5. (a) A transfers a contract to perform services to Newco in exchange for 50% o

Question

5. (a) A transfers a contract to perform services to Newco in exchange for 50% of Newco's stock. B transfers a tract of land with a basis of 50 and FMV of 100 in exchange for 50% of Newco's stock. What are the tax consequences to all of the parties?

(b) Suppose that in addition to transferring the services contract, A transfers cash of 20. A still receives 50% of the stock. How would this change your answer?

(c) Suppose instead that in addition to transferring the services contract, A transfers cash of just 1. How would this change your answer?

Explanation / Answer

1. As per IRS, if any property is transferred by an individual for the corporation's stock and immediately after exchange individual holds 80% or more of the corporation's stock, then no gain is recognized either by the individual or corporation.

In the given case B transferred land with fair market value of 100 in exchange of 50% stock and as a result income is required to be recognized by B since he does not own 80% or more of the stock. Income to be recognized by B is:

Income to be recognized = Fair value - adjusted basis = 100- 50 = 50

As per IRS, property does not include the contract of services and therefore the exchange of services for stock is income of the recipient of stock. Therefore, A is required to recognize the income to the value of services contract.

2. The term property does not include transfer of any property with fair market value less than 10% of the fair value of stock. If A transfers cash of just 1 then the same amount will not be regarded as transfer of property and the same will be required to be booked as income.

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