A transferor’s interest cannot be counted if the stock received is of relatively small value in comparison to the value of that already owned and the primary purpose of the transfer is to qualify other transferors for § 351 treatment. For advance ruling purposes, the IRS treats the amount transferred as not being relatively small in value if it is equal to, or in excess of, 10% of the fair market value of the stock already owned by that person. Thus, if the one share of stock transferred to Peggy is less than 10% of the stock already owned by Peggy, Peggy’s interest probably is not counted. Ted then is taxed on the transfer as he does not have an 80% interest in Robin Corporation.
The shareholder’s basis in the stock received is reduced by the amount of the liabilities assumed by the corporation. If a shareholder transfers a liability to the corporation along with property, the basis in the stock received is reduced by the amount of the liability transferred to the corporation. However, the transfer of the liability to the corporation will not produce gain to the transferor-shareholder (unless the liability exceeds the basis of the assets transferred or there was a tax avoidance scheme or no bona fide business purpose underlying the transfer). In the event a shareholder transfers property with an aggregate adjusted basis in excess of its fair market value, the result reached in part c. below may need to be modified. Section 362(e)(2) generally requires the corporation to step down the carryover basis for the property by the amount of the net built-in loss. However, if the shareholder and the corporation elect, the basis reduction can be applied instead against the shareholder’s stock basis. The shareholder’s basis in the property transferred becomes the basis of the stock received, increased by the amount of gain recognized to the shareholder and decreased by the fair market value of boot received and the amount of liabilities transferred to the corporation. If a shareholder receives “other property” (boot) in addition to stock in a § 351 transfer, gain is recognized by the shareholder to the extent of the lesser of the gain realized or the fair market value of the boot received. Section 358(a) provides that the basis of stock received is the same as the basis the shareholder had in the property transferred, increased by any gain recognized on the exchange and decreased by boot received. Grebe Corporation’s holding period includes the transferor-shareholder’s holding period. As to stock received, a shareholder’s holding period depends on whether the asset transferred was capital (including § 1231) or not. The basis rules are not the same for property acquired from a shareholder and for property acquired from a nonshareholder. The basis of property received by a corporation from a shareholder as a capital contribution generally is the basis in the hands of the shareholder although it is subject to a downward adjustment when loss property is contributed. The basis of property transferred to a corporation by a nonshareholder as a contribution to capital is zero. However, if the nonshareholder transfers money to a corporation, the basis of property acquired by the corporation is reduced by the amount of the contribution.
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