C12-Chp-04-1B-Corp-Cap-Structure-2012

C12-Chp-04-1B-Corp-Cap-Structure-2012 - Chapter 4B...

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Chapter 4B Corporate Capital Structure Howard Godfrey, Ph.D., CPA Professor of Accounting UNC Charlotte Copyright © 2011. Howard Godfrey Edited December 31, 2010 C11-Chp-04-1B-Corp-Cap-Structure-2011
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The student should: 1. Understand the tax treatment of shareholder contributions to equity, as well as contributions by non- shareholders. Page 16+. 2. Understand the role of debt in capital structure. Page 18. 3. Understand the tax treatment of losses by stockholders, including §1244 losses. Page 23. 4. Explain §1202 and §1044. Page 23+.
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Other Considerations in a Sec. 351 Exchange. Characterization of Obligations as Debt or Equity Capital. The tax laws provide an incentive for closely held corporations to use as much debt as possible. Where debt financing resembles equity obligations, the form of the transaction will be ignored and debt will be reclassified as common or preferred stock. No single factor is controlling in determining when reclassification will occur.
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Determine the tax consequences of worthless stock or debt obligations.
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Debt Capital. If assets are exchanged for debt, whether part of an otherwise tax-free transaction or not, the FMV of the debt received is treated as boot. Interest paid on debt is deductible by the payor. Dividends paid on stock are not deductible by the corporation. Noncorporate investors who borrow funds in order to make an investment in a C corporation will find that the interest expense incurred to carry such an investment is generally subject to the investment interest limitation ; unless the investment is a passive activity and the interest expense comes under the passive activity limitation rules.
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Debt Capital. Repayment of a debt is not considered an exchange transaction. Repayment by corporation of an obligation does not result in a gain or loss being recognized by the creditor. The satisfaction of a debt instrument (e.g., note, bond, or a debenture) is an exchange for the holder of a debt instrument and gain or loss will be recognized if the amount received is different from the asset's basis.
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Capital Contributions by Shareholders. A corporation does not recognize any income when it receives money or property as a capital contribution from a shareholder. §118 If additional contributions are made without additional stock being issued, the payments are regarded as an additional price paid for the existing stock.
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The basis of property contributed by a nonshareholder is zero. If money is contributed, the basis of any property acquired with such money during a 12- month period is reduced by the amount of the contribution used for the purchase. Money contributed by nonshareholders that is not spent to purchase property during the 12-month period reduces first the basis of depreciable property, then amortizable property, depletable property and all other property. Basis is not reduced below zero.
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Worthlessness of Stock or Debt. A debt or equity investment that is
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This note was uploaded on 03/09/2012 for the course ACCT 6120 taught by Professor Godfrey,h during the Spring '08 term at UNC Charlotte.

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C12-Chp-04-1B-Corp-Cap-Structure-2012 - Chapter 4B...

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