| Mr. Brown transferred an office building to Corporation J in exchange for 100% of Corporation J’s stock and $30,000 cash. The building had an adjusted basis of $150,000 and a fair market value of $250,000. The building was subject to a mortgage of $120,000, which Corporation J assumed for valid business reasons. The fair market value of Corporation J’s stock on the date of the transfer was $100,000. What is Mr. Brown’s recognized gain? |
| Section 351(a) provides for nonrecognition of gain or loss if a person transfers property to a corporation solely in exchange for stock in the corporation and if immediately after the exchange such person is in control (owns at least 80% of the stock). Since money is received in addition to the stock, any gain realized by the recipient is recognized but not in excess of the sum of the money received. A gain is not recognized on the assumption of liabilities because Sec. 357(c) provides that gain is reported only if the liabilities assumed by the corporation exceed the adjusted basis of the property transferred. Mr. Brown’s recognized gain is $30,000, the cash received. |
| Bob and Charles, as a group, transfer a building with a basis of $100,000 to the ABC Corporation in exchange for 66.67% of each class of stock with a fair market value of $300,000. The other 33.33% of the stock was already issued to Alice. What is the gain, if any, that Bob, Charles, or the ABC Corporation must recognize? |
Bob and Charles combined do not have control over ABC Corporation; therefore, Sec. 351 treatment does not apply. Bob and Charles must recognize a gain of $200,000 ($300,000 FMV – $100,000 adjusted basis), and ABC does not recognize any gain.
| Anna transferred land with an adjusted basis to her of $20,000 and a fair market value of $56,000, to Elm Corporation in exchange for 100% of Elm Corporation’s only class of stock. The land was subject to a liability of $26,000, which Elm assumed for legitimate business purposes. The fair market value of Elm’s stock at the time of the transfer was $30,000. What is the amount of Anna’s recognized gain? |
The general rule of Sec. 351 is that no gain is recognized if a shareholder transfers property in exchange for stock of a corporation as long as the shareholder(s) involved in the transaction control the corporation immediately after the exchange. Control is defined in Sec. 368(c) as 80% of the voting power and 80% of all classes of nonvoting stock. Anna received 100% of Elm Corporation’s stock and therefore has control immediately after the exchange. But Sec. 357(c) provides that gain must be recognized by the shareholder to the extent that liabilities assumed, or taken subject to, by the corporation exceed the adjusted basis of all property transferred. The liability on the land exceeded the adjusted basis of the land Anna transferred by $6,000 ($26,000 liability assumed – $20,000 adjusted basis). Thus, Anna must recognize a gain of $6,000.
| Mr. B transferred property having an adjusted basis of $105,000 and a fair market value of $141,000 to Corporation F. In exchange for the property, he received $15,000 cash, equipment having an adjusted basis of $9,000 and a fair market value of $15,000, and 80% of Corporation F’s only class of stock. The stock received by Mr. B had a fair market value of $111,000. What is the amount of gain that Mr. B will recognize? |
| The realized gain equals the fair market value of property received ($111,000 stock + $15,000 equipment + $15,000 cash) less the adjusted basis of the property transferred ($105,000), or $36,000. If other property or money is received in addition to the stock, any gain realized by the recipient is recognized but not in excess of the sum of the money plus the fair market value of other property received. The sum of boot property received is $30,000 ($15,000 equipment + $15,000 cash). Thus, the $30,000 is recognized as the gain. |
Taxpayer C acquired sufficient stock of Corporation Y in an exchange to meet the nonrecognition of gain or loss requirements. Stock was acquired as follows (stock listed at fair market value):
What is the total amount includible in Taxpayer C’s income? |
| The general rule of Sec. 351 is that no gain or loss is recognized if one or more persons transfer property to a corporation solely for stock and if immediately after the exchange such person(s) is(are) in control of the corporation (i.e., own at least 80% of the stock). Section 351(d) states, however, that stock issued for services is not issued in return for property. Stock issued for services falls outside the general rule and income must be recognized on such a transfer. The fair market value of stock received for services ($15,000) must be included in C’s income. All other stock received was in exchange for property, and no gain or loss is recognized on its transfer. Note that the discrepancy in the amount of stock received for cash does not affect the Sec. 351 transaction as long as it was a bona fide exchange; e.g., the stock may have been overvalued. However, if the excess $10,000 of stock were additional compensation for services, it too would be included in C’s income. |
| Hank transfers land with an adjusted basis of $500,000 to Handy Hank’s, Inc. In exchange, he receives shares of stock with a fair market value of $300,000 and cash in the amount of $175,000. Hank owns 51% of all the outstanding stock of Handy Hank’s, Inc., immediately after the transfer. What is Hank’s deductible loss on the transaction, if any? |
| Even though this transaction does not qualify as a tax-free transfer under Sec. 351, Hank cannot deduct the $25,000 loss. Under Sec. 267(a)(1), if the shareholder owns more than 50% of the corporation’s stock, directly or indirectly, he cannot recognize any losses on an exchange of the property for the corporation’s stock or other property. |
| James transferred property worth $75,000 and services worth $25,000 to the BJ Corporation. In exchange, he received stock in BJ valued at $100,000. Immediately after the exchange, James owned 80% of the only class of outstanding stock. Which of the following is true with regard to James’s treatment of this transaction? |
| The general rule of Sec. 351 is that no gain or loss is recognized if one or more persons transfer property to a corporation solely for stock and if immediately after the exchange such person(s) is(are) in control of the corporation (i.e., own at least 80% of the stock). Section 351(d) states, however, that stock issued for services is not issued in return for property. Stock issued for services falls outside the general rule, and income must be recognized on such a transfer. The fair market value of stock received for services ($25,000) must be included in James’s income. All other stock received was in exchange for property, and no gain or loss is recognized on its transfer. |
| Randy and Audra formed a corporation to which Randy transferred equipment that had a fair market value of $25,000 and zero adjusted basis. Audra transferred a building that had a fair market value of $100,000 and an adjusted basis to her of $80,000. In return, Randy received 200 shares and Audra received 800 shares of the corporation’s outstanding shares of its only class of stock. As a result of this transaction, Audra should report |
Section 351(a) provides that no gain or loss is recognized if one or more persons transfer property to a corporation solely in exchange for stock in such corporation, and if immediately after the exchange such person(s) is(are) in control of the corporation. “Control” is defined in Sec. 368(c) as the ownership of stock possessing at least 80% of the total combined voting power of all classes of voting stock and at least 80% of the total number of shares of all other classes of stock. Since Audra owns 80% of the corporation’s outstanding stock, she controls the corporation. Therefore, Audra reports neither a gain nor a loss on the transfer of property solely for stock.
| Anthony, Bill, and Chester decided to form Paradise Corporation. Anthony transferred property with an adjusted basis of $35,000 and a fair market value of $44,000 for 440 shares of stock. Bill exchanged $33,000 cash for 330 shares of stock. Chester performed services valued at $33,000 for 330 shares of stock. The fair market value of Paradise Corporation’s stock is $100 per share. What is Paradise’s basis in the property received from Anthony? |
| Because less than 80% of the stock was acquired for property (30% was acquired for services), the control requirement fails, and the transfer by Anthony does not qualify for tax-free treatment. Therefore, Paradise takes the property from Anthony with a basis equal to $44,000, the fair market value of the property as well as the stock exchanged for it. |
| Jack Carson transferred a building that had an adjusted basis of $75,000 and a fair market value of $130,000 to Corporation R in exchange for 80% of R’s only class of stock and a car with an adjusted basis to R of $25,000. The fair market value of the stock at the time of the transfer was $100,000 and the car’s fair market value was $30,000. What is the amount of R’s basis in the building? |
| Section 362(a) provides that the basis to a corporation of property acquired in a Sec. 351 transaction is the same as the basis in the hands of the transferor, increased by the gain recognized by the transferor. Here, the transfer qualifies as a Sec. 351 transaction since greater than 80% of all stock was held by the shareholder after the exchange. Jack received a car with a $30,000 fair market value in addition to the stock. Jack realizes a gain of $55,000 ($100,000 FMV of stock + $30,000 FMV car – $75,000 adjusted basis in the building). Jack recognizes a gain of $30,000 which is the FMV of the property other than the stock received. Thus, R’s basis in the building is $105,000 ($75,000 Jack’s adjusted basis + $30,000 gain recognized). |
| Mary owns a farm with a FMV of $500,000 and a mortgage of $200,000. The basis of the farm is $300,000. She exchanged the farm for stock in a transfer under IRC Sec. 351. What is her basis in the new stock? |
| Mary has a realized gain of $400,000 [$500,000 selling price – ($300,000 basis – $200,000 mortgage)]. There is no recognized gain under Sec. 351. However, the mortgage assumed by the corporation reduces Mary’s basis. Therefore, this basis of the stock is $100,000 ($300,000 basis – $200,000 mortgage). |
| Ms. White transferred property having an adjusted basis of $145,000 and a fair market value of $160,000 to Corporation T in exchange for 100% of T’s only class of stock and $20,000 cash. At the time of the transfer, the stock had a fair market value of $115,000. What is the basis of the stock Ms. White received in this transaction? |
| Karen transferred property with an adjusted basis of $45,000 and fair market value of $50,000 to Holiday Corporation in exchange for 65% of Holiday Corporation’s only class of stock. At the time of the transfer, the stock Karen received has a fair market value of $55,000. What is Holiday Corporation’s basis in the property after the exchange? |
| The corporation’s initial carryover basis in property exchanged by a control group shareholder for its stock is an adjusted carryover basis. This carryover basis is increased by the gain recognized by the shareholder on the transfer. The transfer does not qualify for Sec. 351 treatment because Karen received only 65% of Holiday Corporation’s stock (80% is needed for control). Karen must recognize a gain of $10,000 ($55,000 FMV of stock received – $45,000 basis of property). The $10,000 recognized gain is added to the adjusted basis of the property of $45,000 so that the corporation’s basis in the property is $55,000. |
Vagabond Corporation was organized and began active business on January 2 of the current year. Vagabond incurred the following expenses in connection with creating the business:
What is the amount of organizational expense that Vagabond Corporation incurred? |
ection 248 allows a corporation to elect to amortize its organizational expenses over 180 months starting with the month in which it begins business. A taxpayer is deemed to have made the election. Organizational expenditures are those incurred incidental to the creation of the corporation. Regulation 1.248-1(b)(3) specifically excludes expenditures connected with issuing or selling stock and with transferring assets to the corporation. Vagabond’s current-year organizational costs are
State incorporation fees | $ 2,000 |
Legal fees for drafting the charter | 6,000 |
Expense for temporary directors | 5,000 |
Total allowable expenses | $13,000 |
| An accrual-basis corporation’s organizational expenses are amortizable |
| A corporation’s organizational expenditures may be amortized over any period of 180 months that the taxpayer selects, but the period must begin with the month in which the corporation begins business. |
| Dale Corporation’s book income before federal income taxes was $520,000 for the current year ended December 31. Dale was organized 3 years earlier. Organization costs of $330,000 are being written off over a 10-year period for financial statement purposes. For tax purposes, these costs are being written off over the minimum allowable period. For the current year ended December 31, taxable income is |
| Under Sec. 248, a corporation may elect to amortize its organizational expenditures over at least 180 months, beginning with the month in which the corporation begins business. Dale’s taxable income is computed by adding back to book income the book amortization costs of $33,000 ($330,000 ÷ 10 years) and then deducting the maximum tax amortization amount of $22,000 ($330,000 × 12/180 months). Taxable income is $531,000 ($520,000 + $33,000 – $22,000). NOTE: A taxpayer is deemed to have made the election. |
