Corporate Tax Outline 1. Corporate Tax Regimes (Assignment 1) a. Entity Classification §301.7701 2. Property Transfers to Controlled Corporation (Assignment 2) a. §351 Transfer to corporation controlled by transferor i. (a) Three Basic Requirements §351(a) 1. One or more persons (including individuals, corps, p’ships and other entities) must transfer “property ” to the corporation 2. The transfer must be solely in exchange for stock of the corp. AND 3. The transferor or transferors, as a group , must be in “control” of the corporation “immediately after the exchange” ii. (b) Boot rules : money and nonqualified preferred stock treated as boot 1. If (a) would apply but for the fact other property or money is received I addition to stock – 2. (1) Gain to such recipient shall be recognized, but not in excess of a. (A) Amount of money received PLUS b. (B) FMV of the property 3. (2) No loss recognized 4. Boot is allocated in proportion to the FMV of the transferred property taxable boot is limited to the gain realized (boot received plus amount realized for other property transferred) 5. Boot can also be offset by losses realized 6. Nonqualified preferred stock §351(g) counts for control but is boot a. Characteristics of NQPS i. Limited and preferred as to dividends ii. Doesn’t significantly participate in growth iii. Can be voting or non-voting iv. AND v. Right to mandatory redemption vi. Variable dividend rate iii. (d) Stock issued for 1. (1) Services a. Under §1.351-1, services given for stock are ok if services are of relatively small value. Rev. Rul. 77-37 applied a 10% limit for the shareholder to still receive §351 treatment and have their stock qualify for the §368(c) control test. 2. (2) Indebtedness of the transferee corporation which is not evidenced by a security OR 3. (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 issued in return for property iv. Debt vs. Equity §385 1. To properly apply tax provisions need to identify interest as debt or equity a. Deductible interest expenses v. non-deductible distribution to s/h b. Interest receipts v. dividend receipts 1
c. Upon formation/reorganization only transfers of stock qualify for §351 non-recognition treatment, not indebtedness or notes which are treated as boot d. Advantages of debt v. equity i. Deductibility of corporation interest payments on debt v. non- deductibility of corporation dividend payments to shareholders ii. S/h tend to prefer equity, while corporations tend to prefer debt b. Step Transaction Doctrine i. §351(f) If property transferred to corporation not as part of plan of reorganization, treatment as under §311 §311(a) no g/l to corporation, §311(b) g/l recognized for transfer of appreciated property as if sold by corporation for FMV ii. Three tests 1. Binding contract test 2. Mutual interdependence test – American Bantom 3. End result test c. Corporation Tax Consequences i. No g/l to corporation §1032 ii. Corp. asset basis? (§362(a)) 1. Carryover basis 2.
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- Dividend, Corporation, controlled corporation