Today in MAcc (pt.1)

This web log was originally created as a repository for trivial and insignificant things that I stumble upon. So in keeping with that principle, I'm going to start throwing up things that I am covering in class. This may help me recall important code topics down the road.


In corp tax we covered the control requirements under §351 for deferring losses and gains upon incorporation. There are three important factors that come into play when you want to defer the loss or gain. Here's an overview:

1. Property Requirement: Although §351 does not define property, courts have interpreted this as money, assets (insstallment obligations, A/R, inventory, equipment, patents, and other intangibles. Excluded are services, indebtedness not evidenced by a security, etc. Any exchange of services for stock is taxable as ordinary income at FMV. 
2. Control Requirement: According to §368(c) the transferor (individual, partnership, corp, trust) must acquire at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock. The transferors must be in control of the corp immediately after the exchange. Unless transferors of property own at least 80% of the corp's stock immediately after the exchange, the control requirement will not be met, and the entire transaction will be taxable. 
3. Stock Requirement: Under §351 no gain or loss is recognized if transferors control the corporation immediately after exchange; stock may be voting or nonvoting. Note that nonqualified preferred stock is treated as "boot" and is nonqualified if (1) the shareholder can require the corporation to redeem it (2) the corp is either required to redeem or likely to redeem, or (3) the dividend on the stock varies with interest rates, commodity prices, etc. 

If a transferor receives any money or property other than stock in the transferree corporation, the additional money or property is considered to be boot. So here's the catch: The transferor recognizes the gain at the lesser of realized or FMV of boot property received. However, under §351 the loss is never recognzied in such an exchange, regardless of boot in consideration. 


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