a) A and B are unrelated individuals. A forms Newco, Inc. on January 2 of the cu
ID: 2721820 • Letter: A
Question
a)A and B are unrelated individuals. A forms Newco, Inc. on January 2 of the current year by transferring property with a basis of $10,000 and a value of $50,000 for all 50 shares of Newco common stock. On March 2, in an unrelated transaction, B transfers property with a basis of $1,000 and a value of $10,000 for 10 values of Newco nonvoting preferred stock (that is not nonqualified preferred stock).
b)Same as (a), above, except the transfers by A and B were part of a single integrated plan.
c)Same as (b), above, except A transferred 25 of her 50 shares to her daughter, D, as a gift on March 5 (three days after B’s transfer). What if A’s gift to D were on January 5?
Same as (b), above, except that two months after B’s transfer, A sold 15 shares to E pursuant to a preexisting oral understanding, without which Newco would not have been formed
Explanation / Answer
a)A and B are unrelated individuals. A forms Newco, Inc. on January 2 of the current year by transferring property with a basis of $10,000 and a value of $50,000 for all 50 shares of Newco common stock. On March 2, in an unrelated transaction, B transfers property with a basis of $1,000 and a value of $10,000 for 10 values of Newco nonvoting preferred stock (that is not nonqualified preferred stock).
Under IRC section 351 applies to A”s transfer because A transferred property in exchange for stock and immediately after the transaction A had control of Newco .therefore A does not recognize gain and A tames transfer basis of $10,000 in the 50 shares of Newco stock under section 358(a)(1) and tacked holding under section 1223(1) assumed the transferred property is a capital asset , Newco recognizes no gain under section 1032(a) and takes a transferred basis of $10,000 under section 362(a)
B’s transfer is unrelated.B is therefore the only transferor on March 2.After that transfer, B does not have control of Newco.B has only 10/60 of Newco which is less than80%.IRC section351 does not apply to B because B does not satisfy the control requirements of section368(c).B has $9k gain and takes a basis of $10k (cost basis) in his shares of Newco stock. Newco has no gain on the issuance of stock- section 1032, and has a basis of $10,000 in the property transferred by B. Treas. Reg. section 1.1032-1(d)
b)Same as (a) above except the transfers by A and B were part of a single integrated plan?
If the transfers were part of an integrated plan both A and B would both qualify for non-recognition under section 351 because they are both the transferors, and together they control 100% of Newco.Time delay is not fatal Treas. Reg. section 1.351-1(a)(1).The fact that B received preferred stock is ok.(Preferred stock is stock that generally has less voting rights but a senior right to dividends than common stock).
(c)Same as (b) above, except A transferred 25 of her 50 shares to her daughter, D asgift on March 5?What if A’s gift to D were on January 5?
A’s March 5 gift does not change the answer in (b) because the transferors have control, under IRC section 368(c),immediately after the March 2 transfer. As long as A was not under a binding agreement prior to the transaction. If A’s gift were made on Jan. 5, then section 351 does not apply because after B’s contribution the transferors of property (A and B) do not have control (80% of stock voting power and total number of shares of all other classes of stock) – D has >20% common stock and D is NOT a transferor.
(d)Same as (b) above except that two months after B’s transfer, A sold 15 shares toE pursuant to a preexisting oral understanding, without which Newco would nothave been formed.
No section 351 because there was a pre-existing agreement for the transferor to sell shares of Newco at the time of the transfer. After the sale is accounted for, there is no control..A and B would recognize gain and take a basis in Newco shares equal to fair market value. E would take a cost basis for the 15 share
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