Case Study on Corporate Tax
Tax Research Problem 2-64
FACTS:
Lisa and Matthew would like to form a new corporation, Lima Corporation. Lisa will be exchanging $50,000 cash in exchange for 50 shares of stock in Lima. Matthew will be contributing land which has a $35,000 adjusted basis and a $50,000 FMV, also in exchange for 50 shares of stock in Lima.
ISSUE:
When assets are exchanged for stock and control in a newly formed corporation, what are the tax and financial accounting implications of those transactions to Lisa, Matthew and Lima Corporation?
LAW:
1. IRC Section 351(a) Transfer to corporation controlled by transferor:
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 (as defined in section 368(c)) of the corporation.
2. IRC Section 368(c) Definitions relating to corporate reorganizations:
The term control means 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.
3. ASC 845-10-30-3 Nonmonetary Transactions: A nonmonetary exchange shall be measured based on the recorded amount of the nonmonetary asset(s) relinquished, and not on the fair values of the exchanged assets, if…..the transaction lacks commercial substance.
ANALYSIS:
Lisa is contributing $50,000 cash and Matthew is contributing land with an adjusted basis of $35,000 and FMV of $50,000. Both clients will be exchanging their assets for 50 shares of stock and subsequently forming Lima Corporation, thereby having control of the corporation immediately after the exchange. Lisa has no realized gain or loss and Matthew has a $15,000 realized gain. According to Sec 351(a), no gain or loss shall be recognized by Lisa and Matthew when they exchange their property for stock in
FACTS:
Lisa and Matthew would like to form a new corporation, Lima Corporation. Lisa will be exchanging $50,000 cash in exchange for 50 shares of stock in Lima. Matthew will be contributing land which has a $35,000 adjusted basis and a $50,000 FMV, also in exchange for 50 shares of stock in Lima.
ISSUE:
When assets are exchanged for stock and control in a newly formed corporation, what are the tax and financial accounting implications of those transactions to Lisa, Matthew and Lima Corporation?
LAW:
1. IRC Section 351(a) Transfer to corporation controlled by transferor:
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 (as defined in section 368(c)) of the corporation.
2. IRC Section 368(c) Definitions relating to corporate reorganizations:
The term control means 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.
3. ASC 845-10-30-3 Nonmonetary Transactions: A nonmonetary exchange shall be measured based on the recorded amount of the nonmonetary asset(s) relinquished, and not on the fair values of the exchanged assets, if…..the transaction lacks commercial substance.
ANALYSIS:
Lisa is contributing $50,000 cash and Matthew is contributing land with an adjusted basis of $35,000 and FMV of $50,000. Both clients will be exchanging their assets for 50 shares of stock and subsequently forming Lima Corporation, thereby having control of the corporation immediately after the exchange. Lisa has no realized gain or loss and Matthew has a $15,000 realized gain. According to Sec 351(a), no gain or loss shall be recognized by Lisa and Matthew when they exchange their property for stock in