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 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 …show more content…
Commissioner, Campex Corporation proposed exchanging their stock for International Corporations stock. The exchange allowed Campex to own 77.3% of International after the transaction. As part the of transaction it was arranged that a trust the owners of International set aside, the Elizabeth Kamborian Trust, would purchase additional shares for $5,000 (418 shares). The transactions were considered collectively as a control group that exceeded the 80% threshold and the corporations reported no gain or loss. The court overruled this and decided that the Elizabeth Kamborian Trust could not be a property transferor. The court determined that the transaction was of relatively small value compared to the amount of shares available and the motive of the matter was tax
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 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 …show more content…
Commissioner, Campex Corporation proposed exchanging their stock for International Corporations stock. The exchange allowed Campex to own 77.3% of International after the transaction. As part the of transaction it was arranged that a trust the owners of International set aside, the Elizabeth Kamborian Trust, would purchase additional shares for $5,000 (418 shares). The transactions were considered collectively as a control group that exceeded the 80% threshold and the corporations reported no gain or loss. The court overruled this and decided that the Elizabeth Kamborian Trust could not be a property transferor. The court determined that the transaction was of relatively small value compared to the amount of shares available and the motive of the matter was tax