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Sam owns 100% of M Corporation’s single class of stock. Sam transfers land and a building having a $30,000 and $100,000 adjusted basis, respectively, to M Corporation in exchange for additional M Corporation common stock worth $200,000 and IBM stock worth $20,000. The IBM stock had a $5,000 basis on M Corporation’s books. Peter transfers $50,000 in cash for 15% of the M Corporation common stock. What amount of gain or loss is recognized by Sam and M Corporation on the exchange? Sam has come to you for advice so provide him with professional memo on the isssue, based on the IRC, treasury regulations, ruling and court cases if applicable. DO NOT USE IRS PUBLICATION OR OTHER UNRELIABLE SOURCES. Use proper tax language and IRAC form – issues,. rules, analysis conclusion..
Expert Answer
To : Sam
From :
Date :
Subject : Gain or loss on an Exchange
Summary of Facts:
Sam owns 100% of M Corporation’s single class of stock. Sam transfers land and a building having a $30,000 and $100,000 adjusted basis, respectively, to M Corporation in exchange for additional M Corporation common stock worth $200,000 and IBM stock worth $20,000. The IBM stock had a $5,000 basis on M Corporation’s books. Peter transfers $50,000 in cash for 15%of the M Corporation common stock.
Research Issues
1. What amount of gain or loss is recognized by Sam based on this exchange?
2. What amount of gain or loss is recognized by M Corporation based on this exchange?
Applicable Laws:
Section 351(a) of the Internal Revenue Code provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control(as defined in section 368(c)) of the corporation.
Section 368(c) defines control to mean the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation.
Section 1.351-1(a)(1) of the Income Tax Regulations provides that the phrase “immediately after the exchange” does not necessarily require simultaneous exchanges by two or more persons, but comprehends a situation where the rights of the parties have been previously defined and the execution of the agreement proceeds with an expedition consistent with orderly procedure.
Analysis:
Since Sam prior the exchange owned 100% of the stock of M Corporation, after the exchange Sam and Peter both control at minimum of 80% of the M Corporation and therefore meet the control requirement. Also, Sam’s property transfer qualifies under the Section 351 as stated above as property transferred for M Corporation own stock. The receipt of other property of the IBM appreciated stock however qualifies as a boot, which requires both Sam and M Corporation to recognize gain.
Conclusion:
In conclusion, Sam does not recognize the gain for the property transferred in receipt of M Corporation stock, but will recognize capital gain for the IBM stock at $20,000. M Corporation will not recognize of the property transfer with Sam for its stock and also will not recognize gain for the exchange with Peter. However, M Corporation will recognize the capital gain on the IBM stock minus it adjusted basis in that stock. Therefore, M Corporation will recognize $15,000 capital gain.
