Originally from:
Advising Minnesota Corporations and Other Business Organizations - 2nd Edition - Hardcover
Advising Minnesota Corporations and Other Business Organizations - 2nd Edition - Electronic
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CHAPTER 20
TAX ASPECTS OF THE CORPORATION
AT FORMATION
§ 20.01 Receipt of Stock for Services
The principal method of raising the initial capital necessary to launch
a corporation, in addition to incurring debt, is to issue stock. Shares of
stock, in order to be validly issued, must be issued in exchange for
consideration,1 which may take several forms. Valid consideration
includes cash, property,2 and services rendered.3 As a practical matter,
stock is rarely sold to an individual for anything other than cash after the
corporation has been incorporated. During the incorporation stage,
however, exchanging stock for services or for property is a convenient
and advantageous way to form a corporation.
Incorporation often involves forming a business entity with several
people, each of whom has different resources to contribute.4 The
contribution of services in exchange for stock is the same as being paid
in cash for those services from a taxation standpoint, and the result in the
context of corporate formation is no different. Under I.R.C. § 83,
property transferred in connection with the performance of services is
taxable to the person performing the services.5 The transfer of services to
a corporation is not given the preferential treatment accorded the transfer
of property under I.R.C. § 351.6
§ 20.02 Section 83 and the Taxation of Property Transferred for
Services
Section 83 of the Internal Revenue Code7 is entitled "Property
Transferred in Connection With Performance of Services." The section
provides for the taxation of property transferred to an employee or other
service provider in connection with the performance of services by that
person. In relevant part, I.R.C. § 83 provides as follows:
Chapter 20 Tax Aspects of the Corporation at Formation
§ 20.01 Receipt of Stock for Services
§ 20.02 Section 83 and the Taxation of Property Transferred for Services
§ 20.03 --Transfer of Property to the Corporation
§ 20.04 --Tax Consequences for the Transferor
§ 20.05 --Tax Consequences for the Transferee Corporation
§ 20.06 --Transfers of Property to a Corporation as a Gift
§ 20.07 Income Tax Basics
§ 20.08 --Basis
§ 20.09 --Adjustments to Basis
§ 20.10 --Realization
§ 20.11 --Recognition
§ 20.12 Corporate Income Taxation
§ 20.13 --Computation of Tax
§ 20.14 --Gross Income
§ 20.15 --Exclusions
§ 20.16 --Deductions
§ 20.17 --Ordinary and Necessary Business Expenses versus Capital Expenditure
§ 20.18 --Tax Rate
§ 20.19 --Tax Credits
§ 20.20 --Capital Gains and Losses
§ 20.21 Illustrations
§ 20.22 --Receipt of Stock for Cash
§ 20.23 --Appreciated Property for Stock
§ 20.24 --Services for Stock
§ 20.25 --Intellectual Property for Stock
§ 20.26 --Property for Stock and Cash
§ 20.27 --Assumption of Liabilities
§ 20.28 --Going Business for Stock
§ 20.29 --General Considerations
§ 20.30 -- --Choice of a Taxable Year
§ 20.31 -- --Method of Accounting
§ 20.32 --Depreciation by the Transferee Corporation
§ 20.33 --Installment Obligations
§ 20.34 --Treatment of Organizational and Start-Up Expenses
§ 20.35 --Cash Basis Going Concerns
§ 20.36 --Method of Accounting
§ 20.37 --Accounts Receivable
§ 20.38 --Partnership for Stock
§ 20.39 --Intentional Avoidance of I.R.C. § 351
§ 20.40 --Step Transaction Doctrine
§ 20.41 --I.R.C. § 351 and Existing Corporations
§ 20.42 --I.R.C. § 351 Administrative Issues
§ 20.43 -- --Filing Requirements
§ 20.44 -- --Ruling Requests
§ 20.45 Section 1244 Stock
§ 20.46 --Stock Owned by an Individual
§ 20.47 --Stock Originally Issued to the Individual
§ 20.48 --Stock Issued for Money or Property
§ 20.49 --Domestic Small Business Corporation
§ 20.50 Stock Issued in Exchange for Property: Section 351
§ 20.51 --One or More Persons
§ 20.52 --Property
§ 20.53 --Exchange
§ 20.54 --Solely for Stock
§ 20.55 --Recognition of Gain on Transferred Property
§ 20.56 --Control
§ 20.57 --Basis of Property Received by the Transferor
§ 20.58 --Basis of Property Received by the Corporation
§ 20.59 --Limitations on Section 351 Exchanges
§ 20.60 --Consequences of Failing to Comply with Section 351
§ 20.61 Corporate Formation: A Look at Deferred Compensation--Introduction
§ 20.62 --Qualified Plans
§ 20.63 -- --Defined Contribution Plans
§ 20.64 -- -- --Money Purchase Pension Plan
§ 20.65 -- -- --Profit-Sharing Plan
§ 20.66 -- -- --Stock Bonus Plan
§ 20.67 -- -- --Section 401(k) Plan
§ 20.68 -- -- --Simplified Employee Pension
§ 20.69 -- --Defined Benefit Plans
§ 20.70 -- --General Plan Requirements
§ 20.71 -- --Minimum Age and Service Requirements
§ 20.72 -- -- --Vesting Schedules
§ 20.73 -- -- --Reporting and Record Keeping
§ 20.74 --Nonqualified Deferred Compensation
§ 20.75 -- --Constructive Receipt
§ 20.76 -- --Economic Benefit
§ 20.77 -- --Social Security Taxes
§ 20.78 -- --Taxable at Employee’s Death
§ 20.79 --Stock Options
§ 20.80 -- --Statutory Stock Options
§ 20.81 -- --Nonstatutory Stock Options
§ 20.82 Tax Accounting Aspects of Section 351 Transactions
§ 20.83 --Transferor Accounting
§ 20.84 --Corporate Accounting
§ 20.85 --Depreciation
§ 20.86 Issuance of Debt in Exchange for Property
§ 20.87 Choice between Stock and Debt as a Tax Issue: Differences between Debt and Equity Capitalization to the Investor and to the Corporation
§ 20.88 --Tax Consequences of Debt Capitalization: For the Investor
§ 20.89 --For the Corporation
§ 20.90 --Tax Consequences of Equity Capitalization: For the Investor
§ 20.91 --For the Corporation
§ 20.92 --Analysis of Tax Consequences of Debt and Equity Capitalization
§ 20.93 --A Preliminary Note on Bad Business Debts
§ 20.94 --Terms of the Debt Instrument
§ 20.95 -- --Terms of Repayment
§ 20.96 -- --Secured and Unsecured Debts
§ 20.97 -- --Default
§ 20.98 -- --Remedies upon Default
§ 20.99 -- --Voting Rights in the Event of Default
§ 20.100 -- --Conversion Privileges
§ 20.101 -- --Availability of Accelerated Repayment
§ 20.102 -- --Subordination
§ 20.103 -- --Compliance with Applicable Securities Laws
§ 20.104 -- --Transferability of the Debt Instrument
§ 20.105 -- --Choice of Laws
§ 20.106 -- --Escrow
§ 20.107 -- --Reporting and Compliance with Minnesota Statutes
§ 20.108 -- --Limitations on the Corporation’s Ability to Issue Further Debt or Equity
§ 20.109 -- --Limitations on the Type of Business in Which the Corporation May Participate
§ 20.110 --Debt-to-Equity Ratio
§ 20.111 The C Corporation
§ 20.112 --Income Tax
§ 20.113 --Accumulated Earnings Tax
§ 20.114 --Personal Holding Company Tax
§ 20.115 The S Corporation
§ 20.116 --Background
§ 20.117 --Election under Section 1362
§ 20.118 --Effect of S Corporation Status on the Corporation
§ 20.119 --Effect of S Corporation Status on Shareholders
§ 20.120 --Circumstances Where Income Tax May Be Imposed on an S Corporation
§ 20.121 Multiple Corporations as a Tax and Business Planning Phenomenon
§ 20.122 --Reformation for Tax Avoidance Reasons
§ 20.123 --Factors Mitigating in Favor of Multiple Corporations
§ 20.124 --Factors Mitigating against Multiple Corporations
§ 20.125 --Summary
Roger J. Magnuson is a Partner at Dorsey and Whitney, LLP, where he serves as Head of the National Strategic Litigation Group and has practiced since 1973. He has been recognized as one of the top trial lawyers in the United States by major national and international publications, including Chambers International Guide to American Lawyers, which profiles the top 500 trial lawyers in the United States, Best Lawyers in America, Who's Who in American Law, and Who's Who in America. Mr. Magnuson was also recognized by a Journal of Law and Politics' survey for Judge's Choice "Wins Most Cases."
Some high profile cases that he has litigated include representation of the Florida Senate in the Bush v. Gore election controversy in 2000; and representation of the Plaintiffs in the widely publicized and studied Mall of America case. For several years he has represented, among other persons and entities, the Minnesota Twins and Major League Baseball principals and players in litigation; and has litigated national and local cases in federal and state court venues. He has appealed before the Supreme Court in a number of cases; as well as the Minnesota Supreme Court. He has authored several articles and 7 books.
Richard A. Saliterman is a Principal in Saliternan & Siefferman P.C., a full-service firm in Minneapolis established in 1976. Mr. Saliterman is a leading expert on corporate business matters, and is the author of several publications on business start-ups, franchises, and trademarks. Mr. Saliterman is the former National Judge Advocate for the U.S. Navy League, based in Washington D.C.
Contributing Editor:
Amanda Chang
Contributing Authors:
Alecia Anderson
Seth Back
John Baker
Shannon Berg
Constatin Burachek
Benjamin Carpenter
Ryan Check
Carl Christensen
Peter Fear
Michael Frasier
Aaron Hall
Catherine Hanson
Paul Harman
Amy Ithlan
Michael Kern
Chris Kuhlman
Brett Larson
Joshua Lederman
Karen Lundquist
James Magnuson
Jennifer Mead
Rao Menier
Heidi Miller
Rachael Moxon
Oliver Nelson
Scott Peitzer
Mitchell Skinner
Jonathan Stechmann
Lael Weinberger
Jonathan Wilson
Alex Zumbulyadis
