August 11mgmt127b

August 11mgmt127b - $4 in stock 2008 August 11, Shareholder...

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Shareholder Basis: $2 FMV: $5 $4 in stock $1 in cash Corporation Shareholder Basis: $2 FMV: $5 $4 in stock $1 in cash Corporation Shareholder $1 million stock Services Corporation 3 years Pay tax on FMV of the stock Day 1 Pay tax on $1 million Shareholder Cash or property Stock Corporation Shareholder $20 million Cash: $15 million Movie Studio e never delivered deeds to the property, and collected cash as if he sold it to the company. Property Constructive Dividends August 11, 2008 MGMT 127B Section 351 continued… Sometimes transactions are impure, meaning you don’t purely get stock. You don’t purely get a cow for a cow. My cow is worth $5 and yours is worth $4. If we want the swap to be fair, you must add something.
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What happens if you get boot? What if you get stock $4 in exchange for your property, which is worth $5? You say that’s not fair and you get $1 in cash. Recognize the boot received, not to exceed your realized gain. Recognize boot, but never more than you made. In this case, the gain is $3 (FMV-Basis). The boot is $1, so your recognize $1. Book the newly received stock at what it’s worth, less the postponed gain. FMV of the stock: $4 Postponed Gain: $2 ($3 gain less $1 of boot) Basis: $2 Another way of doing it: {$2 of carryover basis + $1 gain recognized}– $1 boot received = Basis of $2 You ought to have a $3 of basis in everything. However, you remove the cash (boot received) to get a basis of $2. Set of assets should be $3; the $1 should go to cash, and the remaining $2 towards the stock. Basis in cash and noncash are kept separate. Debt Relief in Section 351 What if instead of getting $1 cash as boot, you got $1 of debt relief benefit. Normally, when you escape $1 of debt, it improves your liquidity. Economically, you have made a dollar. In tax law, it is normally considered boot. Problem… Example
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You have a consulting practice, and although you don’t have a lot of physical assets, you do work, and you bill people, so you have accounts receivable. You also have accounts payable. If you have employees, you have wages payable. If you were to transfer your assets in, and your liabilities in, and you had a fair number of liabilities that the corporation took of your hands, you would have a lot of debt relief benefit. Your personal balance sheet improves, so an argument can be made that it should be treated it as boot. If we treated it as boot, you would have a lot of debt relief benefit and that would create a lot of income for you. The whole purpose of Section 351 would be put in jeopardy. Incorporation for most people, most of the time, would no longer be tax-free. Debt relief will not be treated as boot, unless you have a specific tax avoidance purpose. Is it normal if you are incorporating your business to transfer all your receivables and all
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This note was uploaded on 10/02/2008 for the course MGMT 127B taught by Professor Klein during the Summer '08 term at UCLA.

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August 11mgmt127b - $4 in stock 2008 August 11, Shareholder...

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