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Sec 351 exchange; compute shareholder basis, tax balance sheet

Hillbilly Company is created with the following asset contributions. Bill and Sue are equal owners in this new business venture.

Shareholder Assets Basis Fair Market Value

Bill Cash $100,000 $100,000
Services 50,000 50,000

Sue Land 40,000 150,000*
*The land is subject to a liability in the amount of $50,000 that the Company assumes.

Using the above information write a paper in APA style with references include the information below:
1. Does the above transaction qualify as a Sec. 351 exchange? Show your computations.
2. Compute shareholder basis in the shares received in the exchange.
3. Prepare a tax balance sheet for Hillbilly Company.
4. Are there any benefits to the owners and company if this transaction is considered to fall under Sec. 351?

Solution Preview

Question 1
According to the Code, Section 351(a) "provides that that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in § 368(c)) of the corporation" (Internal Revenue Service, N.D., p. 1). Control is defined by Section 368(c) as ownership of voting stocks by the transferor or transferors of at least 80 per cent or at least 80 per cent of the total number of shares aside from voting stocks.

Hence, before the transfer of Land by Sue to Hillbilly Company is computed as to basis, the percentage voting stock or all other class of stocks by Sue has to be identified. Since, Bill and Sue are equal owners, then it is understood that Sue owns 50 per cent of Hillbilly's ...

Solution Summary

Sec 351 exchange; compute shareholder basis and tax balance sheet is examined.

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