Question

In each of the problems below please describe the tax consequences to the parties involved in the transaction. The answer should include an analysis of whether Section 351 applies to the transaction (unless the problem already states that Section 351 applies) and the computations for any recognized gain, the tax basis of any stock received by the shareholders; the tax basis of any property received by the corporation and the holding period of the stock/property. 1. On January 1, 2019 Barry and Dan each contribute $50,000 to form ABC Corporation. In exchange for their contributions they each receive 50 shares of stock of ABC Corporation and ABC Corporation has 100 total shares of stock issued and outstanding after that transaction. Two months after the formation of ABC, the corporation issues an additional (new) 50 shares of stock to Edith in exchange for a building that Edith has owned for 5 years, the building has a fair market value of $ 60,000 and an adjusted basis of $30,000. ABC Corporation also transfers $10,000 to Edith as part of the exchange. 2. Lynn transfers land having a $50,000 adjusted tax basis ($80,000 FMV), and $10,000 cash to form Allied Corporation in exchange for 100% of Allied's stock. The corporation assumes the $70,000 mortgage on the land. 3. Carmen and Marc form Apple Corporation. Carmen transfers land with an adjusted basis of $18,000 and a FMV of $20,000 in exchange for one-half of the Apple Corporation stock. Marc transfers equipment with a $23,000 adjusted tax basis and a fair market value of $25,000 and he receives one-half of the stock and $5,000 cash. 4. Jerry transfers two assets to a corporation as part of a valid Sec. 351 exchange. The first asset has an adjusted basis of $70,000 and an FMV of $50,000. The second asset has an adjusted basis of $70,000 and an FMV of $150,000. The FMV of the stock received is $180,000, and he also receives $20,000 cash. 5. Rose and Wayne form a new corporation. Rose contributes cash of $85,000 for 85% of the stock and Wayne contributes property with an adjusted tax basis of $20.00 and a fair market value of $15,000 for 15% of the stock.

Answer 1

There are three requirements to qualify a transaction under section 351:
1. The transferor should transfer the property.
2. Solely in exchange for the corporation's stock.
3. And should have the control immediately after the stock received. The control should be at least 80% of the voting power or non-voting stock.
The satisfaction of all the three criteria leads to an application of section 351.

1. In the first case, there is no application of section 351 as in the 1st transaction there is no transfer of property. In the second transaction i.e, transfer of property by Edith will also don't lead to Sec 351 since his immediately received control doesn't hold 80%.

2. In the case, the Lynn transfers the property received 100% of the stock in exchange for such property. Therefore, Section 351 applies as it holds more than 80%, and the transfer of property exists. Here the stock basis is $50,000 and It is given that the mortgage assumed ($70,000) exceeds the total basis of property transferred $60,000 (basis + cash received) by $10,000.
Recognized gain is equal to $10,000. The amount of stock basis to be recognized is equal to $50,000 + $10,000 + $10,000 gain - $70,000 liability = $0. It is assumed that the shares received by the shareholder will be considered as income in the hands of the recipient. Therefore, the recognized gain is $10,000, the shareholder's basis is $0. The holding period of the shares cannot be determined as the purchase date of the property or the property holding period by the transferor is not available. we, know that no gain or loss is recognized by the corporation if the asset is transferred in exchange for shares under section 351. Therefore, there is no tax implication on the asset received.

3. Section 351 doesn't apply as the criteria of at least 80% of the control over the organization is not met with both Carmen and Marc.

4. In the given case, it mentioned that section 351 applies to this transaction. So now, computing of recognized gain:
The fair market value of 1st asset is $50,000 and the 2nd asset is $150,000. The basis of ($70,000) and ($70,000) should be adjusted in order to arrive at the realized gain or loss, which is ($20,000) for 1st asset and $80,000 for the 2nd asset. Now, the loss is to be deducted from the boot to arrive at the recognized gain. Allocation of boot for the first asset is $5,000 ($20,000 * 50,000/200,000) and for second asset is $15,000 ( $20,000 * 150,000/200,000). Therefore, the recognized gain is $0 (-$20,000 + $5,000) for the 1st asset and $15,000 for the second asset.
The fair market value of the stock received would be considered as the income for tax purposes. The holding period of the shares cannot be determined as the purchase date of the asset or the holding period of the asset by the transferor is not available. we, know that no gain or loss is recognized by the corporation if the asset is transferred in exchange for shares under section 351. Therefore, there is no tax implication on the asset received.