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Corporate Tax
-Overview: -C Corporations: Subchapter C governs corporations. -S Corporations: corps that meet req’s and make election (Subchapter S). -C Corp. v. S Corp. -C Corp. is treated as separate taxable entity; -whereas S Corp. is not separate taxable entity. -EX: 1 million earnings (taxable income). -C Corp. pays taxes on 1 million (Sec. 11 governs tax rates). -Tax Liability of 340k. -Then C Corp. distributes after-tax cash of 660k to Shareholders. -Now, SH’s pay taxes on 660k (dividends, which get special treatment of 15% - 1(h)). -thus, tax liability of 99k. -meaning, total taxes of 439,000 (or 43.9%). -we have double taxation. -S Corp. does not pay taxes, but instead SH’s pay taxes on 1 million TI. -S Corp. is “pass through entity” for taxes. -So, individual SH’s pay taxes on 1 million. Assuming 35% rate means taxes paid = 350k (35%). -these taxes are paid regardless of distribution. -so, there is no double taxation. -Surtaxes: purpose is to offset benefit of lower tax rates. C Corporation is a separate tax entity. -so, 1st taxed at entity level (that is the corporate level, Sec. 11(b)). -then, 2nd taxed when distributed; taxed at preferential rate of 15% until 2011. Qualified Personal Service Corporation -always flatly taxed at 35%. 11(b)(2). -EX: law firm owned by lawyers, or doctors office owned by doctors. Subchapter K -governs partnerships. -partnership is treated as a “pass through entity” for tax purposes. What is a Corporation under Income Tax? -Sec. 7701(a)(3) defines Corporation to include corp. under state law, associations, jointstock companies, and insurance companies. -Reg. 301.7701-2 provides that a business entity with 2 or more members is classified as either a partnership or corporation.

2 Traditional 4 Factors for Corporation: 1. Centralized Management -looks to see if corp. is ran by mangt. on behalf of owners. -so, SH’s do not run business. -in p-ship, the owners usually run the business. 2. Continuity of Life -b/c corp. lasts forever, it lasts despite death of SH. -whereas, p-ship dies when partner dies. 3. Limited Liability -SH’s are not personally liable for debts of corp. 4. Free transferability of interests -SH’s are free to buy and sell stock w/out consent of other SH’s. -whereas, in p-ship partners must give consent to sell p-ship interest. *need 3 of 4 to be treated as corp. -BUT b/c of LLC’s this 4 Factor Test is no longer the end-all, be-all test to determine whether it is a corp. So, this test is no longer relevant. NOW, the IRS has a much simpler classification system to determine what is a corp. -Basically, it is the “Check-the-Box” Regulation. Is it a Corporation: The Steps: 1st step is to determine if you have a Business Entity. -Reg. 301.7701-2(a) defines business entity; it is very broad (includes Business Trust). -but does not include REIT, Ordinary Trusts, Estates, or other specially regulated entities. -what about Business Trusts? -Reg. 301.7701-4: Business Trust is option for business entity under state law. -owners of business are beneficiaries. 2nd step is to determine if Business Entity is a Per Se Corporation. -Reg. 301.7701-2(b) defines per se corp. -(b)(1) corporation created under state law. -(b)(4)/(5): Banks and insurance companies are automatically corp. for federal tax purposes. -(b)(7): publicly traded partnerships. Sec. 7704. 3rd step is eligible entity. -an eligible entity is permitted to decide if it wants to be treated as a corporation or as a partnership. -if no election is made, then default rules apply. -Reg. 301.7701-3 Check the Box regulation.

3 -Domestic Eligible Entity -2 + Owners of Domestic Business Entity, default rule is that entity is treated as a partnership. -BUT have election to treat as corp. -1 Owner of Domestic Business Entity, default rule is that entity is disregarded. Meaning, Owner reports income and takes deductions on own tax return. -BUT have election to treat as corp. Chapter 2, Section 1 Problems Problem 1: Sec. 7704(a): are the interests readily tradeable on a secondary market b/c facts do say that interests are freely assignable? -is the market the LLC interests being traded on substantially the equivalent of a secondary market. Sec. 7704(b)(2)? -doubtful though b/c although interests are freely transferrable, the market forces for re-sale are limited, so not per se corporation. -is this LLC an association b/c if yes then corporation. 7701(a)(3) and Reg. 301.7701-2(b) (2). -LLC has right to elect to be treated as corp. Reg. 301.7701-3(b). Answer: Eligible Entity b/c not a per se corporation. As a result, the LLC is by default treated as a p-ship, but has right to elect to be treated as corp. Reg. 301.7701-3. -BUT note under old 4 Factors, this corp. is probably a corporation. -Remember if publicly traded business, then it’s a C Corporation. Problem 2: (a) the Corp. may offset the losses with the net income. So, Corp. has 1 million net income. i. This is so b/c a single member LLC that is a disregarded entity provides a corporation with a vehicle to insulate other assets against the risks of the business in the LLC while allowing the corporation to offset losses from one line of business against profits from another line of business on its federal tax return. Page 44. ii. NOTE: Rabbit Battery will be treated as a corporation b/c it is a per se corp. since it was created under state law as a corp. 1. remember have to pass per se corp. to take eligible entity test. iii. How will the 2 LLC’s be treated? 1. either as a disregarded entity or elect to be a corp. 301.77013. a. So: Basically default is to treat the Corp. as earning and deducting w/e LLC did. iv. Why might Corp. want to be set up this way? 1. b/c of limited liability, it insulates creditors from going after both LLC’s. (b) In problem, RB, Inc. 100% owns CD, Inc. AND RB owns 80% of MR, LLC and

Inc. INC. Meaning.) a.4 CD. and make it so that CD is an LLC? -now CD. *What if we change the facts. wholly owns LLC. -as a result. is a subsidiary.4 million). Inc’s losses to offset. Inc. takes full loss and get 20% of MR. then losses can offset gains. cannot use CD. CD. it is deemed an owner. and CD. i. so no disregarded entity. This is b/c the LLC is not a single member (not wholly owned by the corporation). RB gets 80% of MR. CD. 1. thus default is that this is a pship. ii. LLC for tax purposes. we can offset losses and gains. Can’t use subsidiary’s losses to offset. Answer: CD. LCC’s earnings (which is 600k). Inc. RB is treated as directly owning all assets of MR. The thing is that RB. has subsidiary Corp. Inc. 1. does not wholly own LLC and when Corp. -HOWEVER. Corp. -but we don’t disregard business entity when Corp. basically: -we disregard business entity when Corp. Inc. is a per se corporation. Regard and Disregard of the Corporate Entity . So. iii. may file a consolidated return. LLC is a disregarded entity for tax purposes. the LLC is owned by 2 owners (RB. owns 20% of MR. And. as long as owner has economic interest in company. 2. Inc. LCC. LLC’s earnings (which is 2.

Bollinger (S. was created to avoid the state usury laws (allow to get higher interest rate). the Corp. whether the corp. -holding: yes.5 Moline Properties Doctrine -Facts: -SH puts R/E in newly formed Corp. -Factor 5: yes. the taxable entity is disregarded. its relations with its principal must not be dependent upon the fact that it is owned by the principal. This was done to get loan. -Holding: Corp. the SH’s are stuck with the corporate form they chose. -the threshold for business purpose or activity is low. Ct. Strong v. -really the Partnership was really the lender but Corp. 6. was holding property as an agent of P-ship. is ok b/c yes normal activity. is wholly owned by one SH is not enough to disregard taxable entity. 5. RA of Factors to Bollinger Case: -1-4 Factors are not at issue (thus are satisfied). but there still must be unequivocal evidence that agency relationship . transmits money received to the principal. If the corp. could act as an agent of TP (SH). is a true agent. -Rule: if Corp. 3. whether receipt of income is attributable to the services of employees of the principal and to assets belonging to the principal. -the corp. the owner can always terminate or alter agent. will be treated as a separate taxable entity. separate taxable entity. 1988) -Facts: -TP argues that the Corp. -Factor 6: Principal represented selves as owner to all relevant parties and the Corp. is purely passive or is used for tax-avoidance purposes. -generally though if corp. Ct. Comm’r v. binds the principal by its actions. was created just to avoid usury laws. is a corporation. -the fact the Corp. Its business purpose must be the carrying on of the normal duties of an agent. which was controlled by mortgagee. Ct. 1976) -Facts: -a p-ship creates a Corp. to avoid usury laws so agency arg. whether corp. is a separate taxable entity. whether the corp. said that this was common practice to use Corp. -Bollinger said arms-length relationship is not required. created to avoid usury laws was an agent of the TP. 1. -also. there is no req’t to pay fee to agent. 2. case that held that a Corp. 4. SH then put stock into Voting Trust. for the purpose of obtaining a loan. operates in the name and for the account of the principal. National Carbide Factors: -S. is created for a business purpose or if it conducts any business activity. -Applying Moline Properties Doctrine: -the corp’s purpose and activities were sufficient to require recognition of its separate ownership of property as a separate taxable entity. Comm’r (Tax Ct.

2. Corp.6 existed at the beginning of relationship. Most Courts look at all factors. Holding in Bollinger: the effect of treating Corp. Written Agency Agreement at time Agent acquires asset. there is no separate taxable entity b/c of the agency relationship. state that the corp. as agent is same as disregarding corporate entity. 3. to avoid usury laws and not be separate taxable entity. -that is all relevant parties know of agency rel. -basically. Review -Corporations . both the Bollinger and the National Carbide Factors. functions as an agent of principal (SH). is held out as agent of principal (SH). Corp. is acting as agent of SH/principal/p-ship. Bollinger: 3 Factors proving Unequivocal Agency Relationship: 1. So. etc. Chapters 1&2: Identifying Taxable Corporate Entities. -no one sees agent as actual owner.

pays Sec. Dividends: -SH must include those dividends in their gross income. -AND Corp. receives dividends? -The C Corp. pays out dividends received to its SH’s. old thing to do was apply the 4 factor test. -now. Partnership -Corporation -Sec. includes: -entity incorporated under state law. -lets Corp. -See Default Rules. 7701(a)(3) -includes associations. -As a result. 7704. banks -tax-exempt corp. the income of C Corp. Sec.. -so. SH deduct dividends received to prevent triple or more taxation -triple tax could happen if C Corp. is required to pay tax on income regardless of distribution to SH’s. 1361. then it is an “eligible entity.” -so. -this does not affect state law of entity (i. Corporation v. -Per Se Corporation. 301. 243 permits a “dividend received deduction” that is designed to eliminate (or at least mitigate the imposition of multiple layers of corporate tax. is taxed twice. -NOTE: a per se corporation may still elect to be treated as an S Corp. 11 tax rates on dividends (no pref. . single owner LLC). -publicly traded partnerships.7701-2(a)) applies to business entities. -if business entity is not a per se corp.e. it is disregarded for federal tax purposes only. Arguments to Disregard Entity: -Shame Argument: the corp. should be disregarded entirely for tax purposes. REITs. REMICs -insurance co’s. treatment).7 -Subchapter C -Subchapter S -Special classes of corporations: -RICs. “Check-a-Box” Regulations -this regulation (Reg. we have 3-step process. -just a per se corp. eligible entity can elect its classification. but this doesn’t help much. is not allowed to deduct the dividends for tax purposes. -Remember if entity is disregarded. if it meets requirements in Sec. -C Corp. -However. -What if C Corp. can’t be a p-ship or disregarded for tax purposes.

-note that the rigid req’t of arms-length b/t corp. Ct. -IRS can argue that TP formed corporation for tax avoidance pruposes.8 -TP’s have hard time winning this argument. and its SH’s. is acting as the agent of the SH/principal. may act as agent of its SH’s. -in National Carbride. Property Transactions: Review of Income Tax Concepts -remember that this course focuses on transactions b/t Corp. S. -look at Bollinger (S. Ct. acknowledged corp. as agent and SH’s is not req’d. need 3 factors. case). . -b/c corporation just has to be made for some valid business purpose or conduct some business activity (extremely low threshold). -Agency Argument: is that corp. -b/c TP chose to form corporation.

9 -Steps: 1. Does TP realize a gain or loss? -Sec. 1001(a) Gain = AR – AB; and Loss = AB – AR 2. Need to determine what the AB is. -Sec. 1012 Cost Basis. -the “cost” basis of property received in an arm’s length taxable exchange is equal to the FMV of the property received in the exchange. -Philadelphia Park Amusement v. U.S. -Cost includes liabilities incurred to acquire property. -Sec. 1016 adjusts the basis of property. 3. Need to determine AR. -AR = amount of cash + FMV of other property received by TP. -also includes liabilities from which the TP is discharged as result of sale or disposition. 4. Now, is this realized gain or loss recognized? -General Rule is that it is recognized, but there are exceptions. -remember need specific code section allowing loss deduction to be recognized. Substituted Basis Rules -use substituted basis to preserve gain or loss. -2 Types: 1. Transferred Basis property is property having a basis determined in whole or in part by reference to the basis in the hands of the transforer. Sec. 7701(a)(43) -in other words, the transforer’s basis in property transfers over to the transferee. 2. Exchanged Basis is property having a basis determined in whole or in part by reference to other property held at any time by the person whom basis is being determined. -in other words, TP’s basis in property acquired in the exchange is determined by reference to the TP’s basis in the property relinquished in the exchange. -get basis from property TP transfers; i.e. property has basis of 10, new property has basis of 10. -Sec. 1031 like kind exchange. -Holding Period: The TP’s holding period = holding period in old land exchanged for new land.

Character of Gain or Loss -is it ordinary or capital?

10 -Sec. 1221(a) defines capital asset. -Remember Sec. 1231 property. (does not include inventory property). -Remember C Corp. does not get 1(h) preferential treatment for LTCG. Capital Loss -Remember C Corp. does not get extra 3k of excess capital losses. -C Corp. can carryback 3 years and forward 5 years.

Chapter 3: Formation of Corporation
-two ways corporation raises capital: 1. stock or 2. debt.

11 -stock represents an equity interest (has residual interest, no right to return); -common stock v. preferred stock (equity investment with some debt-like qualities, i.e. right to return, such as dividend, before common stock). -whereas, debt gives person right to receive return (usually fixed rate). In-Class Examples Chapter 3, Section 1, Part A 1/20 (1) Amy forms X Corporation. Amy transfers Blackacre to X in exchange for 10 shares of common stock (with a FMV of 100,000). Blackacre is a tract of undeveloped land that Amy has held as an investment for 2 years. At the time of the exchange, the FMV of Blackacre is 100,000 and its basis in Amy’s hands is 50,000. -Blackacre has AB of 50k and FMV of 100k. -assume that stock value is equal to FMV of what’s given. -Is there any realized gain? -Yes, use Sec. 1001(a); AR = 100k and AB = 50k, so there is a realized gain of 50k. 1-Is this realized gain recognized? -Sec. 1001(c) says to recognize gain unless non-recognition section applies. -in this case, Sec. 351(a) applies, meaning don’t recognize gain (so, there is 0 gain recognized). * 3 Requirements for Sec. 351(a) Non-Recognition: 1. Property transfer. 2. Solely for stock. (ignore “or securities” part). 3. Control. – that is the property transforers be in control of the corporation after the exchange. Control means that property transforers have at least 80% control of corporation. (368(c)) -Policy Reason for Non-Recognition: there has been no change substantively, just a change in form. Also, want to promote formation of corporation. -i.e. only changing form in ownership of Blackacre. 2-Now, we determine the basis of Amy’s stock: -Sec. 358(a)(1) is used when Sec. 351 applies to determine basis. -says to use “exchanged basis,” meaning take same basis of property exchanged as basis of stock. -So, Amy’s basis in stock is 50k. 3-Last, we determine what Amy’s tacked holding period is in the stock? -Sec. 1223(1) applies b/c Amy held Blackacre as investment (capital

-importance of tack holding period is that allows for LTCG treatment. -Sec. So. except non-qualified preferred stock. cost of 351 deferral is that instead of one gain preservation. does not get 1(h) preferential treatment. Allocation of Basis b/t Classes of Stock (2) Same facts as in (1) except Amy receives 8 shares of common stock (with a FMV of 80. -RA: (3) Common Stock = (80k/100k) * 50k = 40k Basis.358-2(b)(2) -make allocation in proportion to FMV of each class of stock. b/c Amy gets to use holding period of Blackacre for stock. Amy and Ben form X Corporation. 6-X Corp’s tack holding period in Blackacre: -Yes. X Corp’s basis is 50k. meaning same basis as Amy had in Blackacre. 1032: no gain or loss shall be recognized to a corporation on the receipt of money or other property in exchange for stock of such corp. 5-X Corp’s Basis in Blackacre: -Sec. Preferred Stock = (20k/100k) * 50k = 10k Basis.12 asset). 1. X Corp. b/c of Sec. Sec. gets same holding period as Amy had in it. -BUT not that significant b/c Corp. -So. what happened? -Amy has her gain preserved in stock. 1032. -Sec. Stock Class Basis = (FMV of class / Total FMV) * Exchanged Basis. 1223(2) gives tack holding period for transferred basis. 4-X Corporation’s Tax Consequences: -just applying Sec. -But this gain is not recognized b/c of Sec. -So. we now have 2 gain preservations. and Corporation has gain preserved in Blackacre. . 358(b) and Reg. 1001 results in realized gain of 100k.000). so Amy gets to tack holding period for stock. -Amy still does not recognize gain (351(a)) and still has same basis of 50k (358) but now we have to determine how to allocate this 50k basis to each class of stock. -so. 362(a) says to use Transferred Basis. 351(a) applies to any kind of stock.000) and 2 shares of preferred stock (with a FMV of 20.

000). 351(a) looks at all the property transforers in the aggregate to see if all together have control (that is 80% of Corp. Sec. 351(a). question is whether Ben is a property transforer? -IRS has ruled that cash is property for purposes of Sec.13 Aggregate Transforers for Control Req. -X Corporation has no gain on either exchange. Transferring Capital Asset and Inventory. -so. 351(a). Sec. aggregate the two pieces of property. instead Amy must wait 1 year. Split Holding Period (c) Same facts as in (a) except Amy transfers Blackacre (FMV = 50. -for basis. has 50k basis in Blackacre. and has 50k basis in stock. -X Corp. Sec. meaning Basis in Stock = 50k. 1223(1). -issue is whether Amy gets tack holding period? -NO. (a) Amy transfers Blackacre (same information as in (1)) in exchange for 10 shares of common stock (with a FMV of 100. 351(a) is satisfied? -Sec. So. 1032. Amy realizes 10k gain on inventory and 40k on Blackacre. Transferring Inventory.000). 362(a). 1012 cost basis and that Ben gets a fresh holding period in stock. -What about holding period? -Rev. -Keep in mind that Ben’s basis in stock = 100k b/c it is from Sec. Rul.000). -this is to prevent Amy from transforming her ordinary income property to LTCG property immediately.000 in cash in exchange for 10 shares of common stock (with a FMV of 100. -So.000. has tack holding period. Sec.000) and inventory (FMV = 50.).000. -the issue here is whether the control requirement of Sec. basis = 10. Ben is a property transforer. basis = 40. 80% control is satisfied. but no recognition of gain b/c of Sec.000 and a basis of 50.000. Fresh Start Holding Period (b) Same facts as in (a) except Amy transfers inventory with a FMV of 100. Amy has a fresh start for holding period b/c holding period only works for Capital Asset property or Sec. meaning Amy has no recognition of gain. 85-164: -Fraction: (FMV of Tack Property / Total FMV) -Fraction: (FMV of Non-Tack / Total FMV) -RA: Tack: (50k FMV / 100k Total FMV) = ½ Non-Tack: (50k FMV / 100k Total FMV) = ½ . 358(a)(1). 1231 property. Ben transfers 100. -as a result.

000. -each share has a split holding period. -Sec. Meaning. so can’t say half shares b/c applies to each share. . -From X Corp’s perspective: -Sec. (4) Amy forms X Corporation.000. 358(a)(1). -Sec. so Amy’s basis in common stock is 150k. will sell property soon. 362(e)(2) Limitations on Built-in Losses -applies when Sec. -get tack holding period b/c basis starts with transferred basis at 362(a). tack holding period. basis = 150. X Corp’s basis = 100k.000) and Greenacre (FMV = 200. 150k) and SH would have to reduce basis (i. Again the FMV = 100k.000) in exchange for common stock with a FMV of 300. (b) Amy transfers Blackacre (FMV = 100. higher basis.e. . -Basis Reduction = Aggregate AB – Aggregate FMV -basically Corp. basis = 75.000. -this is done to give Corp. we have AR of 100k less AB of 150k = realized loss of 50k. -Does Amy take tack holding period? -Yes. 362 determines X Corp’s basis in Blackacre. 1032 disallows any recognition of gain or loss. -Sec. ½ has tack holding (LTCG treatment) and ½ has non-tack holding period (ordinary income). . -What is Amy’s stock basis? -Use Sec. 351. then Corp. make election. 1223(2) gives X Corp. 351 is satisfied and when 362(a) transferred basis exceeds FMV of stock given. 100k instead of 150k). -BUT Sec. says to use exchanged basis. which has been satisfied. 362(a) gives transferred basis. BUT . gets transferred basis (i. 1223(1) b/c Amy exchanged capital asset and property rec’d has exchanged basis.14 -so. -So. -NOTE: SH would prefer to recognize loss immediately. Sec. thus preserving the loss of 50k b/c if sold stock immediately recognize loss of 50k. but 351 is mandatory so recognition of loss is disallowed. -Sec. (a) Same facts as in (1) except Amy’s basis in Blackacre is 150. Common Stock rec’d = 100k. 362(e)(2)(C) Election -if both SH and Corp. gets FMV basis. disallows recognition of realized 50k loss. b/c of Sec.000. in this problem the basis reduction is 50k. usually for depreciation purposes or b/c Corp.e. -So.

Sec. and Redacre (FMV = 75. -Amy’s perspective: . basis = 150k for BA. -Aggregate AB = 325k and Aggregate FMV = 300k. -So. basis = 150. basis = 175. Amy gets tack holding period. -AND. 362(e)(2)(C) Election could still be made. 362(e)(2) applies. (d) Amy transfers Blackacre (FMV = 100. basis = 150.000. -Amy’s basis = 325k. -Now. -get tack holding period. -aggregate basis for stock basis. 362(e) (2) does not apply. -so.000). 1223(2). GA’s basis = 175k -Remember Sec. and 362(e)(2)(B) says how to allocate basis reduction (allocate based on built-in losses). (take transferred basis of each asset).000. Amy’s basis: -Sec. -find basis for each asset. -And. basis = 175. Meaning.000. basis = 225k.000). still exchanged). -X Corp’s Perspective: -1032 says no recognition.000) and Greenacre (FMV = 200. (Remember to go asset-by-asset). basis = 150. -as a result. -X Corp’s perspective: -Basis: -150k in BA. -Aggregate Basis = 225k and Aggregate FMV = 300k.000) in exchange for common stock with a FMV of 300. 358(a)(1) says take aggregate basis (so aggregate of both properties’ basis. Greenacre (FMV = 200. so basis = 125k. and 175k in GA.000. BA’s basis is reduced by 25k. which would result in Amy having 300k basis in stock.000) in exchange for common stock with a FMV of 375. (c) Amy transfers Blackacre (FMV = 100.15 -Amy is still realizing a loss of 50k on Blackacrea and realizing a gain of 25k on Greenacre.000. 1223(1).000.000. and 75k for GA. 351 says don’t recognize. -Amy’s perspective: -Sec.

and allocate the basis reduction to each in accordance with ratio Formula = ( Realized loss of Asset / Aggregate Realized Loss of all assets) * Basis Reduction 5. 4. for RA (75k/125k) = 60% * 100k = 60k.16 -Basis = 475k. 362(a) 2. 3-BUT how do we allocate the 100k built-in losses b/t BA and RA? (no change to GA b/c no built-in loss) -Use Formula: (FMV of Property / Aggregate FMV) -so. -BA = 150k less 40k reduction = 110k -GA = 175k (no change b/c no built-in loss) 2.000 in cash and undeveloped land having a basis of $20. 3. aggregate the AB and FMV of assets. -so. only use assets with built-in losses. Next. -If make 362(e)(2)(C) election. Chapter 3. Amy contributes truck with basis of $50. using Sec. Ben contributes $100. Sec.000 . Now. 1.000 and FMV of $150.000 and FMV of $100. 362(e)(2) Steps: 1. 358(a)(1) -X Corp’s perspective: -Basis Steps 1-Start with transferred basis: 362(a): -RA = 150k less 60k reduction = 90k. Sec.Next Does 362(e)(2) apply? -YES. b/c Aggregate AB of 475k is greater than Aggregate FMV of 375k.000 and power shovel with basis of $125. Multiply that ratio by basis reduction amount to determine how much to reduce each basis of each asset.000 in exchange for 20 shares of voting stock. Determine transferred basis. for BA (50k/125k) = 40% * 100k built-in loss = 40k. Amy’s basis in stock = 375k. IF aggregate FMV exceeds aggregate AB. then 362(e)(2) applies. Part A Problems: Problem 1.

358(a)(1) (cash gets added in for basis) -NOW. Note the basis of the stock to each SH. 351 apply? -YES. Rul. FMV of the preferred stock is $100. -Sec. 358(a)(1). -Stock Basis for Amy: 175k b/c it is equal to aggregate of properties’ basis she transferred (exchanged basis). Sec. Meaning 40% has fresh start and 60% has tack HP. -Cash represents 40% and Land represents 60% of total FMV of assets transferred. 351(a) applies. b/c rec’d 2 classes of stock. 85-164 also disallows SH from allocating tack holding period to certain class of stock. Sec. and control is met).000. b/c both Amy and Ben are transferring property. 85-164. both are receiving stock.000 in exchange for 100 shares of non-voting stock that includes an 8% dividend preference and also for 12 shares of voting common stock. -Land = 20k. -no recognition of 50k realized loss b/c of Sec. have to allocate basis pursuant to 358(b) b/t classes: -Preferred = (100k/250k) * 120k = 48k. 362(a)(1) -Shovel = 125k. So no recognition. Problem 2. corporation’s basis in the assets. -362(e)(2) goes transforer by transforer (so don’t look at Ben’s assets here. 362(a)(1). -Ben’s Tax Consequences: -Land: realized gain of 130k (AR: 150k less AB: 20k) -the cash purchase is not a realization event. -Tack Holding Period: Yes. -do we have to consider 362(e)(2)? No b/c aggregate FMV does not exceed aggregate AB. 1223(1). . 362(a)(1). 351(a) (meet 3 req’s exchanging property solely in exchange for stock. how much gain they have to recognize. and both are in control (100%). -Common = (150k/250k) * 120k = 72k. -Rev. which says that each share has a split holding period based on relative FMV of the transferred asset.17 and FMV of $150. -X Corp’s Tax Consequences: -no recognition of gain/loss b/c of 1032. must split Holding Period to each share. -Does Sec. -Amy’s Tax Consequences: -Truck: realized gain of 100k (AR: 150k less AB: 50k) -Shovel: realized loss of 25k (AR: 100k less AB: 125k). Claire’s Tax Consequences: -realized loss: 50k. -Stock Basis for Ben: 120k. just look at Amy’s. (a) 1. -Basis: -Truck = 50k. Thus. Sec. Rul. -Tack Holding Period: look to Rev. so no recognition of gain.

362(e)(2). Don’s Tax Consequences (see above). Sec. (reduced to 140k b/c of 362(e)). SW Truck’s basis = 140k. b/c truck was 1231 or capital asset. takes 150k basis in Truck and Claire takes a 100k basis in stock. Sec. 1032. Y Corp’s Tax Consequences: -no gain or loss recognized b/c of Sec. Don’s Tax Consequences: -realized gain: 70k. 351(a). (c) 1. and transforer by transforer. 1223(1). 1223(1). look at Corp’s aggregate AB of assets compared to aggregate FMV of assets. Preserves loss. 362(e)(2).18 -Stock Basis: 150k. Sec. Sec. -Meaning. -Remember go Transforer by Transforer. Sec. Sec. -Stock Basis: 30k. -So. b/c of 1223(2). Sec. Sec. and Y Corp. -HP Tacks b/c land is capital asset or 1231. b/c aggregate Basis of 150k is greater than aggregate FMV of 100k. 3. 358(a)(1). Claire’s Tax Consequences: -no recognition of gain/loss b/c of Sec. go to Sec. -AB: 210k > FMV: 200k. -Stock Basis = 210k. 362(a)(1). -Basis: -SW Truck: 150k. -LW Truck: 60k. basis reduction of 50k. -recognized gain: 0 b/c of Sec. Sec. but then limit by Sec. 362(e)(2)(C) Election: -need consent by both Claire and Y Corp. -so. 2. 1032. Sec. Claire’s Tax Consequences: -no recognition of gain or loss b/c of Sec. Sec. -Next. . Y Corp’s Tax Consequences: -no gain or loss recognized b/c of Sec. 1223(1). -Land: 30k. Preserves gain. -Basis: -go asset by asset. -Tack HP: yes. 358(a)(1). -Land: 30k. 362(e)(2) b/c of built-in loss. 358(a)(1). Sec. 362(a)(1) -Sec. -And what happens is that Y Corp. 362(a)(1) – Transferred Basis. (b) 1. 362(e) Election would result in Claire’s basis being 200k. 351(a). 3. (aggregate the basis of trucks) -Tack HP: Yes. -excess (10k) is basis reduction and apply that basis reduction to the SW Truck (b/c has built-in loss). Basis = 100k. 362(a)(1). -SW Truck: 150k. 351(a). 362(a)(1). -What about Sec. 2. taking SW Truck with 150k basis. -Tack HP: yes. -realized gain of 40k on WT Truck and 50k loss on SW truck.

-Tack HP: yes. AB: 265k > FMV: 250k. (cash method) -Basis in A/R = 0 b/c not received cash yet. 362(e)(2) (B). -Go to Sec. -SW Truck: 150k. -Bulldozer: 75k. reduced to 70k. -Formula = ( Realized loss of Asset / Aggregate Realized Loss of all assets) * Basis Reduction -Thus. Y Corp’s Tax Consequences: -no recognition b/c of 1032. -Basis: -Land: 30k Sec. Accounts Receivable Example -EX 1: Beth transfers Accounts Receivable worth 50k to Corp. 362(e)(2). Sec. 362(e)(2). 362(a)(1).19 -Stock Basis: 265k. 362(e)(2). 3. -accrued cash receivable but don’t include that amount in gross income until that . Sec. and in return receives stock worth 50k. 2. takes basis of 150k in SW Truck and 75k in Bulldozer. 358(a)(1). thus. (50k/75k) * 15k = 10k for SW Truck. Don’s Tax Consequences (see above). -If make 362(e)(2)(C) Election: -Claire’s stock basis is reduced to 250k and Y Corp. 15k basis reduction. Sec. allocate it based on built-in loss assets in proportion to their respective built-in losses. -AND. (25k/75k) * 15k = 5k reduction for Bulldozer. -LW Truck: 40k. 1223(1). reduced to 140k.

-Also. -So. then Beth would pay taxes b/c Beth earned the income.. for tax avoidance purposes.500 after tax cash. thus no recognition of gain. Sec. is not going to be conducting ongoing business (guess it’s just for investment purposes). BUT . pays taxes on the 50k at 15% = 7500 tax. -EX 2: What if Beth is only putting 50k A/R in Corp. b/c income is included when it is earned (not when it is received).500 as dividend to Beth. -look at control element post-transfer/exchange.125 After Tax Cash. -2nd assume transfer of A/R to Corp. 351: -it applies to on-going corporations. not just formation of corp. Beth is already taxed. A/R is collected? -it depends if the Assignment of Income is applied b/c Assignment of Income Doctrine says that who earned the income pays the taxes on it. What if Beth is Accrual Method? -then assignment of income does not apply. = Basically. collect A/R. thus leaving Beth with 36. ?? Things to Remember for Sec. Corp. 351(a). use assignment of income to have TP recognize income when collected). . Beth is better off transferring A/R to Corp. -another example is transferring net operating losses to Corp. Rul. this could apply when there is an Installment Note. and pay 17500 in taxes. -at transfer.500 dividend is taxed at 15% = 6. the Corp. pays out 42. and collection of A/R does not matter.375 tax. the TP is not req’d to recognize gain unless TP is making the transfer for tax avoidance purposes. -BUT Rev. 453.20 amount is received. -so. works for tax avoidance. (if for tax avoidance. Beth includes the 50k in her gross income and pays taxes on 50k at 35% rate. can’t transfer A/R to Corp. -What happens when later in year. -IRS disallows this in Rev. Then TP transfers installment note to Corp. -1st assume no transfer: then Beth would be taxed at 35% on the 50k. Rul. -Then. but Corp. 80-198 prevents Beth from recognizing this income b/c Assignment of Income Doctrine does not apply. In-Class Examples . -Rev. if applied to this case. 80-198. -EX: Buyer agrees to pay TP over 10 years for property. with 32. . -Thus. this is good example of when transfer of A/R to Corp. this is disallowed to offset gains of Corp. meaning when Corp. -NOW. -42. and having Corp. so Assignment of Income Doctrine does apply. 80-198 Accounts Receivable is treated as property for Sec. Rul. As a result. collects the 50k A/R.

which was formed several years ago. -for Corp. which says that Corp. and Eric rec’ing 20 shares.000. Eric is Dana’s son. Receipt of stock disproportionate to property transferred (2) Dana and her son. we would 1st deem Dana rec’ing 80 shares. -in facts. 1032 does not apply b/c no exchange for stock. -Does Sec.000 in 80 shares deemed to receive from Corp. -since Chris is sole SH.21 Chapter 3. has a 25k basis in the securities. No proportionate requirement. Part C 1/25-1/27 (1) Chris is the sole shareholder of X Corporation. Sec. does not recognize gain at receipt of capital contribution.000 per share. so we could assume that the 60 shares .000. -Then do the ‘constructive’ transaction from SH1 to SH2. 1. 118(a). The DE stock has a FMV of 5. -So. and basis per share = 5.000. -so.000 in 20 shares deemed to receive from Corp. Section 1. -BUT there is Sec. -Reg. and then 2nd transferred to the ultimate recipients by way of gift or compensation if the facts so warrant. -Keep these transaction separate. AB = 80. 362 applies for basis when there is a capital contribution. Chris currently owns 100 shares of X stock (FMV per share = 10. -AND.000 in cash and receives 80 shares of DE stock. post-transfer. so Chris transfers a portfolio of marketable securities (FMV = 100. so Corp. Chris has 100 shares. X does not issue any additional shares to Chris in exchange for the securities. Dana transfers various business assets (FMV = 400.000). the issuance of stock is meaningless (makes not economic difference). Eric. X is in need of additional liquidity. 1st assume proportionate transactions from Corp. -as for basis. Sec. AB = 25.250. form DE Corporation. to SH. this is not a recognition event.000) and receives 20 shares of DE stock. Eric transfers 100.000) to X. -Dana’s Tax Consequences: -Basis in Stock = 80. 351(a) exchange. then 2nd we would deem Dana transferring 60 shares to Eric (could classify as gift or compensation). Chris should get to increase his basis by the AB of securities (thus increase basis in stock by 25k). -the question is does disproportionate exchange still satisfy Sec.351-1(b)(1) states that “in appropriate cases” the stock will be treated as if first received in proportion to assets transferred. -Eric’s Tax Consequences: -Basis in Stock = 100. 3 req’s are satisfied. 351? -Yes. b/c it is a constructive Sec. -So. AB per share = 5. for problem. 351 apply? Yes.

you apply the tax rules when appreciated asset is used to pay for services.000.000) in exchange for 70 shares of W stock (FMV = 700. Sec.000 in cash. -Dana has recognition of gain event.000) and 50. -As for George: -Realized Gain is 250k = AR: (700k stock + 50k cash) – AB: 500k. then gets 162 deduction. go to Sec. -Now. -Eric has income. which requires recognition of cash or other property (called “boot”). George recognizes 50k of gain. Sec. 358(a)(1) -RA: 500k – (50k) + 50k = 500k basis. George purchased the land 2 years ago as an investment. -basis starts with SH’s basis in property .000 in cash in exchange for 30 shares of W stock (FMV = 300. Stock + Boot (3) Fred and George form W Corporation. then use same principles as gift transaction (Sec. -What about basis? -SH’s AB in property – (Boot) + SH’s recognized gain = SH’s Basis in stock. not gift? -Then the 60 shares Eric receives is compensation. 351(b). -So. -Fred takes a 300k basis in 30 shares. and no recognition of gain b/c of 351(a). Eric takes the 60 shares with an AB of 60k (the transferred basis). -Does Sec.000). -if considered to be a gift. b/c basis of stock is same in part as land transferred. -Meaning.22 deemed to transfer from Dana to Eric is a gift. -Does Holding Period tack? -Yes. AB = 500. 351(b) allows this when SH receives “other property or cash” in addition to stock. Fred transfers 300. 1015). the 60 shares deemed as gift from Dana to Eric results in FMV of 300k and 60k of AB. and gets Cost Basis. -3rd scenario is that the 60 shares deemed transfer is repayment of a loan. 1223(1). 351(a) apply for non-recognition? -not satisfied b/c “not soley for stock” but Sec. Sec. -As a result. -2nd scenario: What if the 60 shares transferred are instead compensation. -So. = Remember Basis is to preserve non-recognized gain. (a) George transfers land (FMV = 750. 102.

362(a) Basis = SH’s Basis in property transferred + SH’s recognized gain. -meaning immediate LTCG characterization. -What if instead depreciation deductions = 25. Sec. -Sec. – (Boot) + SH’s recognized gain. George has taken depreciation deductions of 250.000 in cash. George’s gain is LTCG. . the 50k is characterized as Ordinary Income b/c all gain of 250k is depreciation recapture. still can’t Recognize Loss (c) Same facts as in (b) except George’s AB in the equipment is 800. -What is character of gain? -character is determined by the character of property transferred. Depreciation Recapture (b) George transfers equipment (FMV = 750. Corporation’s Basis Sec. -Character of property transferred is 1245 property (which is depreciable personal property). -NOW. Sec. See Sec. 358(a)(1). -As a result. SH is still not allowed to recognize any loss. 362(a) Basis = SH’s Basis in property transferred + SH’s recognized gain. except Character. Meaning. AB = 500. it tacks b/c this is 1231 property. George used the equipment for 2 years in another business that he operated as a sole proprietorship.000) in exchange for 70 shares of W stock (FMV = 700. what about Holding Period? -yes.000? -Then 25k of the 250k realized gain is characterized as Ordinary Income. -Sec.000) and 50. Even with Boot. -All is same as above. SH’s Basis: Sec. -As for W Corporation: -no recognition of gain or loss. 351(b) says even if SH receives boot in exchange. -RA: 500k + 50k = 550k basis.000. 1223(1).000. -What about George’s stock basis? -RA: 800k (AB of property) – 50k (boot) + 0 (recognized gain) = 750k. -Realized Loss of 50k = AR (700k stock + 50k cash) – AB: 800k.000 with respect to the equipment (so all of the gain inherent in the equipment is subject to §1245 recapture).23 transferred. 1032. 358(a)(1) Basis Formula = SH’s AB in property transferred to Corp.

20k** 5k** Recognition 351(b) 351(b) 351(b) Character N/A LTCG. W will use the equipment. which requires us to reduce basis by 50k built-in loss. and (3) a building (FMV = 150. George recognizes 5k gain. Rul. But we do have to consider Sec. Property must be depreciable in hands of Transferee. 362(e)(2). 1239 requires us to characterize gain as Ordinary Income. Sec. (2) land (FMV = 300. which requires: 1. 68-55 says to determine Gain and Character on asset-byasset basis. OI. and has taken depreciation deductions of 10. George purchased the land and building 2 years ago as an investment. Sell or Exchange of property b/t related persons. -BUT we have built-in loss. AB = 250. ***don’t worry about Sec.000. but that allows George to . so go to Sec. -Sec. 362(a)(1). -As for basis: 800k (b/c no gain recognized increase). basis in equipment = 750k.000).000.000 with respect to the building. Meaning.000. Sec. 2. -yes.000 in cash. 1250 Recapture for this class. can’t recognize more than boot or more than realized! Rule: recognize gain to extent of boot. -NOTE: on net basis. AND -yes. 68-55) (d) George transfers the following assets: (1) equipment (FMV = 300. and building in its business. 1032. satisfied.000). In exchange. 1239*** *% = (FMV of Asset / Total FMV of all sets) ** Look at gain recognized and compare it to boot.24 -W Corporation: -no gain/loss. Equipment Land Building FMV 300k 300k 150k % of Total 40% 40% 20% FMV* Stock (700k) 280k 280k 140k Boot (50k 20k 20k 10k cash) Total AR 300k 300k 150k AB (350k) (250k) (145k) G/L Realized (50k) 50k 5k G/L 0. Rul. -Remember could have 362(e) Election!! Multiple Assets and Boot (Rev.000). AB = 350. George receives 70 shares of W stock (FMV = 700. Sec. -Rev. AB = 145. 1239.000) and 50. land. George used the equipment for 2 years in another business that he operated as a sole proprietorship. have related persons b/c SH (George) owns more than 50% of stock in Corp.

-Equipment = 350k. -George’s Basis in Stock: AB (350k + 250k + 145k) – (50k Boot) + 25k recognized gain = 720k. which Y had used in its business for the past 2 years. 362(e)(2) does apply. Hank purchased the land as an investment several years ago. to prevent recognition of loss. AB = 150. -As a result. (a) In exchange for the land. -Hank’s Tax Consequences: . there is a 20k built-in loss. Sec. -If had 362(e) Election: George’s Stock Basis = 700k.000). 358(a)(1). which is a 20k basis reduction. 68-55. ***** Other Property Received from Corp. -Corporation’s Asset Basis: -Use Asset-by-Asset Method from Rev.000. -Building = 150k = (145k + 5k).000. meaning Equipment’s basis is now 330k. thus basis = 330k.000) to Y. Rul. AB= 15.25 use non-recognized loss to offset gains. THAT’s why we have the Rev. as Boot (4) Hank is the sole shareholder of Y Corporation. Hank transferred a tract of undeveloped land (FMV = 225. -Basis = AB in Asset + SH’s recognized gain in that asset. -Meaning. See Sec. Asset-by-Asset approach allows loss property to take advantage of boot. 362(a) decrease by 20k basis reduction from 362(e)(2). -Aggregate FMV = 750k < Aggregate AB = 770k. 362(e)(2) limit? -Remember we’re talking about Corp’s AB is in the assets. the 20k basis reduction is allocated to the Equipment.000) and a truck (FMV = 25. which has been operating a real estate development business for several years. -So. Also. -Land = 270k = (250k + 20k). This year. -What about Sec. Rul. Hank received 20 shares of Y common stock (FMV = 200.

-So. -Holding Period: -Tacks in the Stock. 311(a) operates as a loss elimination rule. 358(a)(2) gives rule for basis of Property. thus use: -Sec. Sec.000 at the time of the exchange. -Sec. which does not permit the Corporation to recognize any loss in the exchange. it is not good to transfer loss property in a 351 .26 -Realized Gain = AR(200k Stock + 25k Truck) – AB(150k) = 75k realized gain. 351(b) says to recognize gain to the extent of the FMV of the other property received. -Does NOT tack in Truck b/c Truck’s basis = FMV. is to recognize gain as though Corp. As a result. -Recognized Gain = 25k. -Character of Gain: LTCG. -Meaning. 311(a). 351 exchange. 351(f) points us to Sec. transfers non-cash boot property in Sec. 1032 no gain recognized for stock. 1223(2). -Sec. Sec. -Tack HP: yes. 1223(1). Sec. -No impact to Hank’s Tax Consequences. determined by reference to the property Hank transfers for the Stock. 362(a). -Stock Basis = 150k = AB in Land (150k) – FMV of Truck (25k) + Recognized Gain (25k). -Answer: NO recognized loss. the 5k loss is permanently eliminated. the rules of Sec. sold property to SH at FMV. 311(b) says if transferred property is appreciated property. thus 1245 as to depreciation deductions and ordinary income. Excess of 1245 recapture is 1231 gain. AR: 25k – AB: 15k = 10k. -Impact on Corporation’s Tax Consequences: -Sec. -Basis in Assets: -Land = 175k = 150k AB + 25k Recognized Gain. which is depreciable personal property. -Basis in Truck = 25k. which is the land. -So. 311 govern. (b) Same facts as in (a) except Y’s AB in the truck was 30. Sec. 351(f) says when Corp. See Sec. 358(a)(1). 311. -Corporation’s Tax Consequences: -Sec. the Corp. -Character: determined by reference to the truck. gain is all preserved in the stock basis. says the Basis is simply the FMV of the property. Meaning.

no recognized gain. -Sec. Hank received 20 shares of Y common stock (FMV = 200. 311(b) require recognized gain? -NO. 358(a)(2). FMV. -So. The preferred stock has a par value of 5. -Corporation’s Tax Consequences: -Does Sec.000) and 5 shares of Y nonparticipating preferred stock (FMV = 25. Sec. -Common Stock Basis = 150k.000) and a promissory note for 25. 358(a)(1) (see above). Sec. Non-Qualified Preferred Stock (d) In exchange for the land.000 per share and a 5% dividend preference. -Corporation’s Tax Consequences: . NOTE: Non-qualified Preferred Stock is not qualified for Sec. Hank received 20 shares of Y common stock (FMV = 200. 351(g) gives rules for Non-Qualified Preferred Stock (NQPS) and says that NQPS will be treated as “other property” (boot that is) for purposes of 351(b). Hank has the option of having the preferred stock redeemed by Y at the end of 5 years. and that recognized gain can be reported in the installment method. -NOTE: Hank may not use installment method to report recognized gain b/c he received NQPS.27 exchange. -Don’t worry about basis rules when debt is boot.000 issued by Y and due in 5 years (with adequate interest payable annually). -Preferred Stock is Non-Qualified when redeemable within 20 years (could be req’d to redeem or just have right to redeem). -Basis = 175k (same as above). -Recognized Gain = 25k. -Main thing is that debt can be boot. -Ask: is stock required to be redeemed within 20 years? if yes then fixed maturity date. AR(200k + 25k NQPS) – AB. -NQPS Basis = 25k. (c) In exchange for the land. -the promissory note (debt) is still boot. -Recognized Gain = 25k. -Hank’s Tax Consequences: -Realized Gain = 75k. b/c 311(b) excludes debt instruments as being reported as gain.000). 351(a) non-recognition. -Hank’s Tax Consequences: -Realized Gain = 75k = AR (200k + 25k promissory note) – AB.

1. (AR: 225k – AB: 250k) -Loss Recognized: 25k. NQPS for Loss Property (f) Same facts as in (e) except Hank’s AB in the land was 250. First. 1001(c) to recognize this realized gain. 1012 Cost Basis. use FMV of stock rec’d for basis. -Land Basis: 225k. -Hank’s Tax Consequences: -Gain Realized: 75k (AR: 225k – AB: 150k) -Gain Recognized: 75k. -Philadelphia Park does not apply b/c not taxable event. . including NQPS. 1032 applies to any stock.1032-1(d) says use 1012 cost basis in this circumstance. Sec. -Sec. 351 does not apply. no recognition of gain/loss. fresh start b/c no exchanged/substituted basis. instead using cost basis. Then Look at Sec. Sec. 351. -Hank’s Tax Consequences: -Loss Realized: 25k. 1012 Cost Basis. -267 applies when exchange is b/t Corporation and SH with 50% + stock. (e) In exchange for the land.000 at the time of the exchange.28 -Sec. Hank received 45 shares of Y nonparticipating preferred stock (FMV = 225. -Stock Basis: 225k. 362 does not determine basis.000). go to Sec. fresh start b/c no substituted basis. 1032 applies to both Common Stock and NQPS. 165. 267 b/c 267(a)(1) – the Brier Patch – disallows this loss b/c is exchange b/t related persons. -Tack HP: NONE. Sec. instead using cost basis. So. Go to Sec. Philadelphia Park case. we have new HP. Just use general tax principles. 1001(c). but remember this loss may be recognized but not deductible. Sec. Reg. The characteristics of the preferred stock are the same as in (d). -Tack HP: NONE. we have new HP. Solely NQPS is NOT governed by Sec. -Corporation’s Tax Consequences: -No gain recognized b/c 1032 (no req’t that 351 apply for 1032) -plus.

-Corporation’s Tax Consequences: -no changes. no tack. Chapter 3. Sec. Sec. -Character of Gain: Ordinary Income b/c inventory property.29 -Stock Basis: 225k. 351(a) apply? NO. Section 1. -HP: new HP. 1012 Cost Basis. Sec. 351(b). 351(b) applies b/c rec’ing boot. See Sec. Note – AB: 300k) -Does Sec. -Not tested. . 7-8) Problem 1 (a) -Claire’s Tax Consequences: -Realized Gain: 150k (AR: 250k stock + 200k Prom. but to know: 267(d) would lower amount of gain recognized when land sold at gain. Sec. -Recognized Gain: 150k. -Stock Basis: 250k = AB: 300k – 200k Boot + 150k gain recognized. Part C “Solely for Stock” Problems (p. 385(a)(2) FMV of boot. 358(a)(1). -Basis in Prom. Note: 200k. -preserves disallowed loss.

453(b)(2)(B). 68-55 for realized/recognized gain/loss when SH transfers multiple assets in 351 exchange and receives boot in that exchange. 1223(1). 362(a). Sec. -Nye case disallows this transaction from being done. what if Don bifurcated the transactions by first selling Bulldozer for cash and 2nd exchanging Cement Truck for Stock. 1032. -Recognized Gain: 120k. -Basis: -Bulldozer: 300k. Sec. Sec. 351(b). Only get tack HP if property transferred is 1231 or capital asset property. **NO 453 Installment Method b/c 453(i) says cannot use 453 Method for 1245 recapture. Sec. b/c not 1231 or capital asset. -Tack HP: none. Note rec’d 80k 120k AR: 180k 270k AB: (300k) (150k) Gain (loss) realized (120k) loss 120k gain Gain (loss) recognized None b/c 351(b)(2) 120k. 358(a)(2) -Tack HP: yes for 1231 property. -NOW. -Corporation’s Tax Consequences: -no gain/loss recognized b/c 1032. 351(b). 362(e)(2) limit applies. Sec. 1245 OI. disallows recognition of realized loss. Sec. -Stock Basis: 370k = AB: (300k + 150k) – 200k Boot + 120k gain. -can’t bifurcate a 351 exchange to recognize loss. See Sec. -Stock Basis: 450k = AB: 300k + 150k recognized gain. so basis = 180k. -Basis in Prom Note: 200k. IRS will treat as one for tax purposes to disallow tax avoidance. (this is to recognize loss). **No 453 Installment Method b/c note was for inventory. -use this table: Bulldozer Cement Truck FMV of property X’d 180k 270k % of FMV 40% 60% FMV of Stock rec’d 100k 150k Prom. Rul. Sec. b/c 1245 gain. -Corporation’s Tax Consequences: -NO gain recognized. . -Steps Transaction Doctrine: if two separate steps are really one transaction but done separately. 362(a)(1) gives transferred basis in each asset. Character n/a OI. 358(a). -BUT Sec. -we do this on an Asset-by-Asset approach.30 -Tack HP: none. (b) -Don’s Tax Consequences: -Use Rev.

Reg. -Stock Basis: 250k = AB: (210k + 60k) – 200k Boot + 180k gain. 1. -Land: 90k = 60k + 30k. -Prop. Sec. 1.453-1(f)(3)(ii) says to increase basis of assets in property as SH recognizes gain under 453 Installment Method. the 120k is the required basis reduction under 362(e)(2). and the Corp’s basis in Bulldozer would be 300k. all 120k is allocated to Bulldozer and Bulldozer has a basis of 180k.453-1(f)(ii) says still use same 358 basis rules for stock basis of SH. Sec. -See Prop. 362(a). Rul. Sec. Note rec’d 160k AR: 360k AB: (210k) Gain (loss) realized 150k Gain (loss) recognized 150k gain. 1. **Remember when comparing AB to FMV.453-1(f)(1)(iii) and Prop. -How do we allocate this 120k b/t assets? -we allocate it to the built-in loss assets. -So. Sec. 362(e)(2)(C) Election were made? -the SH would reduce basis by 120k. -So. Reg. -BUT Prop. 1223(1). 358(a). 1032. 68-55. 362(a). Reg. 351(b) Capital gain. Reg. -AB: 570k > FMV: 450k. Land 90k 20% 50k 40k 90k (60k) 30k 30k gain. 362(e)(2) apply? -Corp’s Aggregate AB in Property (that is determined under 362(a) and compare that to the Aggregate FMV of the Properties.453-1(f)(3)(ii) -Corporation’s Tax Consequences: -no gain. -Does Sec. . 1. (c) -Erin’s Tax Consequences: -Use Rev. use the AB determined under 362(a) for the Corporation. 362(a). -Tack HP: yes. thus would be 250k basis.31 -Cement Truck: 270k = (150k + 120k). -What if Sec. Sec. Building FMV of property X’d 360k % of FMV 80% FMV of Stock rec’d 200k Prom. -Basis: -Building: 360k = 210k + 150k. 351(b) Character 1231 gain or capital gain. -NO 362(e)(2) limit.

-Exceptions: -357(b). if Corp. In exchange. exchanged 50k stock + 40k cash + assumed 10k debt. The land is subject to a 10. (Facts and Circumstances Test). which represents the remaining principal balance on a recourse loan that Andy incurred to purchase the land several years ago. -Look at Sec.32 Section 2. 358(d)(1) says that debt relief is treated as Boot (money received) for Stock Basis purposes. and shall not prevent exchange from being within provisions of 351. -Andy’s Tax Consequences: -Realized Gain: 40k = AR: (FMV of Stock 90k + Debt Relief of 10k) – AB (60k). -Recognized Gain: 0. -preserves unrecognized 40k gain. Andy will receive 10 shares of X stock (FMV = 90. if principal purpose of TP with respect to assumption was (1) to avoid taxes OR (2) was not for a bona fide business purpose. gain. Section 2. and X will assume the 10. which says if TP receives property which would be permitted to be received under Sec. “Solely” For Stock: Assumption of Liabilities In-Class Examples Chapter 3. TP would recognize gain of 40k. -Why does this make sense? -b/c Andy’s realized but unrecognized gain needs to be preserved.000).000. 1032. b/c assumption of liability is NOT boot (generally). -no special rule for Corp’s assumption of liability. then such assumption in the total amount shall be considered as money received by TP in exchange. then such assumption shall not be treated as Boot. -Corporation’s Tax Consequences: -No gain. gain. Andy will transfer a tract of undeveloped land (FMV = 100. *Now.000 mortgage debt encumbering the land.000 mortgage. **Sec. -New Brick: Debt Relief is included in AR.000) to X. 351 without recognition of gain if it were the sole consideration AND as part of the consideration another party to the exchange assumes a liability of the TP. -Basis in Land: 60k = AB: 60k + 0 rec. 357(a). Part A (1) Andy plans to form X Corporation to operate a real estate development business. . AB = 60. -Stock Basis: 50k = AB in Land: 60k – Boot (10k)** + 0 rec.

-Andy’s Tax Consequences: -Gain Realized: 40k (FMV of Stock 85k + 10k debt relief + 5k debt relief). -Andy’s Tax Consequences: -Sec. 351(b). still recognized as gain b/c of “bad” purpose of 2nd Mortgage. the total 15k debt is “money received. 1032. -so fact that 10k 1st mortgage is bona fide is irrelevant. -Remember Sec. -Basis in Land: 75k = AB in land: 60k + 15k rec. and is for a bona find business purpose since the 5k is used to improve the land. b/c the 5k debt is treated as Boot. Andy plans to borrow 5. not bona fide business purpose. which is being transferred to Corp. gain. 357(b). and X will assume both mortgage debts. 357(b) says Total (all) liabilities assumed = Boot.000). Andy will receive X stock (FMV = 85. thus this triggers Sec. gain (tax cost investment). (a) Andy plans to use the 5. -Character of Gain: LTCG b/c of land being transferred?? -Stock Basis: 60k = AB in Land: 60k – 15k boot (liability assumption) + 15k rec.000 from a local bank before he transfers the land to X. The bank loan will be a recourse loan and will be secured by a second mortgage on the land. -as a result. 357(b) Triggered: (2) In addition to the facts in (1). -Since the 5k debt is to be used for family vacation. .000 in loan proceeds for a family vacation. (b) Andy plans to use the 5.000 in loan proceeds to improve the land before he transfers it to X.33 Sec. In exchange for the land.” thus treated as Boot under Sec. -Gain Recognized: 15k. but is a tax avoidance purpose. -Corp’s Tax Consequences: -No gain. 357(b) is not triggered b/c this 5k 2nd mortgage is not for tax avoidance.

b/c . -So. -Recourse Debt: Creditor may go after secured property and after Debtor personally. Debtor is personally liable for debt.e. 1032. liability assumed by Corp): 200k. -So. -RA: the liability has a bona fide business purpose b/c the liability was used to acquire the books. but is taking the land subject to the Non-Recourse Debt. 357(d)(1)(A). 357(a) applies. Reg. 358(d). -2nd determine if Sec. 9-10) Problem 1 (a) -PMSI = debt was incurred to buy property (i. -Basis in Books: 300k. 351 applies. . to buy the books). -Non-Recourse Debt: Creditor may only go against property securing debt. the Corporation is not assuming debt. -assume that “assumption of Recourse Debt” satisfies Sec. 362(a). meaning Sec. -Frank’s Tax Consequences: -Realized Gain: 150k = AR: (250k FMV stock + 200k debt relief) – AB: (300k) -Recognized Gain: -1st determine if Sec. 358 applies. 357(b) applies (any exceptions to 357(a)). Sec. 357(d)(1)(B) says to treat non-recourse debt the same as recourse debt (that is treat debt as assumed) for Sec. . but will not expressly assume. what happens: -Andy Tax Consequences: -Realized Gain: 40k = (85k stock + 10k 1st mortgage + 5k 2nd) -Recognized Gain: 0. -RA: yes 351 applies. takes Recourse Debt subject to (instead of assuming it).358-3. 357(a) and Sec. 358. 357 and 358 are used. Sec. -3rd determine if Sec. (b). which were transferred to Corporation. when there is Non-Recourse Debt. and Sec. -See Sec. X will take the land subject to. 1. the mortgage debts. -RA: yes. Study Problems (p. -Stock Basis: 100k = AB: 300k – boot (money rec’d. . NOTE: if Corp. -Corporation’s Tax Consequences: -NO gain. 357(d)(1)(A) applies to determine if Sec. 357(a). The Debtor is not personally liable for debt.34 Non-Recourse Debt: (3) Same facts as in (2)(a) except both mortgage debts are nonrecourse.

the Corp. assuming Jessie’s personal debt (gambling debt) has no bona fide business purpose. Dyla: we had some debts that were incurred 4 years earlier that did not have anything to do with the corporation. Rule If it is a new debt it is probably okay under 351(b) if it relates to business If it is a new debt it is probably not okay of it does not relate to business If it is an old debt it is probably okay even if it unrelated to business when it is incurred but it secures business assets -Jessie’s Tax Consequences: -Realized Gain: 90k = AR: (250k stock + 100k debt relief) – AB: (260k) -Recognized Gain: 90k. 357(a) and NOT trigger Sec. This was okay under 351(b). debt was not transferred to avoid taxes. then Such assumption shall be considered boot Estate of Stoll v. -Generally an old and cold debt which secures asset is fine and thus 357(b) isn’t triggered even when debt used for personal in nature. Was not a bona fide business purpose. Problem 1 (b)(1)(ii) -this would satisfy Sec. what about bona fide business purpose? -NO. not right before incorporation. Sec. Commissioner: tax court held that where an individual incurred a debt just before engaging in a 351 transaction and the property securing the debt was a life insurance policy and was not transferred to the corporation. probably won’t find Tax Avoidance purpose b/c this debt is old and cold. Wheeler (5th circuit): where taxpayer transferred a partnership interest to a corporation in a 351 exchange and the taxpayer recently incurred debts on such partnership then the liabilities assumed constituted boot. -usually if debt is personal and NOT secured by asset transferred = no bona fide business purpose. . So. then the amount of the liability secured by such property constituted boot Campbell v. Was a purpose to avoid federal income tax or B. -NOW. 357(b) -Does Sec. 357(b) b/c old and cold even though debt was to pay off gambling debt.35 Problem 1 (b)(1)(i) What is the implication of the fact that the debt is for gambling expenses? 357(b) – If in taking into account the nature of the liability and the circumstances of the assumption it appears that the principle purpose of the taxpayer A. 357(b) apply? -Ct.

Section 2. gain. gain. 357(c) Liabilities in Excess of Basis -Aggregate Liabilities > Aggregate AB = . Part B(1) (1) Beth plans to form Y Corporation to operate a clothing business.000 mortgage. 358(a). – this is old and cold debt. In exchange for the building. Beth will receive 20 shares of Y stock (FMV = 180. -Basis in Land: 350k = AB 260k + 90k rec. -This debt does not look like for Tax Avoidance purposes b/c not incurred in anticipation of forming Corp. then basis is 160k = 260k – 100k debt relief. 362(a). -Unsecured Debt was used to fund deductible operating expenses of now failed sole proprietorship parking lot. AB = 100. 1032.000. The building is subject to a 120. which represents the remaining principal balance on a recourse loan that Beth incurred to purchase the building several years ago. -Code looks at reason for Assumption of Debt. then ok. no tax avoidance and has bona fide business purpose).000) previously held out for rental. Sec. Sec. -1st 351 -2nd 357(a) -3rd 357(b) -4th 357(c) -this is where the train stops. Sec. and this does not satisfy bona fide business purpose. 357(b)(1)(B). and Y will assume the mortgage debt encumbering the building. -if no 357(b).000). -Sec. 357(c). -(if debt is old and cold and securing transferred asset. -BUT what about bona fide business purpose? -debt is unsecured was incurred for business separate for corp’s business. Y will use the building as a retail store. Sec.36 Problem 1(b)(2) -Jessie’s Tax Consequences: -Realized Gain: 90k = AR: (250k stock + 100k debt relief) – AB: (260k) -Recognized Gain: 90k. thus no tax avoidance. -Stock Basis: 250k = AB: 260k – 100k debt relief + 90k rec. ***** In-Class Examples Chapter 3. -Beth’s Tax Consequences: -Realized Gain: 300k = AR: (180k Stock + 120k debt relief) – AB: (100k) -Recognized Gain: 20k. -Corp’s Tax Consequences: -No gain. Beth will contribute a building (FMV = 300.

Beth used the loan proceeds to purchase a personal residence. Sec. 357(c). -Does Sec.358-2(a). -RA: Sec. 357(b) apply? -No. 1. 1231 property. not more than 50%.37 Recognized Gain. Liabilities in Excess of Basis Problem 1(a) -Bonnie’s Tax Consequences: -NO gain. -Reg. -Stock Basis: 50k. -Recognized Gain: 120k. Chapter 3. 357(c) applies. (b) Ex. -Character of Gain: This is probably Sec. 351. 358(a)(1). -Both Sec. . then 1239 could apply but problem is that SH owns 50%. 1245 could apply to recapture depreciation. the Stock Basis = 0 (zero). -every time Sec. -We are looking at the SH’s AB in property transferred. gain.000 mortgage secures a bank loan that Beth recently incurred in anticipation of forming Y and having it assume the debt. 1239. gain. gain. 357(c) apply. Sec. b/c 20k = 120k liability – 100k AB. -Stock Basis: 100k = AB: 100k – 120k debt relief + 120k rec. 357(c). 357(b) b/c Sec. -Beth’s Tax Consequences: -Realized Gain: 200k. 1032. -Corp’s Tax Consequences: -NO gain. -Clyde’s Tax Consequences: -Gain Realized: 70k = AR: (50k Stock + 30k debt relief) – AB(10k) -Gain Recognized: 20k. 2. 357(b) Trumps Sec. so no tax avoidance and is bona fide business purpose b/c limo is for use in limo services of Corp. 358(a) and 358(d). -Does Sec. 357(c) apply? -Yes. -Character of Gain: Ordinary Income b/c of Sec. b/c the debt is PMSI for limo. Sec. 357(b) and Sec. If 1245 does not apply. Part B. Sec. 357(c)(2)(A) says to use 357(b) when it applies instead of Sec. Sec. so 1239 does not apply. SH and Corporation are related parties. -Basis in Building: 120k = AB 100k + 20k rec. -Stock Basis: 0 (zero) = AB: 100k – 120k debt relief + 20k gain rec. Sec. 357(c) (2) Same facts as in (1) except the 120. 362(a) Sec. Which do you use? -We use Sec. 357(b). b/c Aggregate Liabilities: 30k > Aggregate AB: 10k = 20k. -Stock Basis: 0 (zero) = AB: 10k – 30k debt relief + 20k rec. -Sec. meaning Beth recognizes 20k gain in exchange. 358(a) and (d). 357(c) applies.

38 -Corp’s Tax Consequences: -NO gain. 1032. .357-2(b) Example 2. -Stock Basis: 20k = AB: (48k + 12k) – Debt Relief (25k + 15k). 358(a)(1). Sec. Problem 1(b) -Bonnie’s Tax Consequences: -NO gain.357-2(a) says use aggregate of liability against aggregate AB. Reg. Gain.500/350k) * 60k. No direct authority. b/c Aggregate Liability: 40k < Aggregate AB: 60k. Sec. Sec. gain. -Basis: -MB Limo: 12k.500/350k) * 60k. 1. 351. Sec. 362(a). -Sec. Problem 2 -Patty’s Tax Consequences: -Realized Gain: 310k = AR (250k stock + 100k debt relief) – AB (30k + 10k) -Recognized Gain: 60k. Sec. -Lincoln Limo: 48k. -Recognized Gain: 0. AB: 40k -Thus. but won’t have to do that on exam. -Does Sec. 1. 358(a). -Basis in Limo: 30k = AB: 10k + 20k rec. -Character -not determined by using asset-by-asset approach. -RA: -Gain from Land = 15k = (87. 357(c) apply? -NO. 351 – 357(a) – 357(b) (n/a b/c have bona fide business purpose and no tax avoidance) – 357(c) -Sec. (d). -Stock Basis: 100k. (100K debt relief – 40K AB) -Sec. 357(a). 357(c) is applied SH by SH. 1032. Sec. -Clyde’s Tax Consequences: -Realized Gain: 80k = AR: (100k stock + 25k debt relief + 15k debt relief) – AB: (48k +12k) -Do we calculate debt relief on Asset-by-Asset Basis? -Not sure. 362(a). -Corp’s Tax Consequences: -NO gain. -Gain from Warehouse = 45k = (262. have 60k recognized gain. (Relative FMV) -use ratio: (FMV of asset / FMV of total assets) * Rec. 357(c) applies b/c Aggregate Debt: 100k > Agg. but use Reg.

-NOTE: could have 1250 recapture gain for warehouse. 1032. gain. but not expressly assumed.39 -As a result. gain. Ex. -Stock Basis: 0 (zero) = AB (30k + 10k) – 100k debt relief (boot) + 60k rec. has assumed the Recourse Debt if facts and circumstances show that Corp. not more than 50%. 2 (see above). 358(d)(1)(A) says that Corp. -Look at Sec. 358(a) – 358(d). -assume debt is recourse if not stated as non-recourse. 1. gain. -Basis -Land: 25k = 10k AB + 15k rec. -meaning subject to = assumed for Non-Recourse Debt. -RA: Land: 25% = (77. did not expressly assume the recourse debt? -the rule for Recourse Debt is different from rule for Non-Recourse Debt. -And for 45k warehouse gain is 1231 gain. assumed the debt. -the Rule for Recourse is: -Sec. NOTE: if asset had no appreciation. the answer to Problem 3(a) is same as Problem 2. Problem 3(b) -What if debt is recourse and Corp. which says a non-recourse liability shall be treated as having been assumed by the transferee of any asset subject to such liability. 357(d)(1)(B). -As a result. -Another method is: -Relative Appreciation Method -(Asset: FMV – AB / Total Assets: FMV of all – AB of all) * Recognized Gain. -Sec. Problem 3(a) -Non-Recourse Debt that is subject to. 15k land gain is LTCG/1231 gain.357-2(b). 357(c) refers to liabilities assumed by Corp. -meaning.500/310k) Warehouse: 75% = (262. Allocation of Basis Methods: -How do we allocate 357(c) recognized gain to each assets’ basis? -use Relative FMV Method as seen in Reg. subject to does not equal assumed for Recourse Debt.500/310k) -NO clear answer on what method to use in Code or Reg’s. -Corp’s Tax Consequences: -0 gain. . (from above – Relative FMV Approach) -Warehouse: 75k = 30k AB + 45k rec. -NO 1239 application b/c Patty only owns 50%. -Sec. then gain would be attributable to asset with all appreciation.

based on all the facts and circumstances. So. assumes the Recourse Debt. then assuming debt argument fails!? Rule for Recourse Debt -Recourse Debt is treated as having been assumed only if. the transferee corporation has agreed to pay the debt and is expected to pay the debt.40 BUT: DOES = ASSUMED FOR NON-RECOURSE -you need Corp. -look at facts and circumstances to determine if Corp. 2-Tax Court says NO b/c adopted Rev. SH does not need to tell Creditor that Corp. 357(c) Gain? -EX: Beth transfers Building to Corp. then William would be transferring 350k FMV property for 250k FMV stock = that is disproportionate?? -if got 350k FMV stock. assumed debt b/c William got 50% interest and Evan got 50% interest. And Non-Recourse Debt on Building = 120k. -Also. 362(a)) . must be agreeing to pay the debt b/c look at economics of transaction. Look to see if amount of stock SH’s got is proportionate. 3-Lessinger (2nd Cir. 68-629 says that Beth has 0 (zero) basis in Promissory Note. Rul. b/c if not assuming 100k debt. 357(c) looks at Corp’s AB in Promissory Note. takes transferred basis (Sec. to actually assume (that is Corp. Rul.) says Yes can eliminate 357(c) gain b/c SH’s AB in Promissory Note = 0 but Corp’s AB in Promissory Note = Face Value of Note. -Answer: the Corp. regardless of whether or not the transforer SH has been relieved of liability vis-àvis the creditor. -Problem is that Corp. (proportionate approach). -Would Beth giving Promissory Note valued at 20k eliminate 357(c) gain? 1-IRS says NO b/c Rev. -NOTE: there is no req’t that SH be relieved from being liable for the debt. expressly assume debt. agrees to and actually assumes) the Recourse Debt for Sec. Building has FMV of 300k and AB of 100k. we have 20k Sec. -the Corp. -no req’t that Corp. 68-629. AND Sec. 357 to apply. has assumed debt. How to reduce or eliminate Sec. 357(c) gain.

may not ever collect on promissory note (may not enforce note). and is wrong. says that SH does have AB in promissory note = Face Value of the Note. brings up the fact that Corp. -Sec. SH pays off debt. AB of promissory note = 0 b/c is a liability. -Should standard be Basis in Promissory Note if truly enforceable or if Corp. -In SH’s hands. then SH gets 1012 cost basis in Stock. -Reasoning: if SH buys stock with a promissory note from Corp. -Ct. if bankrupt. -Professor says that Peracchi is incorrect and argues that AB in Promissory Note = 0. is subject to bankruptcy? -the problem with standard being if Corp. which is not allowed to eliminate 357(c). the Corp. -Why is this result right? -b/c payment with promissory note is the same as payment with cash. so isn’t that zero?? So. Commissioner (9th Cir. 357(c) gain is eliminated b/c Aggregate AB of transferred assets = Aggregate FMV of property. that’s a problem b/c Corp. -BUT 9th Cir.41 in Promissory Note. files for bankruptcy.r. -What about fact sole SH wholly owns Corp? -yeah. this is similar to SH guaranteeing Corp’s debts. is subject to bankruptcy. -meaning. 1031 allows for basis credit for promissory note.) says Yes can eliminate 357(c). SH must have had AB in the promissory note? -BUT this does not work. -can make argument that purpose of 357(c) is to avoid negative basis. . so Creditors can enforce it if Corp. -So..). now Sec. Therefore. fails to pay Cr’s (b/c b. 362(a) can’t get to that AB result. And. 4-Peracchi v. + debt may not be bona fide. goes bankrupt is that SH pays only when Corp. Plus. -NOTE: SH getting loan from Bank and using borrowed money (cash) in 351 exchange does avoid 357(c). takes a transferred basis. has Face Value basis and in saying that 357(c) looks at Corp’s AB. Lessinger has no statutory support in saying Corp. -BUT the problem with this is that Cost Basis principles do not apply to 351 exchange. So.

11) -Edmund’s Tax Consequences: -Realized Gain: 1. Tax Court. 357(b) apply? NO. and receives 180k Stock. 1-Now.5 mil.3 mil. agrees and is expected to pay 100k and Beth agrees to pay 20k. Corp. argue 2 Cir. AB (1. Liab. We don’t know. nd -.On Exam. AR: 2. gain. 357(c)? -Yes. sells Note. -How do we eliminate 357(c) gain? -have the Corp. Problem 4 (p. gain.: 1. -problem with giving Note a zero basis is that if Corp. no 357(c) gain b/c 100k = 100k.) – 1. Sec. 357(d)(1)(A). and Recourse debt (Mortgage) of 120k to Corp. -Tax Court Basis in Land = 1. 9th Cir. AB of 100k. Liab.5 mil.2 million.3 mil. AB (800k) – 1..5 mil. -Does Sec. debt relief + 700k rec. debt relief + 200k rec. potential gain of 700k b/c Agg.5 million > Agg. gain. . b/c says promissory note has AB of Face Value = 500k. gain. 2-Now. so 357 applies. b/c Agg. and have in agreement that Corp. argue what happens in the 2nd/9th Cir. -Corp’s Tax Consequences: -Basis in Land: -2nd and 9th Cir. -Stock Basis = 0.5 million debt relief) – AB: (800k) -Recognized Gain: -we have a liability that has been assumed..42 Example: Beth transfers Building with FMV of 300k. + 200k rec. AB by 700k. take the Building subject to the 120k Recourse Mortgage.5 mil. AR: 2. -Gain Realized = 1. AB 800k + 700k rec.7 million. -now. – AB: 800k. in Basis in Land = 1 million. and Discuss why and why not 2nd or 9th is wrong. -Lessinger and Parachi (transferred basis) -Tax Court: 0 or 500k basis. AB: 800k.7 million AR: (1 million stock + 1.5 million. Note has basis = Face Value. assumes 100k recourse mortgage. -Gain Recognized = 200k -Stock Basis = 0. AB 800k mil. -as a result. -What about Sec. -BUT we can’t do this for Non-Recourse Debts b/c “subject to” is enough. -This has statutory basis b/c of Sec. > Agg. what if Tax Court is authority: -Gain Realized = 1. -Gain Recognized = 700k. 357(d). – AB: 1. -Basis in Promissory Note: -2nd and 9th Cir: 500k.

Problems (p. -look at Lessinger for more info. -whereas under accrual which Abe uses. Sec. cases. Do we have assumed liabilities? -Yes. 357(c)(3). 12-13) Problem 1 -Why does Jack’s A/R have AB of zero and Abe’s A/R have a AB of 60k? -b/c under cash method which Jack uses. This example’s promissory note is more likely to have Basis b/c have another SH to enforce the note.43 there is phantom gain. 357(b) issue? NO. Assumption of Debts that Would be Deductible When Paid. 1. -Jack’s Tax Consequences: -Realized Gain on A/R: 60k. income is included in GI when it is earned so Abe takes Tax Cost Basis of 60k b/c already reported GI of 60k. . (40k – 28k) -Recognized Gain: 0. 2. (60k – 0) -Realized Gain on Equipment: 12k. income is not included in GI until it is received. This example is better than the 2nd and 9th Cir. so 357(d) is satisfied.

357(c)(3) liability b/c paying it off gives rise to deduction. -Corp’s Tax Consequences: -Basis (in Jack’s): -Office Equipment: 28k. 357(c) issue? -potentially yes we have a 52k gain. Rul. -Recognized Gain: 0. AB: 28k. -RA: the 25k Purchase Money Mortgage does not give rise to deduction and it gave rise to increase in basis. 358(d)(2) says to exclude any liability excluded by Sec. -Agg. What about Sec. -Abe’s Tax Consequences: -Realized Gain on A/R: 0. (40k – 28k).44 3. . -RA: the A/P of 55k is Sec. -Stock Basis: 3k = AB: 28k – 25k debt relief (358(d)(1)) -Sec. -Reasoning for 357(c)(3): Jack has not taken deduction on A/P. we exclude the 55k A/P from the Sec. -we do count A/P as liability under 357(c) b/c already took the deduction. so he has not recognized tax benefit yet. Liab. 25k < Agg. we take into account the A/P for 357(c). 55k + 25k > Agg. 357(c)(3)? -357(c)(3) says for purposes of applying 357(c)(1). counting A/P as liability would mean over-statement of liabilities. 4. a liability is excluded if payment of liability would give rise to a deduction and the incurrence of the liability did not result in increase of basis of any property. -As a result. -so. -Assignment of Income Doctrine does not apply b/c IRS acknowledges that applying assignment of income in 351 exchange would not allow for tax-free exchange. when Corporation collects the 60k. 80-198. 357(c)(1). So. -A/R: 0k. -351(a) – 357(a) – 357(b) – 357(c). 357(c)(3) – meaning exclude 55k A/P in determining stock basis. -so. Liab. the Corporation is taxed on that income. (60k – 60k) -Realized Gain on Equipment: 12k. for accrual method. Rev. AB 28k. and Jack has no 357(c) gain b/c Agg.

-NO income is reported/taxed on collection of Abe’s A/R b/c already reported by Abe. -Stock Basis: 8k = (88k – 25k – 55k). Problem 1(b) -Corporation reports income and is taxed on collection of Jack’s A/R. 358(d)(2). 357(c) gain: potentially 10k b/c Agg. -Sec. we have preserved 160k gain. Liab. 357(c)(3) includes both liabilities with deductible expenses and with capital expenditures. -So. b/c the 50k liability to pay prize is a Sec. the incurrence of this liability did not increase basis of any property. which is correct b/c 50k of 210k was . -Sec. -NOTE: Sec.e. there is no recognized gain. rev rul 95-74.45 -Agg. -358(a) – 358(d) – 358(d)(2). for awards and prizes). -A/R: 60k. -So. Problem 1(c) -Corporation takes deduction (Sec. -NO deduction is allowed when payment of Abe’s A/P b/c already deducted by Abe. 50k > Agg. 162) on payment of Jack’s A/P. 357(c)(3) apply? -Yes. Rul. -Don’t decrease by 50k b/c of Sec. 95-74. 80k. but can be applied to Accrual Method if economic performance is delayed (i. -Does Sec. prize under §461(h) isn’t deductible until paid -So. (assume Louis is cash method TP). even if Louis used Accrual Method. -Recognized Gain: 0. we’d still apply 357(c)(3) -Stock Basis: 40k. AB: 88k > Agg. no 357(c) gain. See Rev. -Corp’s Tax Consequences: -Basis (in Abe’s): -Office Equipment: 28k. -So. 357(c)(3) usually goes to Cash Method. 162 deductible expense. Also. Liab. Problem 2 Prize Liability -Louis’ Tax Consequences: -Realized Gain: 210k = AR: (200k stock + 50k debt relief) – AB: (40k). AB 40k.

. 358(d)(2) for basis purposes? -well. 358(d)(2) still applies for liab. the transfer does have bona fide business purpose b/c Brownacre is transferred to Subsidiary. Problem 3 Sec. then Louis’ stock basis = 0. pays 50k prize. do we still apply Sec.46 going to be a deduction for payment of prize. 357(b) applies if principle purpose of exchange is to avoid taxes. -Corp’s Tax Consequences: -Basis in Book Inventory: 40k. and IRS says even if Liab. what if Prize = 40k instead of 50k? -As a result. Agg. AB 300k. -Stock Basis: 100k. -As a result. will take deduction. 357(c)(3) applies to deductible expenses and capital expenditures b/c TP has not recognized tax benefit yet. 358(h) -Toxic’s Tax Consequences: -Realized Gain: 200k = AR: (100k stock + 400k debt relief) – AB: (300k) -Recognized Gain: 0. Sec. 400k > Agg. we have no potential 357(c)(3) gain. when Corp. Liab. -contingent environmental liabilities would not be taken by Accrual Method TP until paid (b/c of economic performance test and All Events Test). this 400k liability is excluded for purposes of 357(c)(3)? -Sec. described in 357(c)(3) so that stock basis is not decreased. -So. This transfer in itself was not for tax avoidance purposes. doesn’t exceed Basis. -Sec. if we don’t. -But this does not happen. -Also. -Potential Sec. Now. Corp. 358(h). Plus. 357(c) gain: 100k.

000 in cash. exception applies. -3 Questions: 1. This is a Contingent Liability Tax Shelter. 358(h): if liability is associated with a trade or business. thus stock basis is FMV of stock = 100k. capitalize! Section 3. What does control mean? (issue when there are multiple classes of stock).47 -if Stock Basis = 300k as stated by Sec. Who is included in control group? (control group) 2. RA: exception does not apply b/c Brownacre is not a trade or business. 358(h) applies when AB of property transferred exceeds FMV of stock received. and Chad. Bill. -the transfers do not have to be simultaneously. 358(h).000. Each will receive 10 shares of X stock. it takes a 200k Capital loss. counted in Control Group? (1) Ann. 357(c)(3) liabilities (but do not decrease basis below FMV of stock received). the TP’s stock basis exceeds FMV of stock received. and Sec. . -RA: decrease stock basis by 400k 357(c)(3). but that is below FMV. and Chad will transfer land worth 50. 351(a). Bill. If it was operating as trade or business. What does immediate after the exchange mean? In-Class Examples Chapter 3. Bill will transfer equipment worth 50. Congress put an end to this by enacting Sec. 368(c). then reduce stock basis by Sec.000. Instead. 3. Will the control requirement be met? -the Control Group includes Ann. 358(d)(2). and person assumes the liability. Capital Expenditure: when asset will extend past current taxable year. and Chad agree to form X Corporation. -Sec. Section 3 Who is included. -If after applying other provisions of 358. then when Toxic sells stock for 100k. it was operated. The “Control” Requirement -Sec. -Corp’s (Chimera’s) Tax Consequences: -Basis in Brownacre: 300k. -Exceptions to Sec. Ann will transfer 50. the transfers may take place over a number of days or even months.

1.000.351-1(a)(1)(ii) Relatively Small Value – Who in Control Group? (c) Eric transfers additional property (FMV = 5. thus Dana’s transfer is of relatively small value (satisfies element 1).000). Will the control requirement be met in the following alternative scenarios? (a) Dana transfers additional property (FMV = 5. that SH will not be included in control group if: 1. 351. Dana does not transfer any additional property. 351 only requires that Property Transforer is in control immediately after exchange.351-1(a)(1)(ii) says if existing SH transfers property for stock. so we only look at his ownership of shares. (2) Y Corporation (which was formed several years ago) currently has 95 shares of stock issued and outstanding.000 in cash to Y in exchange for 1 additional share (FMV = 1. it can also apply to later transfers. Eric can qualify under Sec.000). and Eric owns the remaining 5 shares. the primary purpose of that transfer by that SH was for the transfer to qualify for control under Sec. in this question. we have to determine what the primary purpose of transfer is – it appears that this is the case (so element 2 is satisfied). and thus is a taxable event. Dana is not . -RA: 1k/90k does not equal at least 10%. he lacks control under 351(a). And. -So. AB = 1. . BUT . Dana owns 90 shares. The Y stock has a FMV of 1. 351 control req’t. Proc. Meaning. the control req.000 per share. then it is not relatively small value. is satisfied b/c Dana owns 95 of 100 shares.000) to Y in exchange for 5 additional shares (FMV = 5. -Now. 2. 77-37 that if property transferred = at least 10% of stock already owned by SH. -Eric is only property transforer. Sec. -IRS says in Rev. AB = 1. (b) Reg.000) to Y in exchange for 5 additional shares (FMV = 5. So. delay is ok. Property transferred by that SH is of relatively small value in comparison to stock already owned by that SH. Dana transfers 1. . 1. And.000. -Sec.000). AB = 1.000) to Y in exchange for 5 additional shares (FMV = 5. Since Eric owns 10 of 100 shares.000. 351 is not limited to initial transfer. Now. -Reg.000).48 -IRS and Courts ask if property transfers are pursuant to an agreement at the time of the 1st transfer. Eric transfers additional property (FMV = 5.

351(a) is in Sec. and Class D nonvoting preferred stock. -Answer: Eric’s transfer is a taxable event.49 included in Control Group for Sec. After transferring property to Z in exchange for stock. at least 80% of Voting Power. (3) Z Corporation has 4 classes of stock outstanding: Class A voting common stock. 368(c). and Dana’s transfer is non-recognition. Rul. which says Control means owning: 1. not class-by-class. 2. 59-259 says that non-voting test is applied on a class-by-class basis. Meaning. -Rev. Class B nonvoting common stock. Fran’s stock ownership in Z is as follows: Class A VCS Class B NVCS Class C VPS Class D NVPS . Class C voting preferred stock. at least 80% of the total shares of all other classes of stock (that is Non-Voting Stock). Meaning of Control -Definition of Control for purposes of Sec. SH must own at least 80% of stock in each class of nonvoting stock. this is applied on aggregate basis. 351 purposes. AND -look at voting stock.

5% by multiplying 90% by 75% and 10% by multiplying 100%. Is Fran in control of Z? -Application of 2-Part Test of Sec. 368(c) purposes. 368(c): 1. this element is satisfied b/c Fran owns 100% of each class of non-voting stock. Gary transfers property (FMV = 10. -So. b/c Fran owns 100% of Class B NVCS. Now. AB . and the Class C shareholders are entitled to elect the remaining director. Does your answer to (a) change if the Class D nonvoting preferred stock is nonqualified preferred stock (as defined in § 351(g))? -NQPS is treated as boot for purposes of Sec. -You determine this based on number of directors each voting class may elect. Also.5% + 10% = 77. .5%. Class A VCS is 90% and Class C VPS is 10%. 2. Meaning. Not satisfied b/c .000. the Class A shareholders are entitled to elect 9 out of the 10 directors on Z’s board. Fran may elect 67. Yes. Meaning of “Immediately After the Exchange” (4) Gary and Helen form W Corporation.50 Owned by Fran Total (a) 300 400 200 200 100 100 200 300 The Class A and Class C shareholders are entitled to 1 vote per share. Yes. No. Fran owns at least 80% of voting stock b/c Fran owns 400 of 500 shares of voting stock (power). 351(a). Is Fran in control of Z? -So. instead of having 1 vote per share. we look at what % Fran may elect of each class. meaning NQPS is still stock for the Control req’t. . RA: 1. (b) (c) Assume instead that Fran owns all 300 of the Class D shares. but only owns 2/3 of D NVPS. the answer is the same as 3(a). BUT it is still treated as stock for Sec. 2. -Get 67.

The gift would be disregarded for control req’t even if Kim intended to make gift at time. -Steps Transaction Doctrine -a judicial doctrine developed by Court to treat multiple transactions as a single integrated transaction if the steps are sufficiently related. -Courts treat this scenario as Kim receiving all 100 shares. -this applies to many corporate cases.000 in cash in exchange for 10 shares of W stock (FMV = 10. JK also issues 30 shares of stock (FMV = 30.000) to JK Corporation (a newly formed corporation) in exchange for 70 shares of stock (FMV = 70. who does not transfer any property to JK. (5) Jill incorporates her sole proprietorship by transferring the business (FMV = 100. A few months later. then Gary has taxable event.51 = 5. In connection with Jill’s exchange. -Gifts are not a binding contract. End Result Test -if all steps are part of pre-arranged plan to reach a particular end result. -3 Variations of Test: 1. Does Gary’s exchange of property for W stock qualify for non-recognition treatment under § 351(a)? -When do we measure Control? After 1st exchange? Or after Helen subsequently transfers share to Ivan? -If control req’t is not satisfied. and what each test says.000). Does Jill’s exchange qualify for nonrecognition treatment under § 351(a) in the following alternative scenarios? (a) Kim is Jill’s daughter. Mutual Inder-dependence Test -if the steps are so legally inter-dependent that if completion of one step would be pointless without all other steps completed. . 3. and the issuance of 30 shares to Kim is intended as a gift. The actual correct analysis is not as important. Helen transfers 5 shares of W stock to Ivan. Binding Commitment Test -if at time of 1st step. -Remember re-characterization of disproportionate transfers (see above). then multiple steps = single transaction.000) in exchange for 10 shares of W stock (FMV = 10. treat multiple steps as single transaction. so Gifts after transfer do not break control requirement of 351(a). there is binding commitment to engage in subsequent steps.000). then subsequently gifting the 30 shares to Jill. 2. -Difficulty: which test to use? And what does mutual inter-dependence mean? For this class. not just 351(a).000) to Kim. Helen transfers 10. then treat multiple steps as single transaction.000). we need to understand that this test may apply.

Several years ago. -Merril-Goldman: no. -Stock Basis: 1k. they are just shifting ownership b/t property transforers. we have to look at all steps combined. v. b/c transferring services for Stock. Transferred Basis in Copyright. control req’t under 351(a) is satisfied. -so.000). 1032. b/c transferring property for Stock. and transfers b/t property transforers does not break control. 1st 100 shares to Jill and 25 shares to Kim. -As a result. (c) Section 3. 351(a) – Bill is in control immediately after his exchange. -Bill: -non-recognition of gain b/c of Sec. 13-14) Problem 1 -Facts are similar to American Bantam Co. -There is a Binding Contract in this scenario b/c Kim had binding right to receive shares at incorporation. -so. Meaning. Exchanged Basis in Stock. Sec. which provided that in exchange for her services as an employee of the sole proprietorship business. Meaning. -AB in Copyright: 1k.000 in cash to JK in exchange for 25 additional shares of stock (FMV = 25. -Public Investors: yes part of control group. 351(d)(1) says services are not treated as property for 351(a). Control Group = -Bill: yes part of control group. -so. Commissioner. -the point here is that Kim is a property transferor. Kim would receive an equity interest when Jill later incorporated the business. 1-What are tax consequences if Steps Transaction does not apply? -then Bill’s transaction is treated as separate from other subsequent transfers by Underwriter.351-1(a)(3) says . -Doors: -non-recognition. and Underwriter getting common stock for services is all part of one step. Then deemed transfer of 30 shares from Jill to Kim. 1. Bill’s transfer. The Control Requirement (p. Same facts as in (b) except Kim also transfers 25. Underwriters sale to public. then deemed transfer of 30 shares from Jill to Kim in accordance to binding contract. Jill would not have control under 351(a). -So. 1st all 100 shares to Jill. 2-What are tax consequences if Steps Transaction does apply? -Now.52 (b) Kim was a key employee of Jill’s sole proprietorship business. Jill and Kim entered into a contract. b/c Reg. Steps Transaction applies. so it’s a taxable event.

so Binding Commitment Test does not apply to this scenario. control req’t not satisfied b/c Bill and Public own 0% of that nonvoting class. -basis in asset is 10k. Court held that steps transaction did not apply b/c there was no binding contract at initial transfer. -Look at Control Req’t: -Assume that Common Stock given to M-G for services is Voting Stock. courts rely on the mutual interdependence test. 1012. Associates kept stock in escrow which showed ownership by Associates. 1012. plus contract did not provide absolute right that Underwriter would receive common stock (it was a contingent right). even when contract was entered into. -Assume that Common Stock given to M-G for services if Non-Voting Stock. -Corp: -non-recognition of gain. -So. Bill and Public Investors own 75% of Voting Power. would Associates entering into contract prior to initial transfer result in Steps Transaction? -A: what about the contingent right of Underwriter? -a contingent contract/option contract does not trigger the Steps Transaction Doctrine. non-recognition even when 351 does not apply. Also. -Again. what if Underwriter had absolute right to shares? -A: then this would be a binding contract b/c there is no absolute right of Associates to retain the shares. -Bill: -recognizes 9k gain. -As a result. it is like Public Investors are treated as transferring cash for stock directly from Corporation. Plus. then Control Requirement is not satisfied. -has a 10k Cost Basis in Stock. 1032. meaning fail the Voting Power req’t of 368(c). -Remember 1032 still gives Corp. Cost Basis. Associates have non-contingent binding . taxable event for Bill. -Answer: if steps transaction applies. there was no complete obligation for SH’s to transfer stock to Underwriter. -in American Bantham. Meaning. so doubtful there was a binding contract. -Look at American Bantham where Court said there was no binding contract set up before or at time of initial transfer. -Q: Now. Does Steps Transaction apply? 1-Binding Commitment Test -facts are not entirely clear about when contract was set up.53 what to do when person receives stock from qualified underwriter. -NOW. 1001. include Public Investors in Control Group. Instead. -Q: in American Bantham.

Problem 2(a) Donald Thump Land FMV .9M Gain realized Land is 15% .8M Original Cost .100K Building FMV .1M AB . -was there an independent business purpose for transfer of copyright to doors? Or.25% . 2-End Result Test -question is whether all the steps were pursuant to pre-arranged plan.22M Apprentice Corporation 100 shares of stock = 20M (1 sh = 200K) Asset SALE 20M Land/ Building 11. develop.2. which facts do state. End Result Test would probably not apply just b/c of pre-arranged plan.135K tax Building is unrecaptured §1250 .19M AB . but still we need to know what result is? -But like American Bantham.e. -NOTE: courts hold that employee’s having option to receive stock does not break control for 351(a) purposes.54 commitment to sell/give shares to Underwriter. and market software. 3-Mutual Inter-dependence Test -applies if steps are so inter-dependent that if legal significance of one step would be pointless without other steps.885M Net after cash = 17. loans) to generate capital. that public offering was necessary for that 1st step? -b/c yes Doors needed additional capital. but Doors had other options (i.75M TOTAL TAX = 2.115M . -this test may have some play here b/c Doors had to gain more capital to operate. -American Bantham said steps were not mutually inter-dependent b/c 1st initial transfer had legal significance independent of other steps.

351(a) when Donald Thump subsequently transfers stock? -Requirements: -1st thing to look for is whether 2nd transfer (that is subsequent transfer) is non-taxable? -in this problem. -Rev. -plus. yes Thump’s 2nd transfer of stock was non-taxable b/c both Jose and Donald 100% own Las Margarita’s after transfer. 2003-51. -thus. -2nd thing to look for is whether this end result in an alternate route that would have satisfied Sec.8. -Question is whether Donald Thump’s 1st transfer of Hotel to Apprentice satisfies control requirement of Sec. which means state taxes – that’s why they did it other way (way in problem). have 2 transfers of real property. is there any authority saying it should not apply? -Yes. . 351(a)? -in this problem. -Even if Steps Transaction applies. Rul. 351(a) b/c SH is continuing 1st transfer.55 Incorporation §351 gain = 0 §357 issues = 0 (None) Basis in the stock (358) = BPT = Not tax free under §351  immediate sham transfer  offer is lower than what had been offered  possible argument for 351 if offer had been the same Donald must recognize gain of 19M . then treat 1st transfer as nonrecognition under Sec. Plus. Then. Las Margarita’s could transfer Hotel to Apprentice Corp.365M Problem 2(b) -see notebook (back of page 12) for diagrams. 4 million FMV of building is 10% of 40 million FMV of all stock in Las Margarita’s.1M = 10. Rul.9M 15% Net after tax cash = $17. yes this could have been accomplished by Thump 1st transferring Hotel to Las Margarita’s and Jose transferring Restaurant to Las Margarita’s. 2003-51: if subsequent transfer is non-taxable. Jose’s transfer has bona fide business purpose. see Rev.

-Corp’s Tax Consequences: -non-recognition for A. 263. D does not have to report gross income until property right (stock) vests. who received stock for services. and each take a stock basis equal to FMV of stock received. and C qualify for Sec. C’s property contributed. then have to capitalize it. Problem 1(a) -Debbie’s Tax Consequences: -Debbie. -if make election. meaning nonrecognition.1032-1(a) says that stock issued for services is deemed to be issued for cash or other property. 1012. Corp. Problem 1(b) -now. So. 351(a)? -NO. Sec. B. -D will include FMV of stock in year 4 as gross income. -NOTE: if capital expenditure. and stock depreciates.56 Section 4. -non-recognition for D’s transfer b/c of Reg. Risk of forfeiture ends when D is able to sell stock. D could make election if she thinks the stock is going to appreciate in next 4 years. 83(c) says substantial risk of forfeiture is when ownership does not vest until services are completed. Sec. Cost Basis. 1032. -Do A. -So. Sec. Receipt of Stock for Services. 83(b) Election? -Yes. they only own 75%. 351(a) b/c of Sec. 1. 83(a). -See Sec. Debbie reports gross income of FMV of stock. -Meaning. b/c they do not own 80% of stock. these are taxable transactions. Making election means D reports income = to FMV of stock today (year 1). is entitled to deduction for stock paid to D for services. -Debbie’s tax cost basis = FMV of stock. -extends non-recognition to stock for services. which it looks like won’t happen till year 4. 1012. does not qualify for Sec. 162 and Sec. B. 83(a). you don’t get a loss deduction. -Also. we have a substantial risk of forfeiture. -What about Sec. C transfers. See Sec. 351(d)(1). Sec. -Basis is Cost Basis in A. . B.

83 applies. thus Stafford case should apply. thus Stafford case should apply. Letter of Intent -probably property b/c letter of intent was secured by Sean in his own name. -Sean’s contributions: 1. licenses. -Still have gross income in Sec. Contract with Fall University -probably property b/c contract was secured by Sean in his own name. -Stock Basis: 90k. 351. then A. -Difference is that Jill and Kim. Services for organizing and supervising buildings -this is services. and the services are done under Sec. it was his personally. 3-Fran -no gain/loss. 3. 351 non-recognition. 83 and cost basis in stock. We include all stock/shares owned by Service SH in the Control equation. but could make the argument. -As a result. patents. property is treated as Sec. Problem 1 was stock for future services. all have non-recognition under Sec. Jill recognizes income and gets deduction under 83(h). Meaning. . Problem 2(a) -What is property? -intangible property include goodwill. whereas. 2-Pat -no gain/loss. so Sec. 83 and treated as compensation for services. trade secrets. -Who is in control group under 351? -If service SH also contributes property. Other SH’s: 1-Les -no gain/loss. The financing commitment was not property of TP -Stafford case: the TP developed the letter of intent (contractual right) in his own name. 2. 351. Not clear. -So. -But what about contract rights? -James case: the TP negotiated or secured financing agreement in name of Corp.) owns the stock until property interest vests. 351. B. it was considered property.57 -When there is substantial risk of forfeiture. **The difference b/t Kim and Jill example and Problem 1 is that Kim and Jill was stock for past services. 351. we bifurcate the contribution in services and property. -Stock Basis: 210k. every party in this problem qualifies as property transforer. -So. then that SH is included in the Control group. -if we say it this way. So. Exchanged basis. and C could meet control requirement. then Transferor of stock (meaning Corp.

-H is contributing services. F.58 -Stock Basis: 400k. then yes Control Req. in exchange for stock. L. so Control Group still gets 351 non-recognition. -If make election. to work. and G are property transferors. so not included in Control Group. then Pat’s Stock Basis = 200k and Corp’s basis = 200k. it is definitively not NQPS. then do NOT include service provider in Control Group if: (1) the transferred property is of relatively small value in comparison to the value of stock received for services. P. then element 2 of primary purpose is probably not satisfied b/c contracts are for business purpose. -Corp. Problem 3(a)(1) -E.: -Equipment Basis: 90k -Material Basis: 200k. make sure property is at least 10% of stock received for services.351-1(a)(1)(ii) -if service provider also transfers property to Corp. -in 3(a)(1). -Look at Reg. -if stock is voting stock. (need both elements). and P own 80% of voting power. -the extra information at end of problem is to have the Control Group’s stock not qualify as NQPS. then whether Sean is included in Control Group matters b/c now Control may not have 80% Voting Power. Problem 2(b) -since stock is participating. still qualify for 351 non-recognition b/c all SH’s own 100% of voting and non-voting stock. Control Group gets 80% Voting Preferred Stock and H gets 20% Voting Common Stock. -in this case. 351. yes the Control Group req. -Answer: Sean is included in Control Group. -Voting Power: accumulate all voting classes. 362(a) – 362(e)(2) requires basis to be reduced by FMV over AB. is satisfied b/c control group owns 80% of voting power. AND (2) the primary purpose of the property transfer is to qualify the property transfers made by other SH’s for nonrecognition under Sec. L. -relatively small value is generally considered to be less than 10%. thus equal our Control Group. is satisfied b/c F. -RA: even if property is relatively small value. . 1. Sec. -is control still satisfied? -Control Group includes F. 368(c). and S (maybe?). So. -Control Group owns 80% of votes. -thus. -BUT if Fran’s stock is non-voting.

Control Group does not own at least 80% of the Class B Stock. -Meaning. Problem 3(b) -Control req’t is not satisfied b/c -yes voting power is satisfied.59 Problem 3(a)(2) -The Control Group does not own at least 80% of the non-voting Class B common stock. Meaning. Problem 3(a)(3) -Again. -point of this problem is to show that you determine voting power based on number of directors class can elect (or based on number of votes compared to total votes). -BUT Control Group does not own at least 80% of the NVCS Class C – H owns all 100% of Class C stock. so control req’t of 351 is not satisfied. Problem 3(c) -Yes. and not based on pure number of shares owned by each group. taxable exchanges. -remember go class-by-class for non-voting stock. . exchanges are taxable. Even if Class B Stock is NQPS. 368(c) so it still gets counted to determine if control req’t is satisfied. it still does not satisfy control b/c NQPS is stock under Sec. control req’t is satisfied b/c -Control Group has at least 80% of voting power (that is at least 80% of right to vote directors).

5 to 1.2 million 5. -high debt to equity ratio means under-capitalized corporation and thus means probably equity. -we have a Multi-Factor Test. -but courts are inconsistent with what ratio is ok.2 million equity = 7.7 million Is it Debt or Equity? -remember Debt and Equity are treated differently under Tax Code. 2-another factor is Debt-to-Equity Ratio (see how thinly capitalized Corp. -problem when controlling SH’s make contribution. 3-interest rate factor. 163). Below prime may mean bank would not have made this loan. we’re trying to avoid double taxation b/c Debt is taxed once. -Debt allows Corp.60 Chapter 4: The Capital Structure of the Corporation -See Sec. in this case.4 million 5.** Problem 1: -Balance Sheet: Assets Business Asset Cash Total FMV 3. it’s a weighing test. -But dividends are not deductible by Corp. not so with Stock. So proportionate loan to stock ownership is more like equity b/c doubtful SH’s will enforce payment of interest on loans.7 million Debts Bank Note SH Equity 4. gets a deduction. plus the Corp. -So. to take deduction on paying interest (Sec. -with Debt. is). . 385.3 million 2. is whether the contribution is debt or equity? -this is a Facts and Circumstances Test. Problem 1(a) 1-fact that each SH’s loan is in proportion with stock owned makes it look more like equity. it would be 9 million debt / 1. **NOT tested on this chapter.5 million 1.

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Problem 1(b) -fact interest is paid out of profits only looks more like dividends, so really looks like an equity investment b/c payment is dependent on success of business. Problem 1(c) -shows that a debt instrument can later be re-classified as an equity instrument for tax purposes, i.e. when corp. stops making interest payments. Summary of Chapter 3: Corporate Formation -Steps: 1. Does 351 apply? -property -stock -control 2. Is there boot? 351(b)? 3. Liabilities? 357? 4. Character of recognized gain? 5. Stock Basis? 6. Holding Period? 7. Corp’s Basis in Property? -Property: -no comprehensive definition for property, but cash and A/R are property. -but intangible property created by personal efforts of SH are property. (i.e. contract rights created by SH’s efforts and for use by and owned by SH). -if intangible property created for corp., then not property. -Stock: -351 includes all stock, except NQPS, which is treated as boot – remember when determining control under 368(c) include NQPS as stock. -if just receive NQPS, then 351 does not govern at all. -Control: -Service providers not included in control group, unless Service Provider transfers property and provides services. -Reg. 1.351-1(a)(1)(ii), exclude service provider when: (see slide 8) -Remember when including Service Provider, include all the Service Provider’s stock rec’d in measuring control, not just what Provider rec’d for property (but also stock rec’d for services). -Sec. 351(b) rec’ing Boot -recognize realized gain on boot rec’d. -remember if SH transfers multiple assets, gain or loss is determined on asset-byasset basis using relative FMV of each asset. -still can’t recognize loss. -Liability Assumption: -Steps:

62 1. first determine if corp. assumed recourse liability – look at facts and circumstances. 357(d). 2. second determine if lialbity assumed is for tax avoidance or is not for a bona fide business purpose. 357(b). 3. third determine if SH’s aggregate of liabilities assumed by Corp. > aggregate of AB of property transferred by SH to Corp. 357(c). 4. fourth look to see if Sec. 357(c)(3) applies for 357(c) purposes, these are payment of liability that gives rise to deduction or capital expenditure. -look for Cash Method A/P. -Sec. 357(b) v. Sec. 357(c) -357(b) trumps 357(c). -if 357(b) applies, all of SH’s liabilities assumed (not just particular liability) are treated as cash received (that is treated as boot) for Sec. 351(b) purposes, so go to Sec. 351(b) to recognize gain. -for 357(b), look to see if liability was incurred for a business purpose. -if 357(c) applies, recognize gain of liabilities > AB. -SH recognizes gain under 357(c), not 351(b). -357(b) and 351(b) say determine character on asset-by-asset basis, whereas, 357(c) says to determine character using relative FMV of assets or relative appreciation on each of assets transferred by SH. -look at this more!! -Character of Gain: -remember Sec. 1245 and 1239. -Stock Basis: -purpose is to preserve all the realized but unrecognized gain or loss. -focus on how liability assumption affects basis (remember 358(h)). -remember if SH receives multiple classes of stock, then determine basis in accordance to relative FMV of stock rec’d. -NQPS is outside of basis rules under 358. -Holding Period -split holding period in each share of stock. -Corp’s Basis in Property: -look at Sec. 362(e) and how multiple built-in loss assets are affected. -Transfer of Property as Boot by Corp: -if boot property is appreciated, then Corp. recognizes gain on transfer of property as if Corp. had sold asset to SH at FMV. -Sec. 351(f) – Sec. 311(b). -311(b) does not trigger when Corp. transfers own debt instruments or NQPS as boot in 351 exchange. -if boot property is depreciated, then Corp. may not recognize any loss. -Sec. 351(f) – Sec. 311(a). -Disproportionate Exchanges -review it more.

63

-No 351 application: -SH recognizes gain or loss (remember 267 limitation on loss). sec. 1001. -Stock Basis = FMV of stock rec’d. -new holding period. -BUT 1032 still applies for Corp., and Corp. takes Cost Basis in property rec’d (meaning it equals FMV of stock or FMV of other property transferred to SH).

Chapter 5: Dividend Distributions Section 2: Dividend Distributions in General
Sec. 301(a) applies when Corp. distributes property (as described in Sec. 317(a), which says cash, securities, and any other property, but not stock is property) to a SH, in SH’s capacity as SH. -for example, if SH is also employee of Corp. and Corp. pays him compensation, that is compensation not dividend or 301 distribution. -a stock dividend is not covered by 301(a). -317(a) describes property for this part (301 – 318) not for the part 351 is in. Sec. 301(b) tells us the amount distributed. Sec. 301(c) Amount Taxable. -(1) amount constituting dividend shall be included in gross income. -(2) amount applied against basis, that amount which is not a dividend, shall be applied against and reduce the adjusted basis of stock. -aka return of investment/ capital. -(3) amount in excess of stock basis, if stock basis is reduced below zero, then excess over zero is treated as a Capital Gain (usually LTCG) b/c treat as gain from sale or exchange of stock. Sec. 301(f) Special Rules: -redemption of stock (learn later). Sec. 316(a) says distribution is a dividend if it is paid out of either: 1. Current Earnings and Profits for current taxable year, OR 2. Accumulated Earnings and Profits (accumulated after February 28, 1913). a. Running total of all prior years before current year. Meaning any remaining current E&P gets carried over to next year as accumulated E&P. -Earnings and Profits is Corp’s economic ability to pay out distributions from real economic income instead of out of capital contributions.

Items that are deductible for tax purposes. 243. 3.000) Excess capital loss (1.000 Dividend Income 10. which is under Sec.000 *DRD (Dividend Received Deduction). can use to pay distributions.000) Interest on bond (3. but represent actual expenses Corp. 2. excess capital loss.000 Total E&P: 57.000) DRD* (70%) (7.000 Tax Rate * 20% Taxes Paid 12. Items excluded from taxable income. income taxes (since it is accrual method.000 4 Categories of E&P: 1.000 Fine (4. -EX: fines.000) Capital loss (4. subtract from year taxes were accrued.000 Depreciation Adjustment 5. interest on municipal bond. -Earnings and Profits: Taxable Income 60.000) DRD 7. but represent actual dollars Corp. subtract out in year taxes were paid). but do not represent actual economic .000) Federal Income Tax (12.000 Capital Gain Deductions: Wages (33.000 Interest on bond 5. If cash method.000) Depreciation (8. made. Items not deductible for tax purposes.64 Problem 1 -What are Earnings and Profits: -Taxable Income: GI: Gross Receipts 98.000) Taxable Income: 60.

Return of Basis 4. -What if on July 1.000 of accumulated E&P and no current E&P. b/c you measure Current E&P at the end of year. then to Sec. Meaning. So. then out of Accumulated E&P. then accumulated E&P is irrelevant. 316(a) says distribution is a dividend if out of accumulated or current E&P – always 1st from Current E&P. 316(a)): 1. then measure distributions out of Current E&P. and thus make adjustment. -As a result. Current Earnings and Profits 2. As of January 1 of the current year. -Sec. must reduce Current E&P by 30k. use straight line depreciation for E&P.Items that are deductible. (b) X has 30. 301(c). 316(a) for dividend definition. must reduce cash by that amount. -Entire distribution is a dividend out of current E&P.000 in cash to Lisa with respect to her stock. Accumulated Earnings and Profits 3. In-Class Examples Chapter 5. -EX: Depreciation adjustment b/c tax depreciation is accelerated. -Rule: anytime current E&P is sufficient to pay current distribution. (NOT tested on this stuff above from problem 1). thus = 0 . 301(c) and Sec. 312(a): have to decrease Accumulated E&P by 30k.000. there were zero Current E&P. 312(a): anytime cash is distributed. X Corp. Excess over zero basis = Capital Gain. -Sec. thus has 0 current E&P (as a result 0 accumulated E&P). but there are timing issues. -Sec. X distributed 30. Section 2 (1) Lisa has owned 100% of the stock of X Corporation for several years. Distribution Order (Sec. Corp. but then 30k E&P were earned from July to December? -that is not relevant. On July 1 of the current year. all 30k distribution is a dividend.65 expenses.000 of current E&P. 4. How will the distribution be treated in each of the following alternative scenarios? (a) X has no accumulated E&P and 30. her basis in the X stock was 10. -EX: DRD. -Go first to Sec.

decrease Accumulated E&P by 15k. -not clear. (c) X has an accumulated E&P deficit of 30. -Sec. 312(a) requires reduction to E&P. -So. -AND the 1st 15k is dividend. and is thus dividend.000 for the current year. so it is CG. So. 74-164 says to pro-rate current deficit when don’t know when deficit was incurred.66 Accumulated E&P. Rul. -30k Acc. -Meaning. reduce that 15k by 30k deficit. -And. -But what about other 15k? -10k is return of capital (basis). -Sec. (pro-rate means use 1/12 for each month). then accumulated deficit is irrelevant. -Sec. Sec. -never decrease E&P below zero. Meaning. 15k of 30k distribution is dividend. but this seems to be the fair result. -5k is excess. 301(c)(3). 301(c)(2). thus equals 15k. 312(a) -the right result should be to reduce current E&P by 30k. Meaning start next year with 30k accumulated deficit. 301(c)(1). -Rev. -RA: 30k * (6/12) = 15k deficit incurred before July 1. thus have Accumulated Deficit = 15k.000 of current E&P. . and thus have 0 current E&P. -Sec.000 and 30. 316(a) says to 1st look at current E&P. reduce Accumulated E&P of 30k by 15k. (i) X cannot determine how much of the deficit was incurred prior to the date of the distribution. 316(a) says distribution is a dividend if out of current E&P and Regulations say that when current E&P is sufficient to pay distribution. (d) X has 30.000 of accumulated E&P and an E&P deficit of 30. The Regulations say that distribution is a dividend to the extent that Accumulated E&P exceed loss on date of distribution. all 30k is out of current E&P. E&P – 15k loss – 15k distribution = 0. Sec.

-Acc.000 of accumulated E&P and 20. 1. E&P. E&P: 30k – 20k distribution = 10k acc. 10k of Accumulated E&P is Dividend. . -Reduce accumulated E&P to zero. E&P – loss allocated on date of distribution – Dividend Distr. -So.000 of accumulated E&P. (e) X has 30. and thus is acc. -Sec. -Only reduce Accumulated E&P if you end up with a current deficit. -So. E&P – 20k Loss – 10k Distribution = 0. so that means the rest of the distribution (that is 20k) is out of Acc. as for the remaining 20k: -10k is basis and 10k is CG. E&P starting next year.316-2(b) Portion of Distribution out of Current Earnings and Profits -Amt of CEP = Distribution * (Current E&P / Total Distributions) -Look at current E&P first. -Sec. -Meaning. X has 10.000 for E&P purposes for the first 6 months of the current year. all 30k is a dividend. 20k of loss is allocated July 1. deficit next year. and the remaining 10k accumulated deficit is what Corp. E&P on July 1.000 in cash to Mark on December 31 of the current year. -Meaning.000 of positive E&P for the last 6 months.000 of current E&P. 312(a) -Current E&P: 10k – 10k distribution = 0. but it has 40. 10k from current E&P = 10k. 312(a): acc. 312(a) -30k Acc. -And.000 of current E&P for the year. which is not enough to cover total distributions of 40k. there is still a 30k Acc. Sec. X has an operating loss of 30. (2) Same facts as in (1) except Lisa sold her X stock to Mark for 50.000 on October 1 of the current year and X distributed 10. (ii) X can establish that 2/3 of the deficit was incurred prior to the date of the distribution. so X ends up with 10. thus. How will the distributions to Lisa and Mark be treated? -Reg. has to start next year.67 -15k loss is leftover.

Section 2. using Sec. not deductible. Instead. we allocate the Current E&P among the distributions. Mark’s new stock basis = 45k. reduce E&P by 30k. meaning 15k of distribution is out of current E&P -As for Dec. Chapter 5. -Now. 1.68 -So. 1. -Answer: -Lisa’s 30k distribution: -15k is dividend out current E&P. 301(c)(2). Dividend Distributions in General (p. b/c Sec. her gain recognized is 45k = A/R: 50k – AB: 5k. 31 distribution of 10k to Mark: 5k = 10k * (10k/40k). E&P left. 316(a) stops us from having to trace funds. -Mark’s 10k distribution: -5k is dividend out of current E&P. what about Accumulated E&P: -accumulated E&P is allocated chronologically. borrowed money to pay distribution matter? -NO. -What about remaining 10k distribution? -that 10k is a return of capital (basis reduction). when Lisa sells stock on Oct. -5k return of capital (basis reduction).316-2. 312(a). -As a result. -May Corp. See Sec. See Reg. reduce E&P? -Yes. Sec. -remember this is tax-free. -meaning use Ratio = Distribution * (Current E&P / Total Distributions) -As for the July 1 distribution of 30k to Lisa: 15k = 20k * (20k / 40k). E&P by 10k. -Does fact that Corp. meaning 5k of distribution is out of current E&P. and thus Accumulated E&P to start the next year = 0 (zero). -10k is dividend out of Accumulated E&P. distribution is deemed to come out of current E&P. -All 10k of Accumulated E&P is allocated to Lisa on the July 1 distribution. -5k is return of capital (basis reduction). -As result. -Corp’s Accumulated E&P for start of next year is zero (0). So. -New Stock Basis = 14k = (24k – 10k) -May Corp. we decrease Acc. -As a result. 312(a). -So. 22-24) Problem 2(a) -How much will be treated as a dividend? -30k is dividend b/c current E&P = 30k. Problem 2(b) -How much of distribution is a dividend? . deduct distribution? -NO. meaning we have 0 Acc.

E&P = 0 = 36k – 28k to Ben – 8k to Ben and Molly.316-2(b) Portion of Distribution out of Current Earnings and Profits -Ratio = Distribution * (Current E&P / Total Distributions) -As for distribution of 40k to Ben on April 1: -12k = 40k * (24k / 80k) is dividend out of current E&P. always pay out Current E&P. Meaning offset current E&P of 9k with Accumulated Deficit of 20k. -we only have Acc. 31: -6k = 20k * (24k/80k) is dividend out of current E&P. 4k goes to Ben and 4k goes to Molly. -of the 8k Accumulated E&P. so his basis in remaining shares = 12k. -Recognized Gain = 38k on sale = A/R: 50k – AB: 12k.69 -all 15k is a dividend b/c 1st pay out of Current E&P even if there is a deficit of accumulated E&P. -Corp’s starting Accumulated E&P for next year: -0 (zero) -Sec. E&P. E&P = 36k. -As for distribution of 20k to Molly on Dec. -Ben’s new stock basis = 2k = 12k – 10k. and not Current E&P. -so. to have Accumulated Deficit of 11k for start of next year. 1. -Molly’s stock basis = 40k = 50k – 10k. -4k is dividend out of Acc. -Reg. all 40k is dividend. 31 -6k = 20k * (24k/80k) is dividend out of current E&P. -Current Loss = 32k -Acc. -meaning. -As for distribution of 20k to Ben on Dec. -Remember Ben sold ½ his stock to Molly on July 1. -Total E&P = 60k. Problem 2(c) -Total Distributions = 80k. -What about Corp’s Accumulated E&P? -1st reduce Current E&P by 15k. -10k is return of capital (basis reduction). E&P. -2nd offset Current E&P with Accumulated E&P. -10k is return of capital (basis reduction). -so. meaning 24k – 15k = 9k. E&P. Problem 2(d)(1) -Total Distributions = 80k. so how do we determine amount out of . -Current E&P = 24k -Acc. 4k is dividend out of Acc. 312(a) -Current E&P = 0 = 24k -Acc. -28k is dividend out of Accumulated E&P. E&P = 36k.

-Meaning. E&P? -Allocate the Current Loss (Deficit) pro rata across the year. -So. 31: -we have no Acc. . -24k is return of capital. 6k is return of capital (basis reduction) -now Ben has zero stock basis. -then the remaining 12k is return of capital (basis reduction). -As a result. -Thus. E&P. E&P. 1. Sec. -As for distribution of 20k to Molly on Dec. 28k of Acc. 301(c)(3). -So. -Remaining 14k is Capital Gain. E&P is left. 28k is dividend out of Acc. E&P. Problem 2(d)(2) -Now there is no pro-rating the Current Deficit. -so. -Acc. -As for 40k distribution to Ben on 4/1: -4k is dividend out of Acc. E&P. -thus zero basis. -12k is capital gain. 31 -we have no Acc.70 Acc. Then reduce Acc. -NOTE: Ben recognizes 50k on sale = A/R: 50k – AB: 0. -What about Current E&P? -8k Deficit was allocated to 3/12 of year. the entire 32k loss is taken into account on April 1.316-2(b). -now Molly’s stock basis = 30k = 50k – 20k. -Corp’s starting Accumulated E&P for next year: -Accumulated E&P = 36k – 8k current year deficit – 28k distribution = 0. -Bill’s new stock basis = 12k = 24k – 12k. -according to Reg. and 24k is allocated to 9/12 of year. -Meaning 1/12 of loss for each month. E&P of 36k – 32k allocated loss = 4k. -As for 20k to Ben on 12/31: -20k is capital gain. -Answer: 24k Accumulated Deficit. 24k is Accumulated Deficit going forward. -So. -As for 20k to Molly on 12/31: -20k is return of capital. when Bill sells ½ stock to Molly on July 1: -Recognized Gain = 44k = A/R: 50k – AB: 6k (b/c ½ of 12k stock basis). -As for distribution of 20k to Ben on Dec. E&P by amount which is loss allocated to that date. E&P – ((# of months / 12) * Current Deficit) -As for distribution of 40k to Ben on April 1: -8k is loss b/c (3/12) * 32k = 8k. all 20k is return of capital (basis reduction). -Ratio = Acc.

600 treated? -6. . Problem 4 -Alice owns 900 shares of common stock.900 distribution from Corp.000 shares of Preferred Stock and 100.200 is attributed to Stock with Basis of 9k.600 = 2. United States -which says that SH can’t aggregate basis. 69-440 says that preferred stock gets dividend before common stock. and Acc.400 capital gain. -Return of Basis = (# of shares of Stock with Basis / Total # of Stock) * Excess (not dividend). -How do we allocate distributions? -Rev. distributes 700k to Preferred Stock SH’s. all 2200 is return of capital (basis reduction).800.400 is attributed to Stock with Basis of 2k. but how do we allocate it b/t different basis of stock? -See Johnson v. How is the excess of 6. and 3. -Common Stock: 150k is dividend out of current E&P. -and there is 2. -as a result. -(600/900) * 6. So.600 is return of capital. Rul. -As for Corp’s Starting Accumulated E&P for start of next year: -Sec.000 shares of Common Stock. pay preferred 1st out of current E&P and w/e is left goes to Common. -new basis = 6. -600 shares have basis of 2k. but must pro rate excess b/t different basis for classes of stock. -Answer: -(300/900) * 6. -Answer: -Preferred Stock: 700k is dividend out of current E&P. 312(a) -Accumulated E&P = 36k – 32k allocated loss – 4k distribution to Ben = 0 -Answer: 0 (zero) accumulated E&P for start of next year b/c no loss is allocated to dates after April 1.600 = 4.71 -new stock basis = 30k. then distributes 250k to Common Stock SH’s. basis of 2k is decreased to 0 b/c 2k is return of basis. Problem 3 -10.300 is a dividend. -as a result. The rest is return of capital or capital gain for SH. -300 shares have basis of 9k. -Corp’s Current E&P = 850k. -Corp. E&P = 0. -Then Alice receives 9.

311(b)) Earnings and Profits -Sec. -Appreciated Property Distribution: 1. 312(c). Corp. tax depreciation = 10k and E&P depreciation = 2k.312-3). -Reg. see Sec. 312(b) says to use Adjusted Basis for E&P purposes. 1. 1231. End of year 1. -for appreciated property. Section 3: Distributions of Dividend in Kind Corporation Rules: -Sec. -Flush Sentence of Sec. 311(a): general rule is that Corp. Reg. -EX: 100k property. nd 2. 312(a)(3)/(b)(2)/(c): Corp’s downward adjustment to E&P. 1st increase Current E&P by recognized gain. -Character: Sec. must recognize gain on distribution of appreciated property (treat as constructive sale to SH). decrease E&P by adjusted basis of property. 311(b): Exception to general rule. -for liabilities. and . 312(c) and Reg. (History: General Utilities Doctrine: says distribution of property is not taxed. 301(b): Amount of Distribution = FMV of property – Assumed Liabilities. -meaning. 3. SH’s Rules: -Sec.liability assumption. 1245. then decrease E&P by FMV . and 1239 (ordinary income). 312(b)(1)/(f)(1): Corp’s 311(b) recognized gain increases Current E&P. FMV less AB = Gain. Capital Gain. (not below zero). this affects distribution of property and distribution to other SH’s. so.301-1(g)(1) incorporates 357(d) rules for determining liability assumption (remember recourse is facts and circumstances to see if there is assumption. recognizes no gain or loss on distribution of property to SH (that is dividend in kind).312-3. this has been overruled by Sec. 1. treat this recognized gain as E&P for dividends of all SH’s (do the ratio Recognized Gain * (Amount to SH / Total Distributions to all SH).72 Chapter 5. -Sec. decrease by FMV of property (but if liability assumed. -Sec. 1. see Sec. thus use 98k (assume that Adjusted Basis on Exam is for Tax and E&P purposes). Tax Basis = 90k and E&P Basis = 98k. 2 decrease Current E&P by FMV of property less liabilities assumed by SH. -for depreciated property. remember don’t decrease E&P below zero (0).

301(d): Basis in property = FMV of property distributed. -New Holding Period for SH in distributed property. 301(c): Tax treatment. -Earnings and Profits: -increase current E&P by Sec. then adjust E&P (meaning E&P = 35k). then don’t adjust E&P. we decrease E&P by the FMV of property (thus by 100k). 1. but don’t worry about it for this class. has to pay 15k taxes. amounts that are dividend. As a result. -See Sec. thus capital gain. thus have 50k E&P. Paying at 30%. Sec. Y has no taxable income and no E&P from its business operations during the current year. Ned’s basis in stock now is 100k = (150k – 50k). -Tax Treatment (Sec. 301(c)(2)). On December 31 of the current year. 301(d). 316(a)) and 50k is return of basis (Sec. uses cash method.000. Just showing adjustment for taxes. 311(b). If Corp. Sec. -As a result. -decrease current E&P for distribution of property to Ned. -Ned’s Tax Consequences: -Amount of Distribution: 100k. -BUT Corp.73 non-recourse is subject to is enough). and excess of basis. As of January 1 of the current year. . In-Class Examples Chapter 5. has to pay taxes on the 50k. 312. Section 3 (1) Ned has owned 100% of the stock of Y Corporation for several years. How will the distribution be treated in each of the following alternative scenarios? Appreciated Property (a) The FMV of the land is 100.316-2 for amount to treat as dividend. 316 and Reg.000. return of basis. -we do this before determining amount of dividend. 301(b). and its basis in Y’s hands is 50. -Sec. Y has no accumulated E&P. uses accrual method. Corp. his basis in the Y stock was 150. Pursuant to Sec. Y is subject to tax at a flat rate of 30%. 311(b) gain. -Basis in Property: 100k. 301(c)): -50k is dividend b/c paid out of current E&P (Sec. If Corp. -Sec. 50k – 100k = 0 Accumulated E&P. -Y Corp’s Tax Consequences: -Recognized Gain: 50k = A/R: 100k – AB: 50k. Sec.000. -remember don’t decrease E&P below zero for distribution. Y distributes a parcel of land to Ned.

Sec. -Y Corp’s Tax Consequences: -Sec. remember this is FMV less liabilities assumed (100k – 70k). -Ned’s Tax Consequences: -Amount of Distribution: 100k.312-3.000. -Basis in Property: 100k. Accumulated E&P is 20k = 50k – 30k. Sec.74 -new holding period. 301(c). -As a result. Depreciated Property (Loss Property) (c) The FMV of the land is 100. Accumulated E&P is 75k = 200k – 125k. Sec. which Ned assumes. -by permitting downward adjustment of AB of property. 312(b) -decrease E&P by 30k. 301(b). and it is taken into account in one step. -Downward Adjustment should = Net Distribution to SH. 311(b) gain.000. 301(d). (a). -Tax Treatment: all 30k is dividend out of current E&P. -As a result. 301(b). 311(a) prevents recognition of loss. Sec. Property with Debt (b) Same facts as in (a) except the land is subject to a recourse liability of 70. and Reg. 312(b). 311(b). Sec. (c). thus = 50k. -new holding period. . Sec. Sec.000 from its business operations during the current year. 312(a) allows for recognition of unrecognized loss. -Earnings and Profits: -Current E&P = 200k. and its basis in Y’s hands is 125. -Ned’s Tax Consequences: -Amount of Distribution: 30k = 100k – 70k. -Earnings and Profits: -increase current E&P by Sec. 1. -Decrease E&P by the adjusted basis of the land. -liability assumption is not factored into recognized gain. -Y Corp’s Tax Consequences: -Recognized Gain: 50k = A/R: 100k – AB: 50k.000. Sec. Y has E&P of 200.

Rest is either return of capital or capital gain. -new holding period. Sec. Section 3 Problems (p. Sec. 312(b). -Accumulated E&P: 0 (zero) b/c of 60k distribution (the 60k AB is amount to decrease E&P by). -Basis in Land: 60k. Meaning. Sec. 301(d). Sec. Sec. 24-26) Problems 1-5 Problem 1(a) -Corp’s Tax Consequences: -no gain or loss recognized. 301(b)(1). Sec. Problem 1(b) -Corp’s Tax Consequences: -recognized gain: 90k = A/R: 150k – AB: 60k. Accumulated E&P = 0. 301(b)(1). -Basis in land: 100k. -Casey’s Tax Consequences: -Amount of Distribution: 60k. -new holding period. -Basis in Land: 150k. -Casey’s Tax Consequences: -Amount of Distribution: 150k. 301(d). Chapter 5. -Tax Treatment: 115k is dividend b/c 90k out of current E&P and 25k out of Accumulated E&P. -Tax Treatment: 25k is dividend b/c of 25k accumulated E&P. . 25k – 60k = 0 (can’t go below zero). 312(a)/(b)(2). Then the rest (35k) is either return of capital or capital gain. -As a result. the unrecognized loss is eliminated forever. Problem 2(a) -Corp’s Tax Consequences: -Recognized Gain: 100k = A/R: 190k – AB: 90k. 311(b). Sec. -increase current E&P by Sec. -no adjustment to E&P. -decrease E&P by 150k. -probably 1231 gain. 301(d). -remember distributions can’t decrease E&P below zero. -new holding period. but remember 1239 can come into play. 311(b) gain of 90k.75 -Tax Treatment: all 100k is dividend out of Current E&P. Sec.

Sec. . (thus. 312(a)(3)/(b)(2). Problem 2(c) -Corp’s Tax Consequences: -Recognized Gain: 100k = A/R: 190k – AB: 90k. -Tax Treatment: -Dividend Portion: 100k out of current E&P . 357(d) rules here. subject to is enough. Sec. Sec. 301. 301(d). -Ricardo’s Tax Consequences: -Amount of SH’s Distribution: 50k. -SH’s Basis in Land: 190k. 301(d). -as a result.312-3 for liability assumption. Sec. -Return of Capital/Capital Gain: 90k. 312(c) and Reg. 312(a)(3)/(b)(2) as adjusted by 312(c). Problem 2(b)(1) -same answer as Problem 2(a) b/c we use the rules in Sec. Sec. -BUT there is argument that you do make liability adjustment. -Sec. Sec. -this is assuming Ricardo did not assume recourse liability – we have to look at facts and circumstances to determine if Ricardo assumed recourse liability. 357(d) and there is no express assumption of non-recourse debt required. 1. -decrease E&P by 50k. 301(c)(1). -Tax Treatment: -Dividend Portion: 50k out of current E&P. -Basis in Land: 190k. -decrease E&P by 190k(?) distribution. meaning 100k FMV less 50k liability assumption. 301(c)(1). 190k – 140k liability assumed. 311(b) gain. Sec. Sec. -there is no express guidance on how to adjust E&P.312-3 say that SH taking property subject to liability means that you’d take reduction of liability. but it makes sense to apply Sec. 357(d) rules are not incorporated here like they are in Sec. -Earnings and Profits: -increase E&P by 100k Sec. Sec.76 -Earnings and Profits: -increase E&P by 100k Sec. -as a result. Sec. 316. Accumulated E&P = 0 (zero) for start of next year. Reg. 1. Sec. 311(b) gain. -new holding period. 312(b)(1). -Ricardo’s Tax Consequences: -Amount of Distribution: 190k. 312(b)(1). 301(b)(2). no change). Sec. we have 50k Accumulated E&P starting next year. 311(b). Adjust for liability assumption. 301(b). Sec. We don’t have enough facts in this problem.

301 does not apply. 301(c)(1). -So. to SH Problem 3(b) -What if Corp. See Sec. 267(a) did not apply. . -Basis in Property: 100k. 312(f). Sec. can’t recognize this loss. -What is the adjustment to E&P? -yes. sold land to Yuan (sole SH) for 100k? -Corp. Sec. -Sec. from deducting the 30k loss. 312(a)(3) says to decrease E&P by adjusted basis of property (when it is depreciated property). there is no dividend in this problem. -Basis in Land: 100k. we reduce current E&P by 30k. -decrease E&P by 130k.312-7. and don’t think Sec. -Sec. 267 when Sec. 267 applies b/c Corp. 267(a)(1) and (b). Accumulated E&P for next year is 10k = 140k – 130k. 1012 Cost Basis. FMV. may recognize loss of 30k = A/R: 100k – AB: 130k. So. –remember to use AB from Sec. Sec. -Remember there is no distribution. Sec. 1. -then Sec. Sec. BUT . -Dividend Portion: 100k out of accumulated E&P. Sec. Remember don’t adjust twice (just once using AB of property). which disallows Corp. See Sec.77 Problem 3(a)(1) -Realized Loss: (30k) = A/R: 100k – AB: 130k. Problem 3(a)(2) -Amount of Distribution: 100k. Actual Sale by Corp. -Q: What if Yuan later sells property for 180k? How much gain? -80k recognized gain = A/R: 180k – AB: 100k. 301(b)(1). so Sec. Earnings and Profits -0 Current E&P b/c no adjustment when distributing depreciated property. -So. 311(a) says Corp. 301(d). 165 allows. 267 applies. 301(d). Reg. . . we make an adjustment for the loss disallowed for tax purposes. and Yuan are related parties b/c Yuan owns more than 50% of Corp’s stock.

267(d) gives Yuan benefit of previously disallowed loss of 30k.6 million. -decrease Acc.78 -as a result. 311(a) v. -Sec. 267 consistent with the 2 tier tax consequences of Corp. – AB: 400k. Yuan sells the land for 180k? How much gain? -50k b/c Sec.4 million = 2 mil. -Building: 1. Corp. E&P is 6. -Next.4 mil FMV (Bldng). making recognized gain = 50k. Acc. we have 80k realized gain = A/R: 180k – AB: 100k. 267(d) says gain shall be recognized only to the extent it exceeds the previously disallowed loss. E&P by 3. -decrease current E&P by 1. current E&P deficit = 30k. Sec.4 million. -Related Party situation heightens manipulation of tax code. -decrease E&P by 2 million (land) and 3 million (building) = 5 million downward adjustment. -So. -as a result. .6 million starting next year. but chose not to do that and instead have blanket ban on loss. Sec. -Q: What policy reason might there be for the answer being different than in Problem 1(a)? Sec. he gets no benefit of previously disallowed loss.4 mil. instead only get benefit of previously disallowed loss if sell property at gain. 311(b). Tax? -NO they are not consistent with property distribution. Sec. 301(d). FMV (Land) + 1. 267. -But it looks like Congress could have relied on Sec. 267.4 million dividend. but Sec. = 6. 1.6 mil = 0.8 million out of Accumulated E&P. -Dividend Portion: all 3. 311(a). -Martha’s Tax Consequences: -Amount of Distribution: 3. -Basis: -Land: 2 million. That is policy reason for Sec.4 mil. -1st is Sec.6 million = 10 mil – 3. 311(a) disallows Corp. E&P for next year is 110k = 140k – 30k. -Earnings and Profits: -increase Current E&P by 1.6 million = A/R: 2mil. 267(d) to allow SH to take advantage of previously disallowed loss under Sec. from recognizing loss on distribution of building. distributing 2 Assets to SH Problem 4(b) -Corp’s Tax Consequences: -Recognized Gain: 1. -Acc. -Remember if Yuan sells for loss.6 million out of current E&P and 1.

-as a result. -what about out of Acc. which equals 60k out of current E&P. 311(b). -Earnings and Profits: -increase Current E&P by 90k.316-2. E&P) is dividend and rest (75k) is return of basis/capital gain. -Hamlet’s Tax Consequences: -Amount of Distribution: 140k. which equals 30k out of current E&P. and that leave 5k left to H. E&P? -40k goes to O.** . -Answer: all 70k is dividend. Sec. 1. -gain recognized: 90k. 70k distribution * (90k current E&P/210k total distribution).316-2. 1. which affects all distributions to all SH’s throughout current taxable year. -Dividend Portion: -use ratio from Reg. -Answer: 65k (60k out of current E&P and 5k out of Acc. 140k distribution * (90k current E&P/210k total distribution). -Then decrease E&P by 140k + 70k. there is 0 (zero) Acc. Dividend Portion: -use ratio from Reg. -Ophelia’s Tax Consequences: -Amount of Distribution: 70k. -what about out of Acc. E&P starting next year.79 Problem 5 -Corp’s Tax Consequences: -none for cash distribution. E&P? -gets 5k. **Remember to start with Corp’s Tax Consequences b/c Corp’s Recognized Gain increases Current E&P.

301-1(m). has profits of 3 million after salaries. -Facts: W is VP and owns 60% and has salary of 1. 3.) -the 600k is dividend only if E&P is sufficient to cover it. Reg. unless it is excessive. System. and look at what VP and President in similar position at similar corp. 6. 1. -remember a dividend is a distribution to SH in SH’s capacity. Corp’s Tax (35%) 35k 0 Distribution Amount 65k 100k (compensation amount) SH’s Tax 9. 162 deductible. Excessive rent paid to relative of SH. Section 4 Problems (p. . 5. earn as compensation. Corporate expenditures primary for SH’s Benefit (with no expectation in return). Rent-free use of corporate property by SH primary for personal purposes. payment of compensation to SH-ee is not a dividend.2 million. 8. Excessive Rent paid by Corp.162-7. -generally. S is President and owns 40% and has salary of 800k. Cancellation of SH’s loan to Corp. -we do this b/c dividends are not deductible by Corp. so ask why? You’d look at duties of VP compared to duties of President. Bargain Sale to SH. Reg.000 Chapter 5. -this is the incentive to disguise dividend as compensation: Dividend Compensation Corp’s TI 100k 0 = 100k GI – 162 100k ded. -What factors stand out? -fact that VP makes more than President. “Loan” with no real obligation to repay. and 600k is distribution (thus not deductible by Corp. 1. and to ensure double taxation of the Corp. Reg. Excessive Compensation. -8 2.750 (15%) 35k (35%) After-Tax SH amount 55. 7. Corp.80 Chapter 5. 4. 26-28) Problem 1 and 4 Problem 1(a) 1-Excessive Compensation to SH-EE? -See Factors on page 228.301-1(j). Section 4: Disguised Dividends -Disguised (or Constructive Distributions: 1. 1. -What if similar VP makes 600k? -then 600k is Sec.250 65.

Problem 1(b) -SH-EE’s are still paid in proportion to stock ownership. but there is just 30k profits retained after salary? -some courts use the hypothetical investor test. -this is probably not a reasonable rate of return.162-7(b)(2))? -contingent compensation is usually looked whether the agreement is reasonable at time of it being entered into. compensation is solely for services provided by SH-EE. which equals 60%. . we have sufficient retained profits so Hypothetical Investor would probably invest. 1. -fact that salaries are in proportion to stock ownership. has 4 million of profits after paying salary and bonuses? Do bonuses raise an issue? -we don’t have proportionate payments. so even though compensation was reasonable. and Corp. Problem 1(c)(A) -what if W is paid 1 million and S is paid 800k as compensation.81 -remember disguised distribution is treated same under 301 if facts and circumstances so illustrate.) need incentive to do their best. -Req.” Ask if the agreement was entered into at arm’s length. then look at facts and circumstances. -Reg.2 million of 2 million. (closely held Corp. 1. Compensation amount is reasonable. S and W each get a bonus of 800k and 1 million respectively. AND 2. which equals 40%. -would investor invest in this Corp? -the rate of return is 1. -W owns 60% and is receiving 1.162-7/8 says that if salary is not reasonable. so this raises a concern as to whether this compensation is reasonable. even if later the amount is “unreasonable. -so.probably even more) as suspicious. -S owns 40% and is receiving 800k of 2 million. for Compensation: 1. and ask whether a hypothetical investor would be satisfied with profits left after salary. how much of compensation being paid is actually for W and S’s services? Problem 1(c)(A) -Bonuses? -Now. it was not being paid for SHEE’s services. -a bonus is used to get employee to do his best. -What about contingent compensation (Reg.5% = 30k profits retained / 20 million net assets. -there is a case (PSA) that said compensation was partly from services provided by non-SH employees. but do SH-EE who own all Corp. Some Courts look at bonuses to SH-EE who are majority SH’s (+50% .

-but the fact Corp. pays excessive rent (more than Fair Rental Value). 1. 3-Corp. is a constructive 301 distribution b/c of Reg. and Corp. to SH at beginning w/ expectation of SH to pay. but use was primarily for SH’s personal purposes. (Reg. rent free house for SH’s personal purpose. -another example is SH paying less than Fair Rental Value to lease property from Corp. payment of SH’s personal expenses or payment of SH’s personal debt. 5-Corporate Expenditures primarily fbo SH and Rent Free Use of Corporate Property -examples include providing transportation to SH for SH’s personal use (not corporate purpose). If Corp. -Ireland Case: SH-EE used corporate jets. so this was a 301 distribution. 1. then Court will probably look at bonus as compensation. that amount in excess is probably a disguised dividend. -Ultimate Question is: who is primary benefit? Corporate or SH? -if SH contributes property with debt to Corp. . then cancellation of debt (COD) by Corp. does Corp. (there is no automatic dividend/distribution rule). is relevant factor. has paid no dividend in past does not mean bonus is automatically a dividend. 7-Bargain Sale to SH (Reg. the COD income is constructive 301 distribution. paying off assumed debt is NOT a disguised distribution. to SH.301-1(j) says that FMV over Bargain Price = Constructive 301 Distribution. -keep in mind that dividend paying history of Corp. and Corp. has history of paying dividends. 4-Cancellation of SH Loan to Corp. 1.301-1(m)) -this is a true loan from Corp.301-1(j)) -a sale of property to a SH at price below FMV results in the bargain element being taxed as a constructive 301 distribution. -so. Loan to SH -this is where the SH has no real obligation to pay off Corp’s loan. 1. Problem 4 -Reg. reasonably expect to be repaid by SH and intend to enforce loan? -if no. 2-Excessive Rent -SH leases property to Corp. The value is determined using Fair Rental Value. then Corp.82 -another factor is whether Corp. then treat loan as a 301 disguised distribution. Thus. assumes debt but SH remains liable for debt. -Fair Rental Value is standard to use for valuing distribution.3011(m). -this is for Rent Free use of Corporate Property by SH. 6-Excessive Rent paid to Relative of SH -this is deeming the transaction as a 301 distribution from Corp. not corporate purposes. then gift from SH to Relative. ask at time of loan being paid. has history of paying dividend.

Outrun’s Basis in property = 900k.4 million recognized gain. -then use Sec.83 -So. Outrun having Basis in Property Now. when property is sold at 3 million. -A/R: 2 million – AB: 600k (portion of basis allocable to distribution) = 1. 1. this 2 million is a dividend b/c sufficient E&P. meaning amount of distribution = 2 million. 1001(c) for sale portion: -A/R: 1 million – AB: 300k = 700k recognized gain. recognizing gain. for problem 3 million FMV – 1 million paid = 2 million 301 Distribtuion. -Meaning. 301 Distribution Amount 2. Sale Amount . so it is 301(d) FMV basis. what if for problem 4. 311(b) applies. -What is basis in property? -Basis: 3 million b/c 1 million is 1012 Cost Basis and 2 million is distribution. -then Sec.1 million recognized gain. -basically. showing that you have to bifurcate bargain sale transactions to SH for Corp. there is no gain = A/R: 3m – AB: 3m. -As a result. -Total: 2.

243(c). The corporations have never elected to file a consolidated tax return. AND. -this is for affiliated group that does not file consolidated tax return. -Qualifying Dividend means: 1. 1504(a). which owns 100% of the stock in Subsidiary Corporation (“S”). What if S has E&P of only 8. -BUT . Sec. -And. The Sec. P has owned the S stock ever since S was formed five years ago. Section 5 (1) Olivia owns 100% of the stock in Parent Corporation (“P”). this scenario satisfies Qualifying Dividend in that P owns 100% of S and E&P were earned while P owned S. -the excess 2k may be deemed return of capital. then are taxed at Parent level when distributed as dividends. Sec. So. (b).000? -The amount of dividend is only 8k.84 Chapter 5. (a) What are the tax consequences to P if S has E&P in excess of 10. Sec. 301. . 243(a)(3). -this leaves 6500 to be distributed to Olivia. 246. 2-Deduction is 80% if Corporation owns at least 20% of Corporation paying dividend. Section 5: Intercorporate Dividends -Sec. See Sec. 2. 243 DRD is computed only on the dividend. Sec.500 b/c tax rate is 35%. 243 DRD deduction is 100% of 10k = 10k. -Affiliated Group. -Answer: GI 10k – DRD 10k = 0 net income. (b) . Sec. 3-Deduction is 100% if Qualifying Dividend. 243 that affects this in that it allows for a Dividends Received Deduction for the Corporate SH who receives the dividend. 243(a)(1). During the current year. 1059. -Tax on Dividend of 10k to Parent is 3.000? -first earnings are taxed at Subsidiary level. Sec. dividend is paid out of E&P during Corporation’s ownership of 80%. S distributed 10. Sec. P is subject to tax at the highest marginal rate (35%).000 in cash to P. DRD = 8k b/c 100% Qualifying Dividend. . In-Class Example Chapter 5. Sec. Corporation owns 80% or more of Corporation paying dividend. 243. there is Sec. 1504(a). -So. Sec. 243 Dividends Received by Corporate SH Deduction 1-General Deduction is 70% of Dividend Amount.

There is tax savings of 700. Date then sells stock below value for loss deduction. -A/R 28k – AB 30k = 2k STCL. Payment Date c. -GI 2k – DRD 1400 = 600 Net Taxable Income * 35% tax = 210 tax.3/20 -------------------------. b. Record Date: these are SH’s who are to receive dividend. Holding Period looks at 91 day period that begins 45 days before Ex-Div Date and ends 45 days after Ex-Div Date. 243 DRD. Declaration Date ii. Problem 2(a) Timeline: 3/15 -----------------------------. i. iii. SH buys stock before Ex-Div. *Ex-Dividend Date: usually 3 business days before Record Date. SH must hold stock for 46 days of specified period (which is 91 days). -note we have a net taxable loss of 1400. d. Sec. 243: -Corp. . iv. buyer must buy before Ex-Dividend Date. Whoever buys stock on Ex-Dividend Date does not acquire stock having right to dividend. 1. -Corp. -assume no qualifying dividend and assume no 20% ownership. -Sale of Stock for 28k. 246(c) Holding Period Requirement a. sells stock for 28k on 4/15. -Corp. meaning 2k * 70% = 1400 DRD. This is to ensure owner on Ex-Dividend Date is same owner as owner on Record Date. a Corp. 246(c)(3) Holding Period starts on date after purchase date and includes date of disposition (sale).3/17 ------------------------. 2.4/1 Declaration Date Ex-Div Date Record Date Payment Date -Corp. to buy stock with right to dividend. gets 70% DRD. -Application of Sec. Purpose of Holding Period is to disallow Sec. To qualify for Sec. 243 DRD 1.85 Rules Preventing Abuse of Sec. 243 DRD when Corp. -so. Dividend Dates: i. net tax savings of 490. Sec. receives 2k dividend on 3/20. So. buys stock on 3/15 for 30k.

2. 246(c): -Corp. Aggregation of Dividends. *Only go to Sec. . Corp. the basis in such stock is reduced by the non-taxed portion. -So. gets no 243 DRD b/c did not satisfy Holding Period req’t. 243(c)(3). 1059 Extraordinary Dividend a. 1059 does not apply if Corp. see Sec. Sec. Non-Taxed Portion = Dividend – Taxable Portion (which is Dividend – DRD). i. Problem 2(b) -Sec. gets full 243 DRD. receives an extraordinary dividend with respect to stock Corp. ii. -As a result. 1059(c)(3). See Sec. d. now we have GI of 2k – 0 DRD = 2k net taxable income * 35% = 700 tax. 1059(d)(6). 1. -Result: 30k – 2800 = 27. Sec. -Holding Period during these 91 days is 47 days. Corp. e. 1059 if satisfy Sec. -So. ii. c. Amounts in excess of basis are treated as gain. 246(c) Holding Reqt. 246(c). -So. -DRD = 2800 b/c 4k * 70%. Common Stock: threshold percentage is 10%. -Holding Period is 21 days (3/16 to 4/5).86 -This is abuse Congress wanted to prevent in Sec. Sec. 1059 does apply and we do have Extraordinary Dividend b/c 4k / 30k = more than 10%. this % is determined by comparing dividend to Corp’s stock basis (dividend / Stock Basis). -Application of Sec. has not held for more than 2 years before declaration date. -What if Dividend is 4k instead? -Sec.200 Stock Basis. held stock for entire period Corporation paying dividend is in existence. Preferred Stock: threshold percentage is 5%. 246(c) problems hold stock 46 days after Ex-Div Date if buy stock day before Ex-Div Date. has to reduce Stock Basis by non-taxed portion of dividend. If Corp. This is the 80% or more owned subsidiary. 1. This equals DRD. to not run into Sec. 1059(e)(2). b. Problem 2(b) -Holding Period looks at 91 day period that begins 45 days before Ex-Div Date and ends 45 days after Ex-Div Date. 1059 does not apply to qualifying dividend (the 100% DRD). Exceptions: i. which equals DRD. Sec. 1059 does not apply b/c 2k / 30k = 6% which is less than 10%. Extraordinary Dividend defined: i. -in problem this period runs from 1/31 to 5/1.

Result: -Sec. Corp. not clear b/c do not treat as 1 dividend. -NOTE: Net Taxable Income = 1. -NOTE: Net Taxable Income = 1. SH five dividends of 2k each with more than 85 days between each Ex-Div Date? (assume stock basis = 30k). waited to sell stock in Year 3? -That is irrelevant b/c Corp. -Now. which equals DRD. buys stock on 1/15. -DRD = 2800 b/c 4k * 70%. what happens if Corp. 1059(c)(3)(B) says to aggregate dividends and treat each dividend as an extraordinary dividend if within 1 year (365 days). then on 3/16 Stock is worth 42k? -Now. as a result. 1059(c)(4) Election. sells stock for 26k? -A/R 26k – AB 27. 1059(c)(3)(A) Aggregation of Dividends -if Ex-Div dates are within 85 days of each other. 1059(c)(4) Election to use FMV of Stock -What if Corp. Aggregation of Dividends -What if over a 1 year period (365 days). . what happens if Corp. Sec. so the answer is the same. Corp. -What if Corp. -Sec. treat each as own dividend. 1059 does apply and we do have Extraordinary Dividend b/c 4k / 30k = more than 10%.200 b/c 4k – 2800 DRD = 1200. -Result: 30k – 2800 = 27. -So. then combine both dividends as one to determine if extraordinary dividend. Corp.200 capital loss. sells stock for 26k? -A/R 26k – AB 27. -So. Problem 2(c) -Sec.200 capital loss. has to reduce Stock Basis by non-taxed portion of dividend. -10k / 30k = 33%.200 = 1. can use 42k FMV instead of 30k Stock Basis to avoid Extraordinary Dividend problems (the 10% problem).200 Stock Basis. 365 day period: may count dividend in more than 1 365 day period. -Sec. treat each 2k dividend as extraordinary dividend and do basis reduction. pays to Corp.87 -Now. the combined amount of dividends exceeds 20% of Corp SH’s AB in stock.200 = 1. must hold stock 2 years before Declaration Date.200 b/c 4k – 2800 DRD = 1200.

we will be told the Ex-Dividend date. Summary of Chapter 5 -keep in mind 302 redemption distributions trumps 301 distributions. -Current year deficit can reduce amount of Accumulated E&P. meaning can pay all to SH who got distribution 1st from Corp. -a distribution is always deemed to 1st be paid from E&P. E&P? YES. and SH call distribution something other than dividend trying to avoid double taxation.301-1(c) confirms that 301 applies only if the amount paid to SH is paid to SH in SH’s capacity. not on return of basis or gain portion. meaning to be dividend it must be paid out of E&P or Acc. -SH rec’ing property. On exam. Question: Is Corp. -Accumulated E&P is allocated chronologically. E&P does not affect Current E&P for distributions.88 85 day period: treat as one dividend. -when SH assumes liability that assumption of liability reduces amount of 301 distribution to the SH. Disguised Dividend -Reg. -a liability attached to property distributed by Corp. 1. -Dividend is paid out of E&P. DRD is only calculated on portion that is dividend. -Start with Corp’s tax consequences before doing E&P b/c of increase in E&P by 311(b) gain. -deficit in Acc. . 311 applies asset-by-asset. does not affect computation of 311(b) gain. -remember Sec. -BUT 301 can apply even when Corp. SH still under E&P rules. -multiple blocks of stock = stock groups with different basis or holding period. gets FMV basis and new Holding Period. so no overlapping 85 day.

-SH uses Sec. -also. 302(d) says to use Sec. Paul has held his shares ever since X was formed five years ago. then redemption distribution is treated as payment for the redeemed shares (so use Sec.89 Chapter 6: Stock Redemptions Section 1: Introduction -Corporation still uses Sec.000 in cash. Paul’s basis in his X shares is 1. 302(a) applies. 311 to determine tax consequences. -What if this SH is a Corporation? -Sec. 301 dividend. -So. -meaning. so basis of redeemed shares is shifted to other shares. and the shares have a FMV of 1. thus tax of 2. 301 for distribution treatment. Section 1 (1) X Corporation has 100 shares of common stock outstanding.000 per share. Even when basis = 0. so have a 750 tax. 15k is treated as a dividend. -if Sec. If X redeems 10 shares from Paul for 15. how much income or gain will Paul have if § 302(a) applies? What if § 302(a) does not apply? Which would Paul prefer? What if Paul were a corporation taxed at the highest marginal rate (35%)? -if Sec. -AR: 15k – AB in Redeemed Stock: 10k = 5k LTCG taxed at 15%.000. X has E&P of 100. SH prefers 302 Exchange treatment b/c can offset LTCG with LTCL. meaning recognize gain on distribution of property but not loss. Paul still has a basis in his shares of 30k. Meaning. 302(d) says treat distribution as Sec. Paul owns 30 shares.500 per share. -Sec. In-Class Examples Chapter 6. 301 (could be dividend). 302(a) Exchange Treatment: . 302(a) is known as Exchange Treatment. 1001 to determine AR – AB for amount of gain). which is taxed at 15%. Non-Corporate SH prefers Sec. 302 redemption over Sec. 302(a) which says 302 applies if a test in 302(b) is satisfied. 1.302-2(c). if no test is satisfied. 302(a) applies: -this is Sale / Exchange Treatment. Sec. 302(a) does not apply: -Sec. -no basis recovery. -If Sec.250. Reg. SH can use Installment Method for 302 Exchange treatment.

-Sec. 301 so wants 302(d) to apply. 18k stock basis. existence or qualifying dividends. Rob and Sara (unrelated parties) each own 100 shares. 312(n)(7) limits the downward adjustment under Sec. -thus.750 tax. -Rob’s Tax Consequences: -all of Rob’s interest is being redeemed. 301 applies. meaning Rob is treated as selling stock to Corp. but then Sec. Basis in redeemed shares is shifted over to non-redeemed shares when Sec. Rob has no interest left in Corp. 302(a) applies. + 10k AB in redeemed shares. so it should be treated as redemption under all 302(b) tests.000 and current E&P of 50. (a) On December 31 of the current year. -Dividend = 15k and DRD is 12k. this transaction should be treated as exchange. The ratable share of accumulated E&P .90 -A/R: 15k – AB: 10k = 5k * 35% tax rate = 1. 1059(e)(1)(A) says to treat redemption as Extraordinary Dividend whenever it is not redemption pro rata to all SH’s (meaning just redemption of one SH). 1. Rob and Sara both have a basis of 250 in each of their shares.000. The FMV of the stock is 1. 1059(e)(1)(A): 20k AB in Non-redeemed shares.302-2(c) 30k (12k) Non-taxed portion Sec.1059(e)-1. preference for Corporate SH is Sec. -BUT Sec. Reg. 1059(e)(1)(A) does not apply to stock held for entire corp. taxed at 35% = 1. Sec. 312(a) to the ratable share of accumulated E&P attributable to redeemed shares. 302(a) does not apply: -302(d) says this is 301 distribution.000 in cash. RS redeems all of Rob’s shares for 100. -Stock Basis Reduction b/c of Sec. So. -Corp’s Accumulated E&P: -Sec. so Net Taxable Income = 3k.000 per share. -A/R: 100k – AB: 25k = 75k Capital Gain. Behind the 302(b) Tests: (2) RS Corporation has 200 shares of common stock outstanding. the 312(n)(7) limitation is applied based on the accumulated E&P available on date of 302 redemption. What are the tax consequences to Rob? What is RS’s accumulated E&P as of January 1 of next year? (i) RS has accumulated E&P of 50. Reg. -So. 312(a) says to decrease E&P. 1059(a). for 100k.050 tax. (e)(1)(A). -Sec. 1.

this 50k is downward adjustment to Acc. -RA to problem 2(a)(i): 100k Acc. -Sec. E&P for start of next year = 50k. -Entire 50k distribution to each SH is a dividend. E&P. -We allocate Current E&P to SH’s pro rata. -The basis for each SH is shifted.500 basis from redeemed shares being shifted to 12. -Basis shifting. so go to Sec.000 in cash. 312(n)(7): 300k * (100k/200k) = 150k. RS redeems 50 shares from Rob for 50. E&P * (# of shares redeemed / total # of shares outstanding immediately prior to redemption). result is really the same as a 301 distribution.500 basis of non-redeemed shares. Sec. (ii) RS has no accumulated E&P and current E&P of 50. Acc. 302(c)(2) should apply to total stock basis after shifting basis from redeemed shares. -New stock basis for each SH: 0 (zero). totaling 25k basis for stock.000. -So. E&P: 100k – 50k – 50k = 0. 302(d) which says to use Sec. -This kind of redemption does not satisfy 302(b) tests. 301 when 302(a) is inapplicable. -Corp’s Acc. Sec.000 and current E&P of 50. E&P: 50k – 50k – 50k = 0. So. -the redemption is not changing ownership of SH’s b/c each still owns 50% of Corp. E&P for start of next year = 200k. What are the tax consequences to Rob and Sara? What is RS’s accumulated E&P as of January 1 of next year? (i) RS has no accumulated E&P and current E&P of 100. but this is more than 100k 302 redemption. so we limit it at 100k downward adjustment to Acc. 312(n)(7) only applies when it’s a 302(a) redemption. -Acc. -Stock Basis for SH’s: -Sec.000.. that’s 12. 301(c)(2). 301(c)(1) and 316. Not a 302 Redemption (b) On December 31 of the current year. E&P * (100k/200k) = 50k.91 attributable to redeemed shares = Acc. .000 in cash and 50 shares from Sara for 50. -Applying Sec. E&P is limited to 302 Redemption Amt.000. so it’s not wiped out. E&P. -Result: remaining 25k of 301 distribution for each SH is treated as return of capital. (ii) RS has accumulated E&P of 250. so each SH still has 25k basis for stock owned. See 301(c)(1) and 316. -Acc. So. Downward Adjustment to Acc. meaning each SH is treated as receiving 25k dividend income.

-Downward Adjustment for Acc. -A/R: 100k – AB: 25k = 75k Capital Gain. -New stock basis is 20k = 25k – 5k. How much of Sara’s distribution is a dividend? What is RS’s accumulated E&P as of January 1 of next year? (i) RS has accumulated E&P of 50.000 and current E&P of 20. -Sara’s Tax Consequences: -Current E&P are first allocated to Sec. only the excess is attributable to Sec. E&P remaining is allocated to Sara. RS redeems all of Rob’s shares for 100. -Sec. -Now. -the remaining 5k is return of capital. (n)(7) downward adjustment to Acc. E&P: -we pro-rate amount of Current E&P attributable to Rob’s May 1 redemption.000 and current E&P of 80. 301 distributions. -Rob’s Tax Consequences: -all of Rob’s interest is redeemed. -And the 25k Acc. 301 and Sec. Sec.000 in cash. 302(a) applies. -So. affects 312(a). . meaning 25k is dividend out of Acc. meaning 20k is dividend out of current E&P.000. so Sec. RS makes a § 301 distribution of 50. -50k * (100k/200k) = 25k. so first apply to Rob’s 302 redemption. E&P. -Rob’s Tax Consequences: -all 100k is redemption. -this excess 30k Current E&P is taken into account for the 302 distribution. 302 interplay (c) On May 1 of the current year. 302(c)(2).92 Sec. all 20k Current E&P is allocated to Sara. (ii) RS has accumulated E&P of 50. E&P: -Acc.000. 302 redemptions. -Downward Adjustment to Acc. E&P are allocated in chronological order to 301 and 302. E&P. E&P remaining. 301(c)(1). 312(n)(7) limits 312(a)(1) downward adjustment. -Result: 50k – 25k = 25k Acc. there is 30k excess current E&P. 316. -Sara’s Tax Consequences: -all 50k is dividend out of current E&P.000 in cash to Sara. Meaning. On December 31 of the current year. see above.

then use 180k for Sec.500 downward adjustment. then add excess current E&P of 60k from 311(b) gain. E&P = 60k. so that’s (100k/200k) * 60k = 30k downward adjustment to Acc. -Now. -Accumulated E&P -Corp. -this 60k increases current E&P of Corp. -BUT Downward Adjustment using Sec. 302 redemption. -this 10k loss is recognized b/c there is no loss non-recognition rule. 311(b) gain is 60k = A/R: 150k – AB: 90k. -IF attribute 311(b) gain to 302 redemption. E&P for 150k 302 redemption. to 60k. 267 does not apply b/c S does not own more than 50% of stock.500 = 142. E&P for next year. E&P + 30k Current E&P attributable to 302 Redemption (this is pro-rating the Current E&P) = 150k * (25%) = 37. E&P. -is this 10k loss deductible? Yes. Sec. 312(n) (7) downward adjustment.* Chapter 6.* Problem 1(a)(2) -same result for Corporation. -Answer: 180k – 45k = 135k Acc. 302(a) applies b/c all of S’s interest is redeemed. 312(n)(7) limitation to Sec. -then add 10k current E&P to 50k Acc. -Acc. (b)(2) for normal 301 distribution of appreciated property (which is 150k downward adjustment). already had 120k Acc. 180k * 25% = 45. *there is no guidance on which method is correct. apply Sec. -S will realize a 10k taxable loss = A/R: 150k – AB: 160k.93 -meaning. 312(a) b/c this is a Sec. . 1012 cost basis b/c 302 says exchange is treated as payment for stock. -S’s basis in Land: 150k. 312(a)(3). E&P = 60k – 30k = 30k + Current E&P of 20k remaining = 50k Acc. E&P for start of next year.000 downward adjustment. Sec. -120k Acc. -70k LTCG = A/R: 150k – AB: 80k. E&P. 312(n)(7). -S’s Tax Consequences: -Sec. *Remember to add in Current E&P not attributable to 302 redemption to Acc. -Downward Adjustment to Acc. Section 1 (page 30) Problem 1(a)(1) -Corp’s Tax Consequences on 302 Redemption: -Sec. -Answer: 180k – 37.500 Acc. (4/12) * 30k excess current E&P = 10k. E&P for next year. See Sec. E&P. E&P for start of next year. that results in 180k Acc.

-Answer: -SH’s 35k 301 distribution. 312(b)(1). allocate the 90k Acc. We have no excess E&P to allocate. . -Sec. -Now. -go chronologically for Acc. -meaning. E&P left is 90k = 120k – 30k. 312(a)(3). -for each SH: 35k – 20k current E&P = 15k left to deal with. (f)(1). (n)(7) downward adjustment to the 120k Acc. E&P for next year: 45k = 90k – (15k * 3). -resulting in 15k Acc. -Acc. E&P among SH’s. E&P. -Next. 302(a) says to treat as exchange for payment. -so. allocate Acc. E&P is 30k = 120k * (1/4). allocate 60k equally among the SH’s (meaning 20k of current E&P to each SH). look to Accumulated E&P.94 Problem 1(b) -same result as above for Corporation’s tax consequences. -How much of the 12/31 Sec. -So. 301 distributions are dividends? -Current E&P is 60k from 311(b) gain of 60k = A/R: 150k – AB: 90k. 20k is from Current E&P and 15k is from Acc. (b)(2). E&P as to 301 and 302. -Result: Sec. the Acc. E&P to each SH. -S’s Tax Consequences: -70k gain recognized = A/R: 150k – AB: 80k. -Sec. E&P first to the 302 redemption.

2. -Three Categories of Sec.95 Chapter 6. 302(c) says this rule apply). Entity to Family Member to Family Member is ok for reattribution.BUT Owner 1 to Entity to Owner 2 is not ok. Section 2. give all owned by SH or partner. *NOTE: reattribution from Sec. 318(a) (2). -a SH who owns 50% or more Corp’s stock constructively owns stock owned by Corp. 243. (2) his children. . -Attributions is not proportional. 351 or Sec. 318 Constructive Ownership of Stock -only apply when particular statute says so (i. Quick Reattribution Rules: . 318(a)(3) Attribution to Entities -Partnership constructively owns stock owned by partners. 318(a)(2) to Sec. meaning can’t reattribute shares attributed to Entity by Owner 1 to Owner 2. 318 be considered as actually owned.Sec.Sec.Sec. -Exception: The amount to use only includes amount of stock actually owned by Pship. 318 for purposes of applying Sec. (3) his grandchildren. meaning Owner’s attributed shares from Entity 1 may be reattributed to Entity 2. -Attributions is proportional. and (4) his parents. 318(a)(5)(C). 318(a)(5)(A). 318 does not apply to Sec. -Corp. 318(a) (1) Members of Family. Sec. Substantially Disproportionate Redemptions -Sec. 318(a)(1) Family -an individual shall be considered owning stock owned directly or indirectly by (1) his spouse. don’t reattribute stock constructively owned by P-ship. 318(a)(3) can’t be reattributed under Sec.Entity 1 to Owner to Entity 2 is ok. o Also. Stock owned by entity under Sec. 3. Reattribution Rules: General Rule: stock constructively owned by person by reason of Sec. 318: 1. -this allows for re-attribution of stock. -Exception: no reattribution of stock constructively owned as result of Sec. Sec. constructively owns stock owned by SH who own 50% or more in value of stock in Corp.e. -Sec. See Sec. . 318(a)(3) is ok. 318(a)(2) Attribution from Entities -stock owned by p-ship is constructively owned by partners in proportion of partners ownership in p-ship. in proportion to that SH’s ownership.

S and T each own a 50% partnership interest in the ST Partnership. 318 says to count shares once. (a) How many shares in X is S treated as owning under § 318? -S actually owns 30 shares. -Then. no double counting. Sec. and the ST Partnership owns 50 shares.96 In-Class Examples Chapter 6. Sec. -Sec. -Constructive: 50 from S (30 from S and then 20 from S b/c of F) -general rule is that constructive ownership by Partner (the 20 shares attributed from F to S) can be reattributed to P-ship under attribution to entities. and does not decrease. Section 2 Attribution General Assumptions: X Corporation has 100 shares of common stock outstanding. same shares can be owned at same time by more than one SH. Sec. Ownership of the X stock is as follows: (1) S owns 50 shares. How many shares in X is the ST Partnership treated as owning under § 318? -Actual: 50. How many shares in X is the ST Partnership treated as owning under § 318? -ST owns 50 shares. and F owns 20 shares. then constructively owns 25 shares b/c of 50% p-ship interest. -Then b/c of ST P-ship owning 50 shares. b/c of Sec. then constructively owns 50 shares from S. G is F’s father (S’s grandfather). is never treated as constructively owning its own shares. the ST Partnership owns 50 shares. S constructively owns all 20 shares owned by F (S’s father). S constructively owns 25 shares. -Corp. 318(a)(2). 318(a)(5)(A). (a) How many shares in X is S treated as owning under § 318? -S actually owns 50 shares of X Corp. (2) S owns 30 shares. F is S’s father. (b) Notes: (b) . -Total owned by S: 75 = 30 + 25 + 20. -Sec. 318(a)(2). 318(a)(3). -so. Sec. -Sec. 318(a)(1). 318(a) (3). 318 increases shares owned by persons. S and T are unrelated individuals. -Total: 75 shares.

97

(c)

How many shares in X is F treated as owning under § 318? -Actual: 20. -Constructive: 55 (30 + 25 from p-ship interest). -reattribution of S’s 25 constructively owned stock from p-ship interest may be reattributed to F. Sec. 318(a)(5)(A).

Limitations on Reattribution Sec. 318(a)(5)(A) General Rule: stock constructively owned by person by reason of Sec. 318 for purposes of applying Sec. 318 be considered as actually owned. Sec. 318(a)(5)(A). -this allows for re-attribution of stock. -Exception: no reattribution of stock constructively owned as result of Sec. 318(a) (1) Members of Family. -Exception: The amount to use only includes amount of stock actually owned by Pship, don’t reattribute stock constructively owned by P-ship. See Sec. 318(a)(5)(C). Stock owned by entity under Sec. 318(a)(3) can’t be reattributed under Sec. 318(a) (2) to partners or SH’s. (3) S owns 40 shares, F owns 30 shares, and G owns 30 shares. (a) How many shares in X is F treated as owning under § 318? -Actual: 30. -Constructive: 70. -Total: 100. How many shares in X is S treated as owning under § 318? -Actual: 40. -Constructive: 30. Sdoes not constructively own the 30 shares owned by his grandfather b/c gf not listed in Sec. 318(a)(1). -Sec. 318(a)(5)(B) disallows reattribution of stock constructively owned under Family attribution rule Sec. 318(a)(1). -Total: 70. How many shares in X is G treated as owning under § 318? -Actual: 30. -Constructive: 70 = 30 from son and 40 from grandchild. Sec. 318(a)(1). -Total: 100. -Note: Sec. 318(a)(1) says Grandparent constructively owns stock owned by grandchild.

(b)

(c)

98

(4)

S owns 40 shares, the ST Partnership owns 20 shares, and T owns 40 shares. (a) How many shares in X is the ST Partnership treated as owning under § 318? -Actual: 20. -Constructively: 80 (40 shares from S and 40 shares from T). Sec. 318(a) (3). -Total: 100. How many shares in X is S treated as owning under § 318? -Actual: 40. -Constructive: 10. 50% of 20 shares actually owned. - S owns proportion of stock owned by ST P-ship. The amount to use only includes amount of stock actually owned by P-ship, don’t reattribute stock constructively owned by P-ship. See Sec. 318(a)(5) (C). Stock owned by entity under Sec. 318(a)(3) can’t be reattributed under Sec. 318(a)(2). -Total: 50. How many shares in X is T treated as owning under § 318? -Actual: 40. -Constructive: 10. -Total: 50.

(b)

(c)

NOTE: if T is S’s wife, then the 40 shares would be attributed to T. (5) S owns 30 shares, the ST Partnership owns 30 shares, SD Corporation owns 30 shares, and D owns 10 shares. SD Corporation has 100 shares of common stock outstanding. S owns 70 shares and D owns 30 shares in SD Corporation. S and D are not related. (a) How many shares in X is S treated as owning under § 318? -Actual: 30. -Constructive: 15 (p-ship, 318(a)(2)(A) + 21 (from Corp. Sec. 318(a)(2)(C) says SH who owns more than 50% of Corp. owns shares owned by Corp in proportion to that SH’s ownership of Corp). -attribution from entities is always proportional. -Total: 66 shares. How many shares in X is the ST Partnership treated as owning under § 318? -Actual: 30. -Constructive: 30 (from S) + 21 (attributed from Corp. to S) -NOTE: reattribution from Sec. 318(a)(2) to Sec. 318(a)(3) is ok. -Total: 81 shares.

(b)

99 (c) How many shares in X is D treated as owning under § 318? -Actual: 10. -Constructive: 0 b/c does not own more than 50% of stock. -Total: 10 shares. -NOTE: if D is son of S, then both own 100% of Corp., thus attribute all shares owned by Corp. to both D and S. -now, D would own 100% of SD Corp., but does D now own 100% (meaning 30) shares or 30% (meaning 9) shares?? -BUT it doesn’t really matter, b/c even if say D owns 9 shares, then still S’s 21 shares could be attributed to D, meaning D owns 30 shares. (d) How many shares in X is SD Corporation treated as owning under § 318? -Actual: 30 -Constructive: 30 (from S) + 15 (from S b/c of p-ship interest). -Total: 75 shares.

So, for Reattribution Rules: - Entity 1 to Owner to Entity 2 is ok, meaning Owner’s attributed shares from Entity 1 may be reattributed to Entity 2. o Also, Entity to Family Member to Family Member is ok for reattribution. - BUT Owner 1 to Entity to Owner 2 is not ok, meaning can’t reattribute shares attributed to Entity by Owner 1 to Owner 2. (6) Same as in (5) except SD Corporation is an S corporation (rather than a C corporation). -S Corporation is treated as partnership. Sec. 318(a)(5)(E), meaning there is no 50% threshold for S Corp. (a) How many shares in X is SD Corporation treated as owning under § 318? -Actual: 30. -Constructive: 45 (from S) + 10 (from D) b/c now D is treated as partner. -Total: 85. How many shares in X is D treated as owning under § 318? -Actual: 10. -Constructive: 9 (from SD Corp., b/c proportion of ownership of S Corp) -Total: 19. How many shares in X is S treated as owning under § 318? -Actual: 30. -Constructive: 15 (from p-ship) + 21 (from SD Corp.) -Total: 66. How many shares in X is the ST Partnership treated as owning under § 318?

(b)

(c)

(d)

100 -Actual: 30. Sec. 302(b) Tests for Redemption: -Sec. -Constructive: 51 from S -Total: 81. 302(b)(1) Test is more facts and circumstances having to look at whether distribution .

-Formula: (SH’s Common Stock Post Redemption / Total Common Stock Outstanding Post Redemption) must be less than 80% of (SH’s common stock pre-redemption / Total Common Stock Outstanding Pre redemption). 302(b) (2)(B). -SH A owns 80 shares of Class A Stock. (ex: 80% * 60% = 48%. the Post-Redemption ratio must be less than that number. Section 2 . Sec. ratio: (post redemption stock / outstanding voting) -looks at total combined voting power. -multiply Pre-Redemption ratio by 80%. the Post-Redemption ratio must be less than that number. (ii) 80% Voting Power Test: the SH’s post redemption voting power ratio must be 80% less than SH’s pre redemption voting power ratio.101 is substantially disproportionate with respect to SH. must be less than 48%). In-Class Examples Chapter 6. then to satisfy this test. -Formula: (SH’s Voting Shares Post Redemption / Total Voting Shares Outstanding Post Redemption) must be less than 80% of (SH’s voting shares pre-redemption / Total Voting Shares Outstanding Pre redemption). 302(b)(2) Test (more mechanical) -a distribution is substantially if: (i) the SH owns less than 50% of voting power post redemption. (iii) 80% Common Stock Test: the SH’s post redemption common stock ratio must be 80% less than SH’s pre redemption common stock ratio. then to satisfy this test. -EX: 100 Class A Voting Stock that elects 8/10 directors and Class B Voting Stock elects 2/10 directors. -Sec. -that’s 80% of Class A * 80% of total directors = 64% voting power. -multiply Pre-Redemption ratio by 80%. -even though SH A owns 80 of 200 total shares = 40%.

-A now owns 30 shares of 70 outstanding voting shares. 318 b/c satisfies 302(b)(2). this scenario does not satisfy Sec. 318(a). (2) X Corporation has 100 shares of voting common stock and 100 shares of nonvoting preferred stock outstanding. which it does in this problem b/c 43% is less than 48%. *Remember to decrease outstanding shares for denominator when doing this formula by # of shares redeemed. -Thus. (a) Does the redemption meet the test in § 302(b)(2)? -3 Part Test: 1. and Bill owns 40 shares. -Post Redemption: 100% -Pre Redemption: 100% -Thus. -so. -30 / 70 = 43%. Voting Power. -Post-Redemption Ownership is 43%. Alan owns 60 shares of voting common stock and all 100 shares of nonvoting preferred stock. Bill owns 40 shares of voting common . 2&3. X redeems 30 shares from Alan. this part is satisfied. So. 318(b)(2). this is treated as exchange under Sec. Sec. Alan and Bill are not related. -Pre-Redemption Ownership is 60%. which is less than 50% voting power.* 2 & 3. Alan owns 60 shares.102 Section 302(b)(2) (1) X Corporation has 100 shares of voting common stock outstanding. and 80% of 60% is 48%. 50% Voting Power Test. -so. 100% = 70 / 70. (b) What if Bill is Alan’s father? -A now is considered owning all 100 shares. 80% Voting Shares and 80% Common Stock Test. 3 part test: 1. A’s post-redemption ownership must be less than 48% to satisfy this part of test.

Alan owns 60 shares .302-3(a) says that redemption solely of non-voting stock (whether preferred or common) can never satisfy Sec.103 stock. -IRS let Wife piggy back on H’s redemption. What if X also redeems 30 shares of voting common stock from Alan? -Yes. Reg. -3rd party owns 40 voting common stock. When SH has voting common stock that satisfies Sec. -What if Corp. -W owns 10 shares of non-voting preferred stock. and the nonvoting common stock has a FMV of 100 per share. redeems 2 shares of W’s non-voting stock and 30 shares of H’s voting common stock? -Then both get exchange treatment b/c of attribution rules. 1. (b) Rev.302-3. Rul. (3) X Corporation has 100 shares of voting common stock and 100 shares of nonvoting common stock outstanding. 1. then redemption of non-voting preferred stock qualifies when redeemed simultaneously with redemption of voting common stock. (a) Does the redemption meet the test in § 302(b)(2)? -No. X redeems 50 shares of nonvoting preferred stock from Alan. Alan and Bill are not related. 302(b)(2) b/c there is no decline in SH’s voting power. 77-237 -H owns 60 shares of Voting Common stock. b/c Reg. The voting common stock has a FMV of 200 per share. 302(b)(2).

which is less than 58. thus 80% Common Stock Test is satisfied. 3.66%. Rul. Alan owns all 100 shares of voting preferred stock. aggregate those shares pursuant to Sec. Redemption of Voting Preferred Stock (4) X Corporation has 100 shares of voting common stock and 100 shares of voting preferred stock outstanding. and Bill owns all 100 shares of . X redeems 30 shares of voting common stock and 50 shares of nonvoting common stock from Alan. -FMV of shares owned by A is 22k = 100 NVCS * 100 per share = 10k + 60 VCS * 200 per share = 12k.89%. -Rev. 302(b)(2)(C). -3 part test: 1. 50% is satisfied b/c 30/70 = 43%. there is just req’t that own less than 50% of Voting Power. fact that A still owns 100% of non-voting common stock pre and post is ok. -NOTE: fact that A still owns more than 50% of Common Stock is fine. b/c 43% is less than 48% (80% * 60%). Bill owns 40 shares of voting common stock. 2. Also. and 43% is 80% less than pre. 80% Common Stock Test. Alan and Bill are not related.33% by 80% = 58. Does the redemption meet the test in § 302(b)(2)? -issue here is 80% Common Stock Test. Both classes of voting stock have 1 vote per share. = 57.66%. 80% Voting Power Test is satisfied b/c 43% post. 87-88 held when there are multiple common stock classes.33% -then multiply 73. this works b/c of applying common stock on aggregate basis rather than class-by-class basis.104 of voting common stock and all 100 shares of nonvoting common stock. -But last sentence of 302(b)(2)(C) says to aggregate in relation to FMV. -22k/30k = 73. -Pre Redemption -Total FMV of all shares is 30k = 100 shares * $200 per share = 20k + 100 shares * $100 per share = 10k. and 60% pre. -Post-Redemption: -FMV owned: 11k / total FMV: 19k.

Alan owns 60 shares and is the president of X. 81-41 says that 302(b)(2) could apply to a redemption solely of preferred voting stock if SH does not own any common stock before or after redemption. Rul. and Post ratio of 37. X redeems 40 shares of voting preferred stock from Alan. there is no abuse.5% is less than 40%. What if Bill owns 90 shares of voting common stock and the other 10 shares of voting common stock are owned Alan’s son? -Then redemption of Allan’s preferred stock does not work b/c Allan now owns common stock constructively. 302(d) which says to treat redemption as Sec.105 voting common stock. Rul. so this test is satisfied.5% 2. 301 distribution. (b) Series of Redemption (Sec. *3. (a) Does the redemption meet the test in § 302(b)(2)? -only preferred stock is being redeemed. Rul. 81-41 said redemption solely of preferred voting stock works if SH owns no common stock before or after redemption. -3 Part Test: 1. X has an agreement in place with each shareholder. 302(b)(2)(D)) (5) X Corporation has 100 shares of voting common stock outstanding. -reasoning is b/c of legislative history was concerned with 80% Voting Test. go to Sec. -Rev. when owning no Common Stock. 81-41 says SH can’t own any common stock. Alan and Bill are not related. Alan and Bill are not related. . Bill owns 40 shares and is the vice president of X. 80% Common Stock Test -Rev. -Rev. -so. and the 80% Common Stock Test is just a safeguard for equity interest abuse while losing voting interest. 50% Voting Power Test is satisfied b/c 60 / 160 = 37. 80% Voting Test is satisfied b/c Pre ratio is 50% (100/200) -50% * 80% = 40%. -Thus.

106 which provides that the shareholder’s stock will be redeemed by X upon the shareholder’s retirement. Bill announces that he will be retiring in a month. Alan then arranges to have X redeem 30 of his shares. One week after Alan’s 30 shares are redeemed, Bill retires and X redeems all 40 of Bill’s shares. Does the redemption of Alan’s shares meet the test in § 302(b)(2)? -What happens? -Bill announces retirement, and on retirement, Corp. redeems 40 shares of VCS from Bill. -also, on retirement, Corp. redeems 30 shares from Allan. -Redemption of Allan’s shares satisfies 302(b)(2): 1. 50% b/c post redemption is 42.86% 2. 80% b/c 42.86% is less than 48% (60% * 80%) 3. same as 2. -BUT after Bill’s retirement, Allan owns 100% of Corp, so redemption under 302(b)(2) is not satisfied. -So, question is whether Sec. 302(b)(2)(D) is triggered? Do we have a plan? -Sec. 302(b)(2)(D) requires the TP to treat as series of redemption made pursuant to a plan as a single redemption in testing the disproportionately of the redemption. -Rev. Rul. 85-14 says a plan does not require joint action or a written plan b/t 2 or more SH’s. It is sufficient if single SH arranges for redemption of shares as a larger series of events that will restore to SH the portion of ownership he temporarily lost. -in this problem, we have this b/c Alan knew that giving up control req’t (voting ownership) thru redemption would be restored to full control (majority that he had before) after Bill’s redemption. -Answer: Bill’s redemption does not qualify for Sec. 302(b)(2) b/c it is series treated as plan. What if Bill plans to sell his 40 shares to Alan but before sale, Alan has his shares redeemed? -Then Sec. 302(b)(2)(D) is triggered, treat as single redemption. Don’t qualify for redemption treatment.

Chapter 6. Section 2. Problems 1-8 (p. 30-33) 1. Champion has 100 shares of common stock and 200 shares of nonvoting preferred stock outstanding. D owns 70 shares of common stock and K owns 30 shares of common stock. K also owns 100 shares of nonvoting preferred. Which, if any, of the following

107 redemptions qualifies under §302(b)(2) and what are the tax consequences? (a) Corp. redeems 5 shares of common stock from K for $5000. K’s basis in his 30 shares was $900 per share and $27,000 total. o §302(b)(2) governs (3-Part Test):
o

1. §302(b)(2)(B) Limitation (50% Test) – won’t be in §302(b)(2) unless immediately after the redemption the SH owns less than 50 percent of the total combined voting power of all classes of stock entitled to vote  he satisfies 50% test b/c owns less than 50%; he owns 26.32% (25/95). 2&3. 80% Tests §302(b)(2)(C) defines “substantially disproportionate”  ratio to which the voting stock of the corporation owned by the Sh immediately after the redemption bears to all voting stock at the time (25/95) is less than 80% of the ratio which the voting stock of the corporation owned by the SH immediately before the redemption bears to all voting stock at that time (30/100) Post: 25/95 is about 26.32% and Pre: 30/100 is 30%

o

80% of 30% is 24% and 26.32% is greater than 24%. o so this is not a substantially disproportionate distribution and §302(a) will not apply

o o

§302(d) says to use 301 distribution rules for this “5k redemption.”

Remaining basis to the shares transfers over to his 25 remaining stares  total basis doesn’t change, meaning basis is still 27k for all 25 shares. Reg. 1.3022(c) says that basis of redeemed stock is added to the basis of the other stock (same class of stock) held by Taxpayer. (meaning the 4,500 AB in redeemed shares is shifted over to remaining 25 shares owned by K, thus having a 1,080 basis per share (27k/25 shares). o §301 applies

Think about whether this may satisfy Sec. 301(b)(1) test.

(b)(1) C redeems 10 shares of common stock from K for $10,000. K’s basis in the shares is 900 per share and $27,000 total. o 3-Part Test: o 1. 50% Test is satisfied b/c owns less than 50%; he owns 22% (20/90)  Sec. 302(b)(2)(B).

o 2. 80% Voting Stock and 80% Common Stock tests are satisfied b/c . . .

108  §302(b)(2)(C) ratios
• •

Post-redemption: 20/90 = 22% Pre-redemption: 30/100 = 30%
o

80% of 30% = 24% for 80% Voting and 80% Common Stock Test, meaning need postredemption ratio to be less than 24% to satisfy the 80% tests.

o Post-Redemption ratio of 22% is less than 24%, so 80% Tests are satisfied, meaning . . .

Sec. 302(b)(2) is satisfied, so §302(a) (see also Sec. 317(b) Redemption of Stock) exchange treatment applies.

o

§302(a) Exchange Treatment – going to have payment and regular capital gains for the SH.
o

K will have a $1,000 capital gain b/c A/R: 10k – AB: 9k (for 10 shares) from the redemption per the gain recognition rules in §1001(a), 1001(c) recognize gain, Sec. 61(a)(3) gain from dealings in property.

o What is K’s remaining basis in 20 shares?
o

18k basis b/c 27k starting basis less 9k basis recovered b/c of redemption.

(b)(2) What if K’s basis is $1,200 per share and $36,000 total? o We’ll still be in §302(a) but now the SH will have a loss on the redemption of $200 per share or a total loss of $2,000 from the redemption o A/R: 10k – AB: 12 = 2k cap. loss. Sec. 1001(a), 1001(c).
o

Any deductibility for the loss? Yes, under Sec. 165(a) – 165(f) – 1211/1212.
o

§267 will deny loss on sale or exchange b/t related parties  SH is related if he owns more than 50% of the stock by value. He clearly owns less than 50% of the vote. So, deductible loss is not disallowed.

Remember this ownership is based on total value of stock.

(c) Corp. redeems 35 shares of common stock from D? o Post: 35/65 = 53.85% of voting power post-redemption.

the SH’s tax consequences aren’t exchange treatment so there is no real recovery of basis. (f) Corp. redeems 15 shares of cs and 50 of ps from K o RR 87-88 – under §302(b)(2) applies to voting stock and other stock (although not the redemption of solely nonvoting stock) o If there is more than one class of common stock outstanding. redeems 40 shares of CS from D? o D now has 30/60 shares so we still can’t use §302(b)(2) b/c not satisfying 50% test since D still owns 50% of shares. redeems 50 shares of non-voting preferred stock from K. 302(b)(2) only if there is a simultaneous redemption of voting stock. o D does not own less than 50% of Voting Power. 1. The regulations say that the SH adds the basis to the shares he still holds onto. 302(b)(2)(B) says SH must own less than 50% (meaning 49. o Whenever a redemption gets treated as 301. o §301(a) applies b/c of §302(d) o Basis gets added to shares he retains!!!!! Reg. o There could be an argument that the not essentially equivalent to a dividend is met (e) Corp.302-3 says a redemption of non-voting preferred or common stock may qualify under Sec. the FMV of all the common stock (voting and non-voting) will govern the determination of whether there has been the requisite reduction in common stock ownership o This deals with the flush language of §302(b)(2) o Voting stock: .9% or less). (d) Corp. o Won’t apply b/c 302 deals with common voting stock – without some common voting stock we can’t use it.109 o Pre: 70/100 = 70%. o Reg. 1.302-2(c). he doesn’t have a significant change in voting power. Sec. o We get to the limitation in §302(b)(2)(B) b/c D still owns more than 50% of the voting rights in the corporation (35 out of 65 shares). Therefore.

302-3 says a redemption of non-voting preferred or common stock may qualify under Sec. satisfies 80% Common Stock Test (same as 2). we get to piggy back the non voting preferred stock from 1. o 3.65 Pre: 30/100 – 30% o This works for the requirements o Since there is only one class of voting stock (and common stock). o 3-Part Test under 302(b)(2) is satisfied: o 1. o 2. 302(b)(2) only if there is a simultaneous redemption of voting stock. satisfies 50% Test b/c K now owns 17. .65% is less than 24% (30% * 80%). satisfies 80% Voting Test b/c 17. meaning A/R less AB for each class.65% of voting power (15/85). o Point is that non-voting preferred stock gets to piggy back on common stock satisfying 302(b)(2) and that preferred non-voting stock does not have to satisfy any part of 3 par test. o NOTE: you will do exchange treatment class-by-class. 1.  See Reg.302-3 o §302(a) will apply for both redemption of Voting common stock and for nonvoting preferred stock.110 o o Post: 15/85 = 17.

No reduction in A’s interest is to be measured immediately but only after redemption of B’s shares. redeems 40 shares of VCS from W. and 42. Does M’s redemption qualify under §302(b)(2). but may be satisfied by a designed by a single redeemed SH to arrange a redemption as part of a sequence of events that ultimately restores a SH to the control that was apparently reduced in the redemption. M went into semi-retirement. 1.86% is less than 48%. Commissioner – held that a possible future redemption upon the subsequent death of a SH pursuant to an executory buysell agreement should not be considered as part of a plan testing whether a current redemption met the test of §302(b)(2) • . Glacier State Electric Supply v. redeemed 30 shares.86%. • Sec. Meaning. 50% Test is satisfied b/c post-redemption Voting Power is 42. 302(b)(2)(D)) Problem 2. o If included redemption of W’s shares in plan.86% is not 80% less than Pre ratio of 60% since 60% * 80% is 48%. 2&3. then M would own 100% of shares and thus not satisfy 302(b)(2). 1. On Feb. M’s redemption satisfies Sec. W died and M went back to work. 302(b)(2)(D) could be triggered. • • 12/31 Corp. 302(b)(2). They have both worked full time for the corporation. o Glacier State held that the possible future redemption of SH’s shares b/c of SH’s death pursuant to a buy-sell agreement should not be considered as part of a plan testing a current redemption met 302(b)(2). On Aug. the corporation redeemed all of W’s shares from his estate. 1st does M’s redemption on 2/1 satisfy 302(b)(2)? o Yes. TS Corp has 100 shares of voting common stock outstanding.   So. 80% Test is satisfied b/c Post ratio of 42.111 Series of Distributions (Sec. 302(b)(2)(D) is not triggered in problem 2. leaving most management to W and TS Corp. redeems 30 shares of VCS from M. M owns 60 shares and W owns 40 shares. Problem presents issue re: series of redemptions • 2/1 Corp. • RR 85-14 held that the existence of a “plan” does not require an agreement b/t two or more SH. 3-Part Test   1. In December.

800 3k div – CG 2400 drd = 600 NI 2400 basis red.200 NI CG 20.800 basis red. 3 1 year ago 5 5k 3k 2.200 8k div – CG 6400 drd = 1600 NI 6400 basis red.400 5.000 10k div – 8k CG drd** = 2k NI 8k basis reduction*** 2 2 years ago 8 8k 4800 3. after B’s redemption post-mortem. 4 This year 3 3k 1200 1. then M would be the 100% owner after the redemption and we’d have 301 treatment Problem 3.85% o 80% of 60% = 48% o so we’ll have a 302(a) redemption rather than 301 • If we’d been within the RR. owns 40 VCS with AB of 600 per share and BP Corp.000 5k div – 4k CG drd = 1k NI 4k basis red. Total 26 26k 15.112 • • Arguably within Glacier State exception M o Before: 60/100 = 60% o After: 30/70 = 42. -To start: HV Corp. Basis left for 14 shares: 3.200 . owns 60 VCS -Redemptions: Date Shares Redeemed AB in If 302(a) If 302(a) Redeemed Price Redeemed applies* does not Shares apply 1 3 years ago 10 10k 6k 4.600 10.

Post: 26.92% is greater than 17.83% b. the series is not substantially disproportionate. 302(b)(2)(D) is triggered when a single redemption is substantially disproportionate. but need more info.113 *b/c 302(b)(2) is satisfied. -this problem needs more facts to determine.83% c. but in aggregate the series taken together is substantially disproportionate. Pre: 26. would prefer distributions to be 301 instead of 302 b/c of 243 DRD. this happens ________.08% (17/77) c. but when the single is looked at series. Pre: 40% b. does not satisfy 80% Tests b/c 26. This year a. do both 301 and 302 results. 1. the closeness of each redemption satisfying 302(b)(2) is a factor. -point is to show that Corp.27% (33. ***Basis reduction b/c 1059 Extraordinary Dividend. Post: 33. 2&3. b/c need to say if 301 applied.08% is greater than 21.83% is greater than 26. Pre: 33.33% b. NOTE: if on exam. -Courts will look to see if series of redemptions are in accordance to a Firm and Fixed Plan – look at facts and circumstances to determine. **first 3. you got a problem like this one.92% c.46% (26.08% * 80%) Is 302(b)(2)(D) triggered? -NO. . Does each redemption satisfy 302(b)(2)? 1. -in this problem we have the reverse in that each redemption is not substantially disproportionate. Post: 18. satisfies 50% d. 2 years ago a.08% b. this happens ____. Post: 22.66% (22.83% * 80%) 4. 2&3 is not satisfied b/c 18. 1. Corp. qualifies for 80% drd b/c owns at least 20% of Corp. Basis reduction = DRD. and if 302 applies. satisfies 50% Voting Power Test d.33% is greater than 32% (40% * 80%) 2. 1 year ago a.33% c. 2&3. 3 years ago a. 2&3. Pre: 22. does not satisfy 80% tests b/c 33. not satisfied b/c 22.33% * 80%) 3.

50% Voting Power Test – yes satisfied b/c post: 27. 3.55% * 80% = 42. redeems 30 VCS from Jose. -Corp.78% (100 / 360) 2. 81-41 says redemption of voting preferred stock only works if SH owns no common stock post redemption. Problem 5(a) -E owns 40 VCS and 100 VPS.78% is less than 28%. not preferred stock. 318(a) for constructive ownership of stock. can’t satisfy 302(b)(2). only look at common stock. 80% Voting Stock Test – yes satisfied b/c post: 42. 80% Common Stock Test – -Rev. see also Reg.114 Problem 4(a) -Jose owns 60 Voting Common Stock shares (FMV: 6k) and 200 NVCS (FMV: 10k).: 42. Problem 5(b) -Rev. -so.318-1. 318(a)(1)(A)): 1. -satisfied b/c 0% is less than 32%. Rul. -Related Family Members (from Sec. Does this satisfy 302(b)(2)? -3 part test: 1. 80% Common Stock Test – -Pre: 40% (40 / 100) -80% of 40% is 32% -Post: 0% (0 / 60). -Pre: (16k = 6k + 10k) / (30k) = 53. -problem here is that SH owns common stock and preferred stock. 3. this test is not satisfied b/c 48. 1. redeems 40 VCS from E. 87-88 says to aggregate common stock for 302(b)(2)(C) Common Stock Test. *for this part. Rul. 50% Voting Power Test – yes satisfied b/c post-red. 302(c)(1) says to use Sec.86% is less than 48% (pre 60% * 80%). 80% Voting Stock Test – -Pre: 35% (140 / 400) -80% of 35% is 28%. grandchildren .86% 2.78% (100 / 360) -so. 80% Voting Stock Test is satisfied b/c 27. treat this “redemption” as a 301 distribution.67% -Post: (13k = 6k – 3k + 10k) / (27k = 30k – 3k) = 48. -Corp.15% -so. spouse 2. Does this satisfy 302(b)(2)? -3 part test: 1.67% -as a result. and to determine according to FMV (that is multiply CVS by FMV and NVCS by FMV for fraction). -Post: 27. Problem 6(a) -Sec. See 302(d).15% is greater than 42. children 3.

Problem 6(c) -No. b/c post-redemption Voting Power is 65.22% -and 22. 55 = 25 from A + 15 from C + 15 from D 30 = 15 from B + 15 from D 30 = 15 from B + 15 from C 40 = 25 from A + 15 from F 15 from E Total 85 Ben Cindy David Evan Fran 15 15 15 15 15 70 45 45 55 30 Problem 6(b) -No. And.. parents Amy Actually Own 25 Constructively Own 60 = 15 from B + 15 from D + 15 from E + 15 from F. b/c . Z Corp owns 40 shares.05% is greater than 36%. b/c . how many shares does A own? . which is greater than 50%.05% And 36. -Pre: 30% -80% of 30% is 24% -Post: 22.115 4. . so satisfied.22% is less than 24%. in which A owns 60% of Z Corp. Problem 6(d) -Yes.12%. in which A is 1/3 partner. . -So. Amy doesn’t constructively own shares from C b/c C is not family member and b/c can’t reattribute family attributions. then ABC P-ship owns 45 shares. . Problem 7 -A directly owns 15 shares of Y Corp. -Pre: 45% -80% of 45% is 36%. -Post: 36. .

and 4k is treated as capital gain. -remember excess of basis is CG.302-2(c) and Examples) = 76k. Sec. so now basis = 0. there is a 80k Basis Reduction (that is amount of DRD b/c untaxed portion). -so. and W’s basis in shares = 40k. treat as 301 distribution. -now. and in W Corp. which is 80k. See Sec.2%. .. 100k Div. -Why? -for Corp.37% = (19 actual + 20 constructive / 79) -49. -Total shares owned by A = 54 shares. -there is no limit of going Entity – to SH/Partner to – Entity. -Sec. b/c of 50% interest in V. b/c under Sec. -this triggers 243 DRD.89% is greater than 43. -so. 302(d). regardless how long SH has owned stock. Problem 8 -D owns 50% stock interest in V Corp. **-What about Sec. -As a result. 302(d).116 -A owns 15 shares directly + constructively 24 from Z Corp. -Constructively: 20 from D b/c of reattribution rules. 1. and W Corp. he proportionately (60%) owns shares owned by Corp. -then Q Corp.89% (44/90) -48. -thus. -and 20 shares of Q Corp. redeems 21 shares from W Corp. own? -Actually: 40 shares. -D constructively owns 20 shares of Q Corp. treat this as a 301 distribution. -302(b)(2)? -Pre: 60% = (60/ 100) -80% of 60% is 48% -Post: 49. -What is basis though? -36k AB in remaining shares + 40k AB in redeemed shares (b/c of Reg. + 15 from P-ship. b/c of 50% interest in W. A owns in proportion (1/3) shares owned by P-ship. reduce 76k stock basis by 80k = (4k).37% is greater than 48%. then all 100k is a dividend. -How many shares does W Corp. each own 40 shares. -Post: 48. 1059 Extraordinary Dividend? -1059(e)(1) says when not paying dividend pro-rata (meaning same to all SH’s). respectively. 318(a)(5)(A) says person is treated as actually owning shares for reattribution purposes unless otherwise stated. the dividend is treated as extraordinary.2%. – 80k DRD = 20k NI. -V Corp. so 302(b)(2) is not satisfied. 302(b)(2)? -Pre: 54% (54 / 100) -80% of 54% is 43. so fails 302(b)(2). -If E&P are 100k. -for P-ship. in Q Corp. since A owns at least 50% of Corp.

.. not Entity Attribution. 302(b)(3) test -Sec. treat Chad as only owning 50 shares. -BUT Chad can satisfy 302(b)(3) b/c of req’s for waiving family attribution in Sec. or employee. 302(c)(A). director. AND SH must file an agreement with the IRS that SH will notify IRS of any acquisition of a prohibited interest. other than acting as a creditor. 302(a) shall apply if the redemption is in complete redemption of all of the stock of the Corp. thus satisfies 302(b)(3). -So. and CD P-ship owns 50 shares in which Chad is a 50% partner. Section 3: Transaction of a SH’s Interest -Sec. -prohibited interest includes interest as officer. Waiver of Family Attribution is only for purposes of Sec. owned by the SH. -if don’t notify IRS of prohibited interest. 2. *can only waive Family Attribution. -What if Redemption satisfies 302(b)(2) and 302(b)(3)? -b/c this usually happens when redeeming all shares of SH. -302(b)(3) adds something (1) when redemption is of all Non-Voting Common Stock owned by SH. AND SH may not acaquire any prohibited interest (other than by bequest or inheritance) within 10 years from date of such distribution. -Chad can’t satisfy 302(b)(2) b/c of family attribution rules in 318. 302(b)(3). b/c can’t work for 302(b)(2) since it’s Voting Stock and (2) when there is the issue of Family Attribution. then SOL stays open indefinitely. So. -Family Attribution Issue: -Chad owns 50 shares and his daughter Dana owns 50 shares. immediately after distribution. 3. -3 Requirements for Waiver of Family Attribution 1. -EX: Chad owns 50 shares. Chad constructively owns 25 shares. SH may not have prohibited interest in Corp. -then the IRS is given 1 year to assess a tax on prohibited interest acquired by SH.117 **Look at 1059(e)(1) Rule** Chapter 6.

therefore Chad fails 302(b)(3) test. -this will make it so C does not constructively own E’s shares. C gifts 10 shares of stock to Dana (all tax free) with AB of 7k . if C does own shares outright. 3. which also would be treated as 301 distribution. Entity using Waiver of Family Attribution Example: What if Corp. each related person must be held jointly and severally liable for prohibited interest. 2. -BUT this is not allowed by Sec. -also. 318(a) Family Attribution. Prevents Waiver of Family Attribution -Sec. -this will qualify for 302(b)(3) if the Waiver is available. thus 10k dividend. -Requirements: 1. And. has Current E&P of 100k. which are attributed to CD P-ship. -Now. C constructively owns 50 shares (W’s shares). then C has Corp. -C’s Options: 1. can’t waive that attribution. (FMV of 1k per share and AB of 700 per share). C has daughter Dana. -Sec. each related person must satisfy 3 req’s above.118 -can’t waive Entity Attribution. 10k dividend . 10k redemption. 302(c)(2)(B)(i) and (ii). 1001 treats 10k less 7k AB = 3k gain. redeem Dana’s 10 shares for 10k cash. -NOTE: this only works when SH (C from above) does not own any shares outright. W (C’s wife) owns 50 shares. redeems all 50 shares of CD P-ship. then waiving family attribution won’t work.301 distribution paid to C. the Entity needs to waive Family Attribution to qualify for 302(b)(3). -Example 1: C owns 100 shares of X Corp. (Tax . 2. 302(c)(2)(B)(i) since D acquired stock 10 years before redemption and b/c D acquired stock from C (who’s stock would be attributed to C under Family Attribution rules) AND acquired stock for Tax Avoidance purpose. -Related Person is defined under Sec. -and fails 302(b)(2) test b/c owns 50% voting power. C owning shares thru another entity. X Corp. then C gifts 10k to Dana. and C would like to make 10k gift to Dana. So. in which C owns 50% of pship.

Chad and Dana each own a 50% interest in the CD Partnership. -What if instead C gifted 10 shares to Dana hoping Dana would take over family business. 302(b)(3) is satisfied.302-2(c). -this is applicable only when SH’s entire interest is redeemed. Chad owns 50 shares. and the CD Partnership owns 50 shares. Chad and Dana are unrelated. then Dana changed mind and had redemption? -this is ok b/c purpose is not for tax avoidance. Chad owns 50 shares. and no shifting of basis.119 Avoidance means acquiring shares with anticipation of subsequent redemption). Chad and Dana are unrelated. If (3) . See Reg. (a) (b) (c) (2) Does the redemption meet the test in § 302(b)(3)? Does it meet the test in § 302(b)(2)? What if Chad’s shares are nonvoting? What if Dana is Chad’s daughter? X Corporation has 100 shares of voting common stock outstanding. Waiver of Family Attribution is allowed. Section 3 (1) X Corporation has 100 shares of voting common stock outstanding. Chad and Dana are not related. X redeems Chad’s 50 shares. Erin is Chad’s wife. Chad and Dana each own a 50% interest in the CD Partnership. and the CD Partnership owns 50 shares. If X redeems Chad’s 50 shares. and Dana owns 50 shares. thus 10k dividend. treat the 10k redemption as 301 distribution. will the redemption meet the test in § 302(b)(3)? X Corporation has 100 shares of voting common stock outstanding. Erin owns 50 shares. 1. -meaning. -Meaning the 7k basis of redeemed shares goes to C’s basis. -What happens to D’s basis of redeemed shares? -the basis of the redeemed shares is added to the basis of the related persons whose shares were attributed to the redeemed SH. -thus. -Example 2: In-Class Examples Chapter 6. -Thus.

What are the tax consequences if X distributes 10. (a) Chad would like to use some of X’s excess cash to make a 10. saying that Waiver is not available to Chad b/c within 10 year period prior to redemption. and the CD Partnership owns 50 shares. Chad owns 20 shares.000? What are the tax consequences if Chad transfers 10 shares to Dana as a gift and then has X redeem Dana’s 10 shares for 10. will the redemption meet the test in § 302(b)(3)? (4) (5) Same as (3) except Erin owns 30 shares. (6) (b) (c) (d) .000. she decides to pursue other interests and has X redeem her 10 shares. basis = 700 per share). Does the redemption qualify for exchange treatment under § 302(b)(3)? Chad would like to have X distribute 10. C transferred stock to E (whose stock ownership is attributable to C). b/c 302(d) says use 301. but after a few years.000? Assume instead that Chad transfers 10 shares to Dana because he wants to encourage her to become involved in the business so that she can eventually take over when he retires. -don’t want SH to get redemption. Chad also wants to retain effective control over X. Same as (3) except Erin owns 30 shares.000 to Chad as an ordinary § 301 distribution or redeems 10 shares of Chad’s stock for 10. Chad owns all 100 shares (FMV = 1. but at same time retain indirect control over Corp. Chad and Fred (an unrelated party) each own 50% of the stock in CF Corporation. X Corporation has 100 shares of voting common stock outstanding. -Answer: treat as dividend. AND b/c this transfer of shares was for Tax Avoidance. Dana accepts the shares.000 per share. 302(c)(2)(B)(ii) When Transferring SH’s Stock is Redeemed is aimed at this type of scenario.120 X redeems the CD Partnership’s 50 shares. X has cash in excess of its business needs.000 of its excess cash to him at the lowest tax cost possible. CF Corporation owns 20 shares. Does the redemption qualify for exchange treatment under § 302(b)(3)? -this transfer by Chad to Dana was not made for tax avoidance purpose. A few years later. Assume instead that Chad transfers 90 shares to his daughter Dana as a gift because she has become actively involved in managing the business and plans to take over when Chad retires. Chad retires and has X redeem his remaining 10 shares. What are the tax consequences if Chad transfers 90 shares to his wife Erin as a gift and then has X redeem his remaining 10 shares for 10. and the CD Partnership owns 50 shares.000 gift to his daughter Dana.000? -Sec. X has current E&P of 100.

property is ok (so SI in prop.302-4(d): -payment cannot be dependent upon earnings of Corp. ok). -interest rate probably cannot be dependent upon earning of Corp. -Pre: 60% -Post 10/50 = 20% Problem 2(a) -if Henry satisfies 3 requirements under Sec. 1. 302(c)(2)(A) is only for waiving Family Attribution. is this promissory note a real creditor interest or -Factors (see Reg. -IRS says transferring to spouse is indirect control. 302(b)(3). (that is C retains a prohibited interest). -fact that T is nephew is irrelevant. but at same time retains indirect control over Corp. See Lynch . -and b/c C remains as an employee with Corp. Problem 1 -Corp. -Reg. -Answer: Chad gets exchange treatment under 302. 1. -BUT remember could still satisfy 302(b)(2). -Now. and thus satisfy 302(b)(3) complete redemption test b/c owns no shares now. -Remember Grandparents are not Family Members for 318(a). (so SI in stock is prohibited interest). BUT transfer to son or daughter is not indirect control. 302(c)(2)(A). so fact that T is nephew is irrelevant b/c nephew is not attributable under 318(a) family attribution rules.? -now. and said that SI in stock is ok. -Sec. the question is whether the note is debt or equity? -b/c generally a creditor interest is not a prohibited interest. -BUT courts have not agreed with this. but enforcing the SI and acquiring the stock is a prohibited interest. this satisfies Sec. then Henry may waive family attribution rules. -look at whether debt is subordinate to other creditors (if yes then more equity like). -so. the 10 shares are attributed to C. what if C’s son owns 10 shares of Corp. Problem 2(b)(1) -with promissory note. but that re-acquisition of stock is prohibited. C can’t waive family attribution rules under 302(c). redeems all 50 shares of C.302-4(e) says re-acquisition of Corp.121 -Tax Avoidance Purpose is when SH gets redemption treatment. no need to waive family attribution rules.

-BUT T is not employee. -If not aggregated. Firm and Fixed Plan Test Problem 3 -Corp. Independent Contractor Prohibited Interest? (waive family attribution?) Problem 4(c) -Is T working as lawyer for Corp. but the 1st 3 will not be counted as redemption. and O (R’s son) owns 40 shares. then the last redemption will be counted as redemption. has 100 shares. -Corp. -Merril Lynch says plan need not be in writing or legally enforceable. that is compensation tied to future . at 1st redemption. fact R sent in notice to IRS saying he’d notify if obtained prohibited interest. -need to be made to a firm and fixed plan. related party may not have interest in ensuring plan is complete. -unrelated party was factor b/c that party ensures plan is carried out -whereas. -So. use the Tax Court’s Facts and Circumstances Test based on whether the former SH has either retained a financial stake in the Corp. – that is retiring. -also. -party no longer operating or working in Corp. -fact that T is being unpaid is irrelevant. ok to waive Family Attribution? -Sec. 302(c)(2)(A) lists employment as prohibited interest. 302(c)(2)(A)). -Requirement for Serial Redemptions to be Aggregated and counted as One for 302(b)(3) Complete Redemption: -more than a gentleman’s handshake. will redeem 15 shares each year till all 60 redeemed. (R is retiring). -fixed time period. R owns 60 shares.122 Serial Redemption Issue. he is an Independent Contractor. b/c T is still holding a prohibited interest (in that T is remaining as a Director which is a prohibited interest under Sec. -Bleily and Collishaw says plan can be spread out over fixed time period. ok to waive Family Attribution? -NO. count as one complete redemption -RA: looks like plan in problem is firm and fixed b/c of fixed time frame. it’s important that R not staying involved in managing corp. Employee is Prohibited Interest (does not waive Family Attribution Rules) Problem 4(a) -Is T remains as an unpaid Director of Corp. -If aggregated. (does SH something akin to an equity interest.

RR 77-293.123 earnings of Corp. thus there is tax avoidance. if J can waive Family Attribution Rules. Problem 6(a) -Redemption of A’s 25 shares will qualify for 302(b)(3) if A does not retain a prohibited interest. as long as Jim-Bob meets 3 req’s for 302(c)(2)(A). -Does redemption of J’s 50 shares qualify under 302(b)(3)? -yes. 302(c)(2)(B)(ii) b/c of J transferring stock to his grandson? -302(c)(2)(B)(ii) applies b/c Redeemed SH (J) transferred stock to a person whose stock ownership is attributable to Redeemed SH within 10 years prior to redemption. not Jim-Bob to J. 302(c)(2)(A)(ii). 302(c)(2)(B)(i) looks like it might apply. this is fine. but (B)(i) is predicated on J’s stock being attributable to Jim-Bob. -Issue is Sec. -problem with this F&C test is that it is uncertain. Problem 5(a) -J gifts 20 shares of 70 shares to Grandson. not earnings of Corp. -looks more like J is shifting control to his son and grandson. -So. then has his 50 shares redeemed by Corp. -9th Circuit (Lynch Case) said that former SH being an Independent Contractor is a per se prohibited interest. and benefit by its operations. -IRS takes this position as well. Inference from RR 85-19. -Result treat as 302 redemption. -RA: looks like T will qualify b/c his earnings is based on contingent fee. whereas code wanted hard and fast rules for predictability. -What about A inheriting shares from C? -that’s not a prohibited interest according to Sec. -Result treat as 301 distribution.) or continued to control the Corp. Problem 5(b) *What if we change the facts in having J transfer 40 shares to Wife. -is this tax avoidance purpose? -looks like not for tax avoidance purposes b/c J did not retain indirect control over Corp. receiving shares by inheritance or bequest is not a prohibited interest. then has 30 shares redeemed? -this will be harder to prove no tax avoidance b/c IRS deems transfer to Spouse as retaining indirect control. satisfies 302(b)(3). but receiving by gift is a . -RA: looks like T will not qualify and Family Attribution is not waived b/c independent contractor is a prohibited interest. Problem 5(c) -Sec.

having the entity (Estate) and each related person (F and 2 children) meet 3 req’s of 302(c)(2)(A). that son won’t have to join in waiving family attribution and being jointly and severally liable. -So. -Sec. *remember no waiver if F actually owns stock. 302(c)(2)(C) must be satisfied. stock must be attributable to the person. . *remember to be related party under 318. -so.124 prohibited interest. that is irrelevant. Problem 7(a) -How many shares does H’s Estate own? -Estate owns all 100% of shares b/c F constructively owns shares by her children. b/c not related person whose stock is attributed to F. -So. if there is a son (sibling of 2 children) as bene also of Estate. -that is Frances agrees to be J&S liable. the only way Estate can qualify for 302(b)(3) is if it can waive family attribution rules. each related person agrees to be jointly and severally liable for any deficiency resulting from acquisitions (prohibited interest). which will be reattributed to her Estate. inheriting or getting shares by bequest does not dq SH for waiving Family Attribution rules. -So. and it is satisfied by: 1. AND 2. -b/c seen as involuntary.

there must be a meaningful reduction of SH’s proportionate interest in Corporation. 302(b)(1) is facts and circumstances. -D could have given debt. Right to Vote. 318 attribution rules do apply to Sec. -business purpose for redemption or business purpose for issuing of stock is irrelevant to 302(b)(1). United States v. -Issue: -Does redemption of 1k shares of preferred stock qualify for 302(b)(1)? -Holding: No. the meaningful reduction must be in one of these 3 rights. Meaning treat that as a 301 distribution.302-2(b) that says attribution rules of 318 apply) 2. Corp. (see also Reg. 2. so D invests 25k and gets back 1k Preferred Stock (basis is 25 per share). 1. . -Reg. Court held that a SH who owns 100% stock of Corp (either actually or constructively b/c of 318) will never qualify for 302(b)(1). -B (unrelated party) owns 500 shares. 4. but equity investment was better for business purposes. Three Rights of SH: 1. Court held that to qualify for 302(b)(1). 3.302-2: Sec. not as 302 exchange. -problem is court didn’t say what this meant. -so. and D transfers those shares to his 2 children. 302(b)(1) b/c 302(c)(1) says that 318 attribution rules do. -a few years later. -Then. and is if SH does not satisfy safe harbors of 302(b)(2) or 302(b)(3). 1. D’s wife owns 250 shares. Right to share in Corp’s E&P. Right to share in net assets on liquidation. Davis (S. -Corp. 302(b)(1) is made without regard to Corp’s earnings and profits and without regard to whether 302(b)(3) or (b)(2) was not satisfied. Court held that Sec. Ct. needs more capital.125 Section 4: Distributions Not “Essentially Equivalent to a Dividend” -Sec. redeems 1k shares of preferred stock for 25k cash. 1970) -Facts: -D owns 250 shares. -Court’s Holdings: 1. D acquires B’s shares. 3. Court held that business purpose is irrelevant to applying 302(b)(1).

-sole SH cannot ever qualify b/c always has sole right to vote. -pro rata distributions (meaning same reduction to each SH) does not qualify. -2nd a determination is made whether there has been a reduction in SH’s proportionate interest in Corp. Reduction in Voting Power -courts focus on voting power. -Rev. the courts and IRS have focused on voting power reduction. Family Hostility Problem 1(a)(2) -SH’s can argue Family Hostility Exception to negate Sec. but after redemption A lost ability to control by aligning with one other SH. -but if SH has voting right. then determine if it is meaningful reduction according to Davis – look at facts and circumstances. -i. -it is at this point and only then that family hostility becomes a factor.126 -so look at each. now A can’t get joint control unless she aligns herself with B. -Cerone Case -1st apply the 318 family attribution rules. b/c -Pre: 53% -Post: 50. Section 4 Problems (p. go below 50% voting power. -So. 37) Problem 1(a)(1) -No. Rul. Rul. 77-218 says that reduction from 60% to 55% is not meaningful reduction b/c SH still retains voting control post reduction. -3rd if there has been a reduction.e. -Benjamin case held that reduction that left SH owning more than 50% voting power is not meaningful. and B . what is the argument? -argue that pursuant to Rev. 318 Family attribution rules. -usually have to pass some control threshold. 76-364 that before redemption A had ability to control corp by aligning herself with any one other SH (except B). -Benjamin said that voting control right outweighs other 2 rights. Sec. 302(b)(5) -says that fact that SH failed (b)(2) and (b)(3) is irrelevant to applying 302(b)(1). -so.53% (48/95) -b/c apply 318 attribution rules.

-so. going below 50% voting power is a meaningful reduction.) held that loss of supermajority is meaningful. 7 said 57% to 50% is meaningful reduction where other 50% was held by single unrelated SH. from 70% to 55%? -Rickey case held that loss of supermajority is meaningful. -so. 78-401 disagreed and held that loss of supermajority control is not meaningful since SH retains control over day to day operations. get this by inference from Rev. this may not work in this case b/c 2 unrelated SH’s own other 50%. -Rev. A will argue that there is a meaningful reduction. Rul. Rul. -Roebling said that going from above 50% to below 50% voting control is meaningful reduction. Rul. weak authority.47% (19 actually and 28 from A) -so.58% = 21 / 93 . -Wright (8th Cir. -Rev. -Henry T.) held that loss of supermajority is meaningful reduction. but maybe yes. 75-502 said that going below 50% voting control is meaningful. Rul. -Pre: 52% -Post: 50%. -D. + there was no 2/3 vote imminent. 77-28 and Benjamin Case. Ct.127 and A are on bad terms. Patterson Trust (6th Cir. SuperMajority (2/3 vote needed) What if SH loses super majority control? i. So 2/3 imminent vote may make reduction meaningful? Problem 1(c) -No. (especially considering joint control arguments) Minority SH’s Problem 1(d) -Yes b/c -Pre: 28% -Post: 22. Problem 1(b) -Yes b/c -Pre: 53% (24 actually and 28 from A) -Post: 48. -BUT Rev. So.e. this 50% post may not be meaningful reduction since 50% may represent effective control.

-Rev. Look to see if there is joint control pre. -Again use Rev. 76-385 held that a . What if there are 2 SH’s. -so. -A’s 21 + B’s 25 = 46 / 93 = 49. -i. -A must align herself with 2 other SH’s to control Corp. What if Corp. so any reduction (that is not pro rata) would be meaningful. so all are unrelated SH’s. 76-364. Problem 1(e) -Yes b/c -Pre: 23% -Post: 18. 75-512 said that reduction from 30% to 24.95% -NO Family Attribution (318) with siblings. just look to see if there is joint control post with any one SH.46%. then loss of joint control post.6% to 40.3% was meaningful where one other SH held 60% pre and post. one share redeemed would be meaningful. minority SH has no chance to control by aligning self with another minority SH – so no joint analysis. Publicly Traded Stock -Rev. -Now.e. if A aligns self with B. meaning need loss of joint control. post D can have joint control with A. -thus. -Johnson Trust held that reduction from 43. -D could have had joint control by aligning himself only with A pre. Rul. PROBLEM 2 SH Alonzo C/S 60 P/S 10 . Rul. Rul. -rationale is that there was one other SH who owned 10%. 81-289 held that unchanged proportionate interest is not meaningful b/c redemption is essentially equivalent to dividend. Rul. Rul. -this is joint control analysis.128 -b/c of Rev.46% not 50+%. but post can’t align self with A to control so there is a meaningful reduction. look for proportionate reduction in voting power of de minimus SH. 76-364 joint control analysis. 1 with 77 shares and 1 with 23. post redemption. -so.03% reduction was meaningful b/c that de minimus SH had no chance to control. and 1 share is redeemed? -Rev. -so. redeems only 1 share from D? -NO. -A cannot align herself with one other minority SH to control the Corp.8% is not meaningful b/c there was no significant change in control of Corp. that is only 49.

-Ct.e. held that this was not meaningful b/c SH retained joint control. SH recouped 80% of the rights he lost on 10% reduction in NVPS. -Hay’s Case -SH owned all NVPS and 80% VCS. could align self with B or A to control Corp. . redeemed NVS. Rul. Only NVS -if SH holds only non-voting stock. Minority SH -NOTE: if it is minority SH. and no common stock. and there is redemption of NVS. then redemption of Non-voting stock qualifies as meaningful reduction. -Rev. redemption of non-voting p/s most likely meaningful (b) A would likely not qualify. moving forward he is proportionately in greater control  dividend B no change in voting power. then redemption of non-voting stock is not meaningful reduction. -Corp. -SH C constructively owned 18% of Voting Stock and 2 other unrelated SH’s (B and A) each owned 19%. held that this was not a meaningful reduction b/c rights (i. redeemed 10% of NVPS. not losing control. but has lost substantial amount of preferred shares (RR 85106)  302(b)(1)  probably C – dividend  probably not D Would likely still qualify based on above Non-Voting Stock (NVS) NVS and VS -if SH holds voting stock. right at liquidation) attached to preferred stock revert to the common SH’s b/c common stock is the residual interest -thus. -Ct. then yes probably qualifies for meaningful reduction when minority SH can’t control (jointly or otherwise).129 Berta Colin Donna 25 15 0 55 15 20 (a) 5 p/s redeemed from D Probably meaningful RR 77-426 . no change in voting power. -Corp. and other SH’s owned rest (44%). 85-106 extended rationale to joint control.if no common stock before or after redemption.

-RA: -Block 1 represents 2/3 of W’s shares. 331(a) says that liquidation distribution is payment received for SH’s stock. etc. 336(a). -SH’s Tax Consequences: -Sec.332-2(c) says that liquidation is: -(1) Corp. STCG property. 1. recognizes gain and loss. 311(a) where loss is not allowed. is paying off debts. LTCG property. 1001. treated as sale of Stock to the Corporation.130 -Rev. 336 -Sec. -What are tax consequences? -Corp. no tack.000 LTCG. -And W recognizes gain under Sec. -Special Rules in case of liquidation of subsidiary (Sec. 77-426 held that redemption of NVPS where SH only owns NVPS is a meaningful reduction. So gain or loss is recognized under Sec. 1001. under state law. -Sec. ceases to be a going concern. has 7. -But we have to deal with Split HP. -AR: 4 mil. paying SH’s. -We do this by allocating AR based on number of shares. -this is unlike Sec. so 2/3 of 6 mil. are that of winding up in that Corp. Rul. Chapter 8: Corporate Liquidations -General Rules -Corporation’s Tax Consequences determined under Sec. -Fresh HP.950. distribution is allocated to Block 1. -Reg.9 million basis. is allowed to retain nominal assets to retain legal status as Corp. recognizes gain or loss on complete liquidation. -Block 2: 200 shares with 1.4 million E&P and Corp. General and Special Rules are premised on a Complete Liquidation. Problem 1(a) -W has 2 blocks of stock: -Block 1: 400 shares with 50k basis. 332 liquidation). -Corp. 334(a) SH takes a FMV basis in property. Sec. distributes 6 million to W. and (2) the activities off Corp. -Block 2 represents 1/3 of W’s shares. -there is no req’t that this is legal dissolution and Corp. 336(a) corp. – AB: 50k = 3. .

-again the E&P deficit is irrelevant.000 LTCG = AR: 2 mil.9 mil. 1001(c) and is not disallowed by Sec. stopped engaging in in historic business and was conducting in business just to wind up. – AB: 50k.9 mil. we go distribution by distribution: -Distribution 1 of 3 million: -Block 1: 1. -so Corp. -remember 267 disallows loss to a more than 50% SH. 331(a) . *Loss can’t be recognized until complete liquidation is final. Problem 1(b) -Corp. Problem 1(c) -liquidation is allowed if there is a plan. -adoption of the plan is necessary. -Block 2: 1. but then Corp. 1001 gain -Block 1: 150k LTCG = AR: 200k – AB: 50k. and is allowed to take time over a couple of years. 2. -BUT if there is no formal adoption of plan. -W’s Tax Conseq: -Sec. said Corp. -these E&P disappear and the SH gets Capital Gain treatment on liquidating distribution. -plus fact that delay was for marketability of assets and short time frame helps prove that it was liquidation.8 million STCL = AR: 100k – AB: 1. McGuire -adoption of plan in 1934. entered into leasing and royalty relationships with its assets. -Block 2: 900k remaining AB = AR: 1 mil. in problem. distributes 300k to W in complete liquidation. -Ct. there is a 3 prong test -distribution is not liquidation unless 1. = 100k STCG. -What about Corp’s E&P? -they are not relevant. -So. Then Corp. – AB: 1. has E&P deficit. -this STCL is allowed by Sec. stopped historic business and sold its essential assets. had difficult time finding buyer. – AB: 1. Olmstead -adoption of plan. there is a manifest intention to liquidated. said that status of liquidation did not exist in 1960 b/c Corp was not in process of liquidating b/c Corp.950. we need to know whether Corp. was still receiving income. but Ct. -so Corp. 267(a)(1) b/c 267(a)(1) says that complete liquidation is exception to 267. then distribution in 1960. was still engaging in historic business activity.131 -AR: 2 mil. the Corp’s activities must be directed to such termination. -If this is complete liquidation. there must be a continuing purpose to terminate corporate affairs 3.9 million.Sec. .

Rul. 59-228. 331(a) says treat as 1001 transaction. -Character is LTCG. -Basis: 10 million. 334(a) says basis = FMV of property. 334(a) and Ford Case. -Basis is still 10 million. -if SA is building. Encumbered Property: Liability Assumed by SH Problem 2(b) -Corp: -same as above. then Steve would have to pay it. -we would net AR for Steve (FMV – Liability) -BUT we don’t do anything different for Corp. 336(a) treat as sale at FMV to SH. *Liability assumed by SH is a cost of acquiring property. -Gain: 7 million = AR: 10 million FMV – AB: 3 million. SH is treated as assuming recourse and taking property subject to nonrecourse debt. sells assets then distributes cash. -this would reduce Steve’s amount gained. distributes Swampacre to Steve (Steve’s AB in Stock = 1 million). -Character of Gain is probably 1231 gain. -Corp’s Tax Consequences: -Sec.132 -Distribution 2 of 1. distributes all assets or when Corp. -Under State law. 7 million gain. -SA has FMV of 10 million and AB of 3 million. -NOTE: liquidation can be when Corp. -Steve: -Gain: 5 million = AR Net FMV: (10 mil – 4 mil = 6 mil) – AB: 1 mil. -Net FMV = (FMV of Property less Liability Assumed) less AB of Stock. Sec. then 1239 could apply b/c building is depreciable in Steve’s hands and Steve owns more than 50% of stock. Sec. -disregard liability for Basis. Problem 2(a) -Corp. so SH’s tax consequences will be same as above.5 million: -Block 1: 1 million LTCG = AR: 1 mil – AB: 0 b/c all was taken by Dist1 -Block 2: 400k STCL = AR: 500k – AB: 900k. -fresh HP in SA. . did not pay tax liability. -Steve’s Tax Coneq: -Sec. What about tax liability? Let’s say Corp. -Gain: 9 million = AR: 10 mil – AB: 1 mil. See Rev.

-HP tacks. Control Requirement -Parent/Control Corp.133 Section 332 Liquidation -Sec. and Tucker owns the other 20 of Specific. Also. -Basis is transferred Basis: 9 million. Exclude NVPS. (general rules are above. -go from 1st distribution. -this is similar to 243 DRD. Sec. -EX: Plan adopted in Yr. -this control req’t must be satisfied at adoption and throughout liquidation. Sec. then 1st distribution in Year 2. 1. 334(b). 332 liquidation b/c control and timing are satisfied. 1504(a)(2). Global: -recognizes no gain. then final distribution is made in Year 5. 332(b) 1. 337(a) there is no gain b/c the liquidating corp. -so gain inherent in factory is preserved. and the last distribution occurs within 3 years of the taxable year in which the 1st distribution is made. -we’re trying to prevent 2 levels of Corporate Tax. -EX: Plan adopted in Yr. 2-OR if all liquidation distributions don’t take place in single taxable year. under Sec. -this is a Sec. 1223. Timing Requirement 1-all liquidation distributions take place in a single taxable year. Problem 1(a) -Global owns 80 shares of Specific. the distributions take place pursuant to a plan. 332 fails. does not recognize g/l when it distributes asset to 80% SH. -Specific liquidates and distributes Factory with FMV of 20 million and AB of 9 million to Global. 1. Sec. Specific: -so. -remember go from 1st distribution not adoption. -the gain inherent in the stock disappears. . net NOL and other stuff carries over to 80% Parent. owns 80% of Corp’s Total Voting Power and own a value = to at least 80% of Corp. Sec. E&P. -IF timing or control fail at anytime. 2. and thus use general rules of liquidation. then all distributions in Year 2. 332(a). then Sec.

-Result: Specific -Gain: 1 million = AR: 5 mil – AB: 4 mil. Problem 1(c) -Global would take transferred basis in Factory = to 30 mil. but Specific would recognize gain.134 What about distribution to Tucker? -a distribution to a minority SH is governed by General Rules (above). Sec. 336(d)(3) loss is not recognized by Distributing Corp. -AND the minority SH takes a FMV basis in property after recognizing gain even when Corp. -Congress was concerned that Corp’s would pick and choose assets it would distribute to each SH. 334(a) transferred basis. BUT if transferred asset to Minority SH? -Then under Sec. Problem 1(b) -the answer would not change to Global and Specific. may not recognize that loss. . is distributing it to SH. -the loss inherent in the stock disappears. -but this may not be that great b/c Global would recognize loss. Tucker -Gain: 3 million = AR: 5 million – AB: 2 million. -there may be an incentive to fail 332 to recognize the loss. when there is a 332 liquidation and Corp.

of PVS if own no Common stock. -also to reduced from 60% to 50% where other 50% is held by one unrelated SH. *on exam stop at the 302(b) test when it is satisfied. of NV stock. 3rd apply 302(b)(1). Series of Redemptions for 302(b)(2) -302(b)(2)(D): each satisfies on own. -remember IRS can still apply general steps transaction doctrine to series that is not same as 302(b)(2)(D). 3. -yes for red. Fix 10 year look back rule about rule not applying if transferred stock is redeemed from transferee in same transaction. then yes satisfy for any redemption of non-voting.135 Summary of Chapter 6 -For Corporation: Sec. Waiver of Family Attribution -exception is only inheritance or bequest (meaning from Decedent) NOT gift from living.. approach the 302(b) Tests as follows: 1. is meaningful reduction. 2nd apply 302(b)(2). For Exam. 302(b)(2) -never for red. -looks like Firm and Fixed Plan under 302(b)(3) is more strict than 302(b)(2) plan test. -if SH owns no voting. Meaningful Reduction -going from above 50% to below 50% is meaningful. 311 always applies whether it is a 302 or 301 when Corp. but not according to IRS). then red. -but going from above 50% to staying above 50% is meaningful only when there is supermajority (in 6th and 8th Cir. can’t satisfy. -Minority SH -if there is one majority SH. -Non-Voting Stock -if SH owns Voting Stock. 2. but in aggregate it fails b/c retains control. 1st apply 302(b)(3). distributes property to SH. -Rule for S Corporation is rule for when S Corp is Redeeming SH. .

assets retained and whether Corp. -1st treated as recovery of basis. distr. E&P includes any Excess Current E&P attributable at time of 302. and why is there a delay? Good reason for delay or not? -1239 and 1245 can apply for characterization of Corp’s gain. Summary of Chapter 8 -rules only apply when there is Complete Liquidation. then Stock Basis in remaining shares is decreased by the AB of shares redeemed. still has historic business going. and basis of redeemed is transferred to remaining shares. then rest is treated as capital gain. 2nd allocate Accumulated E&P to 301 and 302 in chronological order. -IF not 302. go block by block.. AND only recognize loss after last distr. . -Formula: Basis Left = Basis in Remaining Shares – Basis of Redeemed Shares. 1st allocate 301 out of current E&P 2. -relevant facts are what assets have been distributed v. -this Acc. then is 301. -if SH receives series of liq.136 IF it is a 302 redemption. Allocating E&P 1.

-whereas Subchapter C is less complex and less flexible. . 1361(c)(1) groups Husband and Wife as single SH. -S Corp is treated as a pass-through entity (income taxed once). -EX: Corp. Rul. A and B are treated as family member b/c 2 generations removed from common ancestor (Grandparent). -meaning S Corp SH’s report and pay taxes. 100 Shareholder Limit. 1371(a) says that rules in Subchapter C apply to S Corp unless Subchapter S states otherwise or not fit with purpose of Subchapter S. -this is modeled after Subchapter K. Thus. Then same result. -Subchapter K is more flexible and offers more tax advantages. 2. -taxed 1st at corporate level then 2nd taxed at SH level. -Member of Family includes common ancestor 6 generations removed lineal descendants. 99-43 said that this is ok. Sec. Difference b/t C Corp and S Corp: -C Corp is under double taxation system. Great-Great-Great-Great Grandparent is as far back as you can go (Quadruple Great Grandparent) for a common ancestor. and groups all members of family as a single SH. -2 100 SH S Corp’s could each be a partner in a P-ship. B. has 99 unrelated SH’s. -EX: What if A’s child and B’s child are SH’s. b/c now there are 3 generations removed from common ancestor. and children are all treated as 1 SH. -Also. 1361(c)(1). a SH’s spouse or former spouse is included as Member of Family. -Sec. domestic corporation. Thus. (Sec. A and B are 1 SH. A. Rev. and A and B who are 1st cousins. 1361(a). -So. Requirements of S Corp: -entity is a ”small business corporation” under Sec. the H&W rule gets consumed by Member of Family rule. Purpose of Subchapter S: to allow business to be formed as Corp without significant tax consequences. that is untaxed. -Sec. meaning has 5 elements: 1. not an ineligible corporation. -when S Corp distributes property or cash. So.137 Chapter 9: S Corporations -eligible entities electing to be treated as S Corporation. and won’t combine both S Corp’s together. but there are key differences. 1361(b)(2)) 3.

Problem 1(c)(3) -now we have 101 SH’s. 4. -these 2 cousins are treated as 1 SH b/c are Members of Family b/c there are 3 generations removed. -thus 100 SH limit is satisfied. -Partnership (including LLC treated as P-ship) can’t be SH.One class of stock required. 5. Problem 1(a) -Husband and wife are treated as a single SH under 1361(c)(1)(A)(i).138 -Purpose of 100 SH is for more simple administration of S Corp. so yes 100 SH is satisfied. -may have classes of stock with different voting rights. *if H&W get divorced. . Problem 1(c)(1) -2 cousins whose grandmothers were sisters. Problem 1(b) -Parent and Child are members of a family under 1361(c)(1)(A)(ii) so yes satisfied. Problem 1(c)(2) -Great Great Great Great Grandparent is exactly 6 generations removed. thus have 99 SH’s. so 100 SH limit is not satisfied. -So each family is treated as 1 SH. then probably not 1 SH but then got the definition under Members of Family that includes “former spouse. -C Corp / S Corp generally cannot be a SH of S Corp. Sec. 1361(b)(1)(A) limits S Corp to having 100 SH’s. -Exception is that a S Corp can own 100% subsidiary S Corp (QSub). -SH must be an individual and not a non-resident alien as SH. No ineligible SH. therefore 100 SH limit is satified.” -Reg’s say that H&W cease to be single SH at divorce. -but a single owner LLC can be SH b/c LLC is a disregarded entity as long as owner of LLC is an eligible SH.

139 Problem 1(e) -no b/c SH must be an individual. 1. Sec. so ok. How is election of S Corp made? -all SH’s must consent to election of S Corp. Preferred and common. -can’t have common and preferred. say that one class of stock means all stock must give same rights to right to profits (distribution proceeds) and liquidation proceeds. then election is triggered on January 1 of the next taxable year. -meaning no period of C Corp status during 2 and ½ months. One Class of Stock Req’t Problem 1(a) -Reg. -so b/c have common and preferred. Problem 1(b) -one class. this fails. then may classify as S Corp for that current year. 1361(b)(1)(B). 1. -Reg. makes election by 15th day of 3rd month of current year.1361-1(e)(1) says that partnership may not be a SH of S Corp. so election must be made by May 15 for the election to be effective as of March 1. Problem 1(c) -no b/c 2 classes of stock. -Reg. -here S Corp was created on March 1. Problem 1(a)(1) -retroactive election is allowed if Corp. -if make election after May 15. -requires that Corp qualify as S Corp (5 elements) during whole year and that all SH’s consent. each must consent for election to be valid.1361-1(l) may have different voting rights among stock. -if have H&W. Timing of Election -generally election makes entity an S Corp at start of next taxable year. (retroactive application of election). -1361(c)(5) Straight Debt safe harbor (not tested) Election of S Corp. -if make election on the 15th day on the 3rd month of the current year. . What about reclassifying debt as stock? -there is risk that debt classified as stock = 2 classes of stock.

and sale occurs. 1. -WHAT if Election is made on May 30 and sale occurs on June 15? -that is ok. All SH’s at time of that portion of year consent to election. -So a 2008 election may be made anytime b/t 2-2-07 to 3-15-2008. Problem 1(b) -Corp is owned by D. . still get retroactive status (current year). then if there was reasonable cause for late election. F. -after an election has been made. AND 2. -meaning can’t make election till after F sells stock to D and E. no election to 2007. E. then F must consent to S Corp election b/c req. still new SH need not consent b/c election was valid with all SH’s consent on May 30. Problem 1(a)(3) 1------------------------------1---------------------------------------1----------------------------March 1 March 5 Election May 15 (retroactive effect) -once election is made.’s for retroactive election is: 1. -So. -on Feb. -If make election in 2007. 2007. F sells stock to D and E. new SH’s are not req’d to consent. -IF F is not resident alien. -For 2008 S Corp Election: -F may not consent to election b/c F is non-resident alien. F is non-resident alien.140 -even if delay. will that be retroactive? -NO. subsequent sells or changes in SH’s has no affect on valid election. satisfy all S Corp req’s for portion of year preceding election date. -Retroactive Election is only allowed if Corp satisfied all S Corp req’s on everyday of portion of year preceding election date.

Sec. 1362(d)(1).141 Revocation or Termination of S Corp Status -an S Corp Election is effective until it is revoke or terminated. 1362(d)(2). then revocation is effective on or after date of revocation. must allocate to each. just look at outstanding stock. and new taxable year begins on date after date of revocation. thus new election can be made in year 6. whether voting or non-voting. one reflecting S Corp Short Year and one reflecting C Corp Short year. -EX: 1--------------------------------------------1----------------------------------------1 (S Short Year) 7/1 issues ps (C Short Year) -So. -revocation requires majority of outstanding shares. Ceasing to be a Small Business Corp. have Short S Corp year and Short C Corp year. 1362(g). -or can revoke at anytime thereafter without definite date. -if this termination occurs within taxable year. 1362(e). -usually when more than 50% of stock is held by persons who were not SH’s at . -if want election for current year. -meaning need G and one other SH to consent. then make revocation occur before 15th day of 3rd month. that majority SH’s make revocation. Sec. Problem 1(c) -under Sec. 1362(e). thus have retroactive revocation. -this revocation is effective on date that S Corp fails to satisfy SBC. Sec. -Methods to End S Corp Status: 1. -if no definite date of revocation. Problem 1(a) -Voluntary Revocation by Majority SH’s. then revocation is effective as of 1st day of following taxable year. (failing to satisfy S Corp) Sec. -if definite date. 2. Sec. must file 2 returns. Problem 1(b) -revocation can occur before 15th day of 3rd month if state definite date of revocation. -IRS can consent to earlier filing of new S Corp Election. -req. -can have retroactive revocation if make election before 15th day of third month of taxable year. (50% +) -whether voting or non-voting stock. 1362(d)(1). Voluntary Revocation by SH’s. the entity must wait 5 taxable years to file new election from year of revocation. -EX: revocation occurs in Year 1. when an S Corp election is terminated.

1362(f) may apply. -Rev. IRS determines that disqualification was inadvertent 2. -if voidable.142 date of revocation/termination. Rul. Henry Associates v. -Rule: a minority SH may intentionally terminate an S Corp election without the consent of majority SH’s. whether or not the S Corp distributes the cash. -if Kate did not consent.J. -if Kate did consent. if: 1. -or IRS allows early election b/c event causing termination was not within Corp’s control or SH’s having substantial interest in Corp were not part of plan to terminate the lection. majority SH has right of first refusal to buy any shares. the Corp and each SH agree to such adjustments as the Commissioner may prescribe. 1.1362-5(a). the S Corp needs limits in shareholders agreement. then can’t rescind without Kate. the Corp and/or SH’s take steps to remedy the disqualifying event without a reasonable period after discovery. but unsure. Reg. T. . -So the question is whether Kate consented to revocation on July 1. then attempted transfer does not terminate election. 86-110 has same facts and says this is an inadvertent termination. -Sec.1362-2(a)(4). -so now the Corp and SH must remedy this by correcting the trust. Problem 1(d) -a voluntary revocation may be rescinded as long as rescission occurs before date the revocation is to be effective AND if rescission is consented by every SH who consented to the revocation. 1362(f) gives IRS authority to overlook inadvertent termination. 3. then attempted transfer terminates S Corp Election. Com’r (Tax Court) -to prevent this. Inadvertent Termination Problem 2 -Sec. then can rescind without Kate. i. Reg. and consented by any new SH (meaning SH who came into Corp post decision to revoke). 1.e. Minority SH Terminating S Corp Election Problem 3 -a minority SH may want to terminate an S Corp Election b/c minority SH is taxed on share of income. -if void.

1231 gain of 36k -S Corp is to net 1231 gain with 1231 losses. -see Reg. Effect of Subchapter S Election by Corp with No C Corp History. separately stated b/c non-deductible expense. *this is business interest. 1. 1363(b). Yes. Yes. itemized deductions. -SH nets at individual level. so SH must apply 179 exp rec’d from s Corp against other 179 exp’s. -meaning income and loss is computed at the corporate level . Yes. -Rule: take into account separately if could affect the SH’s liability for that taxable year. exp. (there is a dollar limit under 179. -so if dollar limitation applies at individual level. Tax Exempt Interest 6k -each SH takes pro rata share and takes tax exempt status in own tax return. -another example is investment int. -SH does 1231 hotchpot. Income DVD Rental Receipts Tax Exempt Interest Separately Stated Item 198k 6k Yes.143 Section 3. -and misc. -B owns 50 shares with basis of 22k. 1231 Gain 36k STCG Expenditures/ Losses Salaries Sec. Sec. stated. -AND S Corp is to net LTCG with LTCL. LTCL (18k) Yes. Sec. Not separately stated. -focusing on rules of S Corp that has always been an S Corp. that item must be sep.1336-1(a)(2) generally. so no potential limitations. 1363(a) -but S Corp is a tax accounting entity. Not separately stated. 179 Expenses 30k 62k 15k Depreciation Rent Interest Expense (on loan to purchase DVDs) LTCL Lobbying Expense 9k 40k 12k 18k 12k Yes. Sec. 179 expense b/c there are limitations under 179 that apply at the individual level. STCG 30k but don’t net against LTCL. -S Corp is not subject to income tax. Not separately stated. Problem 1(a) -A owns 100 shares with basis of 20k.

or credits are separately stated if they could affect the liability for tax of any SH. stated computed income. itemized deduction. IF not separately stated. this is Ordinary income or loss. 1366(a)(1)(B) determine income or loss.e. Sec. Sec. 1. NOTE: 1245 Gain is not separately stated. -this makes sense b/c 243 DRD is to mitigate affect of double taxation system. 1363(c). there is no double taxation for S Corp. and with exceptions: -personal exemption under 151 is not allowed. ***this is a net figure. lobbying exp** Non-Sep Stated 75k 50k 25k Computed Income*** *SH is to take pro rata share of sep stated items and non-sep. -limit of charitable contribution is not determined at corporate level. Sec. Sec. Non. deductions. those are passed through to SH’s. loss. . Sep. 1366(a)(1). Separately State Items listed in Sec. it is determined at individual level. that excludes all separately stated items. lump 1245 gain into non-separately stated computed income/loss. And see Reg. And that character flows through to SH’s. with certain items being separately stated. 6k 4k 2k 1231 Gain 36k 24k 12k STCG 30k 20k 10k LTCL (18k) (12k) (6k) 179 Exp (15k) (10k) (5k) Non-cap.1366-1(a)(1). 1366(a)(1)(A): -which says that items of income. then it is part of bottom line number. What if S Corp receives dividends? -gets no 243 DRD b/c S Corp’s computation of income is determined as individual. 1363(b) says that taxable income of S Corp is generally determined in same manner as individual.144 -i. which is non-separately stated item. **separately state b/c this affects stock basis of SH. 1366(b): Tax Character of item is determined at the Corporate level. -same with misc. S Corp makes the elections. Stated A (2/3)* B (1/3) Items Tax Exempt Int. -Sec. Sec.(12k) (8k) (4k) ded. 1363(b).

1367(a)(2)(D) 4. 1367(a)(1)(A). that is 1st decrease by tax loss items. 1. -this comes into play more when there are distributions and when there is loss limitation by 1366(d). so increase stock basis to reflect value attributable to tax exempt income does not result in a gain. Reg.145 -Also. Sec.Reg. 1. Sec. Increase Basis -1367(a)(1)(A). a. Adjustment of Stock Basis Rules . Increase stock basis by separately stated income (including tax exempt income) and increase by non-separately computed income item. (B) 2. -adjustments are taken into account at end of taxable year. . -this prevents us form having to do SEE (that is something apart from tax liability).1367-1(f) Ordering Rule: 1. Dividends pass thru as Qualified Dividends 1(h) rate. 3. This is to prevent SH from benefiting from the non-deductible expense. -so this goes to allocating income items to A and B in problem above. Decrease stock by separately stated loss items and non-separately stated computed loss item. 2. (C). -NOTE: SH has right to change order of last 2 items. Qualified Dividend must be separately stated. Sec. Per-Share Per-Day Rule -when there is no change in ownership during year. 4. then 2nd decrease by non-deductible non-capital loss items. Decrease stock basis by tax-free distributions. Decrease stock by non-capital non-deductible expenses. 1367(a)(2)(B). -b/c no special allocations allowed. Increase by tax exempt income so that SH is not taxed on that amount upon distribution of stock. -SH must pay taxes on pro-rate share. 1367(a)(2)(A).1367-1(g) Election. a. (B). -So. 1367(a)(2)(B) Net Increase Ending Stock Basis A 20k + 98k (8k) (22k) 68k 88k B 22k + 49k (4k) (11k) 56k 56k NOTE: rules for formation of S Corporation are same as for C Corporation. regardless of whether SH rec’d distribution. Decrease Basis 3. Problem 1(b) What about the SH’s basis: Starting Stock Basis 1. Sec. 1367(a)(2)(D). we just allocate the amounts to SH’s on last day of taxable year. This is b/c FMV of stock increases b/c of tax exempt income.

-meaning for Dean’s 10k loss: -8k is non-sep. computed loss (16/20 * 10k) -2k is STCL (4/20 * 10k) -of the 6k current ded: -4800 is non-sep. -stock basis has been reduced to zero. stated and 4k is STCL. NOTE: under Subchapter K. -800 STCL . (10k) 0 (6k) b/c is limited to reducing stock basis (4k) 0 3k D 6k (10k) 6k 6k (b/c of 1366(d)) 4k loss carried over to future years. 1367(b)(2)(A) Debt Basis Reduction -reduce Debt Basis by excess loss over stock basis (Loss – Stock). 1366(d) Special Rules for Losses and Deductions -Loss Limit: deduction taken by SH can’t exceed sum of: 1. AB of debt (that is Debt owed by S Corp to SH).146 Problem 2(a)(1) Starting Stock Basis (1/1/06) Starting Debt Basis (7/1/06) Non-Sep Computed Loss (20k) 1366(d) Loss Limit Loss currently taken 1366(d)(2) Carryover of Disallowed Loss (indefinitely) -suspend loss. -you pro rate this b/t 2 different losses. What about Character? -let’s say that of 20k. partner includes share of p-ship’s liability. 16k is non-sep. -1200 is STCL -of the 4k carry forward loss: -3200 non-sep. AB of stock. 1367(a)(2)(C) stock basis decrease 1367(b)(2)(A) reduce debt basis by excess amount of unused loss of stock basis Ending Stock Basis Ending Debt Basis C 6k 7k (10k) 13k b/c is sum of stock basis + debt basis. 2. (6k) 0 Sec. -SH under S Corp only takes into account his debt to p-ship.

31) but if debt is repaid during year. -also. 1366(d)(2)(B) and Reg.147 Carryover Loss What if D (SH) transfers or sells stock with carryover loss. . Net increase: 6k Debt + 4k Stock + 2k 2k 7k 2k Restoration of Basis: 1st use net increase to increase Debt Basis (restore up to Debt Basis). -IF it is a complete transfer of all S Corp stock b/t spouses.1366-2(a)(5).1366-2(d)(1) adjustments to basis are made at the close of S Corp’s taxable year (calendar year Dec. Sec. -the carried forward loss (suspended loss) is personal to SH and does not get transferred to new SH. the basis of the debt is restored (that is increase by income item) effective immediately before the first repayment of debt during the taxable year.1366-2(d)(1). -stated differently: if a debt is repaid in whole or in part before the close of the taxable year. Reg. its basis is adjusted immediately before repayment. Sec. the carried loss is transferred over to spouse. Reg.1366-2(a)(5)(ii). then carried forward loss disappears. 1. Ending Stock Basis Ending Debt Basis C 0 3k 6k D 0 6k +6k 6k (4k) ordinary loss. 1367(b)(2)(B). Problem 2(a)(2) -then C has same result as D b/c C no longer has any debt basis since S Corp has paid it. 1. 2nd use excess net increase to increase stock basis. Reg. -if complete transfer of stock. 1. 1366(d)(2). 1367(a)(2) (A). Problem 2(b)(1) Starting Stock Basis (1/1/07) Starting Debt Basis (7/1/07) Non-Sep Computed Income 12k 1367(a)(1)(B) stock basis increase 1366 Loss Limit Amount Carryover Loss taken into account Restoration of Debt Basis: 1st use net increase to increase Debt Basis (restore up to Debt Basis) 1367(b)(2)(B). under 1041. carried forward loss does not get reduced when SH partially sells stock. 1.

1367(b)(2)(B) says that any “net increase” for the current year is first applied to restore the prior reduction in the SH’s debt basis. Thus. Explanation: When a SH’s debt basis was reduced in a prior year. then complete debt is repaid (that is 7k).000 of Chantal’s pro rata share of the nonseparately computed income is used to restore her debt basis. ** (amount left of 3rd there is a 1367(a)(2)(B) stock income) basis decrease of 4k.000. The remaining stock basis adjustments simply offset each other. A SH’s “net increase” is the amount by which the SH’s pro rata share of the items described in 1367(a)(1) (income items) exceeds the SH’s pro rata share of the items described in 1367(a)(2) (loss/ded items) for the year. -EX: AB in Debt is 3k.000. Stated Capital Loss 8k (4k) 1367(a)(1)(B) stock basis increase 1366 Loss Limit Amount Carryover Loss taken into account Restoration of Basis: Net increase: 2k = 6k st 1 use net increase to increase income – 4k CL Debt Basis (restore up to Debt Debt + 2k Basis) 1367(b)(2)(B).000. 2. so her debt basis is increased to 5. 2nd there is a 1367(a)(1)(B) stock Stock + 4k basis increase of 4k. leaving her with a 0 stock basis. Chantal’s net increase for 2007 is 2. What if debt 7k is repaid during year when SH has 3k debt basis? -then take that adjustment during year. there is no net increase to her stock basis for the year.** Stock – 4k (amount that is allocable to decrease). In other words. Her stock basis is increased . What if there is a separately stated Capital Loss of 8k? (focus on C) C D Starting Stock Basis (1/1/07) 0 Starting Debt Basis (7/1/07) 3k Non-Sep Computed Income 12k 6k Sep. that 4k “gain” is used to increase SH’s stock basis. 1367(a)(2)(A). Ending Stock Basis 0 Ending Debt Basis 5k **showing that we need to go through all steps on exam. In my hypothetical.148 2nd use excess net increase to increase stock basis. Since the entire net increase was used to restore Chantal’s debt basis. since there is a net increase of 2.

000 The per day. per share amount = 120. Per Day: Nonseparately computed income (ordinary income) = 360. This represents her share of the separately stated capital loss.000 x 3.000 x 10 x 180 days = 45. 1377(a) provides that each SH’s pro rata share of an S Corp’s items passed through under 1366 is determined on a day-by-day.e.000 . share by share method if the ownership of shares changes during the year.33 (rounded) Erin held 25 shares whole year. -so do the following (in that you’re allocating items to shares sold and shares retained). 1.000 x 3.000 under 1367(a)(2)(B). per share amount = 360. per-day.000 / 360 days / 100 shares = 10 Separately stated § 1231 loss = 120.000 § 1231 loss x 3.000 under 1367(a)(1)(B).000 x 10 x 180 days = 45.33 x 360 days = 30.1368-1(g) election to close the books Sec. the portion that was not used to restore her debt basis). Ordinary Income Erin’s pro rata share: 25 shares (retained) 25 shares (sold on 6/30) Total Gabrielle’s pro rata share: 25 shares x 10 x 360 days = 90. Per Share.33 x 180 days = 15. Her stock basis is also decreased by 4.33 x 180 days = 15. -NOTE: that Felix would have been allocated 50% of tax items regardless of whether election is made.000 The per day. -this is the per-share. have to take that into account in determining pro rata share for year. and 25 shares for ½ the year. Point is that you have to do 1367 ordering in determining basis adjustments.000 135.000 45. Normal Method Problem 3(a) No Reg.000 / 360 days / 100 shares = 3..149 by 4. -when there is stock ownership change. b/c she sold those 25 shares on June 30. This represents the rest of her pro rata share of the nonseparately computed income (i.

000 Erin’s gain on the sale is computed as follows: Amount realized (sales price) Adjusted basis Capital gain The remaining basis adjustments take effect at the end of the year. use the allocations for all 360 days.000** 45. -attributable to 360 days.000) (share of 1231 loss) 100. .000* = (140k / 2) 45.1368-1(g).000 180.000 (100.150 The basis adjustments with respect to the 25 shares that Erin sold to Gabrielle take effect immediately before the sale.000* § 1367(a)(1)(B) basis increase 90. 1.000) Ending basis (as of December 31) 130. (meaning.000 § 1367(a)(2)(B) basis decrease (30.000 (1012 Cost) (15. divide starting basis by 2 (or w/e) to determine basis to determine g/l in 1001: AR . See § 1. Gabrielle 180.1367-1(d)(1). See § 1.000 (share of non-sep income) (15. Items are allocated as if the corporation’s taxable year consisted of two short taxable years.000) 210. Erin Starting basis 70.1367-1(d)(1).000 Closing of the Books Method Problem 3(b) Closing-of-the-books election under Reg.AB) Erin’s starting basis § 1367(a)(1)(B) basis increase -attributable to 180 days. § 1367(a)(2)(B) basis decrease -attributable to 180 days.000 **For Erin. Erin’s ending basis (as of June 30) 70.000) 80.

Basis adjustments are also made as if the corporation’s taxable year consisted of two short taxable years. Meaning. the corporation has nonseparately computed income (ordinary income) of 270.000 (60.151 the first of which runs from January 1 through June 30 and the second of which runs from July 1 through December 31. Remember all SH’s must consent to use this method.000 67.1367-1(d)(3).000) 125.1368-1(g).* = 62.000.500 112. use Full basis for starting basis for making adjustments.500 Erin’s gain on the sale is computed as follows: .000 then divide by 2 for AB in below. 31. We allocate tax items for short year as though tax year ends on date of sale. -G is only SH for ½ year and is 25% SH.000. -then Erin owned 25% from July 1 to Dec. Gabrielle’s pro rata share: Ordinary Income July 1 – December 31 (25%) 67. See § 1.000 -Erin owned 50% of stock from Jan. 1. See § 1.000 60.500 § 1231 loss 60. 1 to June 30. June 30 basis adjustments: Erin’s starting basis § 1367(a)(1)(B) basis increase § 1367(a)(2)(B) basis decrease Erin’s ending basis (as of June 30) 140.500 = 25% of 270k. so allocate 25% of tax items for that period. so use 50% to determine amount of tax items. -allocate using pro rata share. 2-For the hypothetical short year that runs from July 1 through December 31.000 45. Ordinary Income Erin’s pro rata share: January 1 – June 30 (50%) July 1 – December 31 (25%) Total 45. and then divide by 2 (or w/e) before determining capital g/l in 1001: AR – AB. -other qualified dispositions are in defined in Reg. 2 Hypo Short years: 1-For the hypothetical short year that runs from January 1 through June 30.1368-1(g)(1). the corporation has nonseparately computed income (ordinary income) of 90. 1st we have a Qualifying Disposition b/c: -When single SH sells at least 20% or more of total outstanding stock during any 30 day period during corp’s taxable year.000 and a separately stated § 1231 loss of 120.

Gabrielle also ends up with 37. **To resolve this dilemma.000 (1012) 67.000 of § 1231 loss for the year (for total net income of 52. If the election is made.500 117. but Gabrielle is still worse off because of timing and character differences. Erin is allocated 37. Erin is allocated 112.500 Note: Erin is better off if the election is made.500 (60k) 52.500 of ordinary income and no § 1231 loss for the year.500 b/c that is E’s basis in shares sold to G.500 130.500 247.500 67.500 -use 62. .000 247.000). If the election is not made.500 less income if the election is made. on a net basis. Therefore. If the election is not made.500 of additional stock basis at the end of the year if the election is made (which will eventually give Gabrielle 37. on a net basis.500* 180.152 Amount realized (sales price) 180.500 130k G 67. ½ of 125k.500*) Capital gain 117.500 more income if the election is made.500 67.000 of § 1231 loss for the year (for total net income of 30. Therefore. Gabrielle is worse off if the election is made. Gabrielle is allocated 37.000 Adjusted basis (in 25 shares) (62. Erin also recognizes 37. this needs to be decided on whether to make election at time of sale.500 Election Made E 112.500).500 of ordinary income and 60.000 of ordinary income and 45.500 less gain or more loss). Gabrielle is allocated 67. Gabrielle is allocated 45.000). If the election is made. but Erin is still better off because of character and tax rate differences (assuming Erin held the shares sold to Gabrielle for more than 1 year).500 more gain on the sale to Gabrielle if the election is made. Erin is allocated 135. December 31 basis adjustments: Starting basis (as of July 1) § 1367(a)(1)(B) basis increase Ending basis (as of December 31) Compare With Election to Without Election: Election NOT made E OI (non-sep) 135k 1231 loss (45k) Net Income 90k Capital Gain 80k Ending Basis 130k G 45k (15k) 30k 210k Erin Gabrielle 62.000 of ordinary income and 15.000 of § 1231 loss for the year (for total net income of 90. -E sold ½ her stock.

-convert to capital loss if principal purpose of contribution is to get Ordinary loss on sale. Section 3 Corporate Formation & Capital Contributions -Most of the rules we learned for C Corp formation also apply in formation of S Corp. which increases her stock basis to 100k. X holds the land as an investment. (1) Amy forms X Corporation. -And Amy gets a stock basis adjustment under 1367(a)(1) of 50k. Amy held the land for more than 1 year before transferring it to X. -What happens when S Corp sells land for 100k? -Gain: 50k = AR: 100k – AB: 50k. Amy is a dealer in real estate and held the land for sale to customers in the ordinary course of business. AB = 50.000). -thus there is only one level of tax on built-in 50k gain. so looks like LTCG. which elects to be treated as an S corporation from the date of formation. -BUT we have an exception in Regulations that says if S Corp was formed for principal purpose of selling contributed property. in which Amy held the land for more than 1 year. Assume that there are no changes in value and no basis adjustments between the time X is formed and the date of sale.000. -What is character of gain? -this is inventory type property in Amy’s hands. -normally character is determined at Corporate level. Amy transfers land (FMV = 100.000. -S Corp’s Tax Consequences: -Basis in Land: 50k. then use OI for character. X later sells the land for 100.000) in exchange for 50 shares of common stock (FMV = 100. . -that 50k is passed through to Amy. -Plus Corp gets tack HP under 1223(2).153 In-Class Examples Chapter 9. -Amy’s Tax Consequences: -Basis in Stock: 50k.

Sec. -Stock Basis: 150k S Corp -Basis in Land: 100k. that 50k gain passes through to Ben. -Arguably this section should not apply to S Corp.000). this would mean Ben would have a 50k special 743(b) basis adjustment. X later sells the land for 100. Amy sells her stock to Ben for 100. and Ben’s stock is increased to 150k.000. -NOT good idea to make election. b/c trap for unwary. (3) Same facts as in (1) except Amy’s basis in the land is 150.000 in cash in exchange for 50 shares of common stock (FMV = 100. -So. X later sells .000. -Ben has stock basis of 100k. -We could have the 362(e)(2)(C) Election: -Amy’s stock basis: 100k. -Amy basis in stock is now: 50k b/c 100k less 50k basis adjustment. at the time of formation. Ben pays tax on 50k gain. -Gain: 50k = AR: 100k – AB: 50k. -Ben has deferred 50k loss. remember tack HP for Amy only applies if it was 1231 or capital asset property. Amy’s 50k loss is deferred until she sells stock.000. meaning 150k – 50k = 100k. 362(e)(2) requires S Corp to reduce basis by the net built in loss. -Amy gets LTCG only if she has held stock for more than 1 year. Amy: -351 applies so no gain or loss. NOTE: Remember 743(b) adjustments for P-ship. S Corp sells land for 100k? -under 1366. In addition. (4) Same facts as in (1). Instead. not inventory property (like in this case). Cindy transfers 100. -S Corp’s basis in land: 150k. when S Corp sells land for 100k. -So. -What if now. -allocate 50k loss to Amy. there is 50k loss.154 (2) Same facts as in (1) except X does not sell the land.

-Cindy: 125k. -Think back to Promissory Note and 357(c). -Stock Basis: 50k. Can David increase his stock basis (in order to deduct the loss) by contributing his own promissory note to the corporation? -David needs to increase basis. Rul. -So. and Lessinger is limited to C Corp. -Cindy: -Sec. As of January 1 of the current year. -What happens when Corp sells land at 100k? -Corp recognizes gain of 50k. meaning 25k gain goes to each partner. or by loaning money to Corp. -so. -Perachi says SH has basis in note. S Corp pass through of loss issue. 351 no g/l -Stock Basis: 100k. -Each partner is taxed on 25k gain. -Amy will in effect recognize all 50k gain in end. Sec. 357(c). -promissory note isn’t an economic investment. so need economic investment. which he can do by contributing cash or contributing property. 351 apples b/c all req’s are satisfied (including control). (no 704(c) in S Corp) -Stock Basis: -Amy: 75k. -X Corp -Basis in Land: 50k. -Amy: -Sec. . Rev.155 the land for 100. and b/c purpose of 1366(d) loss limitation is to limit loss to actual investment in Corp (whether equity or debt investment). Promissory Note (5) David owns 100% of the stock in an S corporation. gain has been shifted. -BUT what about contributing own promissory note? -NO. 81-187 says an S Corp SH cannot deduct a loss by contributing his own self-created promissory note. -b/c SH has zero basis in note.000. The corporation will have a loss for the current year. -Do those cases help an S Corp SH? Do they help SH get basis in note? -looks like the answer is NO. ½ of 50k. -has 25k loss inherent. but Perachi limits holding to C Corp. David had a 0 basis in his stock.

it is capital gain. -Generally an S Corp has no earnings and profits. Don’t apply distr.000 32. and whether it is a 301.000 24. Property distribution = FMV property – liabilities.000 6.000 26. 1368(d) rules.000 12. § 1367(a)(1)(B) stock basis increase 12. Debt.000 24. 2nd determine if distributions exceed stock basis.000 26.000 -each SH pays taxes on this income (the pro rata share). Cash distribution = cash. 1st increase basis by income items. 1368(b) Distribution Rule for S Corp (1)-to extent distribution does not exceed stock basis.000* 26k (26. Arthur Starting stock basis 6. 1368(d) -take into account basis increases at end of year.000 *entire 16k is tax free. 302 redemption. but not distributions. ag.000) 0 Ending stock basis 2.000 0 18k (16. *Debt Basis allows SH to take losses. or liquidating distribution apply.156 S Corp Distributions -most of the C Corp rules (301 and 302) also apply to an S Corp. . Answers to Chapter 9.000 Tax-free portion – § 1368(b)(1) Capital gain portion – § 1368(b)(2) Semi-Ending Stock Basis § 1367(a)(2)(A) stock basis decrease 16. *distribution > basis is capital gain to Bertha. it is tax free. (2)-to extent distribution does exceed stock basis. -generally: 1.000 Stock basis after § 1367(a)(1) increases 18. then next decrease stock basis by the distributions b/c distributions are tax free to extent of stock basis. Section 3B Problems (page 64) Problem 1(a) -have to increase each SH’s basis by the income 1st. -so our provision for distributions is 1368(b). 3rd take loss items into account against basis. -b/c distribution is return of investment.000 Nonseparately computed income 36. 2. -use 301 to determine amount of distribution.000)* Bertha 2.000 July 1 distributions 16. -so same definitional rules of property.

000) 2k 0 § 1367(a)(2)(B) stock basis decrease Reduction in stock basis for share of loss.157 Variation #1 on Problem 1(a): In addition to the nonseparately computed income of 36.000 to S&S and received a 5% demand note from S&S.000.000) 0 (10. Ending stock basis (2.000 for the current year.000) 0 0 0 0 (10.000 (5. So apply 1st distribution and 2nd loss against stock basis.000) Amount taken into account for current year -1366(d) limitation amount. Same as (1)(a) through the § 1367(a)(2)(A) stock basis decrease.000 0 § 1366(d)(1) limitation amount § 1231 loss (15.000 for the current year. Also. Variation #2 on Problem 1(a): In addition to the nonseparately computed income of 36.000) (2. S&S has a separately stated § 1231 loss of 15. Amount of carryover loss – § 1366(d)(2)(A) Notes: shows that distributions are taken into account before losses are against stock basis.000) (3. S&S has a separately stated § 1231 loss of 15. on March 1 of the current year. Bertha loaned 10. thus use stock basis after distribution for 1366(d) limitation amount. .000. Arthur Bertha Stock basis after § 1367(a)(2)(A) decrease 2.000) 2.

Property = FMV .000) (3. So Bertha still recognizes gain on distribution b/c it exceeds stock basis. increase stock basis by income items. 2.000) (10. Note: Bertha’s debt basis does not change the tax consequences of her distribution. it is 1st used to restore Debt Basis. decrease stock basis by distributions.000 (5. Increase debt basis by income items. Cash = Cash b. 3.158 Same as (1)(a) through the § 1367(a)(2)(A) stock basis decrease.000 0 Starting debt basis § 1366(d)(1) limitation amount § 1231 loss (15. a.000) 2. Arthur Bertha Stock basis after § 1367(a)(2)(A) decrease 2. decrease stock / debt basis by loss items. but it does increase her § 1366(d)(1) limitation amount. Ordering Steps: 1.000) (2.000) (2.000) 0 0 Amount taken into account for current year Amount of carryover loss – § 1366(d)(2)(A) § 1367(a)(2)(B) stock basis decrease § 1367(b)(2)(A) debt basis decrease Ending stock basis Ending debt basis Notes: Debt basis only gives SH additional 1366(d)(1) limitation amount for taking losses. 4.000 (10.000 10.000) 0 10.liabilities. . -Remember that when SH is allocated future income.000) 0 0 (10.

000 2k Starting stock basis Separately stated § 1231 gain Nonseparately computed income Stock Basis .000 on the distribution of Whiteacre. -S Corp recognizes gain on distribution. -Remember this gain is passed through.000 24.000 0 (24. -Remember 1368(b) overrides Sec.000 in Whiteacre.000 24.000 12. Sec.000 36.000 § 1367(a)(1)(B) stock basis increase Stock basis after § 1367(a)(1) increases December 31 distributions Tax-free portion – § 1368(b)(1) Capital gain portion – § 1368(b)(2) § 1367(a)(2)(A) stock basis decrease b/c of distribution.000 0 (12.000 24. 301(d) -Bertha takes a FMV basis of 24.000 (the FMV of Whiteacre). 12. -this 6k 1231 gain is passed through to the SH’s.000 in Blackacre. Ending stock basis Basis in Property -Arthur takes a FMV basis of 12. Arthur (1/3) 6.000 6. and the amount of Bertha’s distribution is 24. See § 301(b).000 Bertha (2/3) 2.000 20.000 30. Which is 12k (FMV of property) to Arthur and 24k (FMV of property) to Bertha. 311(b) treat as though Corp sold property to SH at FMV. See § 311(b).000 4. The amount of Arthur’s distribution is 12.000 on the distribution of Blackacre and a gain of 2.000 2.000 (the FMV of Blackacre).000 8. Assume both are § 1231 gains.000 24.000 12. 311(b) gain) 2. *301(d) determines basis of property for each SH.000) 6. 301(c) for tax consequences of distribution.000 12.159 Problem 1(b) S&S recognizes a gain of 4.000 6k § 1367(a)(1)(A) stock basis increase (1231 6k. but 301(b) still applies to determine amount of distribution. See § 301(d).000 4. so the 6k gain is pro rata to SHs.

and one is example of loss disallowed.000 26. then yes the 311(a) loss is carried forward. If so. . -in problem.000 18. -so.000) 0 Arthur 6.000 0 Bertha 2.13671(f).000 36. -so give explanation of Table. § 1367(a)(2)(A) stock basis decrease -recued by the tax free portion.000 (the FMV of Greenacre).000 .000 12. Unresolved issues: Should the unrecognized loss on Greenacre be treated as a noncapital. (g).000 24. .000 26.1367-1(c)(2) gives a non-exclusive list of examples. -1366(d) just talks about actually deductible expenses. Starting stock basis Nonseparately computed income § 1367(a)(1)(B) stock basis increase Stock basis after § 1367(a)(1) increases December 31 distributions Tax-free portion – § 1368(b)(1) Capital gain portion – § 1368(b)(2) -b/c 36k exceeds 26k basis by 10k. Ending stock basis Basis in Property: Bertha takes a FMV basis of 36. -And if policy is to permanently disallow loss forever.000 10. 311(a) works in practice as “loss disallowance” rule.000 12. -BUT if make 1366(d) election. *On exam.000 24. See § 301(d). nondeductible expense that reduces basis under § 1367(a)(2)(D)? See § 1. See § 301(b). it looks like the 311(a) loss would not be carried forward. (18. See § 311(a) prevents recognition of loss. no tax consequences change b/c of 311(a) disallowed loss. and the amount of Bertha’s distribution is 36.000) 0 (26. then there needs to be a basis reduction. -can say basis is increased and decreased by . so maybe it should be treated as non-cap non-ded expense. should it carry over to reduce basis in future years? See §§ 1366(d)(2)(A). those don’t get carried over.000 (the amount of cash distributed).000 in Greenacre. say non-sep stated income is determined per share per day. 1.000 18. The amount of Arthur’s distribution is 18.000 36.000 18.160 Problem 1(c) S&S does not recognize any loss on the distribution of Greenacre. not non-ded non-cap expenses.

000 Louise 220.000 (the FMV of Blackacre). you would adjust basis for decreases before distribution! -do all basis adjst for loss and income before doing distribution. 59-228 (TB 355) says to reduce FMV by liab. 300k loss = 1. 336(d)(1)(A) is n/a b/c Louis who received loss property is not a related party under 267.000 280. -this loss and gain is recognized in liquidation.000) (500.000 1. assumed for determining AR. Stock basis for determining gain on liquidation Gain recognized on liquidating distribution -331(a) 700. -Sec.000 420.200. The § 1367 stock basis adjustments take effect immediately before the liquidation. stated item. See § 336(a). -this is Net 1231 gain sep.4 mil.2 mil – AB: 200k.000 on the distribution of Whiteacre. . § 1367(a)(1)(A) stock basis increase* 420.1367-1(d)(1).000 (700. -1231 Gain on BA: 1 mil gain = AR: 1. See Rev. NOTE: with liquidation.000 -reg’s allow net of 1231 gain / loss. § 331(a) applies to the shareholders.000 280. 267 is n/a. See § 1. Louise’s amount realized (AR) is 800.000 Separately stated net § 1231 gain 1 mil – 300k= 700. See § 1. -Sec.000 (the FMV of Whiteacre minus the mortgage debt).000 CG CG *The § 1367 stock basis adjustments take effect immediately before the liquidation. 336(a) allows for the recognition of the loss and gain. -plus. Rul.000.1 mil – AB: 1.000 800.161 Problem 2 Thunderbird recognizes a gain of 1.200. Thelma’s amount realized (AR) is 1. Assume the gain is a § 1231 gain and the loss is a § 1231 loss.000 500.000 300. -1231 Loss on WA: AR: is FMV b/c of 336(b) says use greater of FMV or liab.000) 500. Pro rata share (det on per share per day basis) Starting stock basis 60% Thelma 40% 280.000 Stock basis immediately before liquidation* Liquidating distribution (amount realized – AR) AR = FMV less liab.1367-1(d)(1) gives rules for when to do basis adjustments.000 on the distribution of Blackacre and a loss of 300.

200. . which is FMV. and Louise takes a FMV basis of 1.000 in Blackacre. See § 334(a) determines basis on liquidation.000 in Whiteacre.100.162 Thelma takes a FMV basis of 1.

-this is a tax free return of basis. Catherine’s remaining stock basis = 30.000 (her basis in the 40 retained shares). the 318 attribution rules apply to C Corp. Catherine’s remaining stock basis = 120. so the redemption should meet the test in § 302(b)(1) b/c is meaningful reduction. 40k * 3 per share = 120k NOTE: for 302. . -that is to attribute S Corp ownership to other parties / entities. 75-502 (TB 272).000 AR – 60.) If so: The redemption is treated as an exchange under § 302(a). If not: The redemption is treated as a § 301 distribution under § 302(d). -only can work is when there is a Q-Sub. -. Catherine recognizes a gain of 90. -thus. -Catherine’s gain = 150. Before the redemption. Can S Corp be parent of C Corp? -Yes. The redemption does not meet the tests in § 302(b)(3) and (b)(2).000 AB (her basis in the 20 redeemed shares). 332 and 337 Can an S Corp ever liquidate under 337? -no can’t have an 80% Corporate Parent b/c non-eligible SH. Problem 3 This is a redemption. Catherine owned 60% of the stock. The distribution reduces Catherine’s stock basis under § 1367(a)(2)(A). an S Corp can own 80% of C Corp. basis is 60k b/c 180k / 60 = 3k per share * 20 = 60k.000. See Rev.000.163 Sec. need to own more than 50%. After the redemption. no recognition of gain. Rul. -and C Corp would use 332 rules. unrelated shareholder. (Point is that you still apply 302 and 301 to S Corp. An S Corporation prefers a 301 distribution b/c gets to receive distribution tax-free. so test to see if it satisfies 302(b) test. -an S Corp is treated as any C Corp to determine constructive ownership. to be owner of S Corp. Catherine owns exactly 50% of the stock and the other 50% is owned by a single.The entire distribution is tax-free under § 1368(b)(1).

164 Chapter 9 Review -you will have eligibility and election questions on exam (slides 1-23). -items flow through to SH’s in corresponding tax year (2009 S Corp items to SH’s in 2009 include on 2009 tax return).e. -so make sure you know them. -reduce debt basis by loss items when stock basis is reduced to 0. look at eligibility of owner of LLC to see if qualifies as a SH of S Corp. non-cap expense. Debt Basis -only counts if SH holds debt at end of taxable year (meaning unpaid debt). -Disregarded single-member LLC. . Slides 24-S Corp makes election (i. -youngest generation can trace back 6 generations. (g-g-g-g grandparent). 179 election) -S Corp gets no 151 PE. -will be told on exam whether it is non-ded. and does not get the 243 DRD.

6. -if can do this. -3 hour exam with 4-5 essay problems. -how to answer problem: -thoroughly explain the answer. -no req’t to cite case names. then won’t have any problem with exam. -in studying. . -what we covered in class is tested. -only have to explain the rule once in a problem.77%. 3. 5. . Chapter 3 not responsible for id’ing NQPS (but do know tax conseq. non at all. -give anything relevant to problem. explain 302(b)(2) once. -other 2 problems could test chapter 2. -also. b/c can only gain points not lose them. but still can do -need to explain code section the 1st time. 302(b)(3) test is satisfied if redemption is in complete termination of all stock. -but exam is time pressured so you need to know your stuff. -i. -have option to type and handwrite exam (do combo). re-do each example and problem. no back. -will take e-mail questions until 8pm before day of exam. then refer back to it. explain each step in how you get to total stock ownership number. need to direct on how you’re doing this.165 Final Exam: -go 2 decimal places. Rev Rulings. -need to get 4 bluebooks for exam. -could say not satisfied b/c not in complete redemption . . explain how you got there. -if do this.e. Chapter 5 will be given starting E&P. meaning 77. Review Session -Monday April 27 at 2pm. Chapter 4. -exam is completely open book. of it). -clearly NOT tested: Chapter 1. -only write on front of page. -even though answer is a number. and Regulations. and study review slides. -and definitely will have 1 chapter 9 problem. or 7. need to explain 318 attribution rules. -i. -so basically explain each code section. -be able to cite code (351 or 301 is enough). -Friday at 1pm. -definitely have large chapter 3 and chapter 5&6 problem.e.

how are the “redemptions” treated? Are they treated as 302(b)(2)? 4-Do you apply STD principles when single redemption satisfies 302(b)(2) but series as aggregate does not satisfy 302(b)(2) and Sec. Do both H and W have to agree to be held jointly and severally liable for any tax deficiency? Or b/c of “Related Person” as defined in Sec. Questions: 1-when does 302(c)(2)(B)(ii) not apply (1) when there is not tax avoidance purpose. 302(b)(2)(D) does not apply? 5-If you have an entity (p-ship) where Husband (H) is partner. 302(c)(2)(C)(ii)(II) does only H have to agree to be held jointly and severally liable? -If W is not a “Related Person. 358. allocate all excess CEP there? -find problem example for this! 3-Net LTCG against LTCL? And ST against ST? But not ST against LT?? .166 Questions: 1-for basis rules under Sec. And Wife (W) owns 50 shares of Corp. and entity owns 50 shares of Corp. and (2) the transferred stock is redeemed from the transferee in the same transaction? What does (2) mean? 2.If distribute 302 appreciated property. 302(b)(2)(D) applies. 302(b)(2)(D) is not satisfied. do we still apply Sec.” then can W acquire a prohibited interest? (all 5 answered). 302(b)(1) or (b)(3)? 3-If Sec. what if debt is boot? How is it treated in calculating SH’s stock basis? 2-If STD applies or Sec.

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