Corporate Tax Research 2 64
“Your clients, Lisa and Matthew, are planning to form Lima Corporation. Lisa will contribute $50,000 cash to Lima for 50 shares of its stock. Matthew will contribute land having a $35,000 adjusted basis and a $50,000 FMV for 50 shares of Lima Stock. Lima will borrow additional capital from a bank and then will subdivide and sell the land. Prepare a memorandum, compare tax and financial accounting for this transaction.”
Memorandum
To: Dr. Ulysses Taylor
From: Jessica Cain
Date: January 26, 2015
Subject: Tax treatment of corporate formation for Lisa and Matthew
Lisa and Matthew are contributing property worth $50,000 each in exchange for 50 shares each in an effort to form Lima Corporation. Lima plans to borrow any additional capital from the bank and subdivide the land. Section 351 and Accounting Standards Codification (ASC) 845 can both be used to determine the tax treatment for their transactions.
Section 351
“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.”
Accounting Standards Codification (ASC) 845
“Most business transactions involve exchanges of cash or other monetary assets or liabilities for goods or services. The amount of monetary assets or liabilities exchanged general provides an objective basis for measuring the cost of non-monetary assets or services received by an entity as well as for measuring gain or loss on nonmonetary assets transferred from an entity. Some transactions, however, involve either of the following an exchange with another entity (reciprocal transfer) that involves principally nonmonetary assets or liabilities; a transfer of nonmonetary assets for which no assets are received or relinquished in exchange (nonreciprocal transfer).”
Lisa and Matthew collectively have 100% control of the corporation and do not have any prearranged
Memorandum
To: Dr. Ulysses Taylor
From: Jessica Cain
Date: January 26, 2015
Subject: Tax treatment of corporate formation for Lisa and Matthew
Lisa and Matthew are contributing property worth $50,000 each in exchange for 50 shares each in an effort to form Lima Corporation. Lima plans to borrow any additional capital from the bank and subdivide the land. Section 351 and Accounting Standards Codification (ASC) 845 can both be used to determine the tax treatment for their transactions.
Section 351
“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.”
Accounting Standards Codification (ASC) 845
“Most business transactions involve exchanges of cash or other monetary assets or liabilities for goods or services. The amount of monetary assets or liabilities exchanged general provides an objective basis for measuring the cost of non-monetary assets or services received by an entity as well as for measuring gain or loss on nonmonetary assets transferred from an entity. Some transactions, however, involve either of the following an exchange with another entity (reciprocal transfer) that involves principally nonmonetary assets or liabilities; a transfer of nonmonetary assets for which no assets are received or relinquished in exchange (nonreciprocal transfer).”
Lisa and Matthew collectively have 100% control of the corporation and do not have any prearranged