Research Problem 1 . Lynn Jones, Shawn, Walt, and Donna are trying to decide whe

Question

Research Problem 1. Lynn Jones, Shawn, Walt, and Donna are trying to decide whether they should organize a corporation and transfer their shares of stock in several corporations to this new corporation. All of their shares are listed on the New York Stock Exchange and are readily marketable. Lynn would transfer shares in Brown Corporation, Shawn would transfer stock in Rust Corporation, Walt would transfer stock in White Corporation, and Donna would transfer stock in several corporations. The stock would be held by the newly formed corporation for investment purposes. Lynn asks you, her tax adviser, whether she would have gain on the transfer of her substantially appreciated shares in Brown Corporation if she transfers the shares to a newly formed corporation. Your input will be critical as they make their decision. Prepare a letter to your client, Lynn Jones, and a memo for the firm’s files. Lynn’s address is 1540 Maxwell Avenue, Highland, KY 41099.

Explanation / Answer

SUBJECT: Lynn Jones

Today I conferred with Lynn Jones regarding her letter of January XX. Lynn Jones, Shawn, Walt, and Donna are trying to decide whether they should organize a corporation and transfer their shares of stock in several corporations to this new corporation. All their shares are listed on the New York Stock Exchange and are readily marketable.

Issue: Would Lynn have gain on the transfer of her substantially appreciated shares in Brown Corporation if she transfers the shares to a newly formed corporation and whether there will be tax consequences if Lynn, Shawn, Walt, and Donna form a partnership, rather than a corporation.

Conclusion : § 351 provides that gain or loss is not recognized upon the transfer of property to a corporation when certain conditions are met. In addition, Section 351 mandates that a controlled corporation will not recognize gain if it transfers only stock to a shareholder in return for property. Therefore, Lynn would not recognize gain on the transfer of her substantially appreciated shares. Only if the shareholder is given appreciated property as boot, the corporation may recognize gain (but not loss).

gain (if any) to such recipient shall be recognized, but not in excess of-:

the amount of money received, plus

the fair market value of such other property received; and

no loss to such recipient shall be recognized.

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