c. Owl Corporation’s basis in the installment obligation. Owl Corporation’s basis in the installment obligation is Tom’s basis of $240,000. d. Gail’s recognized gain or loss. Gail has no recognized gain because the transfers qualify under § 351. e. Gail’s basis in the Owl Corporation stock. Gail’s basis in the Owl Corporation stock is $200,000 (60,000 + 125,000, + 15,000). f. Owl Corporation’s basis in the inventory, equipment, and the patentable invention. Owl Corporation’s basis is $200,000. g. How would your answers to the preceding questions change if Tom received common stock and Gail received preferred stock? My answers would only change if Gail receives nonqualified preferred stock. In that case, both Tom and Gail would have recognized gains because the transfers would not qualify under § 351. Tom would have a recognized gain of $110,000 (350,000 – 240,000). Gail would have a recognized gain of $400,000 [(300,000 – 15,000) + (250,000- 125,000) – (50,000- 60,000)]. Their stock basis would also change. Tom’s stock basis would be equal to the basis he had in the property transferred plus any recognized gain on the exchange minus any boot received, which is $350,000 (240,000 + 110,000). Gail’s stock basis would be $500,000 (15,000 + 250,000 + 60,000 + 400,000). h. How would your answers change if Gail was a partnership? My answer would not change if Gail was a partnership. 29. Michael Robertson (1635 Maple Street, Syracuse, NY 13201) exchanges property (basis of $200,000 and fair market value of $850,000) for 75% of the stock of Red Corporation. The other 25% is owned by Sarah Mitchell, who acquired her stock several years ago. You represent Michael, who asks whether he must report gain on the transfer. Prepare a letter to Michael and a memorandum for the tax files documenting your response. The Kaufman CPA Group 5557 North Boulevard Accent, NY 58900 (555) 333-6875
March 22, 2015 Michael Robertson 1635 Maple Street Syracuse, NY 13201 Dear Mr. Robertson, I am writing you in response to you inquiry regarding whether or not you must report a gain on the exchange of property. Since you do not have 80 percent control of Red Corporation immediately following the transfer, the property exchange does qualify under § 351. So, you would have a taxable gain of $650,000, the difference between the fair market value of the property and its basis. If you have any further questions or concerns, please feel free to contact me. Sincerely, Heather Kaufman The Kaufman CPA Group MEMORANDUM From : The Kaufman CPA Group To : Michael Robertson Re : Gain on Exchange of Property Date : March 22, 2015 Tax Issue : Michael Robertson exchanged property, with a basis of $200,000 and fair market value of $850,000, for 75% of the stock of Red Corporation. The other 25% is owned by Sarah Mitchell, who acquired her stock several years ago. Mr. Robertson inquired whether or not he must recognized gain in this transaction. Authorities : Section 351 provides that the nonrecognition of gain or loss upon the transfer of property to a corporation is permitted if certain conditions are met. There are three requirements for the nonrecognition of gain or loss under § 351. They are that property is transferred in exchange for stock and the control of the corporation after the exchange is in the hands of the property transferors. The control requirement of § 351 states that the
You've reached the end of your free preview.
Want to read all 28 pages?
- Spring '15
- Progressive Tax, Taxation in the United States, alternative minimum tax