Federal Taxes on Income - Chapter 13

What is the justification for tax deferral when a gain or loss occurs on the transfer of property to a corporation in exchange for stock?

When taxpayers transfer property to a corporation, they are trading direct ownership in the property for indirect ownership in the property (through stock ownership)

What is control in a corporation defined as?

80% or more of the corporation’s voting stock and 80% or more of each class of nonvoting stock

What are the requirements for shareholders to defer a gain or loss on transfers of property to a corporation?

One or more shareholders must transfer property to a corporation. Shareholders who transfer property to the corporation must receive stock of the transferee corporation in exchange for the property transferred. After the transfer, the transferors together must control the corporation to which they transferred the property

If the requirements of section 351 are met, is the deferral optional or mandatory?

mandatory

Are services included or excluded from the definition of property?

Excluded

What does stock not include?

Stock warrants, rights, and options

What is a boot?

Transferors who receive stocks and something in addition to the stock

How are transferors who receive stock and boot limited?

They can only recognize gains but no losses on an exchange

If a person transfers both property and service, is their ownership affected by how much stock they receive in exchange for their services?

No

What is the tax basis in a qualifying 351 exchange with no boot?

The tax basis of the property they transferred to the corporation

What is substituted basis?

The transfer of the tax basis of stock or other property given up in an exchange to stock or other property received in return

What is a shareholders holding period in the stock they receive?

The holding period of the property they transfer if they transfer a capital asset or a 1231 asset

For ordinary assets that are exchanged for stock, when does the holding period begin?

The day of the exchange

What must a shareholder who receives boot in an otherwise qualifying 351 exchange do?

They must recognize gain equal to the lesser of (1) the gain realized or (2) the fair market value of the boot received

The amount of gain recognized when boot is received is…

determined by allocating the stock and the boot received pro rata to each property transferred to the corporation, using the relative fair market values of the properties

Is the corporation’s assumption of a shareholder’s liability treated as boot received by the shareholder?

No

When is the corporation’s assumption of a shareholder’s liability treated as boot received by the shareholder?

If the corporation assumes any of the liabilities of a shareholder to avoid federal income tax or if there is no corporate business purpose for the assumption, all of the liabilities are treated as boot

Even if a liability is not treated as boot, when would taxpayer have to consider it when calculating a gain on exchange?

When the liabilities is greater than the basis of the property transferred

When does it not matter that a liability exceeds a tax basis?

When the liabilities would give rise to a deduction

Can shareholders exclude gains realized on qualifying 351 exchanges?

No

What is the formula to compute the tax basis of stock received in a 351 exchange?

Start with cash contributed + tax basis of other property contributed + gain recognized on the transfer - fair market value of boot received for stock - liabilities assumed by the corporation on property contributed = tax basis of stock received

If a liabilitiy is treated as boot what must we do?

The fair market value of boot received is subtracted once already so don’t subtract it again

If a liability causes a deduction, what is the value for gain recognized on the transfer, fair market value of boot received, and liabilities?

0

True or False: A corporation receiving property in exchange for its stock in a 351 exchange will recognize a gain or loss on the exchange.

False

What is carryover basis?

The basis of an asset the transferee takes in property received in a nontaxable exchange. The basis of the asset carries over from the transferor to the transferee.

True or False: The shareholder’s holding period in the property also carries over to the corporation

True

For ______ assets, the corporation’s holding period starts on the date it receives the assets.

ordinary

If a shareholder recognizes gain as a result of boot received, what must the corporation do?

Increase its tax basis in the property by the gain recognized by the shareholder on that property

What is the additional basis in property received by a corporation treated as?

As a newly acquired asset by the corporation

The tax law limits the ability of a shareholder to transfer a ________ to a corporation in a 351 exchange

built-in loss

Why is not recommended to transfer property that has appreciated in value?

Creates a double taxation situation

What is the double taxation situation for appreciated property?

If the corporation eventually sells that property, the corporation pays tax on the gain.

Now that the corporation is more valuable, the stock a shareholder has received is also more valuable.

When the shareholder sells their stock, they will pay tax again on that same increase in value.

What is recommended that shareholders should do with appreciated property?

Keep it personal and lease it to the corporation.

Why is it recommended to keep appreciated property and lease it to businesses?

The rent the corporation pays you is a tax deduction, which will lower the business’s taxable income. The shareholder will maintain their ownership in the asset, leading to no double-tax issue.

What is a contribution to capital?

A transfer of property to a corporation by a shareholder for which no stock or other property is received in return.

What is a corporation’s basis in a contribution to capital?

Carryover tax basis

True or False: In a contribution to capital, the corporation receiving the property does not recognize income on the receipt of the property

True

Do contributions to nonshareholders count as contributions to capital?

No and they are taxable to the corporation

What is a corporation’s basis in property received in a taxable contribution?

The fair market value

True or False: Corporations will deduct the greater of the standard deduction or itemized deduction

False

What corporations may use the cash method of accounting for the 2025 tax year?

Corporations with average annual gross receipts of 31 million or less over the 3 years before the tax year

Corporations generally are required to use the _____ method of accounting

accrual