Question

Question #1Jack transfers equipment with FMV: $500,000; AB: $100,000 in exchange for 50% of the 10,000 shares of common stock of UTH. Jill transfers accounting services w/ FMV of $100,000 and equipment with FMV: $300,000; AB: $150,000; mortgage of $100,000 that will be assumed by UTH; and cash of $100,000 in exchange for 50% of the 10,000 shares of common stock of UTH.

a. Is this transaction a qualified Sec. 351? Why?

b. How does Jack report this transaction?

c. What is his basis in his UTH stock?

d. How does Jill report this transaction?

e. What is Jill’s basis in her UTH stock?

f. What is UTH’s basis in Jack’s equipment?

h. 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.

As contributions made by Jack and Jill meet the above crieteria they will qualify u/s 351.

b.

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

c.

Jack's basis in UTH stock = Adjusted basis (-) mortgage debt = $100,000.

d.

Jill will report only service portion as taxable transaction. Transfer of property and Cash is a non taxable transaction and he will report it as a nontaxable.

e.

Jill's basis = FMV of services + (Adjusted basis - Mortgage debt ) + Cash contributed

= $100,000 + ( $150,000 - $100,000) + $100,000

= $250,000.

f.

UTH's basis in Jack's equipment = Adjusted basis = $100,000.

g.

UTH's basis in Jill's equipment = Adjusted basis = $150,000.

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