Question

Penny, Miesha, and Sabrina transfer property (FMV 150,000, adjusted basis $90,000) to Owl Corporation for 75% of its stock. Nancy, their attorney, receives 25% of the stock in Owl worth $50,000) for legal services rendered in incorporating the business. Penny, Miesha, and Sabrina wish to minimize any tax liability resulting from the transfer.

Penny, Miesha, and Sabrina transfer property (FMV 150,000, adjusted basis $90,000) to Owl Corporation for 75% of its stock. Nancy, their attorney, receives 25% of the stock in Owl worth $50,000) for legal services rendered in incorporating the business. Penny, Miesha, and Sabrina wish to minimize any tax liability resulting from the transfer.

What are the tax consequences for the shareholders (e.g., recognized gain, loss, income) as a result of the transfer?

How should this transaction have been handled? Why?

Answer 1

Part A

Nancy offers legal service, did not contibute propery, and in exchage gets 25% stock. Thus, the chance of section 351 treatement is lost (as all members do not transfers the property), whereby no gain or loss is recognized in exchange. Because other members ho transferred property will not get immediate cotrol after the exchange. It is taxable to all involved persons.

Gain recognized by Penny, Miesha, and Sabrina = $0 (gain recoginzed is loer of gain realized or boot received; gain realied $60000 (FMV - adjusted basis = 150000-90000) or boot received $0)

Income for Nancy = $50000 (stock received are like a compensation for legal service rendered)

Part B

Nancy should have transferred some property along with the rendering services. In that case he would have been treated as the member of the transferring group. Thus, they would have been allowed section 351 treatement, whereby no gain or loss is recognized. However, the value of the stock issued for services is taxed in all circumstances.