Question

Annette owns land worth $75 (adjusted basis of $1). She transfers it to Landcorp for voting common stock worth $75. At the same time Helmut agrees to provide legal services for Landcorp in exchange for stock worth $25. There is no other stock in Landcorp.

            a) Does Annette recognize gain on the transfer and if yes, how much?

            b) What is Landcorp’s basis in the land?

            c) Does the answer change (and if so how and why) if Helmut receives the stock worth $25, for services worth $20 and fixed assets worth $5?

            d) What if Helmut owned the original 100 shares for several years and they are worth $100. Annette transfers land to Landcorp worth $400 (adjusted basis was $12) for 400 new shares voting shares. Would Annette recognize gain on the transfer of the land?

Answer 1

A) As per publication 544 of IRS transfer of property in exchange of stock is not taxable if you are the only owner of the stocks or you are holding at least 80% of stocks of corporations , this rules doesn't apply if corporations is in investment business

Here annette transfer her land of $ 75 to Land corp , as total common stock of land corp have of $100,of which 75$ common stock is exchanged with Annette which is 75% of total stock holding of corporations

in this case Annette will recognize Gain on transfer of land for stock and it will be taxable

Recognize gain = $75 -adjusted basis of land

=$75-$1

= $74

$ 74 is taxable in hands of Annette

b) Land corp basis In the land will be $75 As land corp has exchanged his stock for Land worth $75 and the stock exchanged are of $75

so Land corp adjusted basis of land will be $75

c) as per publication 544 of IRS service rendered is not counted as exchange of property ,service rendered and if we receive stock against it , it will be counted as ordinary income for the service rendered , hence it will be taxable

in given case helmut receive $25 stock for $ 25 of legal services ,so $ 25 will be recognized as ordinary income of Helmut of service rendered and not property transfer so $25 it will be taxable ,

whereas if Helmut receive $25 of stock for $20 service rendered and $5 fixed assets ,yes answer will change

as in this case $20 will be treated as ordinary income as $20 is received for service rendered in mere form of $ 20 stock , $ 5 of fixed assets will be treated as exchange of stock of $ 5 ,

so $20 will be ordinary income which will be taxable

and fixed assets exchange will not result in any any gain ( $5-$5)=0

d) in this case total shares land corp hold $500

where annette share will be of  $400 shares which is 80% of common stock of land corp ,

so as per publication 544 of IRS explained above , the exchange of property with stocks by annette will non taxable as the condition of exchange rule is completed in this case where annette share of control on land corp will be 80%

so this will non taxable exchange and annette will not recognize any gain on this transfer.