Question

In: Finance

What is the basis of the stock in the hands of the shareholder, and what is the basis of the property contributed in the hands of the corporation?

 

Explain the 80% rule as it pertains to the formation of a corporation.

An individual contributes property with a fair market value in excess of basis to a corporation in exchange for stock. What is the basis of the stock in the hands of the shareholder, and what is the basis of the property contributed in the hands of the corporation?

A corporation may make a distribution to its shareholders. Depending on the circumstances, in the hands of the shareholder, the distribution can be classified as a dividend, a tax-free distribution, or a capital gain. Explain the circumstances in which each classification can occur.

What is Schedule M-1, and what is its purpose?

Solutions

Expert Solution

  • The 80% rule pertains to the formation of the corporation. It defines that the shareholders who transfers the assets in exchange of stock and must own the stock of at least 80% of the total voting power of all classes or total number of shares of all other classes of stock.
  • The basis of property contributed in the hands of the corporation is the basis in the hands of the shareholder combined with gain identified by the shareholder.

The basis of stock in the hands of the shareholder is the basis of the property contributed along with the gain recognized and deducting the boot which includes the relief of liability.

  • The board of directors of the corporation make the decision to distribute the profits and its form. Dividends can be paid anytime which is at the discretion of the board of directors. This happens when the stockholders are not interested to keep the retained earnings in large amount.
  • Schedule M1 is the part of income tax return and it tells the difference between the book income with its taxable income. Its purpose is to reconcile both the income as the tax law is different from the book keeping requirements.

Related Solutions

Determine the basis of stock in the hands of the shareholder in each of the following...
Determine the basis of stock in the hands of the shareholder in each of the following instances. Assume that the 80% rule is met in all cases. Contribution of property with a basis of $1,000 and an FMV of $1,400. Contribution of property with a basis of $3,000 and an FMV of $3,800. The stockholder also received $500 cash from the corporation as part of the stock transaction. Contribution of property with a basis of $8,200 and an FMV of...
wk 5-2 Determine the basis of stock in the hands of the shareholder in each of...
wk 5-2 Determine the basis of stock in the hands of the shareholder in each of the following instances. Assume that the 80% rule is met in all cases. Contribution of property with a basis of $2,300 and an FMV of $2,700. Contribution of property with a basis of $5,600 and an FMV of $7,960. The stockholder also received $1,800 cash from the corporation as part of the stock transaction. Contribution of property with a basis of $9,500 and an...
Form a corporation. Explain what each shareholder contributed and what stock percentage and FMV they received...
Form a corporation. Explain what each shareholder contributed and what stock percentage and FMV they received in return. Explain what tax consequences/gains if any recognized upon formation and the Initial bases in the stock for each shareholder.
Ashley, the sole shareholder of Hawk Corporation, has a stock basis of $400,000 at the beginning...
Ashley, the sole shareholder of Hawk Corporation, has a stock basis of $400,000 at the beginning of the year. On July 1, she sells all of her stock for $2 million to Matt (1 million) and Brody (1 million) . On January 1, Hawk has accumulated E & P of $180,000 and during the year, current E & P of $320,000. Hawk makes the following cash distributions: $270,000 to Ashley on March 31, $180,000 to Matt on October1 and $180,000...
9. Ashley, the sole shareholder of Hawk Corporation, has a stock basis of $400,000 at the...
9. Ashley, the sole shareholder of Hawk Corporation, has a stock basis of $400,000 at the beginning of the year. On July 1, she sells all of her stock for $2 million to Matt (1 million) and Brody (1 million) . On January 1, Hawk has accumulated E & P of $180,000 and during the year, current E & P of $320,000. Hawk makes the following cash distributions: $270,000 to Ashley on March 31, $180,000 to Matt on October1 and...
What are the tax consequences to the sole shareholder of contributing encumbered property to the corporation...
What are the tax consequences to the sole shareholder of contributing encumbered property to the corporation as a contribution to capital?
6- how does a shareholder  create debt basis in an S corporation? how is debt basis similar...
6- how does a shareholder  create debt basis in an S corporation? how is debt basis similar and dissimilar to stock basis?  7- when and S corporation shareholder has suspended losses due to the tax basis or at risk amount limitation, is he allowed to deduct the losses if the Corporation status is terminated? why or why not?  8 - how does the tax treatment of employee fringe benefits reflect the hybrid nature of the S corporation?  9- How do the...
S corporation’s sole shareholder has a basis of $20,000, and lent the corporation $20,000. The net...
S corporation’s sole shareholder has a basis of $20,000, and lent the corporation $20,000. The net operating loss for the year was $50,000. Explain the effect on the shareholder
What is the basis for property rights? Why is private property crucial to capitalism and what...
What is the basis for property rights? Why is private property crucial to capitalism and what are its benefits?
TJ Magnasen contributed assets with a $200,000 adjusted basis and a $525,000 FMV to Adelante Corporation...
TJ Magnasen contributed assets with a $200,000 adjusted basis and a $525,000 FMV to Adelante Corporation in exchange for all of its stock. The corporation conducted operations for five years and was liquidated. TJ received the following in a liquidating distribution: $615,000 cash (less federal income taxes of 21% owed on the liquidation by the corporation) The assets that he had originally contributed, which now have a $150,000 adjusted basis and a $615,000 FMV. a) What are the tax consequences...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT