Question

Afton transferred to a newly formed corporation, land with a FMV of $200,000, Basis of $190,000, subject to a liability of $25,000 for acquisition debt, which the corporation assumed. Afton received 50% of the corporation’s stock. Blake transferred equipment with a FMV of $200,000, Basis of $180,000. Blake received 50% of the corporation’s stock and $25,000 from the corporation.

Determine the tax consequences to the transferors and to the corporation.

Answer 1

Issuance of stock in exchange for cash is a non taxable transaction under section 351 only if all the contributors of cash plus property have 80% or more control.

Exception - If boot is received by the shareholder along with stock, realized gain is recognized upto the amount of boot received.

As Afton and Blake both together received more than 80% control, it is a non taxable transaction and as Blake received $25,000 from the corporation, the exemption apply.

Tax consequences :

Afton - No gain/loss is recognized.

Blake - $25,000 gain is recognized.

Corporation - $25,000 gain is recognized.