Lesson 4.3.1 Capital Contributions: Concepts

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From the course by University of Illinois at Urbana-Champaign

Taxation of Business Entities I: Corporations

13 оценки

University of Illinois at Urbana-Champaign

Taxation of Business Entities I: Corporations

13 оценки

Course 3 of 5 in the 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.

From the lesson

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

Meet the Instructors

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

The last several lessons have focused on property for stock transfers.

That is a shareholder transfer property to a corporation,

in exchange for stock and such corporation.

In this lesson, you will learn about another type of

property transfer, capital contributions.

The key distinction here is that,

the transferor does not receive anything in return from the corporation.

More specifically, this lesson considers the effects of

capital contributions on the corporation and the transferor,

which may or may not be an existing shareholder.

As usual, after learning these new concepts,

you will apply them to Sunchaser Shakery.

A capital contribution is a transfer of property by a person,

which may or may not be a current shareholder to

a corporation for which no stock or property is received in return.

Code Section 118A states that,

"in the case of a corporation,

gross income does not include any contribution to the capital of the taxpayer".

In other words, the corporation receiving the property does not recognize any income or

gain on the transfer because

the transaction is not a sale of services, inventory, or property.

As with other exchanges of property,

basis determination is a concern here as well.

For capital contributions,

the corporation's basis in the property depends on whether the contributor transferor

is a shareholder or non-shareholder and

whether the contribution is in the form of cash or other property.

If cash or other property is contributed by an existing shareholder,

the corporation receives a carry over exchange basis in the property.

This is the same basis treatment as in

most other non-recognition transactions such as Section 1032.

If non-cash property is contributed by non-shareholder,

the corporation receives the basis of zero in the property.

A zero basis occurs because the corporation transferred nothing in return,

and the property originated from a non-owner.

This basis treatment makes conceptual sense,

because if the corporation later sells the property

that for all intents and purposes it received for free,

then the entire amount realized should be a taxable gain.

Can you think of a situation where a non-shareholder would voluntarily

transfer property to a corporation for nothing in return?

I mean are you willing to transfer your home or car to Google for nothing? Probably not.

This scenario commonly arises when a local government transfers real estate to

a corporation to induce the corporation to locate its operations within its borders.

If a non-shareholder contributes cash,

which has a tax basis and cannot be zero by definition,

the corporation must reduce its basis and

other property it already owns by the amount of cash received.

For contributing shareholders, a capital contribution is

not a taxable event because nothing is received in return.

Instead, shareholders increase their basis in

any existing stock by the basis of the property contributed.

For non-shareholder transferors, like

the local government mentioned in the example earlier,

special rules beyond the scope of this course generally apply.

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