Corporate Formation

Question 1

Taxpayer’s Gain or Loss on Contribution in Exchange for Stock: No Recognized Gain or Loss

Answer 1

Under IRC §351, a taxpayer will not recognize gain or loss upon a contribution of property in exchange for stock if taxpayer:

(1) Transfers ONLY PROPERTY;
(2) Receives ONLY STOCK; and
(3) CONTROLS the corporation after transfer (80% of total voting power)

Question 2

Taxpayer’s Gain or Loss on Contribution in Exchange for Stock: Recognized Gain

Answer 2

If taxpayer receives stock and other property (boot) in a transaction that would otherwise qualify for § 351, then taxpayer must recognize gain up to the amount of boot received

Question 3

Taxpayer’s Basis in Stock Acquired: If § 351 Applies

Answer 3

Basis of property transferred to the corporation - cash and FMV of boot + recognized gain = taxpayer’s basis of stock received

Question 4

Taxpayer’s Basis in Stock Acquired: If § 351 Does Not Apply

Answer 4

Basis = FMV of boot

Question 5

Corporation’s Basis in Contributed Property: If §351 Applies

Answer 5

Basis of property in shareholder’s hands + recognized gain to shareholder = corporation’s basis of contributed property

Question 6

Corporation’s Basis in Contributed Property: If § 351 Does Not Apply

Answer 6

Basis = FMV of boot