[Heena93]

Please help!!
Question from Becker ( CPA – 02030)
Lind and Post organized Ace Corp, which issued voting common stock with a FMV of $120,000. They each transferred property in exchange for stock as follows –
(i) Lind – Property transferred – Building
Adjusted Basis – $40,000
FMV – $82,000
% of Ace Corp stock Acquired – 60%
Mortgage – $10,000 which was assumed by the Ace Corp,

What amount of gain did Lind recognize?
Solution given by Becker – is NIL as there is no gain or loss in the event of formation of company.

Now, my question is as Lind did not own 80% after the property transfer, then why did Lind not recognize the gain for the property transfer.
Can some one please help me?

[Anonymous]

You're missing part of the question here- what did Post contribute? But since it is a formation, you can assume he got the other 40%. Combined, they are over the 80% threshold for a Sec. 351 tax-deferred organization.

[Heena93]

Hey @Chandler,
Thanks for the reply!
Don't we require to see the individual % of stock acquired rather than combined ratio?

[Anonymous]

Well, actually for a 351 exchange, it is based on combined control. Immediately after contribution, the contributing shareholders must own at least 80% of the voting and nonvoting stock.

[Heena93]

But why will the other SH get the advantage even though he contributes for less than 80% control and they are not even related?
Can you please explain me I am not getting this and my I am taking REG in a month!
Thank you so much for your patience.

[Recked]

Relation does not matter. Combined the 2 new shareholders control over 80% of the new entity, so there is no gain.
It might help to actually read the code section of law…
(a) General rule
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
https://www.law.cornell.edu/uscode/text/26/351
One or more persons, no mention of relationship test. The one person owning more than 80% snagged me too, but once you get it, you'll never forget.
Good luck.

[Heena93]

Oh great! Got it!

A big thank you to @Recked and @Chander

[Author]

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