MODULE 36 TAXES: CORPORATE 563

Corporations are separate taxable entities, organized under state law. Although corporations may have
many of the same income and deduction items as individuals, corporations are taxed at different rates and
some tax rules are applied differently. There also are special provisions applicable to transfers of property to a
corporation, and issuance of stock.
A. Transfers to a Controlled Corporation (Sec. 351)
1. No gain or loss is recognized if property is transferred to a corporation solely in exchange for
stock
and immediately after the exchange those persons transferring property control the corporation.
2. Property includes everything but services.
3. Control means ownership of at least 80% of the total combined voting power and 80% of each
class of nonvoting stock.
4. Receipt of boot (e.g., cash, short-term notes, securities, etc.) will cause recognition of gain (but
not loss).
(1) Corporation's assumption of liabilities is treated as boot only if there is a tax avoidance pur-
pose, or no business purpose.·
(2) Shareholder recognizes gain if liabilities assumed by corporation exceed the total basis of
property transferred by the shareholder.
5. Shareholder's basis for stock = Adjusted basis of property transferred
6. + Gain recognized
7. - Boot received (assumption of liability always treated as boot for purposes of
determining stock
basis)
3. Corporation's basis for property = Transferor's adjusted basis + Gain recognized to transferor.
_C_
EXAMPLE: Individuals A, B, & C form ABC Corp. and make the following transfer to their corporation:
Item transferred _A__ __B_ $
Property - FMV $10,000 $8,000
- Adjusted basis 1,500 3,000 . 1,00
Liability assumed by ABC Corp. 2,000 0
Services
Consideration received
Stock (FMV) $ 8,000 $7,600 $1,000
Two- ear note (FMV)
Gain recognized to shareholder $ soo« 40 $1,OO
Basis of stock received 0 OC
Basis of propertyto corp. 2,000 $ 40 1,000
a Liability in excess of basis: $2,000 - $1,500 = $500 3,000 t.coo
b Assumes B elects out of the installment method 3,400 !
c Ordinary compensation income
d Expense or asset depending on nature of services rendered
8. For Sec. 351 transactions after October 22, 2004, if the aggregate adjusted basis of transferred
property exceeds its aggregate FMV, the corporate transferee's aggregate basis for the property is
generally limited to its aggregate FMV immediately after the transaction. Any required basis
reduction is allocated among the transferred properties in proportion to their built-in loss
immediately before the transaction.
9. Alternatively, the transferor and the corporate transferee are allowed to make an irrevocable
election to limit the basis in the stock received by the transferor to the aggregate FMV of the
transferred property.
EXAMPLE: Amy transferred Lossacre with a basis of $6,000 (FMV of $2,000) and Gainacre with a basis of
$4,000 (FMV of $5,000) to ABE Corp. in exchange for stock in a Sec. 351 transaction. Since the aggregate
adjusted basis of the transferred property ($10,000) exceeds its aggregate FMV ($7,000), ABE's aggregate basis
for the property is limited to $7,000. The required basis reduction of $3,000 would reduce ABE's basis for
Lossacre to $3,000 ($6,000 - $3,000). Amy's basis for her stock would equal the total basis of the transferred
property, $10,000.
Alternatively, if Amy and ABE elect, ABE's basis for the transferred property will be $6,000 for Lossacre and
,$4,000 for Gainacre, and Amy's basis for her stock will be limited to its FMV of $7,000. -