Question

EXAMPLE The Big Picture Return to the facts of The Big Picture on p. 4-1. Assume that the proposed transaction involving Emily and Ethan occurs as described. However, in addition, David decides to contribute property to the new corporation in exchange for an equity interest As a result, Emily exchanges her property for 200 shares of Transformation, Inc. stock on January 7, 2018, David exchanges his property for 10 shares of Transformation stock on January 14, 2018, and Ethan exchanges his property for 4,800 shares in Transformation on March 5, 2018 Because the three exchanges are part of a prearranged plan and the control test is met, the non- recognition provisions of 5 351 apply to all of the exchanges. Stock need not be issued to the property transferors in the same proportion as the relative value of the property transferred by each. However, when stock received is not proportionate to the value of the property transferred, the actual effect of the transac- tions must be properly characterized. For example, in such situations, one transferor may actually be making a gift to another transferor.
write an explanation in Word format for the answers to Example 6

Answer 1

Generally, transferring property into a corporation in exchange for its stock is a taxable event. The transaction is treated as if you sold property to the corporation in return for cash.

Whether you're setting up a new corporation with just yourself or other people, such as partners in a partnership, or getting involved in an existing corporation, under IRC Section 351(a) you can defer (put off) any resulting tax consequence.

Under section 351(a) no gain or loss is recognized (reported) provided:

• You receive ONLY STOCK in exchange for your property, and
• You are in CONTROL of the corporation immediately after the exchange.

Under section 351, a person transferring property to a controlled corporation generally recognizes no gain or loss on the transaction; thus, such transfers are generally free of federal income tax. An exception to tax-free treatment is contained in section 357(c), which generally provides that a transferor in a section 351 transaction recognizes gain to the extent that any liabilities assumed by the corporation on the transfer exceed the transferor’s aggregate adjusted basis in the assets transferred.

In the present case, Emily is transferring her property fro 200 stocks of transformation Inc.. As emily does not recognise any gain to the extent that any liabilities assumed by the corporation on the transfer, section 351 stands and the transaction is not taxable