Question

Which of the following scenarios will qualify under Section 351 as a nontaxable corporate formation? For those that do not qualify, what requirement of Section 351 do they violate?

a. Ginger, Mary Ann, and Mrs. Howell form GMH Corp. Ginger contributes memorabilia in exchange for 40% of GMH’s stock, Mary Ann contributes farmland in exchange for 30% of GMH, and Mrs. Howell contributes cash in exchange for the remaining 30%.

b. Clyde founded ABC Corp. in 215 and owns all of ABC’s 1,000 shares of outstanding stock. In 2019, ABC issues 300 shares of new stock to Bonnie in exchange for land that Bonnie owned. Will Bonnie’s contribution qualify under Section 351?

c. With the same facts as part b, now ABC issues 4,500 share of new stock to Bonnie in exchange for Bonnie’s land

d. Bert and Ernie form Duckie Corp. in late 2019. Bert contributes $10,000 cash in exchange for 60% of Duckie’s stock. Ernie contributes services in exchange for the remaining 40% of Duckie

Answer 1

c option can be determined as non taxable corporates under section 351 of Income Tax Act, 1961. Because section 351 provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control.

So as per section 351 scenario C qualify as non taxable corporates.

For those who do not qualify as non taxable corporate has to pay capital gain tax for exchange of assets