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Corporations: Formation and Operation
Solutions to Tax Research Problems TAX RESEARCH PROBLEMS
19-28 T may have a problem with the transaction as planned, since the IRS might argue that the incorporation does not meet the requirements for nonrecognition under 351. One of the requirements of 351 is that the transferor be in control of the corporation immediately after the transfer. Section 368(c) defines control as at least 80 percent of the voting stock and the way the transaction is structured, T will end up with only 60 percent of the voting stock. T should argue that the incorporation and the gifts are separate transactions as there is nothing in 351 that requires him to maintain control, only that he have control immediately after the transfer. As support for the argument that the gift is a separate transaction, T should rely on American Bantam Car, 11 T.C. 397. The facts in American Bantam Car, 11 T.C. 397. The facts in American Bantam Car are sufficiently different to be immaterial, but the rule of law that two steps will not be treated as one if each is viable and would have been undertaken without the other does apply. The incorporation is a separate economic step, and the gifts are not necessary for the incorporated business to function and be a benefit to T. Therefore, they should be treated as separate transactions. From a planning perspective, T should delay the gifts as long as possible to ensure that the incorporation is treated as a separate transaction. If the IRS is successful in denying nonrecognition treatment, the transfer will be treated as a sale. The transfer of ordinary income property will generate ordinary income. The transfer of property that will be depreciable by the corporation will create additional ordinary income pursuant to 1239, instead of 1231 or capital gains. Any loss realized on the transfer will not be recognized under 267 since T and the corporation are related parties. If T restructures the transaction so that the corporation issues nonvoting stock directly to the children, then the incorporation will not qualify under 351. Rev. Rul. 59-259 interprets the control requirement as meaning at least 80 percent of the voting control, and at least 80 percent of each class of nonvoting stock. Since the children will own 100 percent of the nonvoting stock, 351 will not apply. If T wants to give the children nonvoting stock, the transaction should be structured so that he receives the voting and nonvoting stock and then gives the nonvoting stock to his children, should qualify as discussed above. The contribution of land by E to the RST Corporation in exchange for 60 shares of common stock will not qualify for nonrecognition treatment under 351. Section 351 requires that the transferor be in control of the corporation immediately after the transaction. [Control is defined as at least 80 percent of the voting power by 368(c)]. E would own 60 shares of a total, issued and outstanding, of 560 (the 500 currently outstanding plus the 60 shares issued to E), significantly less than 80 percent. 5- 5- 19-2...
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- Spring '11