Determine how non liquidating distributions will be addressed
A taxpayer who already owns say, 85% of a corporation may continue to transfer appreciated property to the corporation, and the gain will be deferred under Section 351.In addition, Section 351 allows for a group of transferors.
Basis and Holding Period When Section 351 applies to a transfer of property to a corporation, the gain is not excluded, it is merely deferred.This is often referred to as a “substituted basis,” because the basis in the property received is determined in reference to the basis in the property relinquished.In turn, Section 362 provides that the corporation must take a basis in the building equal to your basis in the building.C corporations, like flying, were once a choice of last resort.The aversion of most taxpayers to doing business as a C corporation was attributable to the possibility of suffering a fate worse than death: DOUBLE TAXATION.Under Section 362, the corporation takes a basis in the building of $400,000.
If the corporation sells the building for its value of $1,000,000, the corporation will recognize the $600,000 of gain deferred on the contribution.
This is often referred to as a “carryover basis,” because the corporation’s basis in the property remains unchanged from that which you held in the property.
Going back to our case study, if A and B simultaneously transfer property to a corporation in exchange for 50% of the corporation’s stock, Section 351 applies to the transfer.
A and B would like to form a business that will use both the business assets owned by B and the building owned by A. Should the entity be a C corporation, S corporation, or partnership?
Transfers to Controlled Corporations, In General Under the general tax principles of Section 1001, the transfer of appreciated property triggers gain for the difference between the amount realized on the transfer less the adjusted tax basis of the property.
Despite the fact that A’s building has a fair market value of $1,000,000 and a tax basis of $400,000, no gain is recognized.