Case Analysis : Moonbeam Buggy Rides, Inc. Essay
770 Words Nov 13th, 2016 4 Pages
Jason would like to invest in Moonbeam Buggy Rides, Inc. To do so, he contributes five buggy-trained horses for 10% of the corporation. Jason will also work part-time until the owners find a sufficient manager. The total basis of all five horses is $2,500 and they are each worth $4,200. This exchange does not currently qualify for a deferred gain under section 351 and will result in high tax. To avoid this, Jason has asked Sandy, who presently owns 75% of Moonbeam Buggy Rides, to contribute $2,000 for 1% voting stock. If Sandy agrees, Sandy and Jason’s combined voting power will exceed 80% and allow them to qualify for a deferred gain under section 351.
Does section 351 gain deferral rules, allow this accommodation transfer between Jason and Sandy? Jason’s income will have a marginal tax rate that includes both federal (28%) and a state and local tax rate (5%). Understanding that the horses are investment property for Jason, how much tax will he save?
Analysis and Law
Under the IRC section 351(a) Jason can defer tax consequences provided that, he is receiving stock (10%) in exchange for the property (horses) and will have control of the corporation immediately after the exchange. Section 368(c) defines control as possessing at least 80% of the total combined voting power. After Sandy’s contribution of $2,000 for and additional 1% of her current 75% ownership, Jason believes this will be defined as a control group and exceed 80% of the…