Discussion:Stock Basis/New Corp/Established with Loan
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Discussion Forum Index --> Tax Questions --> Stock Basis/New Corp/Established with Loan
| 20 June 2007 | |
| Hi: If a Corporation is established by a sole prop who loans $10K to the new C Corp (and gets stock) what is the S/H's basis in the stock? $0? Loan was subsequently paid back to the S/H. Thank you. | |
| 20 June 2007 | |
| it is NOT zero
it is the value of the services performed in exchange for the stock, for which a W-2 will be issued and a deduction granted.
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| 20 June 2007 | |
| He has never paid for the stock. He did receive a W2 for wages. I think you are saying that some of those wages could be "allocated" to the cost of the stock ??? | |
| 20 June 2007 | |
| JR, and if that adjusted basis was zero? (I agree in a 351 with basis this becomes initial basis).
Chase, if he received cash for his W-2 wages, then none has been allocated to stock. He has to receive stock for wages, not cash, for it to create equity. | |
| 20 June 2007 | |
| My point exactly. I'm looking at the financials and don't see how the stock was ever issued (no Loan to shareholder, etc.). It's weird. But on the other hand, while the SH thinks he has stock, it's not on the BS either ! So at this point I think we can book the loan to shareholder and then indicate the value of the stock too. Thanks. | |
| 20 June 2007 | |
| your state may say that he doesn't have a corporation at all if adequate capitalization doesn't exist. Better CYA and tell the client immediately. | |
| June 20, 2007 | |
| Did the owner contribute any intangibles or fully depreciated assets that had value at the time of incorporation. You may want to book these to the balance sheet for 'book purposes'.
If not, it would be best to split the $10K between loan and stock. The IRS could treat a part of that loan repayment as a dividend. Also, an uncapitalized corporation could lose it's liability protection in a lawsuit. | |
| 20 June 2007 | |
| Agreed to all points. Just spoke with client -- she told me her attorney said she did not need to capitalize ...... I hjust got his contact info and will be calling him in the A.M. THANKS for everyone's input !! | |
| June 21, 2007 | |
| Never seen a zero equity inc. I've seen a negative equity once, on the advice of an attorney, believe it or not. But if he had $5 in the bank account, he had capital. | |
