Question

Bob and Carl transfer property to Stone Corporation for 90% and 10% of Stone stock, respectively. Pursuant to a binding agreement concluded before the transfer, Bob sells half 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

Answer 1

Generally transfer of property into corporation in exchange for the stock is taxable event i.e. the difference between the stock values received and the tax basis in the property transferred to the corporationwill result into gain or loss. But Section 351 of IRS states that no gain or loss will be recognized or reported if the following two conditions are satisfied and they are:-

Taxpayer receives only stock in exchange of the property

Taxpayer is in control of the corporation immediately after the exchange of the property.

Sec. 368(c) defines control as the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. (Unlike, e.g., Sec. 1504, this provision does not have a value requirement.)

Section 351 (Transfer to corporation controlled by transferror) deals with a situation in which There is a transfer of property between the contributing shareholder and recipient corporation. As per this section no gain or loss is recognized by either the contributing shareholder or the recipient corporation if certain conditions are satisfied. Case of Bob, Carla and Stone corp. has been evaluated using this section.