Jane, Jon, and Clyde incorporate their respective businesses and form Starling Corporation. On March 1 of the current year, Jane exchanges her property (basis of $50,000 and value of $150,000) for 150 shares in Starling Corporation. On April 15, Jon exchanges his property (basis of $70,000 and value of $500,000) for 500 shares in Starling. On May 10, Clyde transfers his property (basis of $90,000 and value of $350,000) for 350 shares in Starling.
a. If the three exchanges are part of a prearranged plan, what gain will each of the parties recognize on the exchanges?
b. Assume Jane and Jon exchanged their property for stock four years ago while Clyde transfers his property for 350 shares in the current year. Clyde's transfer is not part of a prearranged plan with Jane and Jon to incorporate their businesses. What gain will Clyde recognize on the transfer?
c. Returning to the original facts, if the property that Clyde contributes has a basis of $490,000 (instead of $90,000), how might the parties otherwise structure the transaction?
Michael Robertson (1635 Maple Street, Syracuse, NY 13201) exchanges property (basis of $200,000 and fair market value of $850,000) for 75% of the stock of Red Corporation. The other 25% is owned by Sarah Mitchell, who acquired her stock several years ago. You represent Michael, who asks whether he must report gain on the transfer. Prepare a letter to Michael and a memorandum for the tax files documenting your response.
Barbara exchanges property (basis of $20,000 and fair market value of $500,000) for 65% of the stock of Pelican Corporation. Alice, Barbara's daughter, who acquired her stock last year, owns the other 35% of Pelican. What are the tax issues?
At the start of the current year, Indigo Corporation (a calendar year taxpayer) has accumulated E & P of $240,000. Indigo's current E & P is $160,000, and at the end of the year, it distributes $440,000 ($220,000 each) to its equal shareholders, Sarah and Mason. Their basis in the stock is $8,000 for Sarah and $32,000 for Mason. How is the distribution treated for tax purposes?
Bunting Corporation and Jennifer each own 50% of Sparrow Corporation's common stock. On January 1, Sparrow has a deficit in accumulated E & P of $150,000. Its current E & P is $65,000. During the year, Sparrow makes cash distributions of $30,000 each to Bunting and Jennifer.
a. How are the two shareholders taxed on the distribution?
b. What is Sparrow Corporation's accumulated E & P at the end of the year?
Penguin Corporation distributes equipment (adjusted basis of $80,000; fair market value of $65,000) to its shareholder, Holly. What are the tax consequences to Penguin Corporation and to Holly?
Because the exchange is prearranged, and that the party receiving the properties is a related party to Jane, Jon and Clyde, no gain or loss will be recognized by everyone as a result of the exchange
After the transfer, Clyde has 35% of the company; hence he is NOT in control. Therefore the control test is not met. Then Clyde must recognize a gain of $260,000 for the exchange.
The parties might want to structure the exchange in such a way that it will allow Clyde to immediately recognize the loss of $140,000 on the property he's contributing.
Date: September 16, 20xx
Basis in corporation stock, transfer and tax on distributions are examined.