AICPA Representative Tasks (verbatim). 1. Application: Prepare a schedule that is used as an input to an entity selection decision that calculates the tax implications of noncash property transactions for multiple entity types. 2. Application: Identify the type of business entity that is best described by a given set of legal characteristics. 3. Analysis: Derive the tax implications of entity selection and formation decisions across multiple entity types and compare the results. 4. Analysis: Derive the tax implications of entity liquidation decisions across multiple entity types and compare the results.
Entity selection requires matching legal characteristics to client objectives. Each structure carries distinct liability protection, management flexibility, and transferability features.
KEY: S corporations face strict eligibility rules: 100-shareholder limit, one class of stock, no nonresident alien shareholders, no corporate or partnership shareholders. Violating any requirement terminates the election.
IRC §351 permits tax-free property transfers to a corporation when two conditions are met: (1) transferors exchange property solely for stock, and (2) transferors control the corporation immediately after the exchange.
Common mistakes
- Treating liability assumption as boot in §351. Liability assumption generally does not constitute boot under §357(a). Gain is triggered only when liabilities exceed aggregate basis (§357(c)) or lack business purpose (§357(b)). Trap: "the $50,000 mortgage triggers $50,000 gain." Correct: no gain unless liabilities exceed total contributed property basis.
- Applying the 80% control test to partnerships. Partnerships have no control requirement under §721. Even a 1% partner qualifies for nonrecognition. Trap: "partner must receive at least 80% interest." Correct: any partnership interest qualifies.
- Recognizing loss on a §351 transfer. Realized losses are never recognized in §351 exchanges regardless of boot received. The loss is preserved in the shareholder's reduced stock basis. Trap: "boot allows loss recognition." Correct: loss deferred until stock disposition.
Bottom line
- §351 permits tax-free corporate formation when transferors receive solely stock and control 80% immediately after; boot triggers gain limited to the lesser of boot FMV or realized gain (losses never recognized)
- §721 permits tax-free partnership formation with no control requirement; even a 1% partner qualifies, but services for an interest trigger ordinary income equal to interest FMV
- Liability assumption is not boot under §357(a); gain arises only when liabilities exceed total contributed property basis (§357(c))
- Corporate basis in contributed property equals transferor's basis plus gain recognized; shareholder stock basis equals property basis minus boot received plus gain recognized
Exam shortcut
"80-for-351, zero-for-721". Corporate formations require 80% control immediately after for §351 nonrecognition; partnership formations have zero control threshold under §721. "Boot gains, never losses". In §351 exchanges, boot triggers gain recognition but never loss recognition. Realized loss is always deferred regardless of boot. "Double-tax signal = C corp liquidation".
The full lesson (about 2,586 words, 17 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.A1
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