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351+Handout - IRS Regulation 1.351-1(a(2 Example(1 C owns a...

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IRS Regulation 1.351-1(a)(2) Example (1). C owns a patent right worth $25,000 and D owns a manufacturing plant worth $75,000. C and D organize the R Corporation with an authorized capital stock of $100,000. C transfers his patent right to the R Corporation for $25,000 of its stock and D transfers his plant to the new corporation for $75,000 of its stock. No gain or loss to C or D is recognized. Example (2). B owns certain real estate which cost him $50,000 in 1930, but which has a fair market value of $200,000 in 1955. He transfers the property to the N Corporation in 1955 for 78 percent of each class of stock of the corporation having a fair market value of $200,000, the remaining 22 percent of the stock of the corporation having been issued by the corporation in 1940 to other persons for cash. B realized a taxable gain of $150,000 on this transaction. Example (3). E, an individual, owns property with a basis of $10,000 but which has a fair market value of $18,000. E also had rendered services valued at $2,000 to Corporation F. Corporation F has outstanding 100 shares of common stock all of which are held by G. Corporation F issues 400 shares of its common stock (having a fair market value of $20,000) to E in exchange for his property worth $18,000 and in compensation for the services he has rendered worth $2,000. Since immediately after the transaction, E owns 80 percent of the outstanding stock of Corporation F, no gain is recognized upon the exchange of the property for the stock. However, E realized $2,000 of ordinary income as compensation for services rendered to Corporation F.
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Sol Lessinger and Edith Lessinger, Appellants v. Commissioner of Internal Revenue, Appellee (CA-2), U.S. Court of Appeals, 2nd Circuit, 88-4110, 3/29/89, 872 F2d 519, Reversing the Tax Court, 85 TC 824, Dec. 42,489 Bruno Schachner, 595 Madison Ave., New York, N.Y., for appellants. William S. Rose, Jr., Assistant Attorney General, Robert S. Pomerance, Gary R. Allen, Barbara I. Hodges, Department of Justice, Washington, D.C. 20530, for appellee. OAKES, Chief Judge: Taxpayers Sol and Edith Lessinger appeal from that portion of a decision of the United States Tax Court, Charles E. Clapp II, Judge, finding them liable for income taxes of $113,242.55 for the tax year 1977. Lessinger v. Commissioner , 85 T.C. 824 (1985). Because Ms. Lessinger argues that she is an "innocent spouse" and should escape any liability that may be imposed on her husband, see I.R.C. §6013(e) (Supp. IV 1986), we will review the question of Mr. Lessinger's liability first. We will refer to him as the taxpayer. The Tax Court found, and the parties seem to agree, that section 351 of the Internal Revenue Code governs the transaction at issue here. Section 351 provides for the nonrecognition of income when a controlling shareholder transfers property to a corporation. The taxpayer here transferred the assets and liabilities of a proprietorship he operated to a corporation he owned for reasons entirely unrelated to tax planning. It is clear that he was oblivious to the ramifications of
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351+Handout - IRS Regulation 1.351-1(a(2 Example(1 C owns a...

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