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CORPORATE TAXATION I

CORPORATE TAXATION I. Today Introduction to §351 Preserving the gain/loss - §1032 Special Rule for Built in losses Do Problem on page 62 Intermountain Lumber v. Commissioner Rev. Rul. 2003-51 Do Problems on page 71 Revenue Ruling 68-55 Do Problem on page 81 Time permitting

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CORPORATE TAXATION I

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  1. CORPORATE TAXATION I • Today • Introduction to §351 • Preserving the gain/loss - §1032 • Special Rule for Built in losses • Do Problem on page 62 • Intermountain Lumber v. Commissioner • Rev. Rul. 2003-51 • Do Problems on page 71 • Revenue Ruling 68-55 • Do Problem on page 81 • Time permitting • D'Angelo Associates v. Comm'r • Rev. Rul. 70‑140 • Rev. Rul. 79‑194

  2. Implications on the Transferor Group • §351 • Requirements • one or more persons (including entities) transfer propertyto a corporation; • transfer must be solely in exchange for stock of corporation; • transferor(s) as group must be in control of corporation immediately after exchange • control = 80% of vote and value • Multiple classes of stock issue – must meet control of each • §351 is applicable to existing and newly formed corporations

  3. Implications on the Corporation • §1032(a). • We are just deferring the gain, not forgiving it altogether. • carryover basis to corporation in shareholder assets (gain hasn't been taxed yet) (362(a)) • Special Rule for Built in losses – §362(e)(2) – If property with a built-in-loss is transferred to a corporation, then the basis is limited to the FAIR MARKET VALUE, or the shareholder can elect to limit the basis in his stock to the FAIR MARKET VALUE of the contributed property (§362(e)(2)(C)). If it is contributed with additional property, the rule applies to the extent that the property as a whole has a net built-in-loss (§362(e)(2)(A)(ii))

  4. Problem Page 62 • A => $25,000 for 25 shares • B => $10,000 of inventory with a basis of $5,000 for 10 shares • C => $20,000 of land with a basis of $25,000 for 20 shares • D => $25,000 of equipment (depreciated) with a basis of $5,000 for 25 shares • E => $20,000 of installment note with a basis of $2,000 for 20 shares

  5. Problem Page 62 • Who is part of the Transferor Group? Who transferred “property”? • A => $25,000 for 25 shares • B => $10,000 of inventory with a basis of $5,000 for 10 shares • C => $20,000 of land with a basis of $25,000 for 20 shares • D => $25,000 of equipment (depreciated) with a basis of $5,000 for 25 shares • E => $20,000 of installment note with a basis of $2,000 for 20 shares

  6. Intermountain Lumber v. Commissioner • Facts: • S incorporates S&W Sawmill, Inc. • Minutes after incorporation, S announces and documents that he will sell 50% of his stock to W for $500 per share • Issue: Did the incorporation qualify for §351? • Was W part of the transferor group? Why not? • Did the subsequent sale to W destroy the control necessary for the transaction to qualify for §351?

  7. Revenue Ruling 2003-51 Step 2: Step 3: 40 Y Sub Corp Shares X Corp Y Corp $30 Plus Assets 40 X Sub Corp Shares 40 Y Sub Corp Shares Y Sub Corp $40 Step 1: Cash & Assets X Sub Corp Shares 40 Shares of X Sub Corp X Sub Corp Step 4:

  8. Revenue Ruling 2003-51 40 Y Sub Corp Shares X Corp Y Corp $30 Plus Assets 40 X Sub Corp Shares 40 Y Sub Corp Shares Y Sub Corp Cash & Assets X Sub Corp Shares X Sub Corp

  9. Problems on page 71 • Part A • Does it A’s transfer qualify under §351? • Why or why not? • Does it A’s transfer qualify under §351? • Why or why not? • Part B • Does it A’s transfer qualify under §351? • Why or why not? • Does it A’s transfer qualify under §351? • Why or why not? • Part C • Does the gift to the daughter destroy the result under B above? • Part D • Does the sale to E destroy the result under B above?

  10. Problems on page 71 #2 • For Parts A-E • Do the transfers qualify under §351? • Why or why not?

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