Michael contributes equipment with a $25,000 adjusted basis and a $40,000 FMV to Miller Corporation for 25 of its 50 shares of stock. His son, Michael Jr., contributes $10,000 cash for the remaining 25 Miller shares. What tax issues should Michael and his son consider with respect to the stock acquisitions?
What will be an ideal response?
• Does the property transfer meet the Sec. 351 requirements?
• Have Michael and his son transferred property?
• Are the transferors in control of the corporation following the transfer?
• Do the transferors receive transferee corporation stock?
• Does the property contribution/receipt of stock as outlined in the facts reflect the true nature of the transaction? Or has a gift or other event occurred?
• What is each shareholder's recognized gain?
• What is each shareholder's basis for his stock?
• What is each shareholder's holding period for his stock?
• If a gift has occurred, has Michael made a taxable gift to his son? (This question could be rewritten for events other than a gift — e.g., repayment of a loan.)
• What is Miller Corporation's basis for the property received from Michael?
• What is Miller Corporation's holding period for the property received from Michael?
The contribution is tax-free since it meets all the Sec. 351 requirements, and Michael and Michael Jr. own all the Miller stock. Michael Jr. receives a disproportionate amount of stock compared to his $10,000 capital contribution. It appears that the transaction should be recast so that Michael receives 40 shares of stock, each valued at $1,000. He then gifts 15 shares to Michael Jr. The gift leaves each shareholder with 25 shares of stock. Neither shareholder recognizes any gain, and Michael takes a $25,000 adjusted basis for the 40 shares he receives. He recognizes no gain on the transfer of 15 shares to Michael Jr., and $9.375 [(15/40) × $25,000] of his basis accompanies the gifted shares. Michael's basis for his remaining 25 shares is $15,625 ($25,000 - $9,375). Michael, Jr.'s basis for his 25 shares is $19,375 ($10,000 + $9,375).
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