Stu Walker has owned all 200 shares of Lance Corporation's stock for the past six years. This year, Megan Jones contributes property with a $100,000 basis and a $160,000 FMV for 160 newly issued Lance shares. At the same time, Stu contributes $30,000 in cash for 30 newly issued Lance shares. What tax issues should Megan and Stu consider with respect to the stock acquisitions?
What will be an ideal response?
• Does the property transfer meet the Sec. 351 requirements?
• Have Stu and Megan transferred property?
• Does the fact that Stu controls Lance Corporation prior to the transfer change the general Sec. 351 rules?
• Are the transferors in control of the corporation following the transfer?
• Do the transferors receive transferee corporation stock?
• What is each shareholder's recognized gain?
• What is each shareholder's basis for his or her stock?
• What is each shareholder's holding period for his or her stock?
• Does Lance Corporation recognize gain when it issues its stock?
• What is Lance Corporation's basis for the property received from Megan?
• What is Lance Corporation's holding period for the property received from Megan?
The property transfer meets all the Sec. 351 requirements. Stu and Megan are considered to own all 390 of the Lance shares immediately after the exchange. Stu's contribution of cash for stock is not considered to be a nominal amount, according to the IRS rules for private letter rulings (i.e., it equals or exceeds 10% of the value of Stu's prior stock holdings) and permits his stock to be counted toward the 80% minimum stock ownership for control. Megan recognizes no gain on the asset transfer and takes a $100,000 basis for the Lance shares she receives. The holding period for the Lance shares includes her holding period for the property transferred. Lance recognizes no gain when it issues its stock and takes a $100,000 basis for the property.
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