Corporate Formations Tx 8120

Corporate FormationsTx 8120

Goals to Achieve

1. Calculate ____ or ____ from transfers to controlled corporations,

2. Explain _____ and _______ period implications from such transfers,

3. Determine tax consequences of contributions to ________, and

4. Explain deductibility of ______________ expenditures and ________ costs.

You should be able to:

Fundamental Tax IssuesTransfers to Controlled Corporations

Shareholders

Corporation

Property Stock

1. How much gain or loss do shareholders _______________?

2. What _______ do shareholders take in ______ received?

3. When does the ___________ period begin in the _________ received?

1. How much gain or loss does the corporation ____________?

2. What _______ does the corporation take in the __________ received?

3. When does the corporation’s __________ period begin in the ___________ received?

Shareholder (_________) Issues Corporation (__________) Issues

Control

Section 1001

(a) Computation of gain or loss.The gain from the sale or other disposition of property shall be

the excess of the amount realized … over the adjusted basis …, and the loss shall be the excess of the adjusted basis …over the amount realized.…(c) Recognition of gain or loss.

Except as otherwise provided in this subtitle, the entire amount of the gain or loss … on the sale or exchange of property shall be recognized.

Transfers to controlled corporationsShareholder issues

Gain or loss recognized

Section 351(a)

(a) General rule.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.

Rationales: (1) Continuation of (2) Re gains, (3) Re losses,



Section 367(a)(1)

(a) Transfers of property from the United States.(1) General rule. If, in connection with any exchange described in section 332, 351, 354, 356, or 361, a United States person transfers property to a foreign corporation, such foreign corporation shall not, for purposes of determining the extent to which gain shall be recognized on such transfer, be considered to be a corporation.



What Is Property?

• Cash• Accounts receivable• Inventory• Equipment• Real estate• Intangibles No gain results from transferring

cash. So, does it matter whether cash is considered “property”?


Gain or loss recognizedProperty condition



Hempt Brothers, Inc. v. US(CA-3, 1974)

A ___ method partnership incorporated under §351, transferring accounts receivable with a ___ basis. Taxpayer insisted such receivables are not “______” under §351 and, thus, represent gross income to the partnership when transferred or collected. Alternatively, the taxpayer argued that the assignment of income doctrine controls. The IRS countered that receivables are ______ for which the corporation takes a transferred basis of ____ and become gross income to the new corporation when collected.

Hempt Bros., Inc.

100%

Partnership

Shares



Hempt Brothers, Inc. v. US(CA-3, 1974)

In siding with the gov’t, the court found no reason to narrowly construe “_______” and believed that the §351 purpose to facilitate the incorporation of ongoing businesses trumps any assignment of income concerns. Further, the court noted that §358 did not increase the basis of shares received because of the ____ basis receivables. Thus, gross income attributable to the receivables is merely deferred.

Hempt Bros., Inc.

100%

Partners

Shares

Section 351(d)

(d) Services, certain indebtedness, and accrued interest not treated as property.

For purposes of this section, stock issued for--(1) services,(2) Indebtedness of the transferee which is not evidenced

by a security, or(3) Interest on indebtedness of the transferee corporation

which accrued on or after the beginning of the transferor’s holding period for the debt,

shall not be considered as issued in return for property.



Example: Stock for ServicesBart drafts and files articles of incorporation for Al’s business and bills Al $3,000. Al transfers his business assets to the new corporation. Of 100 authorized shares, Bart receives 10 for his work, and Al receives 90. What are the tax consequences to each individual? Would the results change if Bart and Al receive 25 and 75 shares, respectively?

Al (owner) Bart (attorney)



How Much Property?

• For §351 to apply, “_________” must control the corporation afterwards.

• Generally, a person contributing property and services is a “_________” whose total shares count toward control requirement.

• So, why not have service providers contribute ________ property?



How Much Property?(continued)

• Nominal property transfers used ________ to qualify other transferors under §351 are ________, Reg. §1.351-1(a)(1)(ii).

• Transfers avoid nominal label if FMV of contributed property ≥ ___% of FMV of stock previously owned and received for ________, Rev. Proc. 77-37, §3.07.



What Is Stock?

• Can be _____ or _________• Can be ______ or _________• Does not include:

– Stock ______– Long-term _____ securities– ___________ preferredShareholders

Corporation

Property Stock


Gain or loss recognizedSolely for stock condition

Control

Nonqualified Preferred, §351(g)

• Preferred stock– Limited and preferred as to ___________– Doesn’t significantly participate in _______

• Nonqualified – Holder has right to require ___________,– Issuer is required to ________ shares,– Issuer has right to ________ and, on issuance

date, is more likely than not to ________, or– Dividend rate ______



Section 351(b)

(b) Receipt of property.If subsection (a) would apply to an exchange but for the

fact that there is received, in addition to the stock permitted to be received under subsection (a), other property or money, then--

(1) gain (if any) to such recipient shall be recognized, but not in excess of--

(2) no loss to such recipient shall be recognized.

(A) the amount of money received, plus(B) the fair market value of such other property received; and



Receipt of BootShareholders

Corporation

Property Stockplus Boot

____ of stock and boot received- Adjusted of property transferred

_________ gain

_________ gain = Smaller of: (a)(b)



Rev. Rul. 68-55



Individual A(shareholder)

Corp Y

(newly organized)

Corp X

(shareholder)

$20

Issues1. Does X calculate gain on ______

or ___________ basis?

2. If determined on _______ basis, how does X determine what it receives for each _______?

Y stock (FMV$100) and $10

Y stock(FMV $20)

FMV Basis OtherAsset I $ 22 $ 40 LTCLAsset II 33 20 STCGAsset III 55 25 §1245

Rev. Rul. 68-55(continued)




Corp Y

(newly organized)


Corp X

(shareholder)

Y stock(FMV $20)$20


$110 - $85 = $25 gain

Each asset is ________ exchanged:a. No _______ of gains and lossesb. _______________ analysis

Overall or Separate?





Corp Y

(newly organized)


Corp X

(shareholder)

Y stock(FMV $20)$20


Need amount realized for each asset:a. Based on _________ ____b. Compute _____ and ____ separately

Amount Realized?




Asset Asset AssetTotal I II III

FMV of asset $110 $22 $33 $55Percent of total

FMV of: Y stock received Cash receivedAmount realizedBasis of assetGain (loss) realizedGain (loss) recognized

Thus, Corp X recognizes $__ short-term capital gain and

$__ ordinary income. Individual A

(shareholder)

Corp Y

(newly organized)


Corp X

(shareholder)

Y stock(FMV $20)$20


Section 357(a)

(a) General rule.Except as provided in subsections (b) and (c), if--(1) the taxpayer receives property which would be permitted to be received under section 351 … without the recognition of gain if it were the sole consideration, and(2) as part of the consideration, another party to the exchange assumes a liability of the taxpayer,

then such assumption shall not be treated as money or other property, and shall not prevent the exchange from being within the provisions of section 351 ….



Section 357(b)

(b) Tax avoidance purpose.(1) In general. If … it appears that the principal purpose of the taxpayer with respect to the assumption described in subsection (a)--

then such assumption (in the total amount of the liability assumed …) shall, for purposes of section 351 …, be considered as money received by the taxpayer on the exchange.

(A) was a purpose to avoid Federal income tax on the exchange, or(B) if not such purpose, was not a bona fide business purpose,



Attempted Bail Out

Pete

Corporation



Objective: Pete needs $100. He owns unencumbered realty (FMV $100, basis $25) he’d like to sell, but he doesn’t want to recognize gain.

Strategy: Borrow $100 on nonrecourse mortgage, transfer encumbered realty to 100%-owned corporation, and let the corporation pay off the mortgage. 100%

BANK

Section 357(c)(1)

(c) Liabilities in excess of basis.(1) In general. In the case of an exchange--

if the sum of the amount of the liabilities assumed exceeds the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain ….

(A) to which section 351 applies …



Debt Heavy Transfers

Serf Corp

100%

Castle Corp

How much gain does Castle recognize?





Peracchi v. CIR(CA-9, 1998)

An insurance corporation needed capital to meet state premium-to-asset ratios. So, its sole owner contributed encumbered realty for which the debt _________ the realty’s basis. To avoid §357(c) _____, the shareholder also gave the corporation his promissory note, asserting the note’s _____ equaled its face value. The IRS insisted on a _____ _____ for the note.

NAC

Don Peracchi

Realty’s basis $ 980,000 Mortgages 1,550,000Promissory note 1,060,000

100%



Peracchi v. CIR(CA-9, 1998)

The court noted ________ ________ ______ since, in bankruptcy, hostile creditors could recover from the shareholder. Also, the transaction was economically equivalent to the shareholder _________ cash, _________ it to the corporation, and the corporation using the cash to ____ Don’s note from the creditor. Finally, attributing a _____ basis to the note would force the corporation to recognize “________ ____” if it later sold the note. The court _________ the Tax Court, which believed the debt was not genuine, and held for the taxpayer.

NAC

Don Peracchi

Realty’s basis $ 980,000 Mortgages 1,550,000Promissory note 1,060,000

100%

Section 357(c)(3)(c) Liabilities in excess of basis.

(3) Certain liabilities excluded.



(A) In general. If a taxpayer transfers, in an exchange to which section 351 applies, a liability the payment of which … would give rise to a deduction … then … such liability shall be excluded in determining the amount of liabilities assumed.(B) Exception. Subparagraph (A) shall not apply to any liability to the extent that the incurrence of the liability resulted in the creation of, or an increase in, the basis of any property.

Rationale of §357(c)(3)

Cash BasisProprietor

Corporation

100%

Cash BasisProprietor

Corporation

100%



Creditors

Assets: FMV $700Basis 100

Payables 500Shares: FMV $200 Shares: FMV $200

Cash 500Assets: FMV $700

Basis 100

Cash Basis Transferors



Liabilities Not Liabilities

Accrued wagesAccounts payable for heavy machineryRepair services received but not paidBank loan for working capitalUtilities used but not yet paidInventory bought on creditMortgage securing land



Rev. Rul. 95-74The manufacturing business of P, an accrual basis corporation, operated on land that hazardous waste had contaminated, resulting in _________ environmental liabilities. Under §351, P transferred the manufacturing business (including the land and its associated liability) to newly-created S, a 100%-owned, accrual basis corporation. Two years later, S began soil and groundwater remediation efforts, involving §___ and §___ expenditures.

1. Are the contingent liabilities _______ or ________ under §357(c)?2. Can S ______ or ________ expenditures related to these liabilities?

Issues




In determining whether liabilities __ ________ of transferred assets, liabilities for which P has received ___ deduction or _______ increase are ignored. Otherwise, P recognizes gain for which it receives no ___ ______.

Holding on Issue 1

As incurred, S can _______ under §162 or __________ under §263 any soil and groundwater remediation costs it incurs.

Holding on Issue 2



Mapping of Liabilities

• Liabilities transferred to corporations are not treated as ______ received.

• Exceptions:– Tax _________ motive– Lack of __________ purpose– Liabilities __ basis in transferred assets

• Subsidiary to tax ______ and _______ purpose tests• Liability ignored if transferor has not ______ or _______ item

Section 368(c)

(c) Control defined.… [T]he term “control” means the ownership of stock

possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation.

Shareholders

Corporation

Property Stock


Gain or loss recognizedControl condition

Control

Intermountain Lumber Co. v. CIR(TC, 1976)



S&W Sawmill(later acquired by

Intermountain)

364 S&Wshares

Dee Shook

Sawmillsite

Milo Wilson

182 S&Wshares in escrow

Installmentnote

American Bantam Car Co. v. CIR(TC, 1948, aff’d per curiam CA-3, 1949)

“Associates” transferred assets of bankrupt auto company to new corporation in return for voting _________.



June 3, 1936

Associates and underwriters reached fee agreement regarding public offering of voting ___________.

June 8, 1936

Associates placed all _________ in escrow, pending outcome of public offering.

Aug. 1936

Associates transferred _________ stock (> 20%) to underwriters as compensation for public offering.

Oct. 1937

American Bantam Car Co. v. CIR(TC, 1948, aff’d per curiam CA-3, 1949)

Did associates have control on incorporation date?



Issue:

Holding:

No binding, written agreement existed with underwriters _______ incorporation.

Underwriters received common only if sales ______ met.Placing common in _________ indicated ownership.Contemplating steps under general plan does not invoke

______ ___________ doctrine.

Reasoning:

Corporation can deduct depreciation only on the §362 ____________ basis, which is lower than ____ basis.

Implication:

Control _______, so §351 applies. Taxpayer ______.

D’Angelo Associates, Inc. v. CIR(TC, 1978)



Dad contributed $15,000 to new corporation, and corporation issued 10 shares each to Mom and 5 kids.

June 21

Mom and Dad “sold” depreciable assets to corporation in return for $15,000, mortgages assumed, and demand note payable to Dad.

June 30

Dad never had ______.June 30 transaction was a ____.Sec. 351 ___________.Corporation takes __________ basis.

_____ ___________ doctrine applies.Single “__________” transfer exists.Sec. 351 ________.Only _________ basis is depreciable.

Taxpayer Position Gov’t Position

Did Dad have control on incorporation date?



Issue:

_______ existed, so ______ applies. Taxpayer ________.Holding:

Equivalent to incorporation with depreciable assets followed by ______ of shares to family members.

Incorporation and “sale” occurred almost ____________,and formed ________ parts of a single plan; incorporation

was ______________ without later “sale.”No ____________ reason evident for separate transfers.

Reasoning:

Taxpayer can deduct depreciation only on the §362 ________ basis, which is lower than _____ basis.

Implication:

D’Angelo Associates, Inc. v. CIR(TC, 1978)

Rev. Rul. 2003-51



Corp W(businesses A, B, C)

Corp Z(formed to run

combined business A)

Corp Y(business A)

Corp X(Y’s parent)

Transfers #2 and #3 occur simultaneously.

Rev. Rul. 2003-51



Corp W(businesses B and C)

Corp Z(combined business A)

Corp Y

Corp X

100%

40%60%

Rev. Rul. 2003-51


Corp Z(combined A)

Corp Y(business A)


Transfers #2 and #3 occur simultaneously.

“Courts have held that the control requirement of §351 is not satisfied where, pursuant to a _______ ________ entered into by the transferor _____ ___ the transfer of property …, the transferor [Corp _] loses control of the corporation [Corp _] by a ______ ____ of … that stock to a third party who does not also transfer property ….”

However, “a transfer of property that is followed by a ___________ _________ of the stock received … is not

necessarily inconsistent with the purposes of §351.”

Rev. Rul. 2003-51


Corp Z(formed to run

combined business A)

All Z shares

Corp Y(business A)

Business A

Y shares


Y shares $30

Business A and $30

HOLDING: _______ transfer falls under §351 since transaction can be recast to clearly meet requirements.

Collapse Steps If

• Legally bound to complete later steps– Rationale in __________ _________– Missing in _________ ________ ____

• Separate transfers lack business reason– Point of _________ ___________

• Transferee later disposes of shares in prearranged, taxable sale– Taxable sale absent in ____ ____ _______



Basics on Basis

• Two ways to increase basis– Invest ________– Recognize _______

• Two ways to decrease basis– Withdraw ________– Take _________


Basis of stock received

Section 358(a) (a) General rule.

In the case of an exchange to which section 351 … applies--(1) Nonrecognition property. The basis of the property permitted to be received … without the recognition of gain or loss shall be the same as that of the property exchanged--

(A) decreased by--(i) the fair market value of any other property (except money) received by the taxpayer,(ii) the amount of any money received by the taxpayer, and …

(B) increased by--(ii) the amount of gain to the taxpayer which was recognized on such exchange ….

(2) Other property. The basis of any other property (except money) received by the taxpayer shall be its fair market value.



Section 358(a)Basis of ________ _______ to corporation

- Boot _______ - Liabilities transferred (i.e., same as _____)+ recognized

Basis of _______ received from corporation

Shareholders

Corporation



Stockand Boot

Propertyand Liabilities

Control

Rev. Rul. 68-55(extended)


Corp Y

(newly organized)


Corp X

(shareholder)

Y stock(FMV $20)$20






FMV of: Y stock received $100 $20 $30 $50 Cash received 10 2 3 5Amount realized $110 $22 $33 $55Basis of asset 40 20 25Gain (loss) realized $-18 $13 $30Gain (loss) recognized $ 0 $ 3 $ 5

What is X’s basis in stock received?

Basis relinquishedBoot receivedGain recognizedBasis of stock received

20% 30% 50%

Section 1223(1)

For purposes of this subtitle--(1) In determining the period for which the taxpayer has held property received in an exchange, there shall be included the period for which he held the property exchanged if … the property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged, and … the property exchanged at the time of such exchange was a capital asset as defined in section 1221 or property described in section 1231.


Holding period of stock received



Corp Y

(newly organized)


Corp X

(shareholder)

Y stock(FMV $20)$20






When does X’s holding period begin in these shares?

Recall that X takes an $83 exchanged basis in Y shares received.

Per Rev. Rul. 85-164, each share receives a “____ ________ _____” allocated according to relative _____ of assets relinquished.

Thus, __% of each share receives its holding period from Asset I, __% from Asset II, and __% from Asset III.

20% 30% 50%

Section 1032(a)

(a) Nonrecognition of gain or loss.No gain or loss shall be recognized to a corporation on the

receipt of money or other property in exchange for stock (including treasury stock) of such corporation.

Transfers to controlled corporationsCorporate issues


Shareholders

Corporation

Property StockControl

Section 362(a)

(a) Property acquired by issuance of stock or as paid-in surplus.If property was acquired … by a corporation--(1) in connection with a transaction to which section 351 … applies, or(2) As paid-in surplus or as a contribution to capital,

then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer.

Shareholders

Corporation

Property Stock


Basis of property received

Section 362(e)(2)(2) Limitation on transfer of built-in losses in section 351 transactions.

(A) In general. If--

then, … the transferee’s aggregate adjusted bases of the property so transferred shall not exceed fair market value of such property immediately after such transaction.



(i) property is transferred by a transferor in [a 351 exchange], and(ii) the transferee’s aggregate adjusted bases of such property so

transferred would (but for this paragraph) exceed the fair market value of such property immediately after such transaction,

Shareholders

Corporation

Property StockControl

Section 362(a)

Prior basis of _______ to shareholder+ shareholder recognizes

Basis of ______ corporation receives

Shareholders

Corporation

Property Stock



Control



Corp Y

(newly organized)


Corp X

(shareholder)

Y stock(FMV $20)$20






FMV of: Y stock received $100 $20 $30 $50 Cash received 10 2 3 5Amount realized $110 $22 $33 $55Basis of asset 40 20 25Gain (loss) realized $-18 $13 $30Gain (loss) recognized $ 0 $ 3 $ 5

Basis of asset to XGain recognized by X Y’s transferred basis

20% 30% 50%

Section 1223(2)For purposes of this subtitle--(2) In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under this chapter such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person.

Shareholders

Corporation

Property Stock


Holding period of property received

Control

XCorp(new)

A

B

C

D

E

Cash $25,000

Inventory: FMV $10,000 Basis 5,000

Unimproved Land: FMV $20,000 Basis 25,000

Equipment: FMV $25,000 Basis 5,000

*

Prior depreciation was $20,000.

Installment Note: FMV $20,000 Basis 2,000

**

*

**

25 shares

10 shares

20 shares

25 shares

20 shares

RealizedGain <Loss>

RecognizedGain <Loss>

Basis ofShares Received

HoldingPeriod Tacks

Received for land ($2,000 basis) sold last year and payable over 5 years, beginning in 2 years, at $4,000 annually plus market interest rate.

Lind et al., pp. 62-63

XCorp(new)

A

B

C

D

E

Cash $25,000

Inventory: FMV $10,000 Basis 5,000



*


Installment Note: FMV $20,000 Basis 2,000

**

*

**

25 shares

10 shares

20 shares

25 shares

20 shares

Basis ofProperty Received

HoldingPeriod Tacks

Received for land ($2,000 basis) sold last year and payable over 5 years, beginning in 2 years, at $4,000 annually plus market interest rate.

N/A N/A


XCorp(new)

A

B

C

D

E

Cash $25,000

Services: FMV $12,000



**

X Corp assumes a nonrecourse mortgage of $30,000.


Services: FMV $17,000Cash 3,000

*

**

25 shares

10 shares + $2,000 cash

20 shares


20 shares

RealizedGain <Loss>



HoldingPeriod Tacks

*


XCorp(new)

A

B

C

D

E

Cash $25,000

Services: FMV $12,000



**

X Corp assumes a nonrecourse mortgage of $30,000.


Services: FMV $17,000Cash 3,000

*

**

25 shares


20 shares


20 shares

*


HoldingPeriod Tacks

TransferorRecognized

N/A N/A

N/A N/A

N/A N/A

$ 0


NewcoInc.(new)

A

B

Property: FMV $10,000 Basis 1,000

NOTES:A and B are unrelated.Their transfers are not part of integrated plan.B’s shares aren’t nonqualified preferred.

50 common shares

10 nonvoting preferred shares

RealizedGain <Loss>



HoldingPeriod Tacks


Jan 2

Mar 2


HoldingPeriod Tacks

From A

From B

Lind et al., p. 71

NewcoInc.(new)

A

B


NOTES:A and B are unrelated.Their transfers are part of integrated plan.B’s shares aren’t nonqualified preferred.

50 common shares

10 nonvoting preferred shares

RealizedGain <Loss>



HoldingPeriod Tacks


Jan 2

Mar 2


HoldingPeriod Tacks

From A

From B

What if A gifts 25 shares to her daughter on March 5?

What if A gifts 25 shares to her daughter on January 5?

What if A sold 15 shares to E on May 2 under a binding, preexisting agreement without which A would not have formed Newco?

Lind et al., p. 71

Fundamental Tax IssuesContributions to Capital

Transferors

Corporation

Property

1. How much gain or loss does the corporation recognize?

2. What _____ does the corporation take in the property received?

3. When does the corporation’s holding period _______ in the property received?

Transferor Issues Corporation (Transferee) Issues

1. How much gain or loss do shareholders recognize?

2. How does contribution affect basis of shareholder’s _________ shares?

3. How much gain or loss do ______________ recognize?

Investment or Gift

Contributions to capitalTransferor issues

Transferors

Corporation

Property

• For shareholder transfers in nature of additional investment– No gain or loss– Increase basis of _______ shares

for ______ in contributed property

• For nonshareholder transfers in nature of gift (or inducement), ___ gain or loss

CIR v. Fink(S.Ct., 1987)

To attract new ______, two stockholders voluntarily surrendered common shares, receiving no consideration and slightly diminishing their ______. Thus, their net worth declined. Taxpayers claimed an ordinary loss deduction for basis in relinquished shares. Gov’t viewed surrender as _________ __________ to capital.



Peter & Karla

Travco Corp(motor homes)

Sharessurrendered

Fell from 72.5% to 68.5%

CIR v. Fink(S.Ct., 1987)

The court adopted the “______ view,” that a stockholder’s holding should be treated as ____ _______ investment. One cannot tell whether such a surrender results in a loss until the stockholder eventually ________ remaining shares. To rule otherwise would allow stockholders in sinking companies to convert ______ losses into _______ deductions at will.



Peter & Karla

Travco Corp(motor homes)

Sharessurrendered

Held: When a controlling shareholder voluntarily surrenders shares, __ ____ is deductible. The court did not decide whether to treat surrenders resulting

in ___ of _________ differently.

Fell from 72.5% to 68.5%

Section 118(a)

(a) General rule.In the case of a corporation, gross income does not

include any contribution to the capital of the taxpayer.

Transferors

Corporation

Property

Contributions to capitalCorporate issues


Section 362(a)

(a) Property acquired by issuance of stock or as paid-in surplus.If property was acquired … by a corporation--



(1) in connection with a transaction to which section 351 … applies, or(2) As paid-in surplus or as a contribution to capital,

then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer.

Corporation

Property

Transferors

Section 362(c)(1)

(c) Special rule for certain contributions to capital.(1) Property other than money. Notwithstanding subsection (a)(2), if property other than money--

(A) is acquired by a corporation … as a contribution to capital, and(B) is not contributed by a shareholder as such, then the basis of such property shall be zero.

Corporation

Property

Transferors



Section 362(c)(2)(c) Special rule for certain contributions to capital.

(2) Money. Notwithstanding subsection (a)(2), if money--(A) is received by a corporation … as a contribution to capital, and(B) is not contributed by a shareholder as such, then the basis of any property acquired with such money during the 12-month period beginning on the day the contribution is received shall be reduced by the amount of such contribution. The excess (if any) … shall be applied to the reduction … of the basis of any other property held by the taxpayer.



Section 1223(2)For purposes of this subtitle--(2) In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under this chapter such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person.

Transferors

Corporation

Property


Holding period of property received

Organizational Expenditures

____ and accounting fees_________ directors____________ meetingsState _____ fees

______ stock or securities__________ assets

Includes expenses of: Excludes expenses of:

• Must be incurred before end of ___ _____• Elections

– Deduct up to $_____ and phase out if > $50,000– Amortize remainder over ____ months

Start-Up Costs

Business ___________Business _________Operational nature _____

business starts

_____ attempts to acquire a specific business

________ business

Includes expenses of: Excludes expenses of:

• Must be incurred before ____ business begins• Elections

– Deduct up to $_____ and phase out if > $50,000– Amortize remainder over ____ months

Classifying Expenditures

May 1 Aug. 1 Dec. 31

FormCorporation

BeginOperations

End of ShortTaxable Year

Incur Organizational Expenditures

Amortize

Incur Start-Up Costs

Amortize

3 months 5 months

Compare and Contrast

Organizational Expenditures Start-Up Costs

Ordinary and Necessary

Business Expenses

Relevant Statute

When Incurred _________ new corporation

_________ new business

__________ business

When Deducted Up to $____ now; rest over __ years

Up to $____ now; rest over __ years

_____ or incurred

How Elected Statement attached to return

Statement attached to return

Not applicable

Documents

Corporate Formations Tx 8120