Question

ORGANIZATION OF A CORPORATION:

SECTION 351 and RELATED PROBLEMS

3B Boot; Basis; Debt; “Midstream” Issues

(1)(a) Section 351(a) applies. Upon exchange with X, (1) A’s amount realized is $100; (2) A’s gain realized is $60; (3) nothing is recognized, because of § 351(a); (4) A’s basis in stock received is $40 under § 358(a)(1); (5) A’s holding period in the stock tacks under § 1223(1); (6) X’s basis in property is $40 under § 362(a)(1); (7) X’s holding period for property received tacks under § 1223(2); and (8) X would recognize $60 long-term capital gain on a sale of the property. On the separate sale of half the stock, A realizes and recognizes a capital gain of $30 and has a basis of $20 in the remaining 50 shares, which B takes a cost basis of $50 in the purchased shares. B&E¶ 3.10,3.11. If the property’s basis were $200, loss would not be recognized under § 351(a) (whether or not boot is received) and the losses will be built into the stock basis as well as the property basis inside the corporation. Then when A sells half the stock to B, A will recoup $50 loss, retaining a $100 basis in the other half of the stock. Thus, there is a full doubling of the $100 loss in the property (although the Service hates this result, since it forms the foundation for many tax shelter transactions).

*****The above paragraph is an answer/solution to a question in the book. What I need you to do is rewrite this in your own words. Thank you

Answer 1

ORGANISATION OF A CORPORATION:

SECTION 351 AND RELATED PROBLEMS

3B Boot;

Basis; debt; "MIDSTREAM" issues;

(1)(a) Section 351(a) applies upon exchange with X

1)A's amount realized is $100

   2)A's gain realized is $60

3)nothing is recognized because of section351(a)

4)A's basis in stock received is $40 under section 358(a)(1)

5)A's holding period in the stock tacks under section 1223(1)

6)X's basis in property is $40 under section362(a)(1)

7)X's holding period for property received tacks under section 1223(2)

8)X would recognize $60 long-term capital gain on sale of property .

On the seperate sale of half of the stock, A realizes and recognizes a capital gain of $30 and has a basis of $20 in the remaining 50 shares, which B takes a cost basis of $50 in the purchased shares. Were B & E on 3.10,3.11. If the property's basis were $200, loss would not be recognized under section 351(a) (whether or not boot is received) and the losses will be built into the stock basis as well as the property basis inside the corporation. Then when A sells half the stock to B , A will recoup $50 loss, retaining a $100 basis in the other half of the stock. Thus, there is a full doubling of the $100 loss in the property (although the services hates this result, since it forms the foundation for many tax shelter transactions).