Chapter 19

Corporate Formation,
Reorganization, and Liquidation

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Learning Objectives

1.

Determine the tax consequences of corporate

formation

2.

Identify the different forms of taxable and taxdeferred acquisitions

3.

Determine the tax consequences of a corporate

acquisition

4.

Determine the tax consequences of a corporate

liquidation
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Preview

Chapter 18: the tax consequences for

shareholders and corporations when
corporations distribute cash and noncash
property to shareholders.

Chapter 19: the consequences for shareholders

and corporations when shareholders transfer
properties to corporations

For shareholders to receive tax deferral in a

transfer of property to a corporation, the
transferors must meet the requirements of IRC
351
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Tax-Deferred Transfers of Property

to a Corporation

Section 351 Tax Deferral Requirements (gains are

deferred if the following conditions are met):

Transfer of property to the corporation

Cash and noncash properties (not include services)

In exchange for stock of the corporation

When shareholders only receive stocks (no boot)

When shareholders receive property other than stocks (boot)

Transferor(s) of property must be in control of the

corporation immediately after the transfer

Control is defined as ownership of 80 percent or more of the

corporations voting stock and each class of nonvoting stock
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Tax Consequences to shareholders in

a property transfer (no boot received)

For shareholders, they receive only stocks in exchange

for property transferred

If the property transfer qualifies for section 351:

Realized gain can be deferred (Realized gain = FMV of stock

received + liability assumed the corporation Tax basis of
property transferred)
Tax basis in the stock received = Cash contributed + Tax basis of
property contributed Liabilities assumed by the corporation

If the property transfer does not qualify for section 351:

Realized gain cannot be deferred

Tax basis in the stock received = FMV of stock

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Adapted Example 19-9/10

Al transferred some properties to a corporation. The
corporation assumed a mortgage of $75,000 attached to
the building and land. The fair market value of the 360 Air
stock Al received was $300,000. 1) How much gain does Al
realize? 2) Assuming Al meets the requirements under
351, what is his tax basis in the stock received? How
much gain does he recognize when he sells the shares at
FMV? 3) What if Al does not meet 351?

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Tax Consequences to shareholders in

a property transfer (boot received)

For shareholders, they receive property other than stocks (boot) in

exchange for property transferred

Recognizes gain (but not loss) in an amount as the lesser of (1) gain
realized or (2) the fair market value of the boot received.

Boot is allocated based on the FMV of the properties transferred

(pro rata to each property).

The character of gain recognized depends on the nature of the

asset transferred on which gain is recognized.
Inventory and accounts receivable (ordinary assets)
Long-term property used in trade or business (1231)
Investments and property used for investment (capital gain)

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Example 19-11
Suppose Al received 40 shares of 360 Air stock
with a fair market value of $315,000 plus $60,000
cash in return for his transfer of inventory, a
building, and land to the corporation. What amount
of gain does Al recognize on his receipt of the
$60,000 boot and what is its character (ordinary or
1231)?

250,000

(50,000)

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Tax-Deferred Transfers of Property to a

Corporation (shareholders)

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Example (Gain recognized by boot)

Bill transfers property with a tax basis of $600 and
a fair market value of $800 to a corporation in
exchange for stock with a fair market value of $800
and $50 cash in a transaction that qualifies for
deferral under section 351. The corporation
assumed a liability of $50 on the property
transferred. What is Bill's tax basis in the stock
received in the exchange?

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Example (Gain recognized by realized

gain)
Bill transfers property with a tax basis of $600 and
a fair market value of $800 to a corporation in
exchange for stock with a fair market value of $400
and $500 cash in a transaction that qualifies for
deferral under section 351. The corporation
assumed a liability of $50 on the property
transferred. What is Bill's tax basis in the stock
received in the exchange?

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