4.1 Corporation Formation

1. Shareholder's Tax Consequences

1) General rule
(a) Cash
(b) Service (taxable event)
(c) Property (taxable event)

(!) Sec.351: property (nontaxable event)
No gain or loss is recognized (deferred) by the shareholders if the property is transferred to a corporation solely in exchange for stock and immediately after the exchange those shareholders control the corporation.
(1) Property: everything but services
(2) Control: at least 80% of the total combined voting power and 80% of each class of nonvoting stock
(3) Solely: no receipt of a boot (a receipt of boot will cause recognition of gain) but not loss

2. Shareholder's Basis of Stock

a. Cash - Amount contributed
b. Service - Fair market value (taxable to the shareholder)
c. Property - Adjusted basis (NBV)

1) Property subject to liability (C.O.D.)
(1) Under Sec.351: no gain
(2) The basis is reduced by the amount of liability

2) Excess liability: gain recognized by the shareholder

3) Shareholder's holding period for stock
Include the holding period of property contributed, if that was a capital asset or Sec.1231 assets

3. Corporation Tax Consequences

No gain or loss is recognized in:
a. Formation - issuance of common stock
b. Reacquisition- purchase of treasury stock
c. Resale - sale of treasury stock

4. Corporation's Basis of Property Received

Generally, the same basis as the contributing shareholder's hands (carryover basis)

1) Corporation's holding period for contributed property
Include the period that was held by the shareholders