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Unformatted text preview: 4-1Chapter 4 Corporations: Organization and Capital Structure (2012)updated: August 8, 2011 Learning Objectives: Identify the tax consequences of incorporating a business two basic questions: oWhat are the tax effects on the shareholder? oWhat are the tax effects on the corporation? Understand the special rules & exceptions that apply when liabilities are assumed by the corporation. Understand how to compute adjusted basis for the shareholder (in the stock) and the corporation (in the assets). Recognize the tax differences between debt and equity in the corporations capital structure. Recognize tax treatment of shareholder losses from investments worthless securities and bad debts. I. Incorporation in General A. Must file Articles of Incorporation with the appropriate state agency & and pay the appropriate fees the Articles of Incorporationtypically include: 1. the name & address of the corporation 2. the period for which the corporation will exist 3. the purpose for which the corporation is organized 4. the number & type of shares of stock the corporation could issue 5. the provisions relating to the regulation of the internal affairs of the business 6. the number and names of the initial board of directors B. The tax consequences of incorporating a business some basic questions: 1. What are the tax effects on the shareholder/transferor?...Gain or loss realized, gain or loss recognized, character (if any), basis and holding period of the stock. 2. What are the tax effects on the corporation?...Basis and holding period of the asset contributed, and consequences of other tax attributes (depreciation method, potential recapture). C. Other issues to consider when owners are incorporating an existing business or making transfers to an existing corporation include: 1. Which assets & liabilities should they transfer to the corporation? 2. What should they receive in exchange equity or debt, or some combination of the two? 3. Should the assets be leased or sold to the corporation? 4. Do the owners want Sec. 351 to apply? 4-2II. Tax Consequences of Corporate Formation Overview A. It is possible to achieve a tax-free corporate formation if the provisions of Sec. 351 are met. 1. no gain or loss is recognized by the taxpayer when PROPERTY is transferred to corporation in exchange for STOCK & the transferors have CONTROL of the corporation immediately after the exchange 2. receives a substituted basis in the stock (= basis of property transferred into the corporation) 3. exception boot received by the taxpayer triggers the recognition of gain 4. all the tax attributes (adjusted basis, holding period, depreciation method, recapture potential, etc.) generally carry over to corporation 5. tax-free treatment is mandatory if requirements are met 6. tax-free treatment applies to all transfers if, as a group they control at least 80% of the stock For example, if H controls 50%, I controls 40%, and J controls 10%...
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- Spring '08