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What are the 3 major requirements of Code Sec. 351?
must consist of property
must be solely in exchange for stock
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
Note
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