Question

Huppe and Heeter decide to form a new corporation - H2O Meetings and Incentives Corp. Huppe contributes property with a tax basis of $2 million and a fair market value of $5 million, in exchange for 1,000 shares of H2O Meetings and Incentives stock and $1,000,000 of cash (H2O Meetings and Incentives borrows the cash from a financial institution). Heeter contributes property with a tax basis of $1.1 million and a fair market value of $1.5 million in exchange for 200 shares of H2O Meetings and Incentives stock and $500,000 of cash. Each share of H2O Meetings and Incentives stock is worth $5,000. Assume that this corporate formation meets the requirements of I.R.C. Section 351 (Huppe and Monty control 80% of H2O Meetings and Incentives after the exchange).

1. How much taxable gain or loss will Huppe recognize as a result of the transaction?

2. What basis will Huppe take in the H2O Meetings and Incentives stock he receives?

3. How much taxable gain or loss will Heeter recognize as a result of the transaction?

4. What basis in Heeter’s property will H2O Meetings and Incentives Corp. take?

5. What basis will Heeter take in the H2O Meetings and Incentives stock he receives?

Answer 1

A) Calculation of gain or loss recognize by Huppe :-

Amount contributed in terms of property (Fair Market value shall be considered) = $ 5 Million

Total Amount Contributed (1)   = $ 5 Million

Amount Received in exchange in terms of shares = 1000 shares X $ 5000 Per share = $ 5 Million

   Amount Received in cash = $ 1 Million

Total Amount received    (2)   = $ 6 Million

Total gain occurred (2) - (1) = $6 Million - $5 Million = $ 1 Million  

Now, Huppy Control only 80% of H2O Meetings and Incentives so, only 80% of total gain can be recognized by Huppe which comes to $ 1 Million X 80% = $ 0.80 Million.

B) Huppe is getting the amount in the form of shares of H2O Meetings and Incentives equivalent to the fair market value of the Property I.e. $ 5 Million. Also, he is getting profit with this take in . hence he will take in on the basis of Fair value of shares of  H2O Meetings and Incentives.

C) Calculation of gain or loss recognize by Heeter:-

Amount contributed in terms of property (Fair Market value shall be considered) = $1.5 Million

Total Amount Contributed (1)   = $1.5 Million

Amount Received in exchange in terms of shares = 200 shares X $ 5000 Per share = $1 Million

   Amount Received in cash = $0.5 Million

Total Amount received    (2)   = $1.5 Million

Total gain occurred (2) - (1) = $1.5 Million - $1.5 Million = $ 0.00 Million  

Heeter does not have any gain or loss to recognize because he is getting amount equivalent to amount contributed.

D) H2O Meetings and Incentives takes heeter property because cash paid part is small & Fair value of property is equal to its Shares market value which shows that its a fair deal.

E) Heeter is getting the amount in the form of shares of H2O Meetings and Incentives almost equivalent to the fair market value of the Property I.e. $ 1.1 Million. hence he will take in on the basis of Fair value of shares of  H2O Meetings and Incentives.