Moonbeam Buggy Rides Case Study

770 Words 4 Pages
Summary of Facts
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.

Research Issue
Does section 351 gain deferral rules, allow this accommodation
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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 voting power. Unfortunately, under the control requirements of section 351, accommodation transfers explain that previously owned stock would not be included in applying the 80% test if the preexisting shareholder transfers property of a relatively small value in comparison to the value of the stock already owned. Sandy’s 1% is small value compared to her previously owned 75%. In addition, accommodation transfers disallow the primary purpose for the transfer to qualify others for section 351. Since Sandy’s contribution is relatively small compared to her existing ownership and her primary purpose is to qualify Jason for section 351, the gain on the transfer will not be …show more content…
In the court case, Estate of Jacob S. Kamborian et al., Petitioners, Appellants v. Commissioner of Internal Revenue, Respondent, Appellee, Recognition of gain: Transfers to controlled corporation (Nov. 14, 1972), four taxpayers conducted a deal with a corporation that provided them with 76% of the corporations stock. Finding themselves just short of 80% and understanding section 351 rules, they decided to encourage a shareholder from the corporation to purchase a few more shares. The independent shareholder received 13% voting power from the transaction. The combined transaction allowed the taxpayers to be defined as a control group under section 351 and the matter was viewed as a tax-free exchange. The tax court ruled this transaction invalid under the terms that the motive to acquire 80% was primarily to avoid taxes and over ruled the decision that the event could be tax

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