Jane, Jon, and Clyde incorporate their respective businesses and form Star- ling

Question

Jane, Jon, and Clyde incorporate their respective businesses and form Star- ling Corporation. On March1 of the current year, Jane exchanges her property (basis of $50,000 and value of $150,000) for 150 shares in Starling Corporation. On April 15, Jon exchanges his property (basis of $70,000 and value of $500,000) for 500 shares in Starling. On May 10, Clyde transfers his property (basis of $90,000 and value of $350,000) for 350 shares in Starling. a. If the three exchanges are part of a prearranged plan, what gain will each of the parties recognize on the exchanges? b. Assume that Jane and Jon exchanged their property for stock four years ago, while Clyde transfers his property for 350 shares in the current year. Clyde's transfer is not part of a prearranged plan with Jane and Jon to incorporate their businesses. What gain will Clyde recognize on the transfer? c. Returning to the original facts, if the property that Clyde contributes has a basis of $490,000 (instead of $90,000), how might the parties otherwise structure the transaction?

Explanation / Answer

Solution:-

1. If the three exchanges are part of a prearranged plan, what gain will each of the par-ties recognize on the exchanges:-

None of the three individuals will recognize gain. The nonrecognition provisions of § 351 apply to all the exchanges.

2. Assume Jane and Jon exchanged their property for stock four years ago while Clyde transfers his property for 350 shares in the current year. Clyde’s transfer is not part of a prearranged plan with Jane and Jon to incorporate their businesses. What gain will Clyde recognize on the transfer:-

Clyde will recognize gain of $260,000 ($350,000 MV – $90,000 basis) on the exchange.

3. Returning to the original facts, if the property that Clyde contributes has a basis of $ 490,000 (instead of $90,000), how might the parties otherwise structure the transaction:-

Clyde would be well advised to avoid having his transfer treated as a part of an integrated plan that also includes Jane’s and Jon’s transfers. If his transfer is considered independent, not only will Jane and Jon be able to benefit from § 351 (i.e., realized gains would not be recognized), but Clyde’s loss of $140,000 ($350,000 – $490,000) is recognized.

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