Mr. Hill and Mr. Dale formed a corporation to which Hill transferred a patent ri

Question

Mr. Hill and Mr. Dale formed a corporation to which Hill transferred a patent right that had a fair market value to him of $25,000 and a zero adjusted basis. Dale transferred a building that had a fair market value of $100,000 and an adjusted basis to him of $75,000. In return, Hill received 250 shares and Dale 750 shares of the corporation's 1,000 outstanding shares of its only class of stock. As a result of this transaction, Mr. Dale should report A. Neither a gain nor a loss. B. An ordinary gain of $25,000. C. A Section 1250 gain of $25,000. D. A capital gain of $25,000.

Explanation / Answer

Answer (A) Neither a gain nor a loss is correct.

If the requirements of Sec. 351(a) are met, no gain or loss is recognized when property is transferred to a corporation. The requirements are that the transfer by one or more persons, solely in exchange for stock, and the transferor(s) must be in control of the corporation immediately after the exchange.

Sec. 368 (c) defines control as the ownership of at least 80% of both the voting and nonvoting stock. Since Hill and Dale collectively received all the shares, the control requirement is met. Hill and Dale meet the criteria so the transfer qualifies under Sec. 351(a). No gain or loss is recognized. The difference in value of property contributed for equal shares may cause other tax consequences depending on the underlying facts; e.g., Dale may have made a gift to Hill, or Hill may have received compensation from Dale or the corporation.

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