Tax Question
Please see the question in the attached document.
LESSON 3
ORGANIZATION OF A CORPORATION:
SECTION 351 and RELATED PROBLEMS
3B Boot; Basis; Debt; Midstream Issues
(1)(a) Section 351(a) applies. Upon exchange with X, (1) As amount realized is $100; (2) As gain realized is $60; (3) nothing is recognized, because of 351(a); (4) As basis in stock received is $40 under 358(a)(1); (5) As holding period in the stock tacks under 1223(1); (6) Xs basis in property is $40 under 362(a)(1); (7) Xs holding period for property received tacks under 1223(2); and (8) X would recognize $60 long-term capital gain on a sale of the property. On the separate sale of half the stock, A realizes and recognizes a capital gain of $30 and has a basis of $20 in the remaining 50 shares, which B takes a cost basis of $50 in the purchased shares. B&E 3.10,3.11. If the propertys basis were $200, loss would not be recognized under 351(a) (whether or not boot is received) and the losses will be built into the stock basis as well as the property basis inside the corporation. Then when A sells half the stock to B, A will recoup $50 loss, retaining a $100 basis in the other half of the stock. Thus, there is a full doubling of the $100 loss in the property (although the Service hates this result, since it forms the foundation for many tax shelter transactions).
