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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3095
Experience:  I've prepared all types of taxes since 1987.
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How do I file a 351 election for the contribution of assets ...

Customer Question

How do I file a 351 election for the contribution of assets to my Scorp? Is there a specific form I need to file with my corporate tax return? Or do I file with my personal?
Submitted: 6 years ago.
Category: Tax
Expert:  jgordosea replied 6 years ago.

Greetings,

Both the corporation and any person involved in a Section 351 transfer must attach a statement to their income tax returns.

"SECTION 1.351-3. RECORDS TO BE KEPT AND INFORMATION TO BE FILED.

(a) Every person who received the stock or securities of a controlled
corporation, or other property as part of the consideration, in exchange
for property under section 351, shall file with his income tax return for
the taxable year in which the exchange is consummated a complete statement
of all facts pertinent to such exchange, including--

(1) A description of the property transferred, or of his interest in
such property, together with a statement of the cost or other basis
thereof, adjusted to the date of transfer.

(2) With respect to stock of the controlled corporation received in
the exchange, a statement of--

(i) The kind of stock and preferences, if any;

(ii) The number of shares of each class received; and

(iii) The fair market value per share of each class at the date
of the exchange.

(3) With respect to securities of the controlled corporation received
in the exchange, a statement of--

(i) The principal amount and terms; and

(ii) The fair market value at the date of exchange.

(4) The amount of money received, if any.

(5) With respect to other property received--

(i) A complete description of each separate item;

(ii) The fair market value of each separate item at the date of
exchanges; and

(iii) In the case of a corporate shareholder, the adjusted basis
of the other property in the hands of the controlled corporation
immediately before the distribution of such other property to
the corporate shareholder in connection with the exchange.

(6) With respect to liabilities of the transferors assumed by the
controlled corporation, a statement of--

(i) The nature of the liabilities;

(ii) When and under what circumstances created;

(iii) The corporate business reason for assumption by the
controlled corporation; and

(iv) Whether such assumption eliminates the transferor's primary
liability.


(b) Every such controlled corporation shall file with its income tax
return for the taxable year in which the exchange is consummated--

(1) A complete description of all the property received from the
transferors.

(2) A statement of the cost or other basis thereof in the hands of
the transferors adjusted to the date of transfer.

(3) The following information with respect to the capital stock of
the controlled corporation--

(i) The total issued and outstanding capital stock immediately
prior to and immediately after the exchange, with a complete
description of each class of stock;

(ii) The classes of stock and number of shares issued to each
transferor in the exchange, and the number of shares of each
class of stock owned by each transferor immediately prior to and
immediately after the exchange, and

(iii) The fair market value of the capital stock as of the date
of exchange which was issued to each transferor.

(4) The following information with respect to securities of the
controlled corporation--

(i) The principal amount and terms of all securities outstanding
immediately prior to and immediately after the exchange,

(ii) The principal amount and terms of securities issued to each
transferor in the exchange, with a statement showing each
transferor's holdings of securities of the controlled
corporation immediately prior to and immediately after the
exchange,

(iii) The fair market value of the securities issued to the
transferors on the date of the exchange, and

(iv) A statement as to whether the securities issued in the
exchange are subordinated in any way to other claims against the
controlled corporation.

(5) The amount of money, if any, which passed to each of the
transferors in connection with the transaction.

(6) With respect to other property which passed to each transferor--

(i) A complete description of each separate item;

(ii) The fair market value of each separate item at the date of
exchange, and

(iii) In the case of a corporate transferor, the adjusted basis
of each separate item in the hands of the controlled corporation
immediately before the distribution of such other property to
the corporate transferor in connection with the exchange.

(7) The following information as to the transferor's liabilities
assumed by the controlled corporation in the exchange--

(i) The amount and a description thereof,

(ii) When and under what circumstances created, and

(iii) The corporate business reason or reasons for assumption by
the controlled corporation.


(c) Permanent records in substantial form shall be kept by every taxpayer
who participates in the type of exchange described in section 351, showing
the information listed above, in order to facilitate the determination of
gain or loss from a subsequent disposition of stock or securities and
other property, if any, received in the exchange."

Sorry for the length; but I wanted to be sure you had the pertinent sections of the regulations.

Best regards.

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3095
Experience: I've prepared all types of taxes since 1987.
jgordosea and 2 other Tax Specialists are ready to help you
Customer: replied 6 years ago.
I contributed
Computers of 2100 fmv -
Furniture of 4150 fmv
Equipment o f 4750 fmv
I don't know my basis in these assets. I think some of them were depreciated and some were just personal assets that I purchased myself.

Can I just do an excel worksheet showing the individual amounts? It sounds like there is no specific form? Do you have any kind of worksheet you could send me to figure this out.

Thanks!!
Expert:  jgordosea replied 6 years ago.

Hello again,

Indeed there is no form. It is just a statement. Yes you could use a spreadsheet.

If you were using these items in another business activity you could use the depreciation schedule from that business (or the relevant protions) for yoru basis and the list. But yes, you will have to list the assets and you do definitely need to know your basis as that is the basis the corporation must use for depreciation (unless the fair market value at time of transfer is less than your basis).

Usually we just put a statement such as : "The following assets were transfered from ______(name)__EIN to __________ Name__EIN in a tax free exchange under IRC section 351. " and follow that with the list(s) of items.

Are you self preparing a corporate income tax return? If so, that software may have a section with elections that will produce the statement you need (this is what my professional tax software does.)

I hope that helps.

 

 

Customer: replied 6 years ago.
One more question. Sorry about that.

I put the assets on my books at FMV(actually less than FMV to be conservative), it sounds like that may be wrong.

I had the entry as
Fixed Assets (in each category) Debit 11k
Common Stock Credit 11k

Then I was depreciating based on the 11k which sounds like it is too much.

If I put the assets on the books using my basis and then issue stock for FMV what entry do I use to balance the JE?
Expert:  jgordosea replied 6 years ago.

Hello again,

The company's basis in donated property is the smaller amount of either the Fair Market Value or the shareholder's Adjusted Basis. When you convert your business property to an S-Corp, the S-Corp inherits your adjusted basis.

Did you have some reason to think you can get a capital contribution greater than your basis? Have you talked any of these issues through with a tax practiitoner?

I did find an Excel 2003 template for assets and depreciation at http://office.microsoft.com/en-us/templates/TC011843741033.aspx but have not ever used it myself.

I hope this helps further.

 

Customer: replied 6 years ago.
For some reason I thought that the Corp issued stock to me for the FMV of the property rec'd. That is where I was confused on the balancing JE. Yes that makes sense that the basis would be my basis but I thought the point of the 351 was so that i would not have to recognize a gain on the transfer.

I knew that my basis in the stock would be my basis in the assets but I thought that the corp would put the stock issue on their books at the FMV and I would record the difference somewhere(I was putting it to the asset which obviously is wrong)

I am actually an accountant and just took a corporate accounting class so I know enough to get myself in trouble. Yikes!

So let me know if I understand.
I put the assets on the books at my adjusted basis and that is the amount of stock I receive as well.
Expert:  jgordosea replied 6 years ago.

Yes, put the assets on the books at adjusted basis and that is the amount of stock as well. (Unless, as mentioned earlier, the fair market value is less than your basis - then use that amount.)

From http://www.unclefed.com/IRS-Forms/2001/HTML/p54202.html : Basis of stock or other property received. The basis of the stock you receive is generally the adjusted basis of the property you transfer. Increase this amount by any amount treated as a dividend, plus any gain recognized on the exchange. Decrease this amount by any cash you received, the fair market value of any other property you received, and any loss recognized on the exchange. Also decrease this amount by the amount of any liability the corporation assumed from you, unless payment of the liability gives rise to a deduction when paid.

I hope this helps clarify for you.

Customer: replied 6 years ago.
Thank you so very much! You really helped me out.

Christine
Expert:  jgordosea replied 6 years ago.
You are quite welcome. Thank you for the opportunity to be of service.

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jgordosea
jgordosea
Enrolled Agent
2840 Satisfied Customers
I've prepared all types of taxes since 1987.