Federal taxation 2 exam review
Default Position(what the rules would be without Sub C)Under Code section 1001, when there is a transfer of property in exchange for other property, the transferor recognizes gain or loss in the difference between:The FAIR VALUE of the property received, AND His ADJUSTED BASIS (determined under Code section 1012) in the property transferred
EXAMPLE OF DEFAULT POSITION
X has land worth $400,000 and in which he has basis of $150,000.
X transfers the land to Corp in exchange for 100 shares of Corp stock
It is assumed that this is a value for value exchange
X will realize and recognize gain of $250,000 (the difference between the value of the stock ($400,000) and his basis in the land ($150,000). Depending on how X held the land, the gain will be either capital or 1231
Corp recognizes no gain or loss on transactions involving its own stock…ever… Code section 1032
§351 DEFERRING GAIN or LOSS UPON INCORPORATION
No gain or loss recognized to transferors if:PROPERTY transferred in exchange for stock and Transferors have control (80%) of corp . Immediately after the exchange, transferors must own at least:80% of total combined voting power of all classes of stock and 80% of total number of shares of all other classes of stock Contribution of services & property: Stock received counted toward 80% if FMV of property 10% of service’s value
BUSINESS PURPOSE REQUIREMENT
The corporation is not an INVESTMENT COMPANY
Effect of §351 on transferors AND Effect of §351 on transferee corp
Assumption of the transferor’s liabilities AND Other considerations in a §351 exchange.
Effect of §351 on Transferors RECEIPT OF BOOT Gain recognized LESSER of gain realized or FMV of boot received. Gain recognized when liabilities transferred > basis in assets transferred per Code section 357(c). Basis in stock ↑by gain recognized. Basis in boot property is FMV, Holding period of boot begins day after exchange. A S/H’s Basis in stock received is↓by liabilities assumed by the
EXAMPLE OF DEFAULT POSITION
X has land worth $400,000 and in which he has basis of $150,000.
X transfers the land to Corp in exchange for 100 shares of Corp stock
It is assumed that this is a value for value exchange
X will realize and recognize gain of $250,000 (the difference between the value of the stock ($400,000) and his basis in the land ($150,000). Depending on how X held the land, the gain will be either capital or 1231
Corp recognizes no gain or loss on transactions involving its own stock…ever… Code section 1032
§351 DEFERRING GAIN or LOSS UPON INCORPORATION
No gain or loss recognized to transferors if:PROPERTY transferred in exchange for stock and Transferors have control (80%) of corp . Immediately after the exchange, transferors must own at least:80% of total combined voting power of all classes of stock and 80% of total number of shares of all other classes of stock Contribution of services & property: Stock received counted toward 80% if FMV of property 10% of service’s value
BUSINESS PURPOSE REQUIREMENT
The corporation is not an INVESTMENT COMPANY
Effect of §351 on transferors AND Effect of §351 on transferee corp
Assumption of the transferor’s liabilities AND Other considerations in a §351 exchange.
Effect of §351 on Transferors RECEIPT OF BOOT Gain recognized LESSER of gain realized or FMV of boot received. Gain recognized when liabilities transferred > basis in assets transferred per Code section 357(c). Basis in stock ↑by gain recognized. Basis in boot property is FMV, Holding period of boot begins day after exchange. A S/H’s Basis in stock received is↓by liabilities assumed by the