Question

C2-62 Tax Research Problems Bob and Carl transfer property to Stone Corporation for 90% and 10% of Stone stock, resppetively. Pursuant to a binding agreement concluded before the transfer, Bob sells hald of his stock to Carl, Prepare a memorandum for your tax manager explaining why the exchange does or does not meet the Sec.351 control requirement. Your manager has suggested that, at a minimum, you consult the following authorities: * IRC Sec.351 * Reg. SEc. 1.351-1 (prepare a memorandum)

Answer 1

Answer :-

To: Tax supervisor

From: Associate

Re : IRC segment 351

Date : 3 July 2013

Certainties : Bob and Carl exchange property to stone Corporation for 90% and 10% of stone, respectively.pursuant to an official assention finished up before the exchange, Bob pitches half of his stock to Carl.

ISSUE : Why the trade does not meet the sec.351 control necessity .

Examination :for the most part move of property into organization in return for the stock is assessable occasion i.e the contrast between the stock qualities got and the expense premise in the property exchanged to the partnership will result into gain or misfortune. In any case, area 351 of IRS expresses that no gain or misfortune will be perceived or announced if the accompanying two conditions are fulfilled and they are :

Citizen gets just stock in return of the property .

Citizen is responsible for the enterprise quickly after the trading of the property.

Area 368(c) characterizes control as control implies the responsibility for stock having at any rate 80% of the aggregate consolidated casting a ballot forces of all classes of stock qualified for vote and at any rate 80% of the aggregate quantities of extraordinary offers of every single different class of the organization .

Fitting the bill for a tax-exempt trade under area 351(a) :

There are two necessities which must be met with the end goal to fit the bill for the tax exempt treatment under segment 351(a) and they are :

Citizen just gets stock in return of the property and not stock in addition to property. The stock which citizen will get in return of the property must be other than non qualified favored stock.

Citizen must be responsible for the property of the partnership , instantly after the trade.

Along these lines, it very well may be said that no gain or misfortune will be perceived if the property is exchanged to the enterprise by at least one people exclusively in return for stock in such company and quickly after the trade such individual or people holds 8% or a greater amount of the casting a ballot controls in the partnership.

In the present case Bob and Carl exchange their property to Stone partnership for 90% and 10% of stone stock, Respectively. As per an official assention finished up before the exchange, Bob pitches half of his stock to Carl i.e Bob offer will be 40% and Carl offer will be 60% i.e after the offer of half of the supply of Bob to Carl ,Bob will have 40% of the casting a ballot forces or shareholding and Carl will have 60% of the casting a ballot power or shareholding which is under 80% of the casting a ballot powers required to satisfy the necessities of segment 351 .

Along these lines, it tends to be said that out of two necessities which are compulsory just a single prerequisites is satisfied i.e the exchange or the property just in return for stock yet neglects to satisfy the necessity of 80% of the stock proprietorship.

This gets out that Bob and Carl exchanges neglect to meet the basic necessity consequently their exchange of property will be assessable and subsequently they need to cover regulatory obligation on his trade of property.

End :

Sway and Carl exchange property to Stone company for 910% and 10% of stone stock , individually. The exchange of property to stone organization will be assessable in hands of Bob and Carl as a result of non-satisfaction of one of the basic prerequisite.