Question

1_Fred and Steve (father and son) organize a corporation with 100 Shares of common stock to which Fred transfers property worth $80,000 in exchange for 70 shares of stock, and Steven transfers property worth $20,000 in exchange for 30 shares of stock.

a. Does Code Sec. 351 apply to the transfers by Fred and Steve?

b. What additional problems are there?

2_Diamond Corporation was organized in 2012 and has outstanding 100 shares of common stock all of which are held by Gemworks Elmer Elkins owns property with a basis of $10,000 and a fair market value of $18,000. Elmer also rendered services valued at $2,000 to Diamond Corporation. In 2015, Diamond Corporation issued 400 shares of its common stock (with a fair market value of $20,000) to Elmer in exchange for his property and as compensation for the services Elmer has rendered. 

a. Does Code Sec. 352 apply to Elmer

b. How much income must Elmer report?

c. What is Elmer's basis for the Diamond Corporation stock?

d. What is the basis of the property to Diamond Corporation?

3_Kathleen Korren transfers to her controlled corporation property with an adjusted basis of $10,000 in exchange for stock of the corporation with a fair market value of $8,000, $3,000 cash, and the assumption by the corporation of indebtedness of Kathleen amounting to $4,000.

a. What is Kathleen's realized gain?

b. What is Kathleen's recognized gain?

c. What is the corporation's basis for the property received?

d. What is Kathleen's basis for her stock

4_Ben Baxter transfers properties X and Y to his controlled corporation. The corporation issues common stock worth $30,000 and assumes the liability on property Y.

  (Inventory) (Capital Asset) Property X Y FMV $30,000 $30,000 Adj. Basis 10,000 10,000 Liability  0 30,000

a. How much (and what type) gain is recognized by Ben?

b. If there is no business purpose for having the corporation assume the liability, what amount of gain will Ben recognize?

5_Elwood Emerson transferred a building having a fair market value of $200,000 and an adjusted basis of $1215,000 to his controlled corporation. In return Elwood received common stock worth $80,000, a 10-year debenture worth $20,000, a two-year note worth $10,000, $5,000 cash and the corporation assumed the mortgage of $85,000 on the building. 

a. How much gain is realized by Elwood?

b. How much (and what type) gain is recognized by Elwood?

c. What is the corporation's basis for the building?

d. What is Elwood's basis for the note, debenture, and stock received.

6_Norman Nager transfers assets to a corporation that is wholly owned by him. In exchange for the assets, Norman received short-term notes with a fair market value of $64,000 and stock with a fair market value of $136,000. The assets transferred to the corporation are as follows:

Asset Adjusted Basis at Transfer Depreciation Recapture Potential  Fair Market Value at Transfer Land (Sec. 1231 asset) $50,000 $0 $25,000 Building (Sec. 1231 asset) 50,000 15,000 75,000 Machinery 30,000 25,000 25,000 Inventory  70,000 9 75,000   $200,000 $40,000 $200,000

a. How much (and what type) gain will Norman recognize on the transfer?

b. What is Norman's basis int eh corporate stock and short0term notes received?

c. What is the corporation's basis in each asset it receives?

Answer 1

Answer 1a) In this case Fred & Steve transfers their property into the corporation in exchange of stock. Here they do not indulge in any gains or losses. Hence as code sec 351 states that there should not be any gain or loss and hence this code applies. Answer 1 b) Sec 251(b) of the US Code states that if a person receives more property or money than the stock transferable allowable then the gain will be recognizable and not allowed. This additional problem shall be kept in mind. Answer 2a) Here Code Sec 352 does not apply. Rather Code Sec 351(c) is relevant & in it determination of control of the business is not relevant. Answer 2b)  Elmer will report NIL Income. Fair market price of his 100 shares = $ 18000. $ 2000 he owes from Diamond Corporation for his services. Hence net monetary assets with him = $ 20000. Elmer received from Diamond Corporation 400 shares of 20000$ fair market value and in return he relinquishes his $20000 property. Hence elmer will report NIL Income. Answer 2c) Elmer has stocks with him worth 18000 fair market value. 2000 he gets for services rendered. Thus in exchange of that he gets 400 stocks worth 20000 from Diamond Corporation. That is the basis of Elmer stock. Answer 2d) Elmer is the transferor & Diamond Corporation being the transferee receives the property of Elmer & in return issues him 400 stocks worth $ 20000 Fair market value. Answer 3a) Kathleen's realized gain = Fair market value of stocks + cash + assumption of indebtedness amt - property given up by kathleen = 8000 + 3000 + 4000 - 10000 = 5000. hence realized gain = $ 5000 Answer 3b) Kathleen's recognised gain = 8000 + 3000 - 10000 = $1000. Answer 3c) The corporation receives the property by tranferring its stock and cash worth $3000. Answer 3d)   Kathleen transfers the property with realized gains which is not permissible under code. sec 351 general rule. Answer 4a) On adj.basis value of X & Y assets are 40000 i.e. 30000 -10000 +30000-10000 = 40000. Ben receives 30000 stock and 30000 is kept as liability by the corporation. So let's see how much Ben gain = 30000 + 30000 - 40000 = $20000 and the gain is Realized gain. Answer 4b) If there is no business purpose of corporation assuming liability then Ben will lose 10000 dollars. loss = 30000 - 10000 + 3000 - 10000 - 30000 = $10000