Question

QUESTION #2

Jack transfers equipment with FMV: $550,000; AB: $100,000 in exchange for 50% of the 10,000 shares of common stock of UTH. UTH gives him $50,000 cash.

Jill transfers accounting services w/ FMV of $100,000 and equipment with FMV: $300,000; AB: $150,000; and cash of $150,000 in exchange for 50% of the 10,000 shares of common stock of UTH. UTH gives her a painting with FMV of $50,000 and AB of $10,000.

1. Is this transaction a qualified Sec. 351? Why?
2. How does Jack report this transaction?
3. What is his basis in his UTH stock?
4. How does Jill report this transaction?
5. What is her basis in her UTH stock?
6. What is UTH’s basis in Jack’s equipment?
7. What is UTH’s basis in Jill’s equipment?

Answer 1

a.

As per section 351, when all the contributors contributing cash and/or property gets 80% or more control in C corp. it will be a nontaxable transaction u/s 351.

Also, If contribution also combines along with cash and property provision of service it will also qualify for Sec 351 transaction. Only contribution if services will not constitute for sec 351 transaction.

But one of the exceptions to Sec 351 is that,

If boot is received by the shareholder along with the stock where boot can be cash, other securities or other property gain will be recognized upto the extent of boot received (Cash + FMV of other property received)

Hence, transaction of Jack will not qualify for sec 351.

Transaction of Jill will also not qualify u/s 351.

b.

Jack will report this transaction as taxable transaction i.e. gain on transfer of property will not be taxed.

c.

Gain realized = FMV of property + Boot received - Adjusted basis of property

= $550,000 + $50,000 - $100,000

= $500,000

Gain recognized upto the extent of boot received = $50,000

Jack's basis in UTH stock = Adjusted basis (-) mortgage debt + gain recognized - boot received

= $100,000 - 0 + $50,000 - $50,000

= $100,000

d.

Jill will report this transaction as taxable transaction i.e. gain on transfer of property will not be taxed.

Also FMV of services will be taxable.

e.

Boot received = FMV of other property = $50,000

Gain realized = FMV of property + Boot received - Adjusted basis of property

= $300,000 + $50,000 + - $150,000

= $200,000

Gain recognized upto the extent of boot received = $50,000

Jill's basis in UTH stock = Adjusted basis (-) mortgage debt + gain recognized - boot received + FMV of services provided

= $150,000 - 0 + $50,000 - $50,000 + $100,000

= $250,000

f.

UTH's basis in Jack's equipment = Adjusted basis + gain recognized= $100,000 + $50,000 = $150,000

g.

UTH's basis in Jill's equipment = Adjusted basis + Gain recognized = $150,000 + $50,000 = $200,000

For any clarification, please comment. Kindly Up Vote!

For any clarification, please comment. Kindly Up Vote!