## Friday, May 14, 2010

### Corporate Formation Tax Example § 351

Tax Accounting Problem on Corporate Formation under Section 351 of the Internal Revenue Code

A and B organized AB Corporation with initial corporation of \$200,000.  A pays \$100k in cash and in return gets 1000 shares of stock.  B transfers a building worth \$100k, with an adjusted basis of \$60k.

(a) Instead of receiving \$100k in stock, B gets 100 shares of stock worth \$90k and \$10k in corporate bonds issued by the corp.  What are the tax consequences?

B recognizes a \$10k gain (up to the amount of the boot - §351(b))

Her new basis in the stock is \$60k (the basis in the building) - \$10k (of boot) + \$10k (of gain recognized) = \$70k

Corporations’s basis in the building under §362(a) is \$60k + \$10k (amt taxpayer recognized) = \$70k.

(b) How would the result change if instead of the bonds, she gets \$10k worth of 8% preferred stock?

B recognizes a \$10k gain (up to the amount of boot - §351(b)

Basis in stock is \$60k basis in building - \$10k of boot received + \$10k of gain recognized = \$60k basis in stock.

Corporations’s basis in the building = \$60k (taxpayer’s basis) + \$10k gain recognized [by taxpayer] = \$70k basis.