session11.pdfVIP

Session 11 - Corporate formation ? Discuss corporate formation rules ? Examine the tax implications of incorporating a business ? Lokk at how a start-up might be structured 15.518 Fall 2002 Session 11 Overview of Corporate Formation Rules ? Section 351: Deferring gain or loss upon incorporation ? What rationale exists for treating a corporate formation as a nontaxable exchange? ? Specific requirements: ? Property must be transferred to the corporation in an “exchange” transaction ? The transferors of the property must be in control of the corporation after the transfer ? The transferors must receive stock of the transferee corporation in exchange for their property 15.518 Fall 2002 Session 11 Example 1 ? John and Jane form JJ Corporation. John contributes a building that he originally purchased for $50,000 for 50% of the shares. The building has a current FMV of $100,000. Jane contributes $100,000 in cash for the remaining 50%. Section 351 applies and John does not have to recognize any gain on the building. The Property Requirement ? Nonrecognition of gain or loss applies only to transfers of property ? Courts and the government have defined property to include: ? Cash ? Installment obligations ? Accounts rceivable ? Inventory ? Equipment ? Patents ? Trademarks / Trade names ? Other intangibles ? Computer softwareCash ? Installment obligations ? Important exclusion: Services 15.518 Fall 2002 Session 11 The Control Requirement ? Transferors, as a group, must be in control of the transferee corporation immediately after the exchange ? Control is defined as 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 (by class) ? Stock received by a transferor of services does not count in determining the 80% 15.518 Fall 2002 Session 11 Example 2 ? John and Jane form JJ Corporation. John contributes a building he originally purchased for $50,000 in exchange for 50% of th