ch02 - H Chapter Two H CORPORATE FORMATION AND CAPITAL...

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H Chapter Two H CORPORATE FORMATION AND CAPITAL STRUCTURE SOLUTIONS TO PROBLEM MATERIALS RESEARCH PROBLEMS 2-49 This case requires the determination of the corporation’s basis in assets received upon corporate formation. This determination in turn requires the calculation of the transferor’s gain recognized on the exchange. Although the rules as discussed in the text seem relatively precise, the law provides little guidance for determining the tax consequences when multiple assets are transferred in an exchange qualifying under § 351. The IRS has prescribed rules concerning the computation of gain to the transferor in this situation in Revenue Ruling 68-55, as footnoted in the text. However, there is no clear-cut authority for determining how the aggregate basis (or gain), once determined, must be allocated to each asset. Consequently, the student normally must discover an approach that he or she can support. The author’s conclusions are discussed below. 5- Under § 362, the corporation’s basis in the assets received is the same as the transferor’s, increased by any gain. Accordingly, M’s gain recognized must be computed. Under § 351(b), M must recognize any gain realized to the extent that boot is received. When the transferor contributes multiple assets and receives boot as M has done, the issue is whether an aggregate or separate properties approach should be used. [See Rabinovitz, ‘‘Allocating Boot in § 351 Exchanges,’’ 24 Tax Law Review 337 (1969).] 5- If an aggregate approach is used, the gain realized is determined by subtracting the total basis of all of the assets transferred from the total amount of stock and boot received on the exchange. In this case, the gain realized would be $285,000 ($450,000 stock þ $50,000 cash ¼ $500,000 amount realized ± $30,000 basis in the land ± $90,000 basis in the building ± $100,000 basis in the crane). The gain recognized would be $50,000, the lesser of the $285,000 gain realized or the $50,000 of boot received. Although many are apt to accept this method as consistent with the general approach, the Service has not. 5- The IRS has employed the separate properties approach for calculating the gain recognized. In Revenue Ruling 68-55, 1968-1 C.B. 140, the gain recognized is determined on an asset by asset basis with boot allocated to each asset according to its relative fair market value. Using this method, M must recognize a $43,000 gain determined as follows: Land Building Crane Amount realized: Stock $270,000 $ 63,000 $ 117,000 Cash* 30,000 7,000 13,000 Amount realized $300,000 $ 70,000 $ 130,000 Adjusted basis (25,000) (90,000) (100,000) Gain (loss) realized $275,000 $(20,000) $ 30,000 Gain recognized: Lesser of Gain realized or $275,000 $ 0 $ 30,000 Boot received 30,000 13,000 Gain recognized $ 30,000 $ 0 $ 13,000 *Fair market value of the asset ² $50,000 cash $500 ; 000 total consideration 2-1
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It should be noted that M recognizes no loss on the transfer of the building even though he is deemed to have received boot.
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This note was uploaded on 07/26/2011 for the course TAX 772 taught by Professor Ber during the Spring '11 term at Hartford.

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ch02 - H Chapter Two H CORPORATE FORMATION AND CAPITAL...

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