| Course | ACC 455 Corporate Taxation (ACC/455) |
|---|---|
| Week | 4 |
| Paper type | Corporate formation and distributions paper |
| Length | about 1,065 words, 4 double-spaced pages plus title page and references |
| Format | APA 7 student paper |
| School | University of Phoenix |
| Program | BS in Accounting |
| Updated | September 2026 |
Free sample paper for ACC 455 Week 4
Four Owners, One Coffee Roaster: A Section 351 Formation With Equipment, Cash and Services, a Founder Loan and a Distribution That Is Partly a Dividend
[Student Name]
University of Phoenix
ACC/455: Corporate Taxation
Week 4 Assignment
[Instructor Name]
[Date]
The corporation, its owners and all figures are composites written for a model paper; tax rules come from the sources listed.
Four people have decided to form a specialty coffee roaster that will sell beans wholesale to cafes and grocery stores and online to consumers. They will organize as a C corporation because two of them expect to bring in outside investors later. Each is contributing something different, and each contribution has its own tax result. Forming a corporation is usually tax-free, but only if the people contributing property end up in control, and only for the property, not for the work. This paper analyzes the formation, the capital structure and a later distribution.
The Contributions
The first founder contributes a commercial roaster and packaging equipment with a fair market value of $300,000 and an adjusted basis of $120,000, receiving 250 shares worth $250,000 and $50,000 in cash. The second contributes $400,000 in cash for 400 shares. An investor contributes $200,000 for 200 shares. The fourth, an experienced roastmaster, receives 100 shares worth $100,000 for agreeing to design the roasting program and train staff, with no property contributed. In total, 950 shares are issued, each worth $1,000.
The Control Test
Under 26 U.S.C. § 351, people who hand property to a corporation in exchange only for its shares recognize neither gain nor loss, provided that, taken together, they control the corporation right after the exchange. For this purpose, control is ownership of 80% or more of the combined voting power and of every other class of shares. Services are not property, so the roastmaster is not a transferor. The three property transferors together own 850 of 950 shares, about 89.5%, which meets the test.
The roastmaster's shares are compensation. She has $100,000 of ordinary income, and the corporation may deduct or capitalize the same amount depending on the nature of the services.
The Equipment Contributor's Gain and Basis
The first founder realized a gain of $180,000, the $300,000 value received less her $120,000 basis. Because she received $50,000 of cash, which is boot, she recognizes gain equal to the lesser of the boot or the realized gain, $50,000. The character depends on the equipment; because it had been depreciated, the gain is ordinary income to the extent of prior depreciation.
Her basis in the stock equals her basis in the property, $120,000, plus gain recognized of $50,000, less boot of $50,000, or $120,000. The $130,000 of unrecognized gain is preserved in her stock basis, since the stock is worth $250,000.
The Corporation's Basis
The corporation takes the equipment with a carryover basis of $120,000 plus the $50,000 of gain the founder recognized, or $170,000. Its basis in the cash is the cash itself. The corporation recognizes no gain on issuing its own stock.
The Other Owners
The second founder and the investor contributed cash and have stock bases of $400,000 and $200,000. The roastmaster's basis is $100,000, the amount included in her income.
Capital Structure and the Founder Loan
In the first year, the second founder lends the corporation $150,000 for a second roaster, at 7% interest over five years. Debt has tax advantages: interest is deductible to the corporation, and repayment of principal is not taxable to the lender. Graham (2000) estimated that many firms could have captured larger tax benefits by borrowing more, which is why owners of closely held corporations often prefer to provide part of their investment as loans.
The IRS can recharacterize shareholder loans as equity, making interest a nondeductible dividend. Courts weigh factors such as a written note, a fixed maturity and interest rate, actual payments on schedule, adequate capitalization and whether an outside lender would have lent on similar terms. The founder's loan has a signed note, a market interest rate, monthly payments and security in the roaster, and the corporation's equity of $850,000 supports its modest debt. It should be respected as debt.
A Distribution in Year Three
In its third year, the corporation distributes $120,000 to its shareholders in proportion to their shares. Its accumulated earnings and profits at the start of the year are zero, because start-up losses offset early profits, and its current earnings and profits are $80,000. Earnings and profits set the ceiling on how much of any payout counts as a dividend (Internal Revenue Service, 2024). Of the $120,000, $80,000 is a dividend, taxed to individual shareholders at qualified dividend rates. The remaining $40,000 is a return of capital, reducing each shareholder's stock basis. If any shareholder's basis were exhausted, the excess would be capital gain. The investor, for example, receives about $25,300, of which about $16,800 is dividend and $8,400 reduces her basis.
Earnings and profits differ from retained earnings. They start from taxable income and add back items such as tax-exempt income and subtract nondeductible expenses and federal income tax, so a corporation can pay a taxable dividend even when its books show little retained earnings.
Planning the Next Round
The owners expect to bring in outside investors within three years. If new investors contribute only cash for a small share, that later transfer will not qualify under Section 351 on its own, but cash contributors have no gain to recognize anyway. The more important issue is valuation: shares issued to new investors at a higher price will show that the roastmaster's and first founder's shares have grown in value, but that growth is untaxed until they sell. Keeping clean records of each owner's stock basis now will make that later sale, or a redemption, simple to report.
Constructive Dividends
In a small corporation, the line between business and personal spending can blur. If the corporation pays for a founder's personal car or family travel, the IRS may treat the payment as a constructive dividend, taxable to the founder and not deductible to the corporation. The owners have agreed that all personal expenses will be paid personally and that any reimbursements will go through an accountable plan.
Conclusion
The coffee roaster's formation qualified under Section 351 because the property transferors held about 89.5% of the stock. The equipment contributor recognized $50,000 of gain because of boot, the roastmaster reported her shares as income and the corporation took a carryover basis in the equipment. A well-documented founder loan provides deductible interest, and a year-three distribution was split between dividend and return of capital by earnings and profits.
References
Graham, J. R. (2000). How big are the tax benefits of debt? The Journal of Finance, 55(5), 1901-1941. https://doi.org/10.1111/0022-1082.00277
Internal Revenue Service. (2024). Corporations (Publication 542). https://www.irs.gov/publications/p542
26 U.S.C. § 351 (2018).
What the ACC 455 Week 4 instructions ask
ACC 455 Week 4 generally asks students to apply the rules for forming a corporation, choosing its capital structure and taxing its distributions. Typical requirements include testing whether transferors of property control at least 80% of the corporation after the exchange, computing recognized gain when boot is received, determining shareholders' basis in stock and the corporation's basis in property, treating stock issued for services, weighing debt against equity and the factors courts use to classify instruments and computing earnings and profits to decide how much of a distribution is a dividend. Some prompts include constructive dividends or stock redemptions. The paper should show calculations and cite the Code and IRS guidance in APA style.
How this ACC 455 Week 4 example is built
A coffee roaster formed by four people with four kinds of contribution lets the paper test every part of Section 351 in one transaction. The control test is applied first, showing why the service provider does not count and whether the property contributors still reach 80%. The equipment contributor's boot and gain are computed next, followed by basis for each owner and for the corporation. The founder loan section applies the debt-equity factors to a real choice. The distribution section starts with earnings and profits and splits a year-three distribution into dividend and return of capital. The paper closes with the risk of constructive dividends in a closely held company.
ACC 455 Week 4 grading rubric: where the points go
The rubric for this week tends to reward correct application of the control test, correct computation of recognized gain and basis and correct characterization of distributions. Faculty check that stock received for services is excluded from the control group and taxed as ordinary income, that gain is recognized to the lesser of boot or realized gain, that stock basis equals property basis plus gain recognized minus boot and that the corporation takes carryover basis plus gain recognized. Debt must be tested against recognized factors. Distributions must be split in the right order: dividend up to earnings and profits, then recovery of basis, then gain. Clear calculations and cited authority complete the grade.
ACC 455 Week 4 help: mistakes to avoid
A frequent ACC 455 Week 4 slip is counting the service contributor toward the 80% control test. Stock received only for services does not count, so check whether the property contributors reach 80% on their own. Another is recognizing the entire realized gain when boot is received; gain is recognized only up to the boot. Students also give the corporation fair market value basis in contributed property rather than carryover basis. For distributions, compute earnings and profits, not retained earnings, and apply it before basis. Treat founder loans with documents, interest and a repayment schedule if you want them respected as debt. Finally, watch for personal expenses paid by the corporation, which can be constructive dividends.
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ACC 455 Week 4 questions, answered
What does ACC/455 Week 4 usually cover?
It usually covers forming a corporation under Section 351, choosing between debt and equity and taxing corporate distributions as dividends, return of capital or gain.
Where can I find a free ACC 455 Week 4 sample paper?
A coffee roaster formation with four owners, a founder loan and a partial dividend is explained on this page with margin notes. Send the facts from your own assignment; we will write the opening draft for you free.
What is the 80% control test in Section 351?
Transferors of property must together own at least 80% of the voting power and 80% of each other class of stock immediately after the exchange for the transfer to be tax-free.
What is boot in a corporate formation?
Boot is money or other property received besides stock; the transferor recognizes gain equal to the lesser of the boot received or the realized gain.
How is a corporate distribution taxed?
It is a dividend to the extent of current and accumulated earnings and profits, then a tax-free return of capital to the extent of stock basis and then capital gain.
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