[AMERICANDREAM]

I was doing some practice problems on Becker and Wiley and came across the following questions:

(1) Lind and Post organized Ace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows:

Lind: Building — NBV=40,000 — FMV=82,000 — Percentage of ownership=60%
Post: I won’t type this out cuz it’s not needed.

The building was subject to a $10,000 mortgage that was assumed by Ace. What amount of gain did Lind recognize on the exchange?

ANSWER = 0.

(2) Quigley, Roberk, and Storm form a corporation. Quigley exchanges a $25,000 of legal fees for 30 shares of stock. Roberk exchanges land with a basis of $10,000 and a fair market value of $100,000 for 60 shares of stock. Storm exchanges $10,000 cash for 10 shares of stock. What amount of income should each shareholder recognize?

ANSWER: Quigley=25k, Roberk=90k, Storm=0.

MY QUESTION:
It’s related particularly with Lind in question 1 and Roberk in question 2. Why is Lind NOT recognizing any gain but Roberk is recognizing 90k of gain? I’m confused because:
(1) Lind and Roberk are both controlling less than 80% (Roberk + Storm, excluding Quigley because he contributed services).
(2) They both did not receive boot.
(3) They both contributed property with greater FMV than NBV, so did have realized gain.

Please help! My brain is going CRAZYYY

[ThomasHallberg]

For question one:

I think Lind contributed 60% and I am assuming Post contributed 40%. Section 351 is satisfied because both Lind and Post have greater than 80% after the formation, no gain or loss is recognized.

For question 2:

Services do not count for code 351, so nobody contributes more than 80%.

The $25,000 of legal fees to Quigley is compensation for services and is recognized as income by Quigley.

A gain of $90,000 (the fair market value of the land of $100,000 – its adjusted basis of $10,000) is recognized to Roberk.

Storm just bought shares for cash, so he does not recognize any gain.

[AMERICANDREAM]

@ThomasHallberg

Thanks for your response. To make sure I'm understanding your point correctly, when the textbook talks about 80% control, it's group of shareholders?

If A+B+C+D altogether own 100% by contributing property, then 80%+ control requirement is satisfied, so section 351 applies.
If A+B+C altogether own 60% by contributing property and D owns 40% by contributing service, then A, B, and C do not own 80%+ and are subject to gain recognition.

Is this correct? Your explanation was extremely clear btw.

[Author]

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