In: Accounting
Section 351
Indicate whether the following qualify as Section 351
transfers:
Yes No
1. Olive transfers land to Quick for 65% of Quick stock, and Mary
provides services to
Quick for the remaining 35% of Quick stock.
2. John and his wife, Sally, each have owned 50 shares of the 100 outstanding shares of Vast Corporation stock since it was formed three years ago. In the current year, their son, Sam, transfers land worth $50,000 for 50 newly issued shares of Vast stock.
3. Pete transfers land to Target Corporation for 60% of Target
stock, and Robert transfers a machine worth $20,000 and performs
services worth $10,000 for
the remaining 40% of Target stock.
4. Charles and Ruth develop a plan to form Tiny Corporation. On
June 3 of this year
Charles transfers land worth $50,000 for 50 shares of Tiny tock.
One year later, Ruth
transfers $50,000 cash for the remaining 50 shares of
Tiny.
5. Fred exchanges a machine worth $10,000 for all 100 shares of a new corporation and receives cash of $3,000.
6. John transfers property to Johnson for 20% of
Johnson stock, and Sam provides
services to Johnson for the remaining 80% of Johnson Stock.
Indicate whether the following qualify as Section 351:
(a). Any Transfer is non-taxable only if the transferor has control over the transferee after the transfer. And according to section 351 (a) the explanation given for the "control" is that the 'taxpayer should have no less than 80% ownership in the voting power, and no less than 80% of shares of other stock.
In this question, Olive has only 65% control over Quick after transfer. Note that 35% transfer Is done for services. Hence there It doesn’t meet the Section 351 requirement of "Control".
(b) Here John and Sally control the transferee company Vast Corporation, after the transfer is made. Because they hold 100% ownership control over Vast Corporation after transfer. Hence they follow the Section 351 requirement for "Control".
( c) Pete controls 60% control over Target Corporation after transfer of land, and Robert controls around 26.67% control over Target Corporation after transfer of machine worth $20,000.(Note that 13.33% or $10,000 Is transferred for services.) However together they control more than 86.67% of Target Corporation, Hence they satisfy the requirement of Section 351 of "Control".
(d) Since Charles and Ruth together they own 100% ownership of Tiny corporation after the transfer, they have full 100% control over Tiny Corporation, and they satisfy the section 351 requirement criteria for "control".
(e) Since Fred transfers machine for 100% shares ownership of transferee. It satisfies the requirement criteria under section 351 for having 100% control over the transferee.
(f) Since the ownership in Johnson Stock is limited to 20% only, the transferor doesn’t qualify the requirements of 80% ownership under section 351. Remember, that 80% was provided for services.