Formation: Section 351
No gain or loss is recognized on a transfer of property to a corporation solely in exchange for stock if the transferors are in control (80%) immediately after. Boot received triggers gain up to the lesser of realized gain or boot. Services contributed are not property — the recipient recognizes compensation income.
Key book-tax differences
| Item | Book | Tax |
|---|---|---|
| Municipal bond interest | Income | Excluded (permanent) |
| Federal income tax expense | Expense | Not deductible (permanent) |
| Life insurance premiums (company is beneficiary) | Expense | Not deductible (permanent) |
| 50% of meals | Expense | Partially disallowed (permanent) |
| Fines and penalties | Expense | Not deductible (permanent) |
| Depreciation | Book method | MACRS/bonus (temporary) |
| Bad debts | Allowance | Direct write-off (temporary) |
| Warranty accrual | Accrued | When paid (temporary) |
Dividends-received deduction (DRD)
| Ownership in the payer | DRD percentage |
|---|---|
| Less than 20% | 50% |
| 20% to less than 80% | 65% |
| 80% or more (affiliated) | 100% |
A taxable income limitation applies (the DRD generally cannot exceed the same percentage of taxable income before the DRD), unless taking the full DRD creates or increases a net operating loss.
Distributions to shareholders
Ordering: taxable dividend to the extent of current and accumulated earnings and profits (E&P) → then a tax-free return of capital reducing stock basis → then capital gain.
IMPORTANT: A corporation distributing appreciated property recognizes gain as if it sold the property at FMV. It does not recognize loss on distributing depreciated property.
EXAM TIP: Corporate charitable contributions are limited to 10% of taxable income (computed before the charitable deduction, DRD, and NOL carrybacks), with a 5-year carryforward. Corporate capital losses offset only capital gains — back 3, forward 5.