Corp - Chapter 2 Formation of Corporation A Intro to...

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Chapter 2 Formation of Corporation: A. Intro to Section 351 Policy of Section 351: -“Initial” capital of corporation—assets the corp. gets in exchange for cash or other property; usually done by issuing stock or borrowing -Shareholder’s tax consequences for a corporation issuing stock for cash shareholder made a cash purchase and would take a cost basis in the shares acquired -Shareholder’s tax consequences when a firm issues stock for property other than cash taxable event where shareholder recognizes gain or loss ( FMV of stock received –Adjusted basis of the property transferred to the corporation) -Corporation’s tax consequences when a firm issues stock for property and cash the theoretical gain excess of (FMV of the cash and property received –Zero Basis in the newly issued shares) -Routine incorporaitons are tax-free to the shareholders and the corporaiotn - At Shareholder level Section 351 (a) no gain or loss is recognized if the property transferred to the corporation by one or more persons soley in exchange for is stock if the transferor(s) are in “control” of the corporation “immediately after the exchange” - Section 351-applies to both transders to newly formed and preexisting corporations -At the Corporate level Section 1032 (a) no gain or loss is recognized on the receipt of money or other property in exchange for its stock (including treasury stock) * The transfer of appreciated or depreciated property to a corporation controlled by the transferor is just a change in the form of a shareholder’s investment ex. a sole
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proprietor that decides to incorporate its business realizes a theoretical gain when the assets are exchanged for all of the new corporation’s stock , but since he hasn’t “cahsed out” not changed the nature of his investment and owns and operates the same business with the same assets, only now in a corporate solution; incorporation isn’t the right occasion to impose a tax if the transferred assets have appreciated or to allow a deductible loss if the assets have decreased in value. Section 351’s Basic Requirements to Qualify for Nonrecognition of Gain or Loss : 1. One or more persons (including individuals, corporations, partnerships, and other entities) must transfer “property” to the corporation 2. The transfer must be soley in exchange for stock of the corporation 3. The transferor or transferors, as a group, must be in “control” of the corporation “ immediately after an exchange” Definition of “ Control” Section 368 (c) (1) Ownership of stock where the shareholder has at least 80% of the total combined voting power of all classes of stock entitled to vote and (2) At least 80% of the total number of shares of all other classes of stock of the corporation Shareholder Basis and Holding Period -If section 351 applies to a transfer, any gain/loss realized by the shareholder is not currently recognized because the tax attributes are preserved. -Section 351 (a) (1)-basis
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This note was uploaded on 06/15/2011 for the course ACCT 101 taught by Professor Diaz during the Spring '08 term at Rutgers.

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Corp - Chapter 2 Formation of Corporation A Intro to...

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