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Tax Consequences Of Corporation Formation In The US


The On August 1, 2014, Mr. Why met Mrs. Zee at a trade conference. They had very similar educations and business interests, and Mr. Why asked Mrs. Zee to join him in his business by transferring the assets of her business to XYZ Corporation in exchange for an interest in a new corporation to be formed as XYZ Corporation. XYZ Corporation was formed on September 1, 2014. The corporation’s Articles of Incorporation authorized the issuance of three classes of stock-voting common stock, nonvoting common stock, and preferred stock. On September 1, 2014 Mr. Why transferred several of his patents and some machinery to the corporation, and the corporation issued to Mr. Why 600 shares of the voting common stock, representing 60% of the authorized voting common stock (but 100% of the outstanding voting stock) in exchange for the patents and machinery. Also on September 1, 2014, Mrs. Zee transferred machinery that would be used by XYZ Corporation as part of its business in exchange for 600 shares of nonvoting common stock of XYZ Corporation, representing 60 percent of the authorized nonvoting stock of the corporation, (but 100% of the outstanding nonvoting stock). Mrs. Zee’s adjusted basis in the machinery that she transferred to the corporation was $60,000 and the fair market value of the machinery was $40,000. Determine and explain the tax consequences to Mrs. Zee and to the corporation as a result of this transaction. Please prepare a research memo to partner (the professor). Be specific as to the authority upon which you rely.

What are the relevant facts?
What are the key issues that are raised by facts?
What resources did you use and in what order?  Be specific.
What is the law that applies to each of the issues?
What is your analysis of how the law applies to the facts presented?
What are your conclusions?


The question belongs to Finance and it discusses about tax consequences of formation of a corporation in the United States. A scenario of two persons coming together and forming a corporation by transferring money and machinery in exchange for stock has been given. The tax consequences of such a transfer has been discussed in the solution.

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