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 Big and Bob 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 $20,000 and a fair market value of $15,000 for 15% of the stock.

Answer 1

There are 3 conditions to fit a sale following section 351:
a. The transferor should give the property.
b. Individually in exchange for the corporation's assets.
c. Also should have the authority directly behind the stock acquired. The control should be at slightest 80% of the polling power instead of non-voting stock.
The settlement of total the three principles points to an purpose of section 351.
1. During the initial situation, there is no application of section 351 as in the 1st transaction there is no change of property. In the secondary action i.e, transference of goods by Edith will also don't manage to Sec 351 because his quickly gained control doesn't take 80%.

2. Meanwhile the event, the Lynn gives the assets acquired 100% of the goods in replacement for such assets. Accordingly, Section 351 implements as it operates higher than 80%, and the transference of goods endures. Hither the stock base is $50,000 also It is provided that the debt expected ($70,000) passes the entire basis of property assigned $60,000 (base + payment obtained) by $10,000.
Identified profit is equivalent to $10,000. The volume of stock basis to be realized is equal to $50,000 + $10,000 + $10,000 gain - $70,000 liability = $0. It is expected that the shares accepted by the bondholder will be counted as revenue in the support of the beneficiary. Accordingly, the realized gain is $10,000, the shareholder's base is $0. The impeding period of the shares cannot be defined as the buying date of the estate or the estate holding time by the transferor is not possible. we, understand that no earnings or loss is approved by the company if the asset is given in exchange for shares below section 351. Hence, there is no tax connection on the asset acquired.

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

4. Within the presented example, it suggested that section 351 refers to this transaction. Therefore presently, computing of realized profit:
The fair market price of 1st asset is $50,000 also the 2nd asset is $150,000. The basis of ($70,000) plus ($70,000) should be fixed in position to succeed at the earned gain or loss, which is ($20,000) for 1st asset moreover $80,000 for the 2nd asset. Promptly, the loss is to be decreased from the boot to appear at the realized earnings. Allocation of boot for the initial asset is $5,000 ($20,000 x 50,000/200,000) and for secondary asset is $15,000 ( $20,000 x 150,000/200,000). Accordingly, the realized earnings is $0 (-$20,000 + $5,000) for the initial asset including $15,000 for the secondary asset.
This fair market price of the stock gained would be recognized as the income for tax schemes. The holding time of the shares cannot be restricted as the buying date of the asset or the holding time of the asset by the transferor is not possible. we, remember that no profit or loss is realized by the business if the asset is transported in change for shares beneath section 351. Accordingly, there is no tax assumption on the asset acquired.