Question

​, LeviLevi​, and RickRick form Stand UpStand Up Corporation and transfer the following items to Stand UpStand Up​:

Item Transferred Transferor's Basis Shares Received Transferor Joe Levi Rick FMV by Transferor $ 20,000 1,100 common 27,000 275 preferred 7,950 330 common Item Patent Cash Services $27,000 The common stock has voting rights. The preferred stock does not.

a. Is the exchange nontaxable under Sec.​ 351? Explain the tax consequences of the exchange to JoeJoe​, LeviLevi​, RickRick​, and Stand UpStand Up.

b. How would your answer to Part a change if LeviLevi instead had received 220220 shares of common stock and 220220 shares of preferred​ stock?

c. How would your answer to Part a change if RickRick instead had contributed $ 950$950 cash as well as services worth $ 7 comma 000$7,000​?

Answer 1

Section 351 provides that no gain or loss should be recognized in transfer of property to corporation in exchange of stock, where immediately after exchange the transferor or transferors are in control of the corporation.

The transferor or transferors are said to be in control of the corporation if they own at least 80% of the total voting power and at least 80% of the total numbers of shares of different classes of the shares issued by the corporation

a. In this exchange Joe control 76.9% (1100/(1100+330)of the voting power and Levi own 100% of the nonvoting stock,

One of the condition to own at least 80% of the total voting stock is not satisfied, therefore the transferors together does not control the corporation after exchange. Thus this exchange is taxable.

For the purpose of Section 351, transfer of services in exchange of stock is not treated as transfer of property.

b. If Levi would have received 220 shares of common stock, then both Joe and Levi together own 80% [(1100+220)/(1100+220+330)] of the voting stock and 100% of the nonvoting stock.

Both the condition of the section 351 are satisfied, thus the exchange is non-taxable.

c. If Rick would have contributed $950 cash and services worth $7,000, then all the transferor together would have own 100% of the voting stock and 100% of the nonvoting stock.

Both the condition of the section 351 are satisfied, thus the exchange is non-taxable.