Corporate ABCD Formation (C or S Corp)
Shareholder
Transferor
Transferred
Assets/Liabilities
Transferor
Adj. Basis
Shareholder/Transferor
Consideration Received
% of Stock
Owned
A
Land
$ 10,000
$60,000
(10,000)
50,000
100 Shs ABCD Corp Stock
Note receivable from ABCD
33 1/3
B
Equipment
60,000
50,000
100 Shs ABCD Corp Stock
33 1/3
C
Cash
25,000
25,000
50 Shs ABCD Corp Stock
16 2/3
Net FMV of contributions by property contributors
D
Services
?
Net FMV of contributions by all contributors
FMV
125,000
25,000
250 Shs
83 1/3
50 Shs ABCD Corp Stock
300 Shs
16 2/3
100%
$ 150,000
Does this qualify for non recognition of gain/loss by property transferors?
Yes Property contributors 80% control
Fair market value of shares?
$125k / 250 shares = $500/share
Fair market value of services?
D
50 shares x $500/share = $25,000
Stewart Tax 1 Chapter 13
1
Corporations (C or S): 351 Transfer Gain Realized/Recognized by Shareholder
Gain Realized by Transferor:
FMV of Stock Received (500/sh)
A
B
C
D
50,000
50,000
25,000
25,000
60,000
50,000
25,000
25,000
( 10,000 )
( 60,000 )
( 25,000 )
50,000
(10,000)
-0-
Money (Boot) Received
FMV Nonmoney Boot Received (note)
Liabilities Relieved
Amount Realized
Less Basis of Property Transferred
Gain Realized
10,000
0
(
0
)
25,000
Gain Recognized by Transferor:
Lesser of Gain Realized or Boot
10,000
Liabilities>Basis (N/A)
Services Exchanged for Stock
Gain Recognized (loss)
Stewart Tax 1 Chapter 13
25,000
10,000
NONE
-0-
25,000
2
Corporations (C or S): 351 Transfer Stock/Property Basis
Basis of Stock to Transferor SH:
A (100shs)
C
D
10,000
Basis of Assets Transferred
B
60,000
25,000
-0-
Gain Recognized
Service Income Recognized
25,000
Less:
Boot:
Money
FMV Property
Liability Relief
Total Stock Basis
(
)
(
)
(
)
(
)
(
)
(
)
(
)
(
)
(
)
(
)
(
)
(
)
10,000
60,000
25,000
25,000
Basis of Assets to Corporation:
LAND
EQUIP
CASH
SERVICES
SHs Basis of Assets Transferred
10,000
60,000
25,000
Gain Recognized by Shareholder
10,000
Service Income Recognized by SH
Total Asset Basis
Stewart Tax 1 Chapter 13
25,000
20,000
60,000
25,000
25,000
3
PARTNERSHIP FORMATION GENERAL GAIN/LOSS RECOGNITION
Example: Two medical doctors, Dr. Do Little and Dr. Do Lot Decide to form a partnership whereby
partner Little will have 1/3 interest and partner Lot will have a 2/3 interest in the LittleLot partnership.
Partner Little contributes $50,000 while Partner Lot contributes $100,000 of assets described as follows:
Basis
Value
Dr. Do Little (33 1/3%)
Cash
Total 150,000 x 1/3
$50,000
= 50,000
Dr. Do Lot (66 2/3%)
Equipment
35,000
Partner
Gain/(Loss)
Realized
$50,000
50,000
=
-0-
Partner
Gain/(Loss)
Recognized
Partnerships
Property
(Inside) Payable
(15,000)
Accounts Basis
-0-
$50,000
15,000
Note Rec.
20,000
-
Office Building
60,000
40,000
100,000
100,000
55,000
55,000
15,000
Total 150,000 x 2/3
=
Net FMV contributions
$150,000
$105,000
40,000
= 45,000
-0105,000
How much gain/(loss) will the partnership recognize?
Stewart Tax 1 Chapter 13
4
PARTNERS (OUTSIDE) BASIS OF P-SHIP INTEREST & P-SHIPS (INSIDE) BASIS IN ASSETS
IMMEDIATELY AFTER FORMATION W/ PROPERTY CONTRIBUTION & LIABILITY RELIEF
Value
Basis
Dr. Do Little (33 1/3%)
$50,000
Cash
$50,000
Dr. Do Lot (66 2/3%)
Equipment
35,000
15,000
Note Payable
(15,000)
Accounts Rec.
20,000
40,000
Office Building
60,000
100,000
55,000
$105,000
Total
$150,000
Little
(A)
Lot
50,000
+
(B)
+
(C)
+
(D)
+
Basis of the Property Transferred to the P-Ship
Gain Recognized by the Partner Rendering Services in
Exchange for a P-Ship Interest
Gain Recognized by the Partners if the Partnership
Qualifies as an Investment P-Ship
+
Liabilities Assumed by the Partner
( 5,000)
-
50,000
=
Partner Liabilities Assumed by the P-Ship
Basis of the Partners Interest in the P-Ship
(Outside Basis)
(E)
55,000
Cash Contributed to the P-ship
5,000
(F)
55,000
105,000
Stewart Tax 1 Chapter 13
5
Organizational and Start-Up Expenditures
(Organizational cost rules apply to C & S Corps as well as Partnerships)
(Start up cost rules apply to all trades or business)
Delta Corporation is incorporated on January 1, 2011, commences business on July 7, 2011 and elects to
have its initial tax year end on October 31. Delta incurs the following expenses between January and
December 2011 related to its organization during the current year:
2011
January 30
May 15
May 30
May 30
June 5
June 10
June 15
July 15
December 1
Expenditure
Travel to investigate potential business site
Legal expenses to draft corporate charter
Commissions to stockbroker for issuing and selling stock
Temporary directors fees
Accounting fees to set up corporate books
Training expenses for employees
Rent expense for June
Rent expense for July
Legal expense to change corporate charter
Amount
$ 4,000 SU
25,000 OC
20,000 (PIC)
15,000 OC
11,000 OC
3,000 SU
2,000 SU
2,000 Curr. Exp.
900 Capitalize
Deduction(s) on 10/31/2011 return?
Organizational Cost (OC)
25k + 15k + 11k
Imm. Exp. 5k (51k-50k)
Start-up (SU)
4k + 3k + 2k
July Rent
Total Immediate Expense
Stewart Tax 1 Chapter 13
= 51,000
= ( 4,000)
47,000/ 180 months x 4 months
= 4,000
= 1,044
= 9,000
(5,000)
4,000 / 180 months x 4 months
= 5,000
=
89
= 2,000
= 2,000
12,133
6