[goforCPA]

Hi All,

I am really confused and need your help, hopefully on time before my exam on sunday. So the Becker materials that I am studying with for REG state the following regarding Gain or Loss recognized by the shareholder during the formation:

No gain or loss is recognized if the following 2 conditions are met:

1) 80% ownership obtained immediately after the transaction

2) No boot received (receipt of boot triggers a gain recognition)

Additionally the shareholder may have a gain recognized to the extent of the debt on the property contributed and assumed by the corporation exceeds the basis of such property.

Now I also purchased simulations from this Free CPA website and while I am going through those I came accross a scenario where the FV of the stock received is greater than the basis of the propoerty contributed by the shareholder who obtains less than 80% ownerhips. In this instance the shareholder recognizes gain for the amount of FV of the stock in excess of the basis of the property contributed.

Sorry about this long story, but the question is: If the shareholder is a less than 80% owner immediately aftter the transaction and the FV of shares exceed the basis of the prpoerty contributed is there a gain recognized by the shareholder???

October 2011-May 2013. Did not loose any credit!!
AUD - 73, 79
REG - 86
FAR - 72, 83
BEC - 80, last one, DONE!!

[nolifecpa]

yes, if you don't own at least 80% then you don't have control. so giving property to a corp for its stock is a taxable event, treated like you sold property to the corp for cash. the shareholder will have a gain of stock FMV minus property basis contributed to the corp

REG-65,71,74,73,70,74,79
BEC-60's,60's,69,71,76*,78
FAR-67,66,65,79
AUD-54,60's,65,83*,69,80
*expired

DONE

[goforCPA]

Thank you. If that's the case note that the correct answer to the below question is A. The explanation provided is that “the formation os the corporation under these circumstances is a non taxable event, thus John would report zero gain upon the formation of the corporation”. Isn't this contradicting the rule?

John and Jack organize Ace Corporation, which issued voting common stock with a FMV of $120,000. John's percentage of common stockacquired was 60% and he transferred a building to the corporation in exchange for the stock. The building had a FMV of $82,000 and basis of $40,000. It also had a $10,000 mortgage that was assumed by Ace Corp. What's the gain realized by John in this exchange?

A – $0.00

B – $10,000

C – $42,000

D – $52,000

October 2011-May 2013. Did not loose any credit!!
AUD - 73, 79
REG - 86
FAR - 72, 83
BEC - 80, last one, DONE!!

[nolifecpa]

john and jack acquired 100% of the stock (john 60% and jack 40%) so sect 351 rules apply and no gain

REG-65,71,74,73,70,74,79
BEC-60's,60's,69,71,76*,78
FAR-67,66,65,79
AUD-54,60's,65,83*,69,80
*expired

DONE

[goforCPA]

Thanks nolifecpa. What if the problem didn't mention about the 40% and only stated that Jonn gets 60% ownership tghe FV of which is $720,000 (60% of $120,000). Would the answer chsange in that case?

Would you be able to tell me the rules for g/l by the shareholder.

I only know the following:

1) No gain loss is recognized if you get 80% control and there is no boot received upon formation.

2) If the debt on the property exchanged is greater than the basis of the property and is assumed by the corporation, the excess debt over the basis of the property is considered a gain to the shareholder.

Is there any other gain/loss rules applicable to the shareholder and corporation that I should know???

Thanks!!!!!!!!!!

October 2011-May 2013. Did not loose any credit!!
AUD - 73, 79
REG - 86
FAR - 72, 83
BEC - 80, last one, DONE!!

[nolifecpa]

the only way the answer will change is if john was the only shareholder and he only acquired 60%

i would also add services in exchange for stock:

– the value of stock received for services is taxed as ordinary income to the shareholder (it is considered compensation)

– corp gets a deduction equal to the FMV of the service

– services for stock is not counted toward 80% control threshold

REG-65,71,74,73,70,74,79
BEC-60's,60's,69,71,76*,78
FAR-67,66,65,79
AUD-54,60's,65,83*,69,80
*expired

DONE

[Anonymous]

@goforCPA…Are you sure the debt is greater than the BOOK VALUE or the FMV? I am in B-law land right now…I can't remember much details on tax…:-(…I think for corp formation, besides the topic you mentioned, another important concept is the new basis on property and shareholders' shares after the formation.

[nolifecpa]

shareholder has a gain when debt exceeds basis, not FMV

REG-65,71,74,73,70,74,79
BEC-60's,60's,69,71,76*,78
FAR-67,66,65,79
AUD-54,60's,65,83*,69,80
*expired

DONE

[goforCPA]

Thank you for all your help nolifecpa…..One more question….if 2 shareholders contribute property and have stock ownership after the transaction of only 75%, do they both individually have to recognize gain if the FV of the stock is greater than the basis of the property. Also below are the rules recapped would you please let me know if this recap is correct.

FORMATION ONLY – shareholders and C corporation

1) If 80% or more owner and no boot is received than NO gain or loss is recognized (basis to the shareholder will be the adjusted basis of property contributed less any debt assumed by the corporation – assuming the debt assumed is less than the basis otherwise 4) applies)

2) If services are performed the FV of the common stock received is ordinary income to the shareholder (regardless of control ownership) (basis to shareholder is the FV of the common stock received)

3) When shareholder(s) contribute property or cash and individaully or in aggregate obtain less than 80% owenrship, than gain is recognized to the extent the FV of the stock received exceeds the basis of the property or cash. (sould the basis of the stock to the shareholder in this case be the FV??)

4) Gain recognized to the extent the debt on the property assumed by the corporation exceeds the basis of the property contributed (in this case the basis of the stock in the hands of the shareholder is zero)

October 2011-May 2013. Did not loose any credit!!
AUD - 73, 79
REG - 86
FAR - 72, 83
BEC - 80, last one, DONE!!

[nolifecpa]

@goforCPA

yes, if 2 shareholders are both at 75% ownership then they both would have gain on property contributed

recap is good

3) (sould the basis of the stock to the shareholder in this case be the FV??)

shareholder basis in corp will be the FMV of the property contributed to the corp

REG-65,71,74,73,70,74,79
BEC-60's,60's,69,71,76*,78
FAR-67,66,65,79
AUD-54,60's,65,83*,69,80
*expired

DONE

[goforCPA]

Nolifecpa…one thing on 3) above….if the share holder is already recognizing gain which is the difference between the FV of the stock and the basis of the property, why would the basis to the shareholder still be the basis of the property? Since the shareholder already recognized the difference to be a gain than the basis should be the basis of the property PLUS the gain recognized correct? This would be the same as the FV of the stock received.

October 2011-May 2013. Did not loose any credit!!
AUD - 73, 79
REG - 86
FAR - 72, 83
BEC - 80, last one, DONE!!

[Author]

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