actg 451 chapter 14

What are the 3 major requirements of Code Sec. 351?

1. must consist of property

2. must be solely in exchange for stock

3. transferors must be in control immediately after the exchange

To be control, what must the transferor possess?

More than 80% of:

• total combined voting power of all classes of stock entitled to vote

• total number of shares of all other classes of stock of the corporation

What are the tax implications of fleeting control?

exchange may be taxable

What happens if transferors receive shares of stock or securities that are not in proportion to the value of the property they transfer?

transaction may be recast treating it as a Sec. 351 exchange followed by transfers of some stock or securities to other transferors as gifts, compensation, or loan payments

What is the treatment of stock received for services rendered?

not counted toward the control threshold, unless the transferor has transferred both services and property

What are the advantages of debt financing over equity?

• interest payments are tax deductible

• repayment of principal is tax free to the creditor

• should the debt instrument become worthless, then loss may be an ordinary loss if debt is business related

Explain the deductibility of debt financing

• deduction of net interest expense is limited to 30% of adjusted taxable income

• business interest expense may be carried forward indefinitely

• limitations doesn’t apply to businesses below the $27 million gross receipts test

What is Sec. 1244 stock?

issued by a domestic small business corporation that qualifies for certain tax benefits

Qualifications for Sec. 1244 stocks

• must be a domestic small business corporation

• must be issued to individuals

• must be exchanged for money or property

Tax treatment of Sec. 1244 stocks

• losses on worthlessness or sale can be deductible as ordinary losses

• deduction is limited to $50,000 for individuals and $100,000 for married

• gains from sale is capital gains

Who qualifies for the special treatment of Sec. 1244 stocks?

original holders of the stock

Who can issue Sec. 1202 stock?

• only small business domestic C corporation

• aggregate gross assets cannot exceed $50,000,000 anytime before or after issuance

What are the corporate requirements of Sec. 1202 stocks?

• must be an operating company actively engaged in a trade or business

• at least 80% of its assets are used in active conduct of one or more qualified trades or businesses

What is the tax treatment of net capital gains?

added to ordinary income and taxed at regular corporate rate

What is the tax treatment of net capital losses?

cannot offset ordinary income

What is the maximum deduction limit for charitable contributions in any taxable year?

limited to 10% of adjusted taxable income

How are excess charitable contributions treated?

can be carried forward 5 years

Who is considered related taxpayers?

• certain family members

• a corporation and an individual with direct or indirect ownership of more than 50%

• two corporations, if the same person owns more than 50% of each corporation

Explain deductibility of losses between related parties

not deductible for anti-fraud purposes

What is the difference between organizational and start-up expenditures?

• organizational expenditures are costs incurred in the formation of a corporation

• start-up expenditures are costs associated with setting up a new business

Explain the election of organizational and start-up expenditures

expense up to $5,000 in the first year, with a dollar-for-dollar phaseout over $50,000

Explain the amortization of organizational and start-up expenditures

expenditures not expensed are amortized over a period of 180 months or more, beginning in the month the corporation begins operations