XYZ Inc

1
Assume No Special Rules
Equipment Basis 100k, FMV 200k
XYZ Inc
Jim
100 Shrs Common Stock
1. Jim recognizes 100k gain. 2. Corp
recognizes 200k gain. 3. Jim basis in stock
200k, new holding period. 4. Corps basis in
equipment 200k, new holding period.
Special Rules Change All This - Maybe
2
Rule 1 351 Rule
Equipment Basis 100k, FMV 200k
XYZ Inc
Jim
100 Shrs Common Stock
No gain or loss is recognized by the
transferor on the transfer of property to a
corporation in exchange for stock of the
corporation if 1. Property is
transferred 2. Solely in exchange
for stock 3. Transferor(s) in
control immediately after exchange. Two
80 requirements 80 of all voting stock and
80 of total shares of each other class of
stock. Result Jim recognizes no gain or
loss on the exchange.
3
Rule 2 351(b) Boot Rule
Equipment Basis 100k, FMV 200k
Jim
XYZ Inc
Common Stock Cash
If 351 would apply except that corporation issues
property in addition to stock (boot) to the
shareholder, then shareholder recognizes
gain on the property transferred to corporation
equal to the lesser of 1. The
built-in gain on the property transferred the
excess of FMV over basis
2. The FMV of boot received by the
shareholder. Result If 80k cash boot, Jim
recognizes gain equal to boot 80k. If 120k
boot paid by XYZ Inc in addition to stock, Jim
would recognize gain equal to 100k
excess of 200k FMV over 100k basis.
4
Rule 3 The 358 Basis Rule
Equipment Basis 100k, FMV 200k
Jim
XYZ Inc
Common Stock Cash
If 351 applies to an exchange of
property for stock in a corporation, the basis of
the stock received by the shareholder equals
1. The basis of the property
transferred to the corporation in the hands of
the shareholder, plus 2. Any gain
recognized by shareholder ala the 351(b) rule,
less 3. The FMV of any boot
received. Result If XYZ Inc issues
100 share of its stock and 80k cash, Jim
recognizes gain equal to boot 80k, and Jims
basis in stock is equal to 100k (basis in
equipment), plus 80k gain less 80k boot 100k.
If 120k boot was paid by XYZ Inc in
addition to stock, Jim would recognize gain equal
to 100k. Basis in stock would equal 100k plus
100k gain less 120k boot 80k basis.
5
Rule 4 Shareholder Tacking Rule
Equipment Basis 100k, FMV 200k
Jim
XYZ Inc
Common Stock Cash
If 351 applies to an exchange of property
for stock in a corporation, the holding period of
the property transferred by the shareholder is
tacked on to the holding period of the stock if
the transferred property was a capital asset or a
1231 asset (asset used in trade or business). No
inventories or receivables.
Result Jims holding period of equipment is
tacked on in determining holding period of
stock.
6
Rule 5 The 1032 Rule
Equipment Basis 100k, FMV 200k
Jim
XYZ Inc
Common Stock Cash
Corporation recognizes no gain or loss on
receipt of money or property in exchange for its
own stock Result XYZ Inc issues 100
share of its stock and 80k cash to its sole
shareholder Jim for equipment worth 200k that has
a basis of 100k. XYZ Inc recognizes no gain or
loss.
7
Rule 6 The 362 Rule
Equipment Basis 100k, FMV 200k
Jim
XYZ Inc
Common Stock Cash
A corporations basis in property
acquired in exchange for its stock in a
transaction that qualifies under 351 equals the
shareholders basis in the property basis plus
any gain recognized by the shareholder. But if
net built-in loss, basis limited to FMV of
property unless all elect to reduce stock basis
of shareholder to FMV. Result XYZ Inc
issues 100 share of its stock and 80k cash to
Jim, Jim recognizes gain equal to boot 80k.
XYZ Inc.s basis in equipment is equal to 100k
(Jims basis in equipment), plus 80k gain
recognized by Jim 180K.
8
Rule 7 Corporate Tacking Rule
Equipment Basis 100k, FMV 200k
Jim
XYZ Inc
Common Stock Cash
If 351 applies to an exchange of property
for stock in a corporation, the holding period of
the property transferred by the shareholder is
tacked on in determining the holding period of
the property in the hand of the corporation.
Result Jims holding period of equipment is
tacked on in determining XYZ Inc.s holding
period of equipment.
9
Problem 64(a)
25k Cash / 25 Shares
Note / 20 Shares
X Corp
Inventory / 10 Shares
Equip. / 25 Shares
Land / 20 Shares
A
B
C
D
E
FMV -10k Basis 5k
FMV - 20k Basis 25k
FMV - 25k Basis 5k
FMV - 20k Basis 2k

• 351 requirements satisfied. Hence
• A No gain or loss. Stock basis 25k.
  Holding period starts on exchange.
• B No gain recognized Stock basis 5k
  no tacking holding period.
• C No loss recognition Stock basis
  25k tacking holding period.
• D No gain recognition Stock basis 5k
  tacking holding period.
• E No gain recognition Stock basis 2k
  tacking holding period.

10
Problem 64(b)
25k Cash / 25 Shares
Note / 20 Shares
X Corp
Inventory / 10 Shares
Equip. / 25 Shares
Land / 20 Shares
A
B
C
D
E
FMV -10k Basis 5k
FMV - 20k Basis 25k
FMV - 25k Basis 5k
FMV - 20k Basis 2k
(b) Per 1032, X Corp recognizes no income on
issuance of stock. X takes transferred basis in
each asset (except land) and may tack holding
period per 1223(2). Tacking is irrelevant to
inventory, as it will be ordinary income or loss.
Land 5k built-in loss forces basis reduction to
FMV 20k per 362(e)(2)(A), unless C agrees to
stock basis reduction to 20k.
11
Problem 64(c) (d)
25k Cash / 25 Shares
Note / 20 Shares
X Corp
Inventory / 10 Shares
Equip. / 25 Shares
Two 10k Parcels / 20 Shares
A
B
C
D
E
FMV -10k Basis 5k
1 15k Basis 2 8k Basis
FMV - 25k Basis 5k
FMV - 20k Basis 2k
c) Two land parcels from C each 10k FMV
(20k total) and 23k combined basis (15k and 8k).
May net built-in gains with built-in losses in
applying basis adjustment of 362(e)(2)(A). Thus
only 3k basis reduction, all allocated to
built-in loss parcel, reducing its basis to 12k.
As option, C could elect to take 3k basis
reduction. d) What impact if X corp sells
inventory for 10k and B sells stock for 10k.
Both recognize 5k gain on inventory appreciation.
Thus, double tax inherent in 351 carryover
non-recognition impact. Note S Corp impact where
shareholder basis is increased by S Corp income.

12
Problem 73-1 (a) (b)
Newco
Property / 10 Shares Preferred
Property / 50 Shares
Jan 2
March 2
A
B
FMV - 50k Basis 10k
FMV - 10k Basis 1k
(a) A transfer qualifies under 351 A has no
gain or loss A stock basis 10k tack holding
period if asset was capital asset or 1231 Newco
no gain or loss Newco takes basis of 10k in
property. B transfer not qualify under 351 B
sole transferor and no voting stock. B
recognizes 9k gain Stock basis is 10k Newco no
gain or loss Newco basis in asset is 10k. (b)
If both part of integrated transaction, 351
applies to both A B are both transferors and
together own all voting and non-voting stock.
Requirement of immediately after exchange does
not require simultaneous transfers.
13
Problem 73-1 (c)
Newco
Property / 10 Shares Preferred
Property / 50 Shares
Jan 2
March 2
A
B
D
March 5
25 Share Gift
FMV - 50k Basis 10k
FMV - 10k Basis 1k
(c) A gift of half voting shares after
integrated transfers should not impact 351
treatment for A B. If gift on 1/5, between
integrated exchanges, 351 is killed because not
own voting control after transfers.
14
Problem 73-1 (d)
Newco
Property / 10 Shares Preferred
Property / 50 Shares
Jan 2
March 2
A
B
E
May 2
15 Share Sale
FMV - 50k Basis 10k
FMV - 10k Basis 1k
(d) Pre-existing promise to sale stock kills
351. E is not a transferor under 351, but is
part of the plan.
15
Problem 73- 2 (a) (b)
Jyve Inc.
Assets / 200 Shares
5 Yr. Employment / 150 Shares
Cash/ 150 Shares
Java
Manager
Venturer
FMV - 200k Basis 50k
150 k Cash

• 351 requirements not satisfied services not
  property for 351 and Java and Venturer (the
  property contributors) do not have control.
  Java recognizes 150k gain on incorporation, and
  Manager has compensation income equal to FMV of
  stock received as much as 150k.
• If Manager pays 150k for stock - 351 then works.
  Note from manager may also qualify as property,
  but many state laws prohibit unsecured note for
  stock. May need to secure note with escrowed
  stock.

16
Problem 73- 2 (c) (d)
Jyve Inc.
Assets / 200 Shares
5 Yr. Employment Plus Cash for 150 Shares
Cash/ 150 Shares
Java
Manager
Venturer
FMV - 200k Basis 50k
150 k Cash
c) Idea Manager pays 1k for 150 shares
of stock and documents say services of manager
not consideration for stock. No hope under 351.
Substance will prevail. Stock will still be
deemed for services because property is of
relatively small value compared to services.
d) Manager pays 20k for stock? Since
property transferred exceeds 10 of shares for
services, not relatively small value per Rev.
Proc. 77-37 and 351 available. This helps Java
big time, but Manager still must recognize 130k
on receipt of compensation-related shares.
17
Problem 73- 2 (e)
Jyve Inc.
5 Yr. Employment Plus Cash for 150 Shares
130 Subject to Risk
Assets / 200 Shares
Cash/ 150 Shares
Java
Manager
Venturer
FMV - 200k Basis 50k
150 k Cash
e) What impact if compensation related shares
subject to forfeiture if Manager leaves within 5
years? Per Section 83, Manager not recognize
until restriction lapse, but then recognize full
FMV as ordinary income. 83(b) election allows
recognition now, against risk of forfeiture and
potential of more favorable capital gain
treatment on growth.
18
Compensation Gross-Up Game
Assume 1. Stock for services equal 150k
2. Corporation tax rate 34 3.
Executive tax rate 33 Straight recognition
transaction - Executive pays
taxes of 50k - 33 of 150k. -
Corporation saves taxes of 51k 34 of 150k
Gross up amount formula
Stock value / (1 - Executive tax rate)
Stock value Gross-Up Tax Bonus
150k / (1 - .33 .67) 150k 74k
- Corp tax savings (150k 74k) x 34
76k (More than Gross-up) - Employee
tax bill (150k 74k) x 33 74k (Paid by
Gross-up)
19
Problem 83 (a)
X Corp.
15k common 2k Cash 5k Pf
10k Common 5k Cash 35k Note
15k Common 15k Cash
A
C
B
22k Equip Basis -15k
50k Land Basis -20k
Inv 20k, Land 10k Basis 7k Inv, 25k Land

• A 2k boot 1245 ordinary income Stock basis 15k
  75 common, 25 preferred holding period
  tacked X basis is 17k X may tack holding
  period.
• B 15k boot allocated 10k inv, 5k land
  recognize 10k ordinary on inv, no loss
  recognition land B Stock basis is 27k (32k
  15k(boot) gain recognized(10K)) 1/3 stock
  tack, 2/3 not. X basis inv is 17k (7k 10k),
  land 23k (25k less 2k aggregate built-in loss).
  

20
Problem 83 (a)
X Corp.
15k common 2k Cash 5k Pf
10k Common 5k Cash 35k Note
15k Common 15k Cash
A
C
B
22k Equip Basis -15k
50k Land Basis -20k
Inv 20k, Land 10k Basis 7k Inv, 25k Land
(a) C 40k boot 30k gain recognized If no
453(d) elect out, C could use installment. 10k
basis allocated to stock other to 40k note and
cash, with 25 (10k/40k) recovery ration. Of 5k
cash, 3.75 recognized yr one 75 of all future
payments taxable. C stock basis is 20k start
30k gain recognized 40k boot received 10k. X
Corp land basis is 20k start 3.75 yr 1 gain and
increased as more payments received ultimately
to 50k.
21
Problem 83 (a) Calculation for C
(a) C - Detailed installment sales
calculations - Transferred basis
(20K) first allocated to permitted property
the stock up to FMV here 10k. Prop. Reg.
1.453-1(f)(3)(iii). - Excess 10k
transferred basis is allocated to boot 5k cash
and 35k note. Total boot of 40k, against basis
of 10k, and gain of 30k. Thus, ratio of profit
to total boot is 30/40 75. -
First year payment of 5k produce 3.75 income (5k
x .75) - C basis under 358
determined without regard to 453 installment
reporting. Hence is 20k transfer 30k gain
40k boot 10k. - X Corp basis
does use 453 installment. Hence, year 1 is 20k
3.75k 23.75k. Will eventually get to
50k as installment not paid.
22
Problem 83 (b)
X Corp.
15k common 2k Cash 5k Pf
10k Common 5k Cash 35k Note
15k Common 15k Cash
A
C
B
22k Equip Basis -15k
50k Equipment Basis -20k
Inv 20k, Land 10k Basis 7k Inv, 25k Land
(b) C instead transfers equipment with 50k FMV
and 20k basis. Original cost 50k. All 30 income
recognized as 1245 ordinary income, with no 453
installment reporting available. C stock basis
is 10k. X Corp basis in equipment is 20k 30k
gain recognized 50k.