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III.

Disadvantages of Consolidation

A.

Complexity

B.

Loss limitations are quite stringent

09/29/2009 – Acquisition of subsidiaries

IV.

Formation of joint venture with another taxpayer (typically another corporation)

A.

E.g., Chevron and Exxon may form a joint venture to explore and/or develop an offshore oil & gas lease

B.

Essentially, the joint venture is a separate partnership

C.

Sec. 721: No gain or loss is recognized on contribution of property for an interest in capital and profits of the partnership/joint venture

D.

Sec. 722: Partners take substitute basis in their partnership interest equal to:

a.

Basis of property contributed to joint venture

b.

Less liabilities transferred to and assumed by the joint venture

c.

Plus share of jv liabilities for which partner is indirectly responsible

E.

Sec. 723: JV takes carryover basis in property contributed by a partner in a transaction governed by Sec. 721

F.

Subsequent operations of Joint Venture—

a.

Each partner reports its share of joint venture income or loss each year, whether or not distributed by JV to such partner;

b.

Basis in JV is adjusted as follows:

i.

Increase by share of gain/income

ii.

Decrease by share of loss

iii.

Decrease (but not below zero) by distributions received

V.

Formation of new subsidiary via contribution of property

A.

Sec. 351: No gain or loss is recognized on contribution of property for stock in a controlled corporation

a.

351(b)—gain, but not loss is recognized if transferor receives property other than stock in the new corporation. Gain recognized equals the lesser of:

i.

Gain realized on exchange; or

ii.

FMV of “boot” received

b.

Debt assumed by transferee corporation is not treated as boot unless incurred by transferor in anticipation of transfer to corporation.

B.

Sec. 358: Contributing shareholder takes substitute basis in stock received equal to:

a.

Basis of property transferred

b.

Less FMV of boot received

c.

Less debt transferred to corporation

2

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