Question

John and Lydia form Fusco Inc., a C-Corporation. Lydia transfers land (FMV $100,000 and adjusted basis of 100,000) and agrees to provide legal services to draft the organization documents worth $190,000 for 50% of the stock in the corporation. John transfers equipment (FMV $310,000 adjusted basis of $75,000 for 50% of the stock in the corporation and $20,000 cash. The value of the stock received is $290,000 for each John and Lydia. (8 points) a. Will the transfer qualify under §351 as a tax free transfer? Explain. b. What are the tax consequences to John and Lydia including the basis in the stock they received? c. What is Fusco Inc.’s basis in the land and equipment received? d. Would your answers change to questions a and b if Lydia had only contributed the services?

Answer 1

According to sec 351, When a C Corp issues stock in exchange of property the said transaction is not taxable if it satisfies the condition below

Condition : All contributors of cash and property have >/ 80% control in c corp. When a shareholder provides both services and property he is counted as part of control group for 80% control calculation, but if he provides only services for stock is not taken to 80%control .

(a) Yes, the transfer is Tax free and qualify under sec 351.

Both John and Lydia have contributed cash and property to Fusco. Inc. and the combined control of both of them is 100% which Is greater than 80% . Hence both the transfers would be non taxable. Note that as Lydia agreed to Provide services in addition to property contribution so it will come under 80% calculation.

(b) Transfer of property is not taxable hence there attracts no tax liability for John and Lydia . But services provided by Lydia for $190,000 are treated as ordinary gain and taxable in Lydia individual Return Of tax.

Basis of stock for John = Carryover basis of property + cash contributed = $75,000+20,000 =$95,000

For Lydia = carryover basis of property + value of services provided =$100,000+190,000 =$290,000

(c) Fusco inco basis in land and equipment received = carryover basis

Land = $100,000

Equipment =$75,000

(d) Yes answer changes as only contribution of services is not taken to calculations of 80% control.