Lesson 4.3.2 Capital Contributions: Applications

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Do curso por University of Illinois at Urbana-Champaign

Taxation of Business Entities I: Corporations

13 ratings

University of Illinois at Urbana-Champaign

Taxation of Business Entities I: Corporations

13 ratings

Curso 3 de 5 em Specialization U.S. Federal Taxation

This course provides an introduction to the U.S. federal income taxation of corporations and their shareholders. The course focuses on the relevant provisions of Subchapter C of the Internal Revenue Code, as well as related Treasury Regulations and judicial opinions, governing corporate formation, operations, distributions, and liquidation. Practical in-class study problems facilitate self-discovery of technical tax knowledge along with the development of a variety of professional skills and attitudes.

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Module 4: Corporate Formation II

In this module, you will continue to explore property-for-stock transactions. Assumption of liabilities and transfer of services along with property will be introduced. Next, you will examine the effects of capital contributions on corporations, shareholders, and non-shareholders. You will also analyze the rules for debt and equity regarding capital structure. Finally, investor losses due to worthlessness of debt/equity investments and bad debts will be discussed.

Lesson 4.3.1 Capital Contributions: Concepts3:19

Lesson 4.3.2 Capital Contributions: Applications4:36

Conheça os instrutores

Michael P Donohoe, PhD, CPA
Associate Professor of Accountancy and PwC Faculty Fellow
Department of Accountancy, Gies College of Business

[MUSIC]

Let's get started with the tax implications of capital contributions.

In an effort to convince Sunchaser Shakery Corporation to open a location within

the city limits,

the city of Miami transferred land worth $250,000 to Sunchaser.

The land cost the city $100,000.

What amount, if any must Sunchaser recognize?

And what basis does Sunchaser receive in the land?

So let's start with the amount that Sunchaser must recognize, part a.

Well, this is actually a pretty easy situation to consider in the event of

a capital contribution.

As you've learned,

capital contributions do not typically result in any gain recognition or income.

So under section 118, there is no income to recognize.

No income to any corporation for a capital contribution.

In terms of basis, we have a situation here where the corporation,

that is Sunchaser is receiving property from a non-shareholder, city of Miami.

And they're receiving land, so non-cash property.

So based on the rules that you learned earlier, their basis in this

particular item of land will be zero and that's all there is to it.

The city of Miami gave Sunchaser Shakery Corporation $200,000 cash

to purchase a building in an effort to convince the business

to open a location within the city limits.

Sunchaser purchased the building four months later for $150,000.

What basis does the Sunchaser receive in the building?

Well in the event of a capital contribution, section 118 as we've learned

provides that there's no income recognition to the corporation.

So when it comes to basis, section 362 tells us what to do.

So here we're receiving, in this case, cash from a non-shareholder.

And as you learned in the concepts in this situation,

the corporation will reduce the basis and

others property acquired with the cash.

So here, the corporation's receiving $200,000 in cash from the city of Miami.

They went out and purchased $150,000 building at cost.

So their cost basis would be $150,000, but so

they're going to be able to reduce the basis of this building down to zero.

Because they have $200,000 that they received in cash.

The remaining amount, the $50,000 that's left.

We reduce the basis in the corporations other property.

So in other words, they paid $150,000 for the building.

But we reduce that amount down to zero, so

the building's basis is now zero, is reduced by the cash.

And then the $50,000 that remains will reduce

the basis of the corporation's other assets and there's a tiered structure.

We don't have any information to do it here, but the rest,

the ordering with which we would do this would be to other depreciated assets.

Then to amortizable property.

And then finally, all remaining property if there was still some left over.

And that's it.

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