Question

Problem #1 Mark and Jain form X corporation with the following consideration: Consideration Transferred Basis to FMV Number of Shares Transferor Received From Mark Cash Installment Obligation 20,000 140,000 20,000 180,000 20 From Jain Services 20,000 Calculate Realized and recognized gain/loss, basis to each shareholder. Also calculate basis to X corporation for Installment Obligation.

Answer 1

§351 provides a that the act of incorporating is not a taxable event to the entity or the shareholders, if 3 specific conditions are met:

1. Shareholders transfer property to the corporation

2. The transfer is solely in exchange for stock of the corporation, and

3. Immediately after the transfer, the transferors are in control of corporation i.e. own 80% of total combined voting power entitled to vote and 80% of other stocks

Further if a shareholder receives stock in exchange for services provided to the corporation then gain is recognized by the shareholder because “services” is not “property”

The basis of shareholder will be equal to basis of transferred asset+Gain recognized on exchange by shareholder

The basis of corporation will be equal to basis in transferred asset+Gain recognized on exchange by shareholder

Particulars	Mark	Jain	Total
Gain Recognized for shareholder	-	20,000.00
Basis to Shareholder	160,000.00	20,000.00
Basis to Corporation	160,000.00	20,000.00	180,000.00

Mark's asset transfer fulfills all the condition of sec.351 including control since he hold more than 90% of shaes (20/22) and hence it is not a taxable event.

Jain is transferring services hence gain needs to recognized.