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ms500
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Posted: 07 Jul 2009 at 18:36 \| IP Logged

Hi,

Washington, Lincoln, and Roosevelt formed President Corporation during 2007. Pursuant to the incorporation agreement, Washington transferred cash of $60,000 for 600 shares of stock, Lincoln transferred property with an adjusted basis of $5,000 and a fair market value of $15,000 for 150 shares of stock, and Roosevelt performed services valued at $25,000 in exchange for 250 shares of stock. Assuming the fair market value of President Corporation's stock is $100 per share, what is President Corporation's tax basis in the property received from Lincoln?

a)0, b)5000, c) 15000, & d) 25000

ans is c-15000

I am confused with wiley's explanation, appreciate if some one help me in understanding above

thanks in advance

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arushi_13
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Posted: 07 Jul 2009 at 18:50 \| IP Logged

In my opinion...

Total shares of Corp.= 600+150+250 shares =1000.
Lincoln and Washington were the only ones which transferred property in exchange of Corp.'s stock but they own only 750 shares of the total 1000 shares which is less than 80% ownership required for Section 351. Also, note that when stock is exchanged for services it does not qualify as Section 351 transfer (as is the case with Roosevelt.)Thus, this will not qualify for a Section 351 transfer and the Corp.'s basis will be the FMV of property transferred by Lincoln = 15,000 and NOT the adjusted basis. Adjusted basis would only be used when there is a Section 351 transfer.

Thus, the transfer is TAXABLE event for all the 3 shareholders. None of them individually or collectively meet the 80% ownership requirement.

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Arushi

ms500
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Posted: 07 Jul 2009 at 19:25 \| IP Logged

Hi Arushi

I Agree with your explanation,but as per the explanation of item # 4 in following link states that- no stock may be given in exchange for future services, but in this case, Roosevelt has already performed services

http://books.google.ca/books?id=Jflfus8Vg88C&pg=PA141&am p;am p;lpg=PA141&dq=section+351+tax&source=bl&ots=ltX 2LlBf55&sig=KGNdx41BX8FArBMBwHThqNlifU4&hl=en&ei =WtNTSvGLFYfCNaes_ekI&sa=X&oi=book_result&ct=res ult&resnum=6

Arushi, still it is unclear, appreciate if you go thru abv link, may be my interpretation is wrong

Thanks

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bryris
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Posted: 07 Jul 2009 at 20:26 \| IP Logged

I will second what Arushi said. He is right.

For 351 to apply, after the transfer, those who transferred property (NOT services) must hold 80% or more of the corp immediately after the exchange. The property transferors owned 75%, killing the 351 stuff.

Hence the corp takes a FMV basis in prop, gain is recognized by the shareholders as if prop was sold at arm's length.

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ms500
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Posted: 07 Jul 2009 at 20:41 \| IP Logged

Hi Bryris / Arushi

I agree with the concept of 80%, but this services rendered has confused me, May be reading too much or refering other materials gives more confusion

Anyway, In conclusion, now future promises or services already rendered should be excluded, right

Pls confirm abv

thanks

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