Question

Michelle owns appreciated property and she wants to use this property to start a business with her son, Lance. Michelle is considering making a contribution of the property to a newly organized corporation in exchange for 100 percent of the corporate stock. She then contemplates giving half of the stock to Lance in exchange for his promise to manage the business.

(1) Do you think this transaction will qualify for Section 351 Treatment?

(2) Suppose Michelle promises that she won't transfer the stock for a month after making the contribution of property. Does this make any difference?

(3) What is one piece of tax planning advice you have for Michelle as she begins her new business?

Answer 1

1. Section 351(a) provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control of the corporation.

Section 368(c) defines control to mean the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation.

In the given case. Michelle is considering making a contribution of the property to a newly organized corporation in exchange for 100 percent of the corporate stock. She then contemplates giving half of the stock to her son in exchange for his promise to manage the business. Thus She loses Ownership to 50% and Hence It will be treated as a taxable transfer.2.It wont make any difference.