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Federal Taxation II | ACC4020 R01

Discussion Question 1

The IRS code section 351 addresses property issues in a corporation. According to this section,
transfer to corporation is controlled by the transferor. The transferee corporation takes a basis in
the property equal to that of the transferor/shareholder, who, in turn, takes an equal basis in the
stock received in exchange.

Can this transaction provide opportunities for the duplication of losses? Why or why not?

This transaction will not provide opportunities for the duplication of loss. The reason for this, as
stated by South University Online (2017, para. 4), is: Section 362(e)(2) requires the corporation's
carryover basis to be reduced when the aggregate basis of the property transferred by a shareholder
exceeds the fair market value. This adjustment is necessary to prevent both the shareholder and the
corporation from benefiting from the losses involved
.
The requirements under 135 was not met by Charles, so he would have to recognize the gain.
The requirements under 351 is: The three requirements for nonrecognition of gain or loss under 351
are that (1) property is transferred (2) in exchange for stock and (3) the property transferors are in control
of the corporation after the exchange (Hoffman, 2017, p. 18-4-18-5).
Liz would own 51% of the stock and therefore would not meet the requirements under 135. This
would prevent her from being in control of the corporation. For the transaction to qualify as nontaxable
under 351, the property transferors must be in control of the corporation immediately after the
exchange The person or persons transferring the property must have at least an 80 percent stock
ownership in the corporation, resulting in the entity being a controlled corporation (Hoffman, 2017, p. 18-
6).

If the transferee corporation were to declare bankruptcy, would section 351 still apply? Why?

351 would not apply if the transferee was in bankruptcy. This is explain by Alexander (2003, p.
6) in the following:

Section 351(e)(2) provides that section 351 shall not apply to a transfer of property of a
debtor pursuant to plan while the debtor is under the jurisdiction of a court in a title 11 or
similar case (within the meaning of section 368(a)(3)(A)), to the extent that the stock received
in the exchange is used to satisfy the indebtedness of such debtor.

Imagine, Charles and Liz has decided to switch their 40:60 partnerships to a corporation. Charles
has cash, furniture, and land, which he will transfer to the corporation. His total tax basis for these
items is $70,000, and they are valued at $170,000. Liz's contributions total $80,000 tax basis and
$180,000 fair market value. Liz received stock for her assets.

Would Charles recognize any gain in this transaction? Why or why not? What would be Charles's
tax treatment on this transaction? Justify.

The requirements under 135 was not met by Charles, so he would have to recognize the gain.
The requirements under 351 is: The three requirements for nonrecognition of gain or loss under 351
are that (1) property is transferred (2) in exchange for stock and (3) the property transferors are in control
of the corporation after the exchange (Hoffman, 2017, p. 18-4-18-5).
Analyze and explain how this transaction would impact Liz's basis in the stock.

Liz would own 51% of the stock and therefore would not meet the requirements under 135. This
would prevent her from being in control of the corporation. For the transaction to qualify as nontaxable
under 351, the property transferors must be in control of the corporation immediately after the
exchange The person or persons transferring the property must have at least an 80 percent stock
ownership in the corporation, resulting in the entity being a controlled corporation (Hoffman, 2017, p. 18-
6).

References

Alexander W. D. (2003, August 28). Tax Treatment of Bankruptcy Reorganization: Issue 2: Section 351.
Retrieved from: https://www.irs.gov/pub/irs-wd/0350016.pdf

Hoffman, W. H. (2017). South-Western Federal Taxation 2017: Comprehensive, 40th Edition


[VitalSource Bookshelf version]. Retrieved from
https://bookshelf.vitalsource.com/books/9781337342070

South University Online (2017). ACC 4020: Federal Taxation II.


Week 2: Recognize basis issues. Retrieved from: myclassonline

Discussion Question 2

Explain how the IRS has interpreted the phrase "in control immediately after the exchange" for
purposes of a section 351 exchange.

Section 351 requires the transferors, as a group, to be in control of the transferee corporation immediately
after the exchange. Control after the exchange can apply to a single person or to several taxpayers if
they are all parties to an integrated transaction The property transferors must own stock possessing at
least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80
percent of the total number of shares of all other classes of stock (Hoffman, 2017, p. 18-6).

Reference

Hoffman, W. H. (2017). South-Western Federal Taxation 2017: Comprehensive, 40th Edition


[VitalSource Bookshelf version]. Retrieved from:
https://bookshelf.vitalsource.com/books/9781337342070