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Chapter 2- Sec.

351 (those who qualify dont recognize gain or loss when transferring property)
General Formulas
1) Amount Realized = FMV + Cash (whatever you get from the transfer)
2) Realized Gain/Loss = Amount Realized Adj. Basis of the property being transferred
a. Adj. Basis = Cost Depreciation
3) Recognize Gain= Lesser between Boot (cash) & Realized Gain
4) Shareholders Basis= Adj. Basis of property + Recognized Gain Boot Liability (Mortgage)
5) Basis on the cash= boot (cash)
6) Corporation Gain= 0 *always
7) Corporation Basis= Basis of the property + Recognized Gain Reduction

Reduction happens when:


Basis > FMV, then:
1)
2)
3)
4)
5)

Realized Loss= FMV Basis= (will be a negative #)


Recognize Gain/Loss= 0 *always, because a corporations NEVER recognizes a loss
Shareholders Basis= Basis + Recognized Gain (will be 0) Boot Liability
Corporation Gain= 0 *always
Corporation Basis = FMV

Recognize a GAIN (Sec. 362) when:


Liability > Basis, then:
1)
2)
3)
4)
5)
6)

Amount Realized= FMV


Realized Gain/Loss= FMV (of the stock) + Liability Basis
Recognize Gain= Liability Basis
Shareholders Basis= Basis + Recognized Gain Boot Liability= *always 0
Corporation Gain= 0
Corporation Basis= Basis + Recognized Gain Reduction (* in this case it will always be 0)

When there are Services and Property involved then:


1)
2)
3)
4)
5)
6)
7)

Services x 10%, must equal same amount as the property being transferred, or less to qualify
Amount Realized = FMV
Realized Gain/Loss = Services
Recognize Gain= Services (which is treated as ordinary income)
Shareholders Basis= Services + Property (such as cash)
Corporation Gain= 0
Corporation Basis= Basis of the Services (0, because youre not transferring property) + Recognized Gain
Reduction (0)
8) The corporation will be able to expense $5,000 in the current year and amortize the remaining (Corporation
9) Basis 5,000) in 15 years as an organizational cost.
*Holding Period= For how long youve owned the transfer, except with cash. It begins the day after the exchange
date.

Chapter 3

Step 1:

Charitable Distribution

Maximum Chat.Cont. for that


year
If any,
Carryforward for 5 years

Gross Income
+ Dividend Income
-Operating Expenses
Taxable Income
x 10%
Charitable Distribution
-Charitable Distributions made
in cash
ANSWER is an excess

Step 2:
Taxable Income for that year
Gross
+Dividend
-Operating Expenses
Taxable Income
-Charitable Deduction
Taxable income before DRD
deduction
Step 3:
DRD, if ownership is:
-less than 20%, then 70%
deduction
-20% or more, then 80%
-80%, then 100%
-Select the lesser of Tax.Inc.
bef. DRD or Dividend income,
then x.7,.8, or 1
-Select the lesser of Tax.Inc.
bef. DPAD or QPAI, then x .09
QPAI=Gross IncomeOperating Exp.

Taxable income before DRD


deduction
DRD

Taxable income before DPAD


DPAD
Taxable Income

Step 4:
If there is a Net Operating
Loss (NOL)

(Tax.Inc. NOL)(.10)=

Gross Income
+Dividend Income
-Operating Expenses
Taxable Income
Charitable Distribution
by NOL)
Taxable income before
DRD
Taxable income before
NOL
Taxable income before

(affected
DRD
NOL
DPAD

DPAD
Taxable Income

Chapter 4
General Formulas
Distribution of Appreciated Property
1)
2)
3)
4)
5)
6)

Distribution Dividend Income= FMV Liability


Basis in the land = FMV
Corporation Gain = FMV Basis
New CE&P= CAE&P + Gain Tax
Effect on E&P= New E&P Dividend Income
Effect on E&P after distribution= CE&P+Gain after subtracting tax= New CE&P
Distribution= CE&P+AE&P

***When Liability > FMV, then FMV=Liability

Stock Dividend Distribution


1) Income Recognized- You need to have had the option between cash or stock. If
given the option and you chose tax then the gain=cash, if stock then the
gain=FMV-Basis
2) Recognized Gain/loss= Allocate Basis
a. Basis Allocation for Pref. Stock= Original Basis x (Distribution Price or FMV x
P.S shares)/(Total for both)
b. Total for both= (Distribution Price or FMV x P.S shares) + (Distribution Prince
or FMV C.S x C.S)
3) Basis on the remaining share (C.S & P.S)= Selling Price (Basis pf P.S or C.S)

When there is no cash distribution, then, you find the gain first:
1) Corporation Gain = Realized Gain (of individual 1) + any other individuals involved
a. Realized Gain= FMV Basis
2) Tax = Gain (1) x 25%
3) New Current E&P= CE&P + Gain(1) Tax

When, CE&P=Positive Number and theres a deficit in AE&P=(Negative Number)

Individual 1

FMV or Cash
Distribution
(1)

CE&P

AE&P

(2) (1)(%)

Ignore

Dividend
Income
(1)=CE&P

Individual 2

(2)

(3) (1)(%)

Ignore

(2)=CE&P

Total(s)

(3)

(1)

(1)

ROC
(1) FMV
Dividend Inc.
(2) FMV
Dividend Inc.

Determine %
of each=
(1)/Total
New Basis = Stock Basis (for the stock) ROC
Individual 1= New Basis
Individual 2= (New Basis) should be negative
Then, add (2) New Basis, and write, Basis was reduced to $xx,xxx (sum of 2 basis) and
(negative basis) capital gain, so his new basis= 0.

When you sell and there are cash distributions and CE&P= Positive Number, and
AE&P= Positive Number
Distribution

CE&P

Individual 1

(1)

(2) (1)
(%)

Individual 2

(2)

(3) (1)
(%)

Total(s)

(3)
Determine
% of each=
(1)/Total

(1)

AE&P
(2) (1 CE&P)
If the subtraction
is greater than (1),
then allocate
everything in
Ind.1, so (Step 2)
= (1)
(3)

Dividend
Income
(1)=CE&P+A
E&P

(2)=CE&P+A
E&P

ROC
(1)
Distribution
Dividend
Inc.

(2)
Distribution
Dividend
Inc.

(1)

New Basis = Stock Basis (for the stock) ROC


Individual 1 (seller)= New Basis, so since he sold it theres a capital gain
Capital Gain (seller)= Selling Price New Basis
Individual 2 (buyer)= Selling Price New Basis (of individual 1)

When theres a deficit in CE&P= (Negative Number) it means that there will be a loss
every day of the year, and AE&P= Positive Number

Individual 1

FMV or Cash
Distribution
(1)

CE&P
(2) Ignore

AE&P
*Calculate

Dividend
Income
(1)=AE&P

ROC
(1)

the

Individual 2

(2)

(3) Ignore

Total(s)

(3)
(1)
Determine %
of each=
(1)/Total

Loss, in
order,

(2)=AE&P

Distribution
Dividend
Inc.
(2)
Distribution
Dividend
Inc.

To obtain
how much
will be
allocated

Before continuing to calculate for AE&P, you MUST, calculate the Loss due to a negative
CE&P
1) CE&P/365 days= $xxx loss per day
2) Loss per distribution= day before payment x loss
1st distribution (March 1st)= day before payment is February 28th= so from Jan. 1st
Feb. 28th = 31 days + 28 days = 59 days - - - > 59 days x (1) loss = (loss)
2nd distribution (Sept. 1st)= day before is Aug. 31st = so from March. 1st Aug. 1st =
31 (mar) + 30 (apr.) + 31 (may) +30 (jun.) + 31 (jul.) + 31 (aug.)= 184 days x loss
= (loss during second distribution)
3) Distribution
AE&P (given)
-1st distribution loss
xxx,xxxx
-1st cash distribution
xxx,xxx (if this answer is smaller than the 1st
cash distribution that was made, then allocate
the full amount to AE&P
-2nd distribution loss
xxx,xxx
-2nd cash distribution (if the 2nd cash distribution
> xxx,xxx, this means there is not enough
money, so allocate xxx,xxx
New Basis = Stock Basis (for the stock) ROC
Individual 1 (seller)= New Basis, so since he sold it theres a capital gain
Capital Gain (seller)= Selling Price New Basis
Individual 2 (buyer)= Selling Price New Basis (of individual 1)
Effect on AE&P
Original on AE&P
-Total Dividend Income (for

both)
xxx,xxx
-CE&P
New AE&P
In case both AE&P and CE&P are negative, then theres no dividend income, no effect on
E&P, and theres no gain. And the distribution will be Return on Capital (ROC) and
anything that exceeds ROC will be negative.