An S corp may have to pay a corporate level built in gains tax when it disposes of assets that were appreciated in value at the time the company converted from a C corp to an S corp.

If an S corporation has no accumulated earnings and profits, the amount distributed to a stockholder decreases the basis for the stock. The distribution is nontaxable to the extent of the shareholder’s basis.

Of the following, only having 100 or fewer shareholders would allow the corporation to elect an S corp election. The other criteria negate this.

When shares of stock are received in exchange for services, the recipient’s basis in the stock is the FMV of the shares, or $10,000 here (10% of the $100,000 authorized stock). The stock received is treated as ordinary income. 

When a corporation is formed (or when ownership changes) through the contribution of property, the transaction will result in no recognized gain if:

1. Those contributing property will own at least 80% of the voting stock and at least 80% of nonvoting stock; and
2. The property is exchanged solely for stock (e.g., no cash is transferred to those contributing property)

In this case, Boss and Craft both contributed property and together will have 90% ownership of all stock. Since they only received stock in exchange for the property, neither Boss nor Craft will recognize a gain.

When shares of stock are received in exchange for services, the recipient’s basis in the stock is the FMV of the shares, or $25,000 for Clint as ordinary income. Owners who contribute property (here, Darren) will not recognize a gain if they will own more than 80% of the corporation’s stock; that threshold is not met here (Darren will only own 60%), and so income is recognized for the difference between the shareholder’s basis in the property ($10,000) and the property’s FMV ($100,000), or $90,000. No gain or income is recognized when cash is exchanged for stock.

1231 assets are depreciable personal property and real property used in a business and held for over 12 months. Land held for 18 months meets this definition.

An automobile for personal use is a capital asset. Real property in a trade or business is a Section 1231 asset just as is depreciable business property.

When a corporate reorganization is qualifying, it is tax-free to both all corporations involved and their shareholders.

The taxpayer’s realized gain is $190,000 ($200,000 FMV of building + $35,000 cash + $75,000 mortgage relief - $120,000 basis in property exchanged). Total boot received is $110,000 ($35,000 cash + $75,000 mortgage relief). In like-kind exchange transactions where boot is received, the gain recognized is the lesser of the realized gain ($190,000) or the boot received ($110,000), and here the lesser is the $110,000 of boot.