@bourne that looks correct. This is what I have from my notes (taken from another 71 board and I added some info as well)
-IRC 351 → (a) No gain or loss shall be recognized if property is transferred to a C corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (80% or more control defined section 368(c) of the corporation → shareholder gives corporation property and corporation gives shareholder stock then there is no gain or loss unless corporation also gives shareholder cash or property in addition to stock
Exception to IRC 351: However, shareholder would recognize taxable gain if shareholder receives cash or property in addition to stock
(1) gain (if any) to such recipient shall be recognized, but not in excess of—
(A) the amount of money received, plus
(B) the fair market value of such other property received; and
(2) no loss to such recipient shall be recognized
Example:
4 people start a C corporation for 25% interest each. All of them contribute property or cash, no one contributes services. **Since no services are contributed for stock… at least 80% (in this case 100%) of the corporation is now controlled by people who donated property, so section IRC 351 applies and no gains will be recognized EXCEPT for people who get cash or property back from the corporation.
Jones contributes this to the corporation for his 25% share of stock and also gets $10,000 cash:
**Stock exchanged for services is not counted toward the 80% control threshold. No gain or loss recognized when services are given in exchange for stock. The shareholder basis is the FMV of the services given
FMV of property given: $120,000
Liability on property given: $60,000
Jones basis of property given: $100,000
Cash contributed: 0
Jones needs to recognize a gain since he got 10k cash from the corp. His gain realized would be 20k (120K FMV -100K basis) but he only got 10k cash so his recognized gain is only up to that amount $10,000
(recognized gain is lessor of $10K boot received or $20K realized gain).
JONES (shareholder) basis in the 25% stock is now: 100,000 (basis in property given) + 10,000 (recognized gain)– 10,000 (boot received) – 60,000 (liability given up) = 40,000 (stock basis since cash is received)
CORPORATION basis in Jones 25% = 100,000 (basis given) + 10,000 (recognized gain) = 110,000
Corporation basis does NOT factor liability assumed or boot received/given → that is for shareholder basis
Same example as above but with different numbers. Shareholder gives property (but not cash) in exchange for Corporation’s stock. Corporation also gives shareholder $10K cash (so shareholder has to now recognize gain)
FMV of property given: $105,000
Liability on property given: $60,000
Jones basis of property given: $100,000
Cash contributed: 0
Cash received $10,000
Recognized gain in the smaller of $5,000 realized gain or $10,000 boot received
So, the gain recognized is $5,000 ($105K FMV – $100K basis)
100,000 (basis in property given) + 5,000 (recognized gain)– 10,000 (boot received) – 60,000 (liability given up) = 35,000 (basis in property for shareholder in a Corporation)
Basis for corporation would be: $100K (basis) + 5K (recognized gain) = $105K (corporation basis)
Corporation basis does not factor liability assumed or boot received/given → that is for shareholder basis
.