparison to stock already owned OR to be received for services by transferor (issue = de minimis nature)
1. interpreted generously by the IRS→ fmv = to OR in excess of 10% of FMV of stock already owned (or to be received for services) by the transferor
iii. “in exch. for stock (omitted “solely”)”
1. “What is Stock?” → ownership rights in a corporation (made up of 3 rights)
a. Exercise mgmt. control (“voting”)
b. Right to distributions
c. Right to share in the liquidation value/disposition of the corp.
i. Types of stock and the rights they encompass
1. Common → all
2. Nonvoting common → all but mgmt.
3. Preferred → pref. w/ respect to distributions and liquidation value
d. DOES NOT INCLUDE (requires recognition of gain)
i. stock rights or warrants
ii. Nonqualified preferred stock (§ 351(g)) → treats this type of stock as boot received and allows recognition of loss ONLY when ALL nonqual. pref. stock is rec. (NOTE: TREATED AS STOCK FOR ALL OTHER PURPOSES UNTIL REGS ARE ISSUED)
1. Preferred def. → limited and preferred as to dividends and does not participate in corporate growth to any significant extent with any of the following:
a. right of redemption from corporation
liabilities any obligation that would give rise to a deduction if paid by TP or which would be described in § 736(a) (CASH BASIS PAYABLE PROBLEM)
ii. SEE FN 12 pg. 82 for exceptions to this exception
iii. 736(a)–> liquidation payments to a retiring partner or a deceased partner’s successor in interest
ii. Basis
1. Cash – non-recognition basis (§ 358) → exchanged basis; same as the basis of the prop. transferred
a. TEST basis by asking what the g/l would be if immediately selling stock for FMV
2. Receiving BOOT (§ 351(b) and § 358(a)(1)(B)(ii))
a. Calculation = Basis of property transferred – FMV of boot + Gain recognized = basis of stock (nonrecognition property)
3. Rec. different classes of stock (Reg. 1.358-2(b) → allocate total basis based on the proportionate fmv of the classes of stock rec.
4. § 358(a)(2) – Other property = FMV of the prop.
5. § 358(d) – when transferee assumes liabilities of SH → requires a reduction in the basis in the stock received by treating the relieved liabilities as money received by the transferor (Transferred basis + Gain recognized – amount of liab)
iii. holding period (§ 1223(1)) → where transferor receives property with an exchanged basis, holding period of that property is det. by incl. the period during which he held the transferred property IF it was a capital asset or 1231 asset
1. Holding period for stock when rec. it in exch. for multiple assets → allocate holding period to the proportion of the fmv of assets transferred
a. INVENTORY IS EXCLUDED
d. Step #4 → Corp (NOT gov. by § 351)
i. G/L (§ 1032) (applies to any transaction)
1. money = NO GAIN/LOSS
