Generally no. There is no gain or loss recognized by the taxpayer (or a group of taxpayers) when:
1. Property is transferred by the taxpayer (or a group of taxpayers) to a corporation solely in exchange for stock in such corporation; and
2. Immediately after the exchange the taxpayer (or a group of taxpayers) is in "control" of such corporation.
However, this rule does not apply if the corporation is an investment company (e.g. corporation that holds and sells stocks as investments).
No. Property, not services, must be transferred to the corporation in order for the tax-free treatment to apply. There are generally three things that are not considered property for the purposes of this tax-free contribution rule:
2. Unsecured loan of the corporation
3. Accrued and unpaid interest on a loan of the corporation
If corporate stock is issued in exchange for the contribution of the above items, then the exchange will not qualify for tax-free treatment.
Generally, "control" means that after the transfer of property, the taxpayer (or a group of taxpayers) has:
1. At least 80% of the total combined voting power of all classes of stock entitled to vote; and
2. At least 80% of the total number of all other classes of stock.
"Control" does not require the taxpayer to have actual "control" over the affairs of the corporation (i.e. daily operations). "Control" in this case only refers to the ownership of the corporation.
Not entirely. When a taxpayer receives property other than stock in this type of an exchange, he/she may still enjoy partial tax-free treatment on the transfer. In this case, gain from the exchange (i.e if the fair market value of the stock received exceeds the basis of the property transferred) needs to be recognized to the extent of:
1. The amount of cash received, plus
2. The fair market value of such other property received.
No loss is recognized by the taxpayer in this type of a transfer, even if property other than stock is received from the corporation.
Tax laws are complex and ever-changing. Although there are various tax preparation softwares on the market that may help you with your tax problems, they cannot provide the same level of service that an experienced and knowledgeable tax attorney can. If you are unsure how to organize your corporation in a tax-free manner or you need someone to represent you before the IRS, a tax attorney can help you.
Last Modified: 02-10-2015 10:28 AM PSTLaw Library Disclaimer
We've helped more than 4 million clients find the right lawyer – for free. Present your case online in minutes. LegalMatch matches you to pre-screened lawyers in your city or county based on the specifics of your case. Within 24 hours experienced local lawyers review it and evaluate if you have a solid case. If so, attorneys respond with an offer to represent you that includes a full attorney profile with details on their fee structure, background, and ratings by other LegalMatch users so you can decide if they're the right lawyer for you.