Q: Problem 2. Assume all of the same facts as Problem 1 above, except that each will receiving 25% of the common stock for their contributions of property and services.
- What are the tax consequences of this deal (gains/losses/income recognized, basis of shareholders in stock, basis of corporation in property)?
- How might the transaction be structured differently in such a case to provide for a more favorable tax result for the shareholders? What if David gave $25,000 cash as well as his services for his 25% interest?
Problem 1. Property Exchanges to Controlled Corporation. Adam, Beth, Clayton and David are forming a bakery business, called ABCD Corp, and decided to organize as a corporation. Adam Beth and Clayton will each own 300 shares of the common stock and David will own 100 shares of the stock (there are 1000 shares total of the corporation). Adam is contributing cash of $200,000, Beth is contributing equipment from a prior business that was originally purchased for $300,000 and was depreciated for tax purposes by $120,000 (current FMV is $200,000). Clayton is contributing a store front that he purchased two years ago for $250,000, but is currently worth only $200,000. David is contributing his time and will work full time for the business as the manager for the first year to train all the staff and get the business running on its own (David's services would cost $67,000). A. Determine any gains/losses or income that may be recognized incident to the formation of ABCD Corp. (make sure you consider the tax consequences pursuant to IRC Section 351). Concern about the tax liability that could result from incorporating a currently unincorporated business and the barrier to incorporation it could present, prompted Congress to enact Section 351 to remove this barrier to incorporation of an unincorporated business. A loss on an exchange is not deductible if you own, directly or indirectly, more than 50% of the stock. B. Determine Adam, Beth, Clayton, and David's basis in their newly issued ABCD Company stock and ABCD Corp's basis and tax consequences of the contributed property/services, if any. The tax paid will also be distributed among all four in the ratio of the number of shares bought by each. Adam, Beth, and Clayton will pay the tax 3/10 of the total company's tax while David will pay only 1/10 of the total company's tax. C. Do your answers change if ABCD Corp already existed as David's 100% owned company for two years before Adam, Beth and Clayton make their property contributions? Would still be the same. It is with the assumption that David has the original 100 shares and no other assets or liabilities prior to the formation of ABCD Corporation. D. What would be the result if Beth's property were worth $250,000 and so the Corporation gave her $50,000 cash in addition to her stock? If Beth's property were worth $250000 and so the corporation gave her $50000 cash in addition to her stock, then the corporation uses the higher adjusted basis for the property it receives. E. What would be the result if two years after formation, a capital call is made, and each shareholder is required to contribute $100 of cash for each share owned? What if Beth wanted to meet the capital call with appreciated property? Adam, Beth, Clayton, and David forming a bakery business called ABCD crop, after 2 years Capital call is made, and each shareholder required to contribute $100 cash for each share owned. Adam, Beth, Clayton will have $30,000 each and David will have $10,000. if Beth wanted to meet the capital call with appreciated property, yes Beth can do the same only if the Policy allows that. In this case property's appreciation will be adjusted against the capital call requirement. Problem 1. Property Exchanges to Controlled Corporation. Adam, Beth, Clayton and David are forming a bakery business, called ABCD Corp, and decided to organize as a corporation. Adam Beth and Clayton will each own 300 shares of the common stock and David will own 100 shares of the stock (there are 1000 shares total of the corporation). Adam is contributing cash of $200,000, Beth is contributing equipment from a prior business that was originally purchased for $300,000 and was depreciated for tax purposes by $120,000 (current FMV is $200,000). Clayton is contributing a store front that he purchased two years ago for $250,000, but is currently worth only $200,000. David is contributing his time and will work full time for the business as the manager for the first year to train all the staff and get the business running on its own (David's services would cost $67,000). A. Determine any gains/losses or income that may be recognized incident to the formation of ABCD Corp. (make sure you consider the tax consequences pursuant to IRC Section 351). Concern about the tax liability that could result from incorporating a currently unincorporated business and the barrier to incorporation it could present, prompted Congress to enact Section 351 to remove this barrier to incorporation of an unincorporated business. A loss on an exchange is not deductible if you own, directly or indirectly, more than 50% of the stock. B. Determine Adam, Beth, Clayton, and David's basis in their newly issued ABCD Company stock and ABCD Corp's basis and tax consequences of the contributed property/services, if any. The tax paid will also be distributed among all four in the ratio of the number of shares bought by each. Adam, Beth, and Clayton will pay the tax 3/10 of the total company's tax while David will pay only 1/10 of the total company's tax. C. Do your answers change if ABCD Corp already existed as David's 100% owned company for two years before Adam, Beth and Clayton make their property contributions? Would still be the same. It is with the assumption that David has the original 100 shares and no other assets or liabilities prior to the formation of ABCD Corporation. D. What would be the result if Beth's property were worth $250,000 and so the Corporation gave her $50,000 cash in addition to her stock? If Beth's property were worth $250000 and so the corporation gave her $50000 cash in addition to her stock, then the corporation uses the higher adjusted basis for the property it receives. E. What would be the result if two years after formation, a capital call is made, and each shareholder is required to contribute $100 of cash for each share owned? What if Beth wanted to meet the capital call with appreciated property? Adam, Beth, Clayton, and David forming a bakery business called ABCD crop, after 2 years Capital call is made, and each shareholder required to contribute $100 cash for each share owned. Adam, Beth, Clayton will have $30,000 each and David will have $10,000. if Beth wanted to meet the capital call with appreciated property, yes Beth can do the same only if the Policy allows that. In this case property's appreciation will be adjusted against the capital call requirement
