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.

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