Ch. 2
For Sec. 351 purposes, the term "property" does not include
services rendered
Carryover Basis
the basis of transferred property in the hands of the recipient equal to the basis of the property in the hands of the transferor Transferred Basis: (carryover basis) Relative gifts real estate Worth $500,000, and his basis is $100,000 Take his basis
Sec. 357 (a) / (b) / (c) 2 exceptions of (a)
(a) Treat as boot for realization & reducing stock basis (NOT recognition) Transferee Corp's assumption of transferor liabilities in property transferred under Sec 351 is NOT considered equivalent to transferor's stock basis - Liabilities assumed & decrease basis - assumption of liabilities is apart of the realized gain Recognized gain: FMV of stock received + Corp's assumption of liabilities - A/B of property transferred = realized gain/ loss Stock basis: A/B of property transferred (liability assumed by corp) Corp's basis: basis of property transferred + no gain recognized Two exceptions: 1. transfer purpose is for tax avoidance or w/o bona fide business purpose 2. liabilities assumed > total basis of property transferred (B) no bona fide business purpose * treat as boot for the purpose of recognition (c): total liabilities transferred > total adjusted basis - excess liability is taxed as gain to transferor - character: depends on property transferred - Correct when you land at zero Ex: C2-37: Liability assumed: $100,000 And all stock of corp for... $10,000 cash contributed Land: FMV: $125,000 / A/B: 70,000 Recognized gain = total liability assumed - adjusted basis of stock 100,000 - (10,000 + 70,000) = $20,000 Land transferred A/B 70,000 + cash transferred 10,000 + gain recognized 20,000 (liabilities) 100,000 Basis of stock; -0-
Transfer of Depreciable Property: On Jan. 10, 2015, Mary transfers to Green Co. a machine purchased on Mar. 3, 2012, for $100,000. On the transfer date, the machine has a $60,000 adjusted basis and a $110,000 FMV. Mary receives all 100 shares of Green stock, worth $100,000, and a two-year Green note worth $10,000. 1. What are the amount and character of Mary's recognized gain or loss? 2. What is Mary's basis in the stock and note? When does her holding period begin? 3. What are the amount and character of Green's gain or loss? 4. What is Green's basis in the machine? When does Green's holding period begin?
1. Recognized Gain in assets = FMV - adjusted basis = $110000 - $60000 = $50,000 realized gain recognized gain in shares (lesser of boot v. realized gain) = $10,000 Note:- section 1245 , any boot received in exchange of assets in ordinary income which is treated as taxable income 2. Mary's basis for the stock= 60000 + 10000(Boot in exchange) - 10000(profit) =$60000 Mary's basis for note =$10000 (Boot in exchange) 3. No profit, no loss 4. $70,000, Tact holding period
Port Corporation wants to change its tax year from a calendar year to a fiscal year ending June 30. Port is a C corporation owned by 100 shareholders, none of whom own more than 5% of the stock. Can Port change its tax year? If so, how can it accomplish thechange? A. Yes, Port may change its annual accounting period. All corporations desiring a change in accounting period must file a Form 1128 for approval from the IRS. B. Yes, Port may change its annual accounting period. It may do so without prior approval if it meets certain conditions, including, but not limited to, the following: it may not have changed its accounting period within the previous 48 months, it must close its books on the last day of the short-period and subsequently compute its income and keep its books using the new tax year, and it must file full 12-month returns for subsequent years ending on the new year-end. If Port does not meet theserequirements, it can request approval for a change in accounting period by filing a Form 1128. C. No, Port may not change its tax year because it has 100 or more shareholders. D. Yes, Port may change its annual accounting period by filing a Form 1128, but only if
B. Yes, Port may change its annual accounting period. It may do so without prior approval if it meets certain conditions, including, but not limited to, the following: it may not have changed its accounting period within the previous 48 months, it must close its books on the last day of the short-period and subsequently compute its income and keep its books using the new tax year, and it must file full 12-month returns for subsequent years ending on the new year-end. If Port does not meet theserequirements, it can request approval for a change in accounting period by filing a Form 1128.
Sec 385
Debt is treated like stock for tax purposes written unconditional promise to pay on specified date in return for adequate consideration
Assignment of Income doctrine
Doctrine does not apply - Sec 351 where taxpayer transfers substantially all business assets & liabilities & bona fide business purpose exists - Corp can collect on acc. receivable - take a zero basis
Disproportionate Receipt of Stock: Jerry transfers property with a $ 28,000 adjusted basis and a $ 50,000 FMV to Texas Corporation for 75 shares of TexasTexas stock. Frank, Jerry's father, transfers property with a $32,000 adjusted basis and a $50,000 FMV to Texas for the remaining 25 shares of Texas stock. a. What is the amount of each transferor's recognized gain or loss? b. what is Jerry's basis in his Texas stock? c. What is Frank's basis in his Texas stock?
Jerry: Realized gain: (50,000 - 28,000) = 22,000 No recognized gain Frank: Realized gain (50,000 - 32,000) = 18,000 No recognized gain Both same FMV, so should be given equal amount of shares If given 50 shares each, Frank must have gifted 25 shares $18,000 realized gain/ 2 = $9,000 potentially charged with gift tax. Arms length: parties who act independently of one another C2-21: Don & John Treat exchange as proportionate first Look at relationship bw parties
Avoiding Sec 351 Treatment: Six years ago, Donna purchased land as an investment. The land cost $150,000 and is now worth $480,000. Donna plans to transfer the land to Development Corporation, which will subdivide it and sell individual tracts. Development's income on the land sales will be ordinary in character. a. What are the tax consequences of the asset transfer and land sales if Donna contributes the land to Development in exchange for all its stock? b. In what alternative ways can the transaction be structured to achieve more favorable tax results? Assume Donna's marginal tax rate for capital gains is 23.8% (20% +3.8% on net investment income), and Development's tax rate is 21%.
Step 1: Capital Gains A Capital gain is the increased of the asset and it is realised when we sell an asset or an investment. For Example, Mr. A Purchases shares worth $10000 and sold for $15000. Explanation: Here, the excess amount of $5000 is Capital gain. a. Donna recognises no gain or loss on the transfer of land to development corporation. Development's basis in the land will be $150,000. All gains on the subsequent sales will be ordinary income to Development. Explanation: This alternative results in the pre-contribution gain that accrued prior to Donna's transfer and the post contribution profit earned from subdividing the land being taxed at rate of 21%. b. Sec 351, States that no gain or loss should be recognized if property is sold or 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. Correct Answer: Donna could elect out of the sec.351 provisions. Explanation: By including including an election with her timely filed income tax return in the year of the transfer. Donna Can avoid the sec. 351 provisions.
Substitute Basis
The basis in a property acquired in a qualified Section 1031 Exchange is reduced by deferred gain and becomes the substitute basis. Substituted Basis: Enter nonrecognition transaction, give up an asset Basis from asset given up, jumps to asset received
Lucia, a single taxpayer, operates a florist business. She is considering either continuing the business as a sole proprietorship or reorganizing it as either a C corporation or an S corporation. Her goal is to withdraw $20,000 of profits from the business annually while minimizing her total tax liability. She expects the business to generate annually $50,000 of taxable income, all of which qualifies as pass-through income, before considering a deductible salary expense (see below). Which business form(s)can best achieve Lucia's goals? Remember that a shareholder is taxed on S corporation income whether withdrawn or not and is not taxed on the actual withdrawals or distributions. Assume the C corporation is taxed at 21%, Lucia is in the 22% individual tax bracket for ordinary income, and Lucia is taxed at 15% on dividend income. When considering either corporate option, perform the analysis first by treating any withdrawals as deductible salary payments of the corporation. Then do the analysis by treating them as non deductible dividends or distributions. Ignore employment and self-employment taxes.
The tax implications of each business structure for Lucia: Sole proprietorship: Lucia will be taxed on all of the business's income at her individual tax rate of 22%. This is the least tax-efficient structure for Lucia because she will be taxed twice on the business income, once at the corporate level and again at the individual level. C corporation: The business will be taxed at a flat rate of 21%. Lucia will then be taxed on any dividends she receives from the corporation at a rate of 15%. If Lucia takes a salary of $20,000 from the corporation, her total tax liability will be $8,800 ($21,000 of corporate income taxed at 21% plus $20,000 of salary taxed at 22%). S corporation: The business income will be taxed to Lucia at her individual tax rate of 22%, regardless of whether she takes it out of the business as salary or as a distribution. This is the most tax-efficient structure for Lucia because she will only be taxed once on the business income. If Lucia takes a salary of $20,000 from the S corporation, her total tax liability will be $4,400 ($20,000 of income taxed at 22%). Analysis of deductible salary payments If Lucia treats the withdrawals as deductible salary payments, then the best business structure for her is the S corporation. She will pay $4,400 in taxes in this structure, compared to $8,800 in taxes if she operates the business as a C corporation and $11,000 in taxes if she operates the business as a sole proprietorship. Analysis of nondeductible dividends or distributions If Lucia treats the withdrawals as nondeductible dividends or distributions, then the best business structure for her is still the S corporation. She will pay $4,400 in taxes in this structure, compared to $5,300 in taxes if she operates the business as a C corporation and $11,000 in taxes if she operates the business as a sole proprietorship. Explanation: Brief explanation of why the S corporation is the best business structure for Lucia: The S corporation is a pass-through entity, which means that the business income is taxed to the shareholders at their individual tax rates, regardless of whether it is taken out of the business as salary or as a distribution. This is in contrast to a C corporation, where the business inc
Sec 362(e)(2)
Under Sec 351: Loss Property: 1231 property - When aggregate FMV < Aggregate Basis - entity push down carryover basis by excess of Basis - FMV - Only push down LOSS assets; relative built-in loss Asset 1/ Loss of all assets x (aggregate Basis - aggregate FMV) ELECT by all shareholders to recognize Fail Sec 351: Loss assets; recognize loss by shareholder stock basis = FMV (or cost basis) Corp's basis = FMV (or cost basis) Holding period: day after
Sale of Sec. 1244 Stock: Lois, who is single, trasnfers property with an $80,000 basis and a $120,000 FMV to Water Corporation in exchange for all 100 shares of Water stock. The shares qualify as Sec 1244 stock. Two years later, Lois sells the shares for $28,000. a. What are the amount and character of Lois's recognized gain or loss? b. How would your answer in Part a change if the FMV of the property were $70,000?
Under Section 1244, worhtless stocks yield ordinary losses. However, worthless debts yield capital losses. Ordinary loss is preferred because the firm can use an ordinary loss to net against the ordinary income. A Section 1244 loss is an ordinary loss. The limitation of an allowed ordinary loss is much higher than that of a cpaitla loss. For indvidual taxpayers, the limitation of an allowed ordinary loss is $50,000 general, and $100,000 for married filing jointly per stock sale or exchange. a. Lois's stock Basis = $80,000 - directly obtained from the Water Corp, the Section 1244 treatment applies - Amount realized = $28,000 - loss realized: 28,000 - adjusted basis = (52,000) Limited to $50,000, remaining $2,000 is a long-term capital loss. b. FMV of property = $70,000 Limitation = FMV - Amount realized $70,000 - $28,000 = $42,000 Limited to $42,000 of the $52,000 loss - $42,000 = Sec 1244 ordinary loss and remaining $10,000 amount is a long-term capital loss (LTCL).
Worthless Stock or Securities: Tom and Vicki, husband and wife, who file a joint tax return, purchase for $75,000 each one-half the stock in Guest Corporation from Al. Tom is employed full-time by Guest and earns $100,000 in annual salary. Because of Guest's financial difficulties, Tom and Vicki each lend Guest an additional $25,000. The $25,000 is secured by registered bonds and must be repaid in five years, with interest accruing at the prevailing market rate. Guest's financial difficulties escalate, and it declares bankruptcy. Tom and Vicki receive nothing for their Guest stock or Guest bonds. a. What are the amount and character of each shareholder's loss on the worthless stock and bonds? b. How would your answer to Part a change if the liability were not secured by bonds? c. How would your answer to Part a change if Tom and Vicki had purchased their stock for $75,000 each at the time Guest was formed?
Worthless securities have a market value of zero. Worthless securities can include stocks or bonds that are either publicly traded or privately held. Sec 165: (a) Definition of security. As used in section 165(g) and this section, the term "security" means: (1) A share of stock in a corporation; (2) A right to subscribe for, or to receive, a share of stock in a corporation; or (3) A bond, debenture, note, or certificate, or other evidence of indebtedness to pay a fixed or determinable sum of money, which has been issued with interest coupons or in registered form by a domestic or foreign corporation or by any government or political subdivision thereof. (b) Ordinary loss. If any security which is not a capital asset becomes wholly worthless during the taxable year, the loss resulting therefrom may be deducted under section 165(a) as an ordinary loss. (c) Capital loss. If any security which is a capital asset becomes wholly worthless at any time during the taxable year, the loss resulting therefrom may be deducted under section 165(a) but only as though it were a loss from a sale or exchange, on the last day of the taxable year, of a capital asset. See section 165(g)(1). The amount so allowed as a deduction shall be subject to the limitations upon capital losses. A. general rule for deducting losses on worthless investment securities is found in Sec. 165(g), which permits a loss deduction for a security that becomes worthless during the tax year, but only if the security is a capital asset in the taxpayer's hands. The loss amount is determined by treating it as having resulted from a hypothetical sale or exchange of the security on the last day of the tax year in which the security becomes worthless. The worthless stock of $ 150,000and bond of Guest corporation of $50, 000 can be treated as capital loss. B. With respect to debt securities, standard investment-grade securities that are offered for sale on the public markets will likely be issued in registered form and will therefore qualify as securities for purposes of deducting worthless securities losses. Sec. 165(j) denies a deduction for losses on securities that are required to be issued in registered form but are not registered. The worthless sto
Choice of Capital Structure: Kobe transfers $500,000 in cash to newly formed Bryant Corporation for 100% of Bryant's stock. In the first year of operations, Bryant's taxable income before any payments to Kobe is $110,000. What total amount of taxable income must Kobe and Bryant each report in the following two scenarios? a. Bryant pays a $70,000 dividend to Kobe. b. Assume that when Bryant was formed, Kobe transferred his $500,000 to the corporation for $250,000 of Bryant stock and $250,000 in Bryant notes. The notes are repayable in five annual installments of $50,000 plus 8% annual interest on the unpaid balance. During the current year, Bryant gives Kobe $50,000 in repayment of the first note plus $20,000 interest.
a. In this case, the Kobe would have the dividend income of the amount of $70,000 and taxed at the capital gains tax rate as well as Bryant Corporation has the $120,000 taxable income. b. In this case, the Kobe basically gets the $20,000 interest income and taxed at the ordinary tax rate as well as Bryant Corporation $100,000 taxable income because the interest expense paid to Kobe is actually deductible.
Liabilities in Excess of Basis: Barbara transfers to Moore Corporation $10,000 cash and machinery having a $15,000 basis and a $35,000 FMV in exchange for 50 shares of Moore stock. The machinery was used in Barbara's business, originally cost Barbara $50,000, and is subject to a $28,000 liability, which Moore assumes. Sam exchanges $17,000 cash for the remaining 50 shares of Moore stock. a. What are the amounts and character of Barbara's recognized gain or loss? b. What is Barbara's basis in the Moore stock? c. What is Moore's basis in the machinery? d. What are the amount and character of Sam's recognized gain or loss? e. What is Sam's basis in the Moore stock? f. When do Barbara and Sam's holding periods for their stock begin? g. How would your answers to parts a through f change if Sam received $17,000 of Moore stock for legal services (instead of cash)
a. $ 3,000 of ordinary income Stock (FMV) Received$ 17,000 Release from liability$ 28,000 Amount realized$ 45,000 Minus: Basis of property transferred Machinery$ -15,000 Money$ -10,000 Realized gain$ 20,000 Liability assumed$ 28,000 Minus: Basis of property transferred$ -25,000 Recognized gain$ 3,000 b. Property transferred$ 25,000 Minus: Boot received$ -28,000 Plus: Gain recognized$ 3,000 Basis in Moore stock$ - c. Barbara's basis in the machine $ 15,000 Plus: Barbara's recognized gain$ 3,000 Moore's total basis in machinery$ 18,000 d. Sam recognizes NO gain or loss e. $17,000 basis, the amount of money he contributed to Moore for the stock f. Barbara's holding period for her stock includes her holding period for the machinery. Sam's holding period starts on the day after the exchange date. - is it not a fragmented holding period? g. (a) Barbara: recognize: $20,000 ordinary income recapture (b) Barbara's stock Basis: FMV of stock: $17,000 (c) Moore's Basis in Machinery: FMV: $35,000 (d) Sam's recognized gain: $17,000 ordinary income (e) Sam's basis: $17,000 (f) Holding periods: - fragmented
Sec 351 Boot Property Received: Sara transfers land (a capital asset) having a $30,000 adjusted basis to Temple Corporation in a Sec 351 exchange. In return, Sara receives the following consideration: @FMV 100 shares of Temple stock $100,000 50 shares of Temple qualified preferred stock 50,000 20 shares of nonqualified preferred stock 20,000 Total $170,000 a. What are the amount and character of Sara's recognized gain or loss? b. What is Sara's basis in her common stock, qualified preferred stock, and nonqualified preferred stock? c. What is Temple's Basis in the land?
a. Amount realized $170,000 Minus: Basis in land ( 30,000) Realized gain $140,000 Boot received (note) $ 20,000 Gain recognized (capital gain) $ 20,000 b. Basis of common stock , preferred stock and three-year note: Overall Basis: A/B + gain recognized - FMV of boot = $30,000 Qualified stock for A&B = A/ A+B Basis of common stock: 30,000*100000/150000 = $20,000 Basis of preferred stock: 30,000*50000/150000 = $10,000 Basis of long-term note: $20,000 (FMV). c. Basis of land to Temples Corporation is: $30,000 + $20,000 = $50,000. - Overall basis + gain recognized
Transfer of Property and Services to a Controlled Corporation: In the current year, Dick, Evan, and Fran form Triton Corporation. Dick contributes land (a capital asset) having a $50,000 FMV exchange for 50 shares of Triton stock. He purchased the land three years ago for $60,000. Evan contributes machinery (Sec1231 property purchased four years ago) having a $45,000 adjusted basis and a $30,000 FMV in exchange for 30 shares of Triton stock. Fran contributes services worth $20,000 in exchange for 20 shares of Triton stock. a. What is the amount of Dick's recognized gain/ loss? b. What is Dick's basis in his Triton shares? When does his holding period begin? c. What is the amount of Evan's recognized gain or loss? d. What is Evan's basis in Triton's shares? When does his holding period begin? e. How much income, if any, does Fran recognize? f. What is Fran's Basis in her Triton shares? When does her holding period begin? g. What is triton's basis in the land & machinery? When does it's holding period begin? How does Triton treat the amount paid to Fran for her services?
a. Dick: No recognized gain/ loss b. Dick's Basis = $60,000, Tact holding period c. Evan: No recognized gain/ loss d. Evan's Basis = $45,000, Tact holding period e. Fran recognizes $20,000 ordinary income f. Fran's Basis = $20,000, Day after g. Triton's Basis: Property loss limitation: lower the basis to FMV 50,000 + 30,000 = 80,000 Basis in services = 20,000
Transfer of Business Properties: Jerry transfers property having a $32,000 adjusted basis and a $50,000 FMV to Emerald Corporation in exchange for all ofEmerald's stock worth $15,000 and Emerald's assumption of a $35,000 mortgage on the property. a. What is the amount of Jerry's recognized gain or loss? b. What is Jerry's basis in the Emerald stock? c. What is Emerald's basis in the property? d. How would your answers to Parts a through c change if the mortgage assumed by Emerald were $15,000 and the Emerald stock were worth $35,000?
a. Jerry realizes a(n) $18,000 gain and recognizesa gain of $3,000. b. Jerry's basis in the Emerald stock is $0 c. Emerald's basis in the property is $35,000 d. (a) Jerry recognizes no gain or loss. (b) Jerry's basis in the Emerald stock is $17,000 (c) Emerald's basis in the property is $32,000
Transfer of Personal Liabilities: Jim owns 80% of Gold Corporation stock. He transfers a business automobile to Gold in exchange for additional Gold stock worth $5,000 and Gold's assumption of both his $1,000 automobile debt and his $2,000 education loan. The automobile originally cost Jim $12,000 and, on the transfer date, has a $4,500 adjusted basis and an $8,000 FMV. a. What are the amount and character of Jim's recognized gain or loss? b. What is Jim's basis in his additional Gold shares? c. When does Jim's holding period for the additional shares begin? d. What basis does Gold take in the automobile?
a. Jim realizes a $3,500 gain and recognizes a $3,000 gain. This is treated as ordinary income. - wouldn't jim only recognize $2,000 for the education loan bc that's personal? b. Jim's basis in the stock is $4,500 c. Jim's holding period for the additional shares includes the holding period for the automobile. d. Gold corporation's basis in the automobile is$7,500
Receipt of Bonds for Property: Joe ,Karen and Larry form Gray Corporation. Joe contributes land (a capital assest) having an $8000 adjusted basis and a $15000 FMV to Gray in exchange for Gray 10 year notes having a $15000 face value. Karen contributes equipment (sec. 1231 property) having an $18000 adjusted basis and a $25000 FMV for 50 shares of Gary stock. She previously claimed $10000 in depreciation on the equipment. Larry contributes $25000 ok cash for 50 shares of Gray Stock. a. What are the amounts and characters of Joe's, Karen's and Larry's recognized gains or loses? b. What basis do Joe, Karen and Larry take in the stock or notes they receive. c. What basis does Gary take in the land and equipment? What happens to the $10,000 of depreciation recapture potential of the equipment?
a. Joe: recognizes $7,000 built in gain - character: capital - Holding period, day after Karen: no recognition - realized gain: $7,000 - character: capital - Holding period: tact Larry: no recognition - realize: none - character: ordinary - holding period: day after b. Joe's Basis: $15,000 Karen's Basis: $18,000 Larry's Basis: $25,000 c. Gary's Basis: Land: $15,000 Equipment: $18,000 The $10,000 depreciation is recaptured upon Gray's sale or disposal of the equipment. When Corporation sells property:
Incorporating a Cash Basis Proprietorship Ted decides to incorporate his medical practice. He uses the cash method of accounting. On the date of incorporation, the practice reports the following balance sheet: ** All the current liabilities would be deductible by Ted if he paid them. Ted transfers all assets and liabilities to a professional corporation in exchange for all its common stock having a $60,000 FMV plus the corporation's assumption of the liabilities. a. What are the amount and character of Ted's recognized gain or loss? b. What is Ted's basis in the stock? c. What is the corporation's basis in the property? d. Who recognizes income on the receivables upon their collection? Can the corporation obtain a deduction for the liabilities when it pays them?
a. No gain or loss recognized. Ted realizes a $70,000 ([$60,000 + $35,000 + $15,000] - [$5,000 + $35,000]) gain, but Ted recognizes no gain or loss. Section 357(c)(3) precludes Ted from recognizing a gain because of his "excess" liability situation (i.e., liabilities that total $50,000 exceeding the $40,000 total bases of the assets). b. $25,000 basis. Ted's basis in the stock received is $25,000 ($40,000 - $15,000). No reduction in basis is required for liabilities assumed by the transferee corporation under Sec. 357(c)(3) or under Sec. 358(d)(2). c. $40,000 basis. The corporation's basis in the assets is the same $40,000 basis that Ted had ($5,000 in the cash, zero in the accounts receivable, and $35,000 in the equipment). d. The corporation. The corporation must recognize the income from the receivables when it collects on them. The corporation also can deduct the current liabilities when it pays them (Rev. Rul. 80-198, 1980-2 C.B. 13).
Sec 351 requirements: Al, Bob and Carl form West Corporation and Transfer the following items: The common stock has voting rights. The preferred stock does not. a. Is the exchange nontaxable under Sec 351? Explain the tax consequences of the exchange to Al, Bob, and West. b. How would your answer to Part a change if Bob instead had received 200 shares of common stock and 200 shares of preferred stock? c. How would your answer to Part a change if Carl instead had contributed $800 cash as well as services worth $6,700?
a. No the exchange is not nontaxable under Sec 351 Carl is the only transferor of property in exchange for common stock and only owns (1000/1300 = 76%) 1. Al: realized & recognized gain of $25,000 as ordinary income, holding period day after/ stock Basis: $25,000 2. Bob: No realized/ recognized gain, holding period = day after 3. West: recognizes no gain/ loss Basis: $25,000 in patent, $25,000 in cash, $7,500 in services b. Yes, this would qualify (1200/1500 = 92%) 1. Al: realize: $25,000 - would not report recognized gain/ loss - Stock Basis: $0 - Tact holding period 2. Bob: realize/ recognize no gain/ loss - Stock basis: $25,000 - Holding period, day after 3. Carl: Realize and recognize $7500 ordinary income - stock basis: $7500 4. West: Recognize no gain/loss Stock basis= Patent: $0, cash: $25,000, services: $7500 c. This would qualify under Sec 351 since Carl meets 10% nominal requirement ( 800/ 6700 = 11.9%) Carl: realize $6,700, recognize: $6700 of ordinary income, no recognition of $800. West Corp: Basis for Carl's services = $6700 & Basis for cash: $800
Transfer of depreciable property: Nora transfers to Needle Corporation depreciable machinery originally costing $18,000 and now having a $15,000 adjusted basis. In exchange, Nora receives all 100 shares of Needle stock having an $18,000 FMV and a three-year Needle note having a $4,000 FMV. a. What are the amount and character of Nora's recognized gain/loss? b. What are Nora's bases in the Needle stock and note? c. What is Needle's basis in the machinery?
a. Nora: Amount realized: 18,000 + 4,000 = 22,000 - A/B (15,000) = 7,000 realized gain FMV of boot received: $4,000 Recognized gain: Lesser of so $4,000 Character: capital asset (1231) b. Nora's Bases: Stock: A/B of property transferred + gain recognized 15,000 + 4,000 - 4,000 = $15,000 Note: $4,000 c. Needle's Basis: Transferor's adjusted basis in property transferred to the corporation + gain (if any) recognized by transferor (reduction for loss property) ... if applicable = Transferee Corp's Basis in property $15,000 + 4,000 = $19,000
Contribution to Capital by a Non-shareholder: In the current year, the City of Omaha donates land worth $500,000 to Ace Corporation to induce it to locate in Omaha and create an estimated 2,000 jobs for its citizens. a. How much income, if any, must Ace report on the land contribution? b. What basis does Ace take in the land? c. Assume the same facts except the City of Omaha also donated to Ace $100,000 cash, which the corporation used to pay a portion of the $250,000 cost of equipment that it purchased six months later. How much income, if any, must Ace report on the cash contribution? What basis does Ace take in the equipment? d. How would your answers to Parts a-c change if the contribution is made by a non-shareholder who is not a customer, potential customer, governmental entity or civic group?
a. Since the land is donated by the City of Omaha, Ace Corporation does not have to report any income on the land received. - is this wrong? - I think the income would be $500,000 - after Dec 31, 2017, they have to report taxable income to extent of FMV of property received b. Ace Corporation's basis in the land is $0. c. Since the $100,000 cash is donated by the City of Omaha, Ace reports $100,000 income. - Ace takes $0 basis d. When a capital contribution is made by a non-shareholder who is not customer, government entities or civic group will be nontaxable. If a corporation received cash from non-shareholders and not used that amount to acquire the property in the 12-month period. It reduces other non-cash property held by the corporation in its last twelve month period - Basis is reduced by cash amount used to acquire property - $150,000 basis
Incorporating a Sole Proprietorship: Tom incorporates his sole proprietorship as Total Corporation and transfers its assets to Total in exchange for all 100 shares of Total common stock and $40,000 worth of non-qualified preferred stock. The common stock has $125,000 FMV. The assets transferred are as follows: a. What are the amounts and character of Tom's recognized gains/ losses? b. What is Tom's basis in the Total common and non qualified preferred stock? c. What is Total's basis in the property received from Tom?
https://www.chegg.com/homework-help/questions-and-answers/tom-incorporates-sole-proprietorship-total-corporation-transfers-assets-total-exchange-100-q11491459 Total recognized gain = 21,818 + 6,000 = 27,818 Tom's Basis= 140,000 - 40,000 = 27,818 Total's Basis = 5,000 + (60,000 + 21,818) + 51,000 + (24,000 + 6,000) = 167,818
Transfer to an Existing Corporation: For the last five years, Ann and Fred each have owned 50 of the 100 outstanding shares of Zero Corporation stock. Ann transfers land having a $10,000 basis and a $25,000 FMV to Zero for an additional 25 shares of Zero stock. Fred transfers $1,000 cash to Zero for one additional share of Zero stock. What amount of the gain or loss must Ann recognize on the exchange? If the transaction does not meet the Sec 351 requirements, suggest ways in which it can be structured so as to meet these requirements.
https://www.chegg.com/homework-help/questions-and-answers/transfer-existing-corporation-last-five-years-ann-fred-owned-50-100-outstanding-shares-zer-q68455066 Ann holding after allotment would 60% approximately = [(50+25/100+25+1)] = 75/126 = 60% approximately Since Ann has less than 80%, she is not controlling the transferee after the transfer. Therefore the transfer does not meet the requirements of sec 351 and Hence taxable. Ann must recognize the gain realized. Gain realized = Amount realized - Adjusted basis = 25,000 - 10,000 = $15,000 Suggestions:- Ann can transfer more property so that she can get 80% share in Zero corporation. Or Fred should buy atleast 5 shares that is more than nominal rate (10%) to adhere the requirements of sec 351.
