S-Corp. form 2553 and 351 transfer

[Gretel]

I never before was involved in the formation of a new corporation and feel somewhat edgy. I read everything available to me and here are my thoughts that I need to have confirmed and/or rejected.

Corp. (single shareholder) started filed with SOS) 11/2008 and 2553 was not filed. Attorney prepared documents (first meeting, shares, bill of sale for vehicle transferred to corp.). The bill of sale is dated in March of 2009, all other documents are dated Feb.2009. Some cash was used to open checking account and is part of capital stock along with FMW of vehicle.

I think all documents should have been dated as of date of SOS filing and 351 transfer needs to be reported in 2008. If vehicle indeed was transferred in 2009 then original stock transfer for cash in 2008 needs to be separated from the 351 transfer, which will then be reported in 2009.

After all, a shareholder cannot sign as a shareholder on form 2553 if stock were not transferrred in 2008, right?

[Bees Knees]

Just because the Secretary of State filing was done in Nov of 2008 doesn’t mean the transfer of assets for stock occurred on the same date. You can file with the SOS and then later hold a board of director’s meeting to transfer assets in exchange for stock.

The corporation cannot open its doors for business until it is funded with cash and/or other assets. With what you describe, it appears the corporation did not exchange its stock for cash and assets until Feb of 2009 at the earliest. Thus, the corporation’s first tax year cannot begin before Feb of 2009.

[Gretel]

Thanks Bees. Some more details. Cash ($900) to open the bank account was transferred in Nov of 2008, business was done in 2008. Truck was transferred in 2009.

No meeting was ever held and I strongly believe the attorney messed up here. So, what you are saying leaves two choices:

1. Documents need to be redone, having the first meeting when SOS approved, transferring stock for $900 and then again in 2009 for FMV of truck.

OR

2. File biz as Schedule C until first meeting.

Second choice surely doesn't feel right since corp. bank account was used to do biz. Any other remedy?

[Bees Knees]

If a corporation checking account was opened in Nov 2008 using the corporation EIN, that changes everything. Even though no meeting was held, the shareholder in effect had an informal agreement to fund the corporation in exchange for stock he/she eventually received later at the first meeting.

I would use Nov 2008 as the starting date, especially since as you say, some business was in fact conducted in 2008.

As for how to handle the 2553 that was never filed, see TTB SB3-2 and SB3-4, Relief for Late S Elections. There are a number of options you can use to still consider the corporation an S corporation for its first taxable year.

As for Section 351, that is automatic. No election is required to have the transfer tax free under Section 351.

[Gretel]

Bees, Thank you. Sorry, for being so insecure. Formal things like this scare the heck out of me.

So, on form 2553 I state the numbers of shares eventually received in 2009. But since the 351 transfer was done in 2009 I report this transaction in 2009?

[Davc]

Sec. 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.
Retrieved from "http://www.taxalmanac.org/index.php/Treasury_Regulations%2C_Subchapter_A%2C_Sec._1.351-3"

Category: Treasury Regulations

[Gretel]

Sec. 1.351-3 Records to be kept and information to be filed

(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

Thanks, Davc. It looks like that the attorney will need to split the stock transfer for the initial transaction ($900) and the 351 exchange. It also looks like this is independent on in which year the transactions occurred. If I understand the above correctly then the transfer of stock for capital and a 351 transfer can never be combined. Correct?

[Gretel]

I am afraid I was not able to make clear what my problem is, if this is a problem at all. I appreciated if I could get an opinion on "What would you do if it was your client".

I don't have a problem how to make the 2553 election nor do I have a problem with the filing requirements for form 351.

I have a problem that the corporation (single shareholder) started in a different year than the first meeting (with the determination of how many shares were issued) was held. I also have a problem that, at this first meeting the original $900 to open the bank account in 2008 and the transfer of the truck in 2009 was one transaction for 3200 shares received. Does the attorney need to split these two transactions? or ....

On form 2553 (filed with the tax return) I report 3200 shares for the shareholder.

In 2009 I will report the 351 transfer. Shares before transfer = 0, shares after transfer=3200

Thank you.

[Gretel]

One last attempt to get a healthy opinion.