When forming a corporate entity, one method of
capitalization is through a tax-free (actually, taxdeferred)
exchange. Properly transferring property to a
corporation delays the recognition of any gain on that
property until a taxable event occurs (e.g., sale of the
property or stock of the corporation, or liquidation of the
Generally, the transfer of assets and liabilities to a newly
formed corporation solely in exchange for stock does
not result in recognition of gain or loss by the transferor/
shareholder or transferee/corporation. The nonrecognition
of gain or loss is mandatory rather than elective.
There are four requirements for a tax-free incorporation:
- Property must be transferred to the corporation by
one or more persons (including individuals, trusts, estates,
partnerships, associations, companies, or corporations).
- The transfer must be solely in exchange for the stock
of the corporation.
- The persons making the transfer, taken as a group,
must own at least 80% of the transferee corporation
immediately following the exchange.
- The transfer of property to the corporation must be
for a business purpose.
The IRS has proposed, but not finalized, a fifth requirement
that the property have net value; i.e., the property's
value exceeds any debt on the property.
Property transferred to the corporation can include items
such as cash, fixed assets, corporate stock, partnership or
LLC interests, oil and gas interests, goodwill, and patents.
However, property cannot include services rendered
or to be rendered. Stock does not include securities
(debt obligations), stock warrants or rights, or nonqualified
preferred stock. If any
shareholder receives property
other than stock in exchange
for property transferred to
the corporation, a taxable
gain may need to be recognized
by that shareholder.
Please contact us if you
have questions concerning a
tax-free incorporation or a
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opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2014