Accy 551
Handout Packet 4
Corporate Formation and Property Contributions
Case 1
Accy 551
Corporate Formation – Control
Is the control test in §351 met? Why or why not?
1. Olive transfer property to Quick Inc. for 75% of Q Inc.’s stock and Mary provides services to Q Inc. for the remaining 25% of stock.
2. Pete transfers property to T Inc. for 60% of T’s stock and Robert transfers property worth $15,000 and performs services worth $25,000 for the remaining 40% of T Inc.’s stock.
3. Joan and Sam (married) each own 50 of the 100 outstanding shares of V Inc. since it was formed three years ago. In the current year, Rachel, their daughter, transfers property to V Inc. for 50 newly issued shares.
4. Charles and Ruth develop a plan to form C&R Inc. On June 3 of this year, Charles transfers property worth $50,000 for 50 shares ofC&R stock. On August 1, Ruth transfers $50,000 cash for 50 shares ofC&R stock.
5. Assume the same facts as in (4) above except that Charles has a prearranged plan to sell 30 shares to Martin on October 1.
Case 2
Accy 551 – Corporation Formation
Sam transferred the following assets and liabilities to Z corporation:
In return Sam received $50,000 in cash plus 80% of Z corporation's class of stock outstanding (fair market value of stock $150,000). Lori contributed services value at $37,500 for the other 20% of stock.
a. What is Sam's recognized gain?
b. What is Sam's stock basis?
c. What is the corporation's total basis in the assets received?
d. What is Sam’s recognized gain if the bank loan was used to buy a personal auto (i.e. no business purpose for the loan)?
e. How much property would Lori need to contribute in order for her stock ownership to count towards the control test?
Case 4
Accy 551 - Corporations
Assumption of Liabilities by Corporation in a §351 Transfer
Facts
Jean currently operates Sports, Ltd. as a sole proprietorship. The business produces tennis and golf clothing in a factory owned by Jean. Three years ago, Jean borrowed $60,000 to expand the plant. The plant was pledged as security for the loan. The security agreement provides that the collateral cannot be held by anyone other than the debtor. No principal has been paid on the loan.
The factory has a FMV of $125,000 and a tax basis of $40,000.
Jean would like to incorporate the business. She plans to contribute the factory building, cash of $5,000, and inventory $5,000 (FMV = basis) in exchange for 100% of the stock. The debt will also be transferred to the corporation.
Issue
Can Jean transfer the factory, debt, and other assets to the new corporation without recognizing gain?
Variation
How would your answer change if Jean transferred a debt of $1,000? The proceeds were used to buy a satellite dish for her home.
Case 5
ACCY 551 - CORPORATIONS §357 and §351
Facts
B organized Y Inc. and transferred a building with a basis of $100,000 and a FMV of $400,000. The building was subject to a first mortgage of $80,000 which was incurred two years ago for valid business reasons. Two weeks before the incorporation of Y, B borrowed $10,000 for personal purposes and secured the loan with a second mortgage on the building. In exchange for the building, Y Inc. will issue $310,000 of Y common stock to B and will take the building subject to the mortgages. Assume B receives 100% of Y Inc.'s stock.
Issues
a) What are the tax consequences to B on the transfer of the building to Y Inc.?
b) What result if B did not borrow the additional $10,000 and, instead, Y Inc. borrowed $10,000 from a bank and gave B $310,000 of Y Inc. common stock, $10,000 cash and will take the building subject to the $80,000 first mortgage?
c) Is the difference in results between (a) and (b), above, justified?
d) When might there be legitimate business reasons for a corporation assuming a transferor's debt or taking property subject to debt?
Accy 551- Corporations
Case 6 – Property and Service Contributions
1. As part of an incorporation, Bob provides services worth $30,000 and
transfers property worth $20,000 (tax basis $8,000) for 50% of the stock.
Cathy transfers equipment for the other 50% of the stock (FMV $50,000 and tax basis $22,000). Do these transfers qualify for §351 treatment? Why or why not?
2. Tracy has owned all 80 shares ofW Inc. for three years. The stock has a
current FMV of $200,000. She wishes to admit Norm as a new shareholder. Norm will contribute property worth $50,000 (tax basis $5,000) for 20 shares of stock. Does Norm’s contribution qualify for §351 treatment? Why or why not?
If Tracy contributes an additional $5,000 at the time Norm makes his transfer, will Norm’s transfer qualify for $351 treatment? Why or why not?
3. Quincy owns 550 shares and Zelda owns 150 shares of QZ Inc. Six years
after QZ’s formation, Lindsey contributes land ($60,000 FMV and $20,000) for 200 shares of QZ stock. At the same time Quincy contributes $30,000 cash for an additional 100 shares of QZ Inc. stock. Determine the likely tax effects of these additional contributions.
4. During the current year, Frank and Sarah decided to organize FS Inc. They received stock in exchange for the following asset contributions to the corporation:
In addition to the property transfers, Jennifer performed services in exchange for 30 shares of stock valued at $30,000.
How should each of the transferors treat this transaction? (gain/loss realized, recognized, and stock basis)
Accy 551- Corporations
Case 7 – Property Contribution Gain/Loss Property
Incorporating a Sole Proprietorship
Teri incorporates her sole proprietorship by transferring all its assets to newly formed Rocky Inc. for all 100 shares of Rocky stock, with a FMV of $125,000, and four $10,000 interest-bearing notes that mature consecutively on the first four anniversaries of the incorporation date. No liabilities are transferred. The assets transferred consist of:
Create worksheets to answer the following questions. Include IRC citations for support.
a. What are the amount and character of Teri’s realized and recognized gain or loss?
b. What is Teri’s basis in her Rocky Inc. stock?
c. What is Rocky Inc.’s basis in the property received from Teri?