Corporations

Corporation Notes Dump

Corporation Intersection of § 351 Nonrecognition

358 Basis to Distributee

351 and 1.351-1

1.61-6

1.1001-1(a)

1.1002-1 1.1032-1

1.1361-1(l)(l) [Italic L] - A corporation that has more than 1 class of stock does not qualify as a small business corporation. -- Control means: Not ventures, not debt, but stock

368(c) and 1.351-1

Base Notes: Stock becoming worthless 83(a) and regs

A minority transferor transferring a relatively small proportion of the total corporation assets may have a taxable event and may not fit under §351. Ex. A and B form a corporation, A transfers 99.9% of the total value of the new Corp but B only transfers 0.1%; B may have a taxable event. P 3-7 B&E

Major Requirements of 351

1) One or more persons must transfer property to a corporation; 2) The transfer must be solely in exchange for stock in such corporation; AND 3) The transferor or group of transferors must be “in control” of the corporation immediately after the exchange, as defined by § 368(c).

If these requirements are met 1) The transferor(s) do not recognize gain or loss on the exchange; 2) Under § 362, the transferee corporation taxes over the transferor’s basis in the property it just received. 3) Under § 358, the transferor’s basis in the stock received is the same as the transferor’s basis in the property transferred.

If the transaction failed only because the transferor received consideration in addition to the stock (“Boot”) then §351 can still apply in part. See B&E 3-21

§ 351(d) exceptions to §351 generally. (d)(1) Exchange services for Stock - Throws a monkey wrench in everything - B & E P 3-10

Zero-Basis problem If two Corporations exchange stock, they each get a zero basis in the stock received AND NOT a cost basis. Rev Rule 74-503 1974-2 CB 117 P 3-9 B &E Own Note in exchange for Stock Tax Court does not recognize the note as property.

Boot discussion B&E P 3-20 – Example of Boot calculation. - Timing and Character of Boot 3-22 Corporate Debt received as Boot - Most likely falls under 453(f)(6) Installment Sale

Lesson 3 Q 1 Amount Realized $100 Adjusted basis 50; gain recognized 50; character: depends on the asset

351 is an exception from 1001; like 1031, 721 - except as otherwise provided means 1031, 721, 351 - Nonrecognition sections

1012 cost basis

Transferring stock in exchange for land - assuming there is control - need control to have - Assume General Rule Applies

Corporation does not recognize gain on the issuance of its own stock - 1032? maybe?

Corporations basis in the land is $50.00 Shareholder's basis in his stock? $50.00

This is not 355 - that is a course in its own 358 and 362 = basis --> Transferred Basis --> 1223 Tacked Holding Period

722, 723 Carryover = Transferred basis --> 1223 Tacked Holding Period

This is 1223(1)

Q2 The 25 shares are ordinary income to B - Services are not property

If we cannot count B, then A doesn't have control and A must pay ordinary income Tax

351 does not apply to services

The Corporation does not pay tax under 1032 for giving shares in exchange for the services.

Q3 is illustrated by 1.351-1(b)(2) Example 1 Accommodation Transfer? Maybe? 3.08[1]

Maybe disguised compensation? Maybe indirect sale?

351 applies, but something is going on in the background - probably compensation; maybe a gift; maybe part-sale-part-gift. Would have to bifurcate the basis.

Between the corporation and the 2 guys the transaction is clean; however, it is fishy between the two guys.

Q4 Rev. Rul. 59-259 It would be meaningless to treat all nonvoting shares as fungible. P 3-45

Q5 - instead of paying money for services, the corporation makes a payment in stock Stock in exchange for Services - A is already a shareholder

351(d)(2) Indebtedness - its not stock for property so 351 doesn't apply.

How to deal with this transaction - A has a receivable; - A expects 10 but receives 6

The 4 is a loss

267(a) related parites, do not let related parties take a loss.

Can the corporation have income? No, 1032

the $6 is 1032 - the $4 is Cancellation of Debt

So the Corporation has $4 of CoD income; run the 108 rules; see if its insolvent etc.

Q6 Nonexclusive license is not property - Tell the client "I dont know" Whats the nonexclusive license worth?

Exclusive license will be property - nonexclusive license is questionable.

Q7 Contribution of appreciated property worth $80 Then A gives 1/4 of the shares to (B)) the employee,

both A and B gives something to j

If 351 does apply: No gain upon incorporation - A's basis: under 358 is $60 Stock's basis is carried over under 1223 FMV in stock is 80 with Basis of $60

Corporation's basis in property is $60 No gain on stock 1032

Shareholder gives stock to Employee, - Payment of stock for debt Amount realized is 20, adjusted basis is 15; gain 5 LTCG of $5

3.10 - Transferor's basis for stock

Employee has ordinary income of $20.00 Basis in the stock = 20

If 351 does not apply Shareholder has gain of $20 of a 1231 gain 362 Flush Language - Corporate gets a transferred basis plus the amount recognized by transferor - New Basis for both Corporation and Shareholder [not carryover]

No gain - getting payment of debt basis = amount realized

Question 9) A owns 20% of T's Stock X wants to acquire a controlling interest Remaining 80% is public

How can A and X use 351 to cash out the public and satisfy a's desires.

Form a new corporation and give preferred stock. A and X form a new company 351(e) is this an investment company?

Doing a Type A Statutory Merger [not Type D] - under Mi law

New Company is a subsidiary - the cash goes into T Co. and gets disbursed to the public shareholders

361(a)(1)(A) X then has 80% of T

The public holding the 80% were "Redeemed out"

He cannot get the "Tender Offer"

Could 332 Merge Up

Corporations

Page 14 number 3 Half of X's stock

Boot coming back to shareholder A is getting stock and boot (cash) in exchange for property 351 partially applies

A has nondepreciable property worth To X Corp

X Corp gives stock and cash

351partially applies 351(b) says that there is recognition of $50 $50 boot

Investment property = 1221 Longterm or short term

A's basis in stock is $40 - 358 Basis to Distributees

Basis of the property Decreased by FMV of other property (except money) Decreased by any money received by the taxpayer Decreased by the amount of loss to the taxpayer which was recognized

AND INCREASED BY The amount which was treated as a dividend The amount of gain to the taxpayer which was recognized on such exchange (other than dividend)

Effect on Corporation Basis 362 Property acquired by issuance of stock Basis = Basis in the hands of transferor increased by the amount of gain recognized to the transferor on such transfer

Corporation's Basis = 90 FMV 100 Gain =10

--- 453 Installment Sale A is receiving a note Stock for 50 5 year 1 Note for 50

Basis is 40 in the land 60 gain realized

Gain Recognized 50 - Not Property 351(d)(2) just like services so it falls back to 1001 [get kicked out of 351]

1.453 - 1(f)(3) Under 358 Basis increased as payments received.

Basis Increase by transferor's gain and decrease by amount received. $10 each year for 5 years

If this was 1245 property - then 453(i) would not allow the spread out - 453(i) would recognize the income in the year of disposition

1245 and 453 don't work well together

- A is giving A's note to X in exchange for X's stock Different from A is giving X's note back to X in exchange for X's stock

NOT EVIDENCED BY SECURITY For 351(d) to apply indebtedness of someone else's Transferee

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Basis = 40 Gain = 50 Receipt of Cash = 50

358 Basis to Distributees - similar to 1031

Nov 8 Lesson 3 Q4

1.453-1(f)(3) P 1220

Put all the basis in the property in the stock; as collect on the notes, pick up gain. Character of that gain is the character of the transferred asset.

A gets $40 basis in stock; 0 basis in note Corporation gets $40 basis in the received property - as gain is picked up by A, the corporation gets 362 Carryover basis. Every time the note is paid, the corp has to recognize the gain on the corporate side - recognized over time because of note.

Lesson 3B Q5 P 14 Pure Preferred Stock Redeemable in 5 years 351(g) the preferred stock is treated as property so it kicks you out to §1001 and its an exchange of property for property.

§267 could disallow a loss deduction related tax payer cannot recognize a loss in a transfer to a related party

Lesson 3B Q6 Assumption of Liability 357 Corporation Assumption is different than in Partnership and Normal

357(a) creates a situation different than normal Assumption of Debt rules [not like cash]; 357(b) - if the transaction fails the (b) test then it's treated like cash (boot); 357(c) - When a piece of property is exchanged and the liabilities are in excess of basis, then the EXCESS is a gain from sale or exchange of Capital Asset or Non-Capital Asset [as the case may be].

Hypo: 40 Basis; 50 Liability; 10 Gain Recognized [Characterized as the property transferred] --> Basis is 0 in the stock received.

3 Tests whenever liability goes into a Corporation: 1)	357(b) 2)	357(c) 3)	357(a)

358 Basis to Transferor

What is the basis of the Corporation? P 3-59 for basis change when assumption. Lesson 3B Q7 No assumption so 357(d) kicks you to 351

8.05 ; 8-39 Constructive Distributions? Maybe (maybe not) § 301 Distribution List § 301(b) List

§ 316 § 317

Lesson 3B Q8 3-91 B&E

Incorporate an ongoing business. Tackle the Liability first - Does it pass 357(b)?

Tacked Holding Period for the 0 basis in the stock 1223 - no - not a capital asset at the time of exchange (exception 1231, 1221)

Nov 22 – Quesiton 5 P 29

X Leases rental property Tennant pays the rent directly to Shareholders - However, this is still payment to the corporation and

60 increases e&p; not reduced by Tax (no deduction) – distribution goes out to each shareholder $30 each.

Question 6 X sells building under market value to shareholders Distribution of property to shareholders - 311(b) Treat as if sold to third party; recognize gain. - Sold for $100; basis of 100; FMV of 200

Start out with $94 E&P; Gain of 100 [§311(b)] Be careful because 200 is going out to shareholders, but shareholders is sending $100 back - Actually only a $50 distribution to each A and Y - all dividend - 312(c)

Shareholder’s Basis in property received 311(b) each get $100 (owned jointly)

Question 7 Shareholders are overpaying for the property now - no real distribution element - Corporation really sold it for $200; the $100 is a contribution of capital §118; reg 1.118-1

8.05; 8-39 Constructive Distributions Salary & Fender Sales

Reasonable compensation; if its not reasonable compensation it might be a dividend without a deduction to the corporation. Excessive Salaries paid to shareholders or their relatives P 8-42; 8.05

--- Preferred stock worth $100 - No tax cost basis; 1032 corporations don’t pay gain on the issuance of their stock. - It’s a salary – nothing to do with respect to its stock. - Not a distribution - If it really is a dividend then its under 305

Question 8 “Accounts Receivable Shareholder” Lucky if 7872 Imputed Interest happens

Looks like dividends

Lesson 6 Redemptions and Partial Liquidations 302(d) If the corporation buys its shares back, it’s a distribution [301 applies] (shareholder must prove it otherwise)

Question 1

Alternate: 1.1012-1(c)(2) 1.1012-1(c)(1)

Redemption? Pre-arranged plan for B to buy the stock from A,

302 (d) redemptions treated as distributions of property -

When Corporation buys stock from its shareholder Don’t look at 302(a) from top down - Look at it from bottom up

Trying to make it not be a distribution

A redemption is a dividend unless it meets 302(b) Go 302(b)(4) 302(b)(3) 302(b)(2) 302(b)(1)

302(b)(2) look at Question 2; This is a substantially disproportionate Distribution – this means he sold half of his shares for $600; should have been a distribution, but its not because its substantially disproportionate redemption. Test is below 40, but you have to move 80% [ 80% swing; must move below 80% of his previous voting shares for all voting classes].

$300 capital gain instead of a $600 distribution [--- if its not a substantially disproportionate distribution, then must do the dividend calculation] - pro rata; 500 * 60 would have had $300 dividend; 300 reduction of basis or capital gain. ]

--- If the whole thing was treated as a dividend; The remaining basis gets reallocated to the remaining shares.

Question 3 A sells 20 shares back to X for $400 - Not below 50% so cant use 302(b)(2) 302(b)(2)(D)

302(b)(1) facts and circumstance test

Not in exchange for stock – not under 301

1239 does not apply because it is not a capital asset.

Lesson 3B Page 12 Do Question 1 at home

Question 3 Step Transaction P 349

Question 4 5-year notes instead of cash

Not doing lesson 4, doing Lesson 55

Lesson 5 Question 5

2010: E&P = 0 December 1 2011 Declared December 15 Record Dec 31 Mailed checks

Jan 2 2012 checks received

When are the divedents paid? The day they declare? The day the mail the check? The day their received? Day they're recorded? - Its the Date of Payment (Dec 31) Rev Ruling 65-23 [also for in-kind property distributions] - Date of Valuing any property distributions

When does Shareholder A have to recognize income? When he receives it because he is cash method.

Shareholder Y is Accrual Method; 1.301-1(b)

EVERYONE IS ON CASH METHOD FOR DIVIDEND

Time of Inclusion 1.301-1(b) [Included in the gross income of the distributees when the cash or other property is unqualifiedly made subject to their demands. However.... { 1109 }

Constructive Receipt - Lawyer receives a check on Dec 20 but does not deposit it until Jan 1; he has received it but does not deposit it to avoid tax.

Question 6 Sell for 540

A Sells his Stock for 540 on Deccember 10 2011 [Sold to C] When C Pays for it, he gets a 1012 Cost Basis of 540. A has an amount realized of 500, with 40 basis, 500 Capital Gain.

Effect of this deal on C

C gets Dividend of 50 and reduction of Basis of 50 and ends up with a basis of $490. Split with Y.

E&P is treated as being paid out Pro Rata; gets devided equally 50/50.

Question 6 Alternative Y sells his stock to Z on Dec 20 for $440. - Y's basis is 100; sells for $440 = $340 Capital Gain - No longer owns the stock and then gets the divdend; 301(c)(1) $50 301(c)(2) $0 301(c)(3) $50

Dividend was declared, He was the owner of record; buyer knows he is not going to get the dividend so he pays $100 less.

Question 7 A owns all of X Corp Stock Basis of $1mil X owns $1mil of cash and a hotel. X has 1mil of E&P

B wants to buy the stock of X for $5M after X has distributed teh cash

B will pay $6M for the stock without a prior distribution to A

Doesn't currently make a difference; A would get a 1M dividend at 15% and 5M sale at 15%; or 6M at 15% in sale to B.  - Right now no difference between dividends rate and capital gains rate; might change.

Step Transaction Doctrine

Corporations get a 70% hair cut under 243

Next class 5(B) P 27 and 6(A) Distributions in Kind and Constructive Distributions

Taxing Dividends at the same rate as capital gains (generally 15%) - Still in effect but discussion to change

B&E 8.20 - 8.22

Code 301(a) - 301(c) 311 312(a) - 312(c)

316(a) - 317(a) 337(d)(1) 1001 1222(3)

Regs 1.301-1(g) 1.312-3

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8.20 Property Distributions in Kind P 8-70 "The term Distribution in Kind is used here to m ean a distribution of property other than money or the distributing corporation's own stock or rights to acquire such stock. See IRC 317(a)

Liquiditating Distributions Non-Liquidating Distributions

LD IN Kind and NLD in Kind.

Employee-Shareholder receives APPRECIATED property or DEPRECIATED property as COMPENSATION, then the corporation recognizes gain or loss under §1001

General Facts A Owns Half the Common stock of X Adjusted Basis of $40

Y Owns other half Adj Basis $100

X's Current E&P is $94 X has no accumulated E&P

Lesson 5B Question 1 311(b) Distribution to Y of ATT Stock Basis 40/ FMV 100 Distribution to A Basis of 60 and FMV 100

Example on P 8-83 Exemplifies this

Effects on the corporation; 311(b) Sold at FMV under 1001 - Generated $100 + 94 = 194; Corporation has to pay tax on the Gain. 94 + 66 = 160 Interim E&P

P 8-85 E&p = 94 + 40+60 - [100+100] = -6 but cannot go below 0? Final E&P Look in B&E for Calculation

Distribution is $200; 160 as dividend; $20 reduction in basis [80 to each/20 to each]

To Y 301(c)(1) Dividend = 80 301(c)(2) Reduction of Basis = 20 301(c)(3) Gain = 0 Basis in X Corp Stock after Transaction $80

To A 301(c)(1) Dividend = 80 301(c)(2) Reduction of Basis = 20 301(c)(3) Gain = 0 Basisin X Corp Stock after Transaction $20

Basis in AT&T's Stock = 100 1223; which section? Its not an exchange; it falls under 1223(2) - No Tacked Holding Period

Losses on Distribution of Depreciated Property p 8-77 Section 311(a)(2) Corporations do not reocgnize loss on distribution of depreciated property

Effect on Earnings and Profits 8-85; 1.312-1

301(c)(1) Dividend 301(c)(2) Reduction of Basis 301(c)(3) Gain

Y $2 Reduction A $4 reduction in basis

Alternative One stock had a gain of 60 the other had 20 loss

Loss of $20 P 8-77 B&E; 8-86 $20 Loss is 1) 311(a)(2) not recognized 2) Distribution is a dividend to the extent of the proprerty's FMV up to the amount of E&P 3) E&P is decreased under 312(a)(3) but not below zero by the ADJUSTED BASIS OF THE PROPERTY

34% of $60 gain = $20.4 Net increase is 40

90 E&P plus Net Increase of 40 = 134

Distribution = $200; but 60 is a gain and 20 is a loss. Of the FMV

134 is reduced by 100 for ATT Appreciated Stock and reduced by 120 for Loss Property. E&P goes down to 0.

Lesson 5B Question 2 A Adjusted basis $60; FMV $100; Subject To Non-Recourse Debt of $50 Y Adjusted Basis of $40; FMV $100; Subject to Debt of $50. ---> 357(c) 1.301-1(g)

[Turning a Corporation into a Partnership] 311(b) Liquidating distribution to Shareholder(s) and then the Shareholders forming the partnership via 721.

Must look at all the assets including good will.

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If you see cash or property coming out, first find out E&P to see how much can be a dividend.

MUST PAY ATTENTION TO GOOD WILL