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IG_ch 04 - CHAPTER 4 CORPORATIONS ORGANIZATION AND CAPITAL...

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CHAPTER 4 CORPORATIONS: ORGANIZATION AND CAPITAL STRUCTURE LECTURE NOTES SUMMARY OF CHANGES IN THE CHAPTER The following are notable changes in the chapter from the 2008 Edition. For major changes, see the Preface to the Instructor’s Edition of the text. News Boxes Added Global Tax Issues titled Is the Deductibility of Interest Eroding the Federal Corporate Tax Base . Ethical and Equitable Considerations o Added Ethical and Equitable Considerations titled Can a Loss Produce a Double Benefit . o Removed Ethical and Equitable Considerations titled Will the Sale be Recognized . Text Changes Added Concept Summary 4-1, which shows the shareholder and corporate consequences of transfers to a corporation of stock with ad without the application of § 351 using the facts of Example 19. ORGANIZATION OF AND TRANSFERS TO CONTROLLED CORPORATIONS In General 1. Under § 351, neither gain nor loss is recognized on the transfer by one or more persons of property to a corporation solely in exchange for stock in that corporation if, immediately after the exchange, such person or persons are in control of the corporation to which the property was transferred. a. The justification for this nonrecognition provision is similar to the justification supporting other tax-deferral sections (e.g., § 1031 like-kind exchange). 4-1
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4-2 2009 Annual Edition/Instructor’s Guide with Lecture Notes (1) There has been a lack of substantive change in the taxpayer’s investment. (2) The property transferor lacks the wherewithal to pay a tax on gain realized. (3) The notion that tax rules should not impede the exercise of sound business judgment. b. Receiving cash or property (other than corporate stock) from the corporation, causes gain recognition to the extent of the lesser of the gain realized or “boot” received. (1) Boot is equal to fair market value of other property and money received. (2) Type of gain recognized (capital, ordinary) is based on assets transferred, not boot received. (3) Long-term debt securities (bonds) received in a § 351 transaction are boot and may trigger gain recognition. c. Loss is never recognized by a property transferor in a § 351 transaction. 2. Nonrecognition is accompanied by a substituted basis. Section 358 provides that the basis of stock received in a § 351 transfer is the same as the basis the taxpayer had in the property transferred, increased by any gain recognized on the exchange and decreased by boot received. 3. Section 351 is mandatory if all of the requirements of the provision are met. Property Defined 4. Definition of “property” is comprehensive. a. Property includes items such as cash, unrealized receivables, installment obligations, and secret processes and formulas. b. Definition of property under § 351 specifically excludes services rendered.
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