Chapter 14 — Corporate

Formations
Overview
Choice of Entity
Sole Proprietor Partnership/LLC S Corp. C Corp

Tax
State Tax

Liability

Other Factors
Loss Utilization
Benefits
Administrative costs
Check the Box Regulations
Internal Revenue Code – Section 351

Sec. 351.TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR

351(a)General Rule.—
No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in
exchange for stock in such corporation and immediately after the exchange such person or persons are in
control (as defined in section 368(c)) of the corporation.

351(b)Receipt of Property.—If subsection (a) would apply to an exchange but for the fact that there is received,
in addition to the stock permitted to be received under subsection (a), other property or money, then—

351(b)(1) gain (if any) to such recipient shall be recognized, but not in excess of—
351(b)(1)(A) the amount of money received, plus
351(b)(1)(B) the fair market value of such other property received; and

351(b)(2) no loss to such recipient shall be recognized.

Contributions to a Corporation – Section
351
• Taxable to shareholder, unless Section 351 Requirements are satisfied

• Section 351 – Basic Statutory Requirements

o Transfer of Property

o Solely in Exchange for Stock

 If something besides stock is received (i.e., boot), SH must recognize gain to extent of
“boot”

o Transferor(s) must control corporation immediately after the transfer

 Control is at least 80% Ownership
Contributions to a Corporation – Section
351 (continued)
• What is Property? (not services)

• Solely for Stock

• Gain is recognized to extent of “Boot” (i.e., anything except stock) received.

• Allocation of boot to multiple asset contributions

• Boot is allocated based upon fair market value of assets (NEWCO Example).

• Control is 80% of stock.

• Accommodation transfers of property do not qualify

Problem 52
• .
Shareholder’s Basis and Holding Period
• Shareholder's Basis (Section 358)

• Basis of property transferred

+ Gain recognized
- Boot Received
- Relief of liabilities
= SH’s Basis in Stock Received

• Holding Period of stock

• Tack time of property ownership for capital and 1231 assets
Corporation’s Basis in Property Received
• Corporation's Basis (Section 362)

Basis of property transferred (i.e., carryover basis)

+ gain recognized by transferor
= Corporation’s Basis in Property Received

• Holding Period of property

• Add shareholder’s holding period
Transfer of Liabilities to a Corporation
• General rule - liabilities are not boot for purposes of gain recognition, but are
boot in calculating the transferor's basis in stock received.

• Two exceptions where the contribution of liabilities results in gain recognition

• Tax Avoidance Motive (357(b))

• All contributed liabilities treated as boot for gain recognition.

• Liabilities in Excess of property Basis (357(c))

• Not including payable that will give rise to a deduction when paid by the
corporation.
Corporate Gain or Loss
• No gain or loss recognition to corporation (section 1032)
Problem 59
Problem 109
Intentional Avoidance of Section 351
• Section 351 is mandatory.

• May result in double tax on gain not recognized by shareholder