Chapter 4 Cheat Sheet PDF

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Section 351: No gain or loss shall be recognized Problem 38: upon corporate formation or if a shareholder Allie forms Broadbill Corporation by transferring land (basis of $125,000, fair market value of $775,000), purchases stock for an existing corporation if 1) property is given to the corporation which is subject to a mortgage of $375,000. One month prior to incorporating Broadbill, Allie borrows 2) stock is given to shareholder 3) everyone doing 1 or 2 must have control of the $100,000 for personal reasons and gives the lender a second mortgage on the land. Broadbill Corporation corporation immediately after the exchange. Control = 80% of total shares and stock issues stock worth $300,000 to Allie and assumes the mortgages on the land. FMV of all stock outstanding. a. What are the tax consequences to Allie and to Broadbill Corporation? Corporate basis = Recognized gain is lesser of b. How would the tax consequences to Allie differ if she had not borrowed the $100,000? When both "b" and "c" apply only use "b". adjusted basis in property boot or realized gain Character of gain is capital +gain recognized by the shareholder Allie: Adjusted basis in stock Shareholder basis in stock received = get: 300,000 stock adjusted basis in property 125,000 adjusted basis of property transferred by the shareholder 475,000 debt relief +gain recognized 475,000 +gain recognized give up: (125,000) basis of land -boot received 475,000 -boot received 650,000 Realized gain -liabilities assumed by corp -liabilities transferred to the corporation 475,000 Boot (recognized gain) 125,000 Section 357: Liabilities transfer in a section 351 transaction (a) No gain Ann and Bob form Robin Corporation. Ann transfers property worth $420,000 (basis of $150,000) shall be recognized upon the transfer of a liability in a section 351 for 70 shares in Robin Corporation. Bob receives 30 shares for property worth $165,000 (basis of exchange except: (b) if any liability transferred by a shareholder has a' non-business purpose, all liability transferred by the shareholder are boot. $30,000) and for legal services (worth $15,000) in organizing the corporation. Example: Brad Adj. Basis FMV 1. What gain or income, if any, will the parties recognize on the transfer? A/R 50,000 100,000 2. What basis do Ann and Bob have in the Robin Corporation stock? Equipment 100,000 300,000 3. What is Robin Corporation’s basis in the property and services it received from Ann and Bob? Loan 75,000 75,000 A/P Icecream Cone 1 1 All of Bob's shares are included in determining control if the 10% test is met. A: If loans fail business purpose test, then $75,001 boot B: If loans don't fail business purpose test, then $0 boot FMV Property ≥ 10% FMV services Ann's recognized gain 165,000 ≥ 10% * 15,000 get? 420,000 stock Since $1 is not for business purposes the whole of debt is boot give up? 150,000 property Ann's basis: 270,000 realized gain Brad's realized gain = gain? adjusted basis of property contributed 150,000 0 boot - recognized gain Stock 324,999 +recognized gain Bob's recognized gain: debt relief 75,001 -boot Property for stock -liabilities assumed by corporation get? 165,000 stock give up? 150,000 give up? 30,000 property A/R 50,000 Corporation's basis in Ann's asset: 135,000 Equipment 100,000 adjusted basis of property contributed 150,000 0 boot - recognized gain 250,000 +recognized gain Services for stock c) if total liability of shareholder are grate than the total adjusted basis of all assets 150,000 get? 15,000 stock transferred by the shareholder, the excess liabilities must be recognized gain. Bob's basis: give up? 0 services adjusted basis of property contributed 30,000 15,000 realized gain - recognized gain What if the loan is $175,000 instead? +recognized gain 15,000 Section 351 applies 10% test met Realized gain: Brad's basis (if no gain is recognized): -boot gain? Adj basis of asset 150,000 -liabilities assumed by corporation Stock 224,999 +Recognized 45,000 debt relief 175,001 -Boot Corporation's basis in Bob's asset: -Liabilities transferred 175,000 Negative basis cannot occur adjusted basis of property contributed 30,000 give up? (25,000) +recognized gain A/R 50,000 30,000 Equipment 100,000 Brad's basis (should be): Transfer of an asset at loss for stock. Section 368 anti-loss duplication 250,000 Adj basis of asset 150,000 Tom contributes property, basis of $1,000,000 FMV 50,000 to a corporation in exchange for all its stock. +Recognized 25,000 Tax Consequences? Gain: Tom's Basis: Corp's Basis: -Boot Gain must be recognized to get? 50,000 stock 1,000,000 Adj. basis of property 1,000,000 Adj. basis of property -Liabilities transferred 175,000 prevent negative basis give up? (1,000,000) property 0 + recognized gain 0 + recognized gain (950,000) realized loss 0 - boot 1,000,000 Section 368 0 boot - recognized gain 0 - liabilities transferred 50,000 1,000,000

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