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have 100 percent control at the end of the transaction,

immediately after the exchange,

and that is obviously greater than our 80 percent control threshold.

So overall, Section 351 does apply.

And that means no gain or loss will be recognized on the transfer by each of

the three individuals contributing property in exchange for stock.

So now let's go through each individual shareholder to assess their situation

specifically this time focusing on basis and holding period.

So let's start with Nicholas.

So where do we begin?

Where we always begin, amount realized.

So when the problem it says that Nicholas is going to

contribute cash and in return he receives 35 shares.

Again, we have a closely held corporation so there's no market for this particular stock,

so we assume and it's a safe presumption in practice as well,

that the amount of property given up is equal to the amount of

stock received so that we have an arm's length transaction.

So he's going to receive $35,000 of stock.

And so what's the adjusted basis of the property that he's contributing?

Well he's giving up cash, cash is cash,

so the basis is equal to the fair market value of cash.

So $35,000.

So when it comes to a realized gain or loss he doesn't have any.

Which means there's no gain or loss to recognize either.

So so far nothing new.

That's what we've seen before but now we want to start thinking about basis here and in

particular we're worried about the basis of

the new shares that he just acquired from the corporation.

And so how do we figure that out.

Well, we've previously talked about in the concepts a basis formula for

an individual shareholder in

Section 351 and so it basically is comprised of the following components.

So it's the basis of the property contributed.

In other words the exchange are carry over basis so basis of property contributed.

Which in this case is the $35,000 which is noted from right here.

And then we make several modifications to this particular starting point.

And we haven't talked about these yet but we're going to get used to writing

out the formula because eventually it will be very handy.

So any gain recognized,

well we didn't recognize any gain on this transaction.

We haven't yet talked about.

The fair market value of any boot receive.

But again we're going to write this down

anyway so that we get used to this particular formula

now and the corporation did not assume any liabilities.

Again these are the components of the basis formula that you've learned about

recently and they're zero for now because we haven't really dealt with them yet.

So his basis is new shares of stock are $35,000.

And so what's his holding period in the stock.

In other words if he turned around and sold this stock immediately to

a third party how long would he be deemed

to have held this stock even though he just received it.

So holding period can be taxed that is include

the holding period of the property transferred in certain situations.

And that certain situation for an individual shareholder is whether or not he

transferred a capital or a Section 1231 asset.

In other words that's what we're concerned with.

And then this situation he is transferring

cash which is not one of these two types of assets.

So his holding period is not taxed.

In other words it begins at the time that he receives the shares from Sunchaser.

Okay. So now let's move on and let's talk about Michael.

In this situation Michael as a refresher is transferring

restaurant equipment with a fair market value 40,000 just a basis of

12 and that has accumulated depreciation on the property of

$28,000 all in exchange for 40 shares of stock.

So where do we begin,

where we always begin amount realized.

So in other words he's deemed to be receiving $40,000 of stock

from the corporation which is the fair market value of the property he contributed.

What is his adjusted basis in the property that he gave up?

And we're told that it's $12,000,

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which means he has a realized gain of $28,000.

How much of this gain is recognized?

On this situation, none of it.

Why? We said Section 351 applies to the transaction.

So there's no gain to recognize.

Okay what is his basis in the new shares that he receives.

I would do it like we just did before we'll use our new formula.

So we have this exchanged or carry over

basis in other words the basis of the property contributed.

It's going to change the terminology here so you get used to seeing that as well.

It's the same thing though. So exchanged

for carry over basis of the property he contributed.

He contributed $12,000 of property.

So we start with $12,000 and

then we would add in these components that we haven't yet use.

So any gain, minus any boot,

minus any liabilities assumed by the corporation.

And these are all zero right now because we haven't talked about

them but we're just getting used to writing this formula down each time.

So that when we do get to those issues it won't be as confusing.

And so we conclude that he has a $12,000

basis in this new shares of stock that he just received.

So what's his holding period in these shares of stock?

How long is he deemed to hold them?

Well, the holding period in this case will be

tacked because the holding period for a shareholder is tacked that is and

includes the holding period of the property that he contributed

if they contribute Section 1231 assets or capital assets.

And here, we're told that we have restaurant equipment.

Restaurant equipment would be used in a trade or business,

held for more than one year because we have accumulated appreciation of $28,000.

In other words, it's depreciable property.

So as a result, this holding period can be tacked.

What that means is if he turns around and sells these new shares of stock immediately,

he's deemed to have held them for as long as he's held this restaurant equipment,

which is greater than one year.

So in other words, even though he's held the shares for only five minutes,

if he sells them immediately,

he would have a long term capital gain rather than a short term capital gain,

even though he just got the shares of stock.

It's very favorable to the taxpayer in that situation.

So now, let's consider the effects on Emily.

And as a reminder, Emily is going to

contribute food inventory with a fair market value of

$25,000 in an adjusted basis to $17,000 in exchange for 25 shares of stock.

So let's start where we always start.

Amount realized, she's going to receive $25,000 worth of stock.

Her adjusted basis and the stock is $17,000,

which means she has a realized gain of 8,000.

How much of this realized gain will she recognize?

Well, normally you recognize all of your realized gains

except when you have a code section that says you do not have to.

And here, as before, we have Section 351 telling us not to

recognize this gain because we met those requirements.

So what's her basis in the new shares?

Just as before, we'll start with that exchange,

the carry over basis.

In other words, the property she contributed.

She contributed $17,000 of property.

We would add any gains minus the fair market value of any boot

received minus any liabilities assumed by the corporation.

And again, these are 0 for now because we haven't talked about these concepts just yet.

But we'll get used to writing the formula.

So she has the $17,000 basis in her new shares of stock.

So what's her holding period now in this new stock?

Here, it's not going to be tacked because,

again, for the shareholder to tack a holding period,

that is, include the holding period of the assets that they transferred,

it must be a capital asset or a Section 1231 asset.

However, here Emily is transferring inventory,

which by definition is an ordinary asset because when sold,

it will generate ordinary income.

So it's not capital, it's not 1231,

which means it's ordinary,

and if it's ordinary, then she cannot receive a tacked holding period,

meaning it begins on the date of which she received the stock.

And then finally, let's examine all of this

from Sunchaser's perspective, the corporation's perspective.

So Section 351 does not apply to the corporation.

It's a shareholder level issue.

The corporation has its own code sections which address what to do.

So if you recall, we have section 1032 A,

which will basically say no gain or loss when a corporation deals in its own stock.

This is just a quick summary here;

section 302, which says in general, in these situations,

you have exchanged or carry over,

let's put CO, basis.

And then we have section 1223 (2) which would deal with holding period,

which says it's tacked if you have exchanged her carry over basis.

So, an important point to note is that from the corporate perspective,

there is no capital asset or Section 1231 asset in order to determine holding period.

That only applies to the shareholder, not the corporation.

Okay. So let's look at each of these three issues for each of

the three assets because that's what the corporation receives.

They're getting cash.

So there's no gain or loss on that.

The basis would be the exchange or carry over basis,

which would be $35,000 of cash received from Nicholas.

So, I'll put $35,000 a basis,

and then the holding period,

I'm going to say not tacked but it's kind of irrelevant here because it's cash.

You're not going to turn around and sell cash as an investment.

So you really don't need a holding period.

But either then, it's not capital asset,

and it's not a Section 1231 asset,

so it can't be tacked by definition.

But again, it doesn't really matter here.

The equipment that they received,

again, no gain or loss because they're dealing in their own stock.

The basis would be carry over exchange basis.

In other words, what was the basis in

the hands of Michael when he transferred the equipment? $12,000.

And then here,

it would be tacked because they received an exchange basis.

And then finally, the inventory,

we have no gain or loss, section 1032.

They're dealing in their own stock.

And we have $17,000 basis carry over,

the basis in the inventory when it was contributed,

and then holding period would also be tacked.

But again, here, this is somewhat of an irrelevant concept because it's inventory.

So when the corporation inevitably sells this particular asset,

it automatically, by definition,

must generate ordinary income.

So even though it's tacked, it wouldn't actually matter. So that's it.

We've addressed the tax effects for

both the transferors as well as the corporation itself.

Nicholas, a cash basis taxpayer,

form Sunchaser Shakery Corporation by transferring assets in exchange for 100% of

the outstanding stock equipment with a fair market value of $22,000

and the adjusted basis of $13,000 and cash of $10,000.

Now, we want to know what is Sunchaser,

that is the corporation's,

total basis in the transferred assets.

So where do we get we begin?

We begin where we always begin, do Section 351 apply?

And in here, we have a person transferring property in exchange, solely in exchange,

for stock and afterwards,

they have 100% of the outstanding stock, thus control.

So for all intents and purposes,

we can tell the Section 351 does indeed apply.

So, Section 351 applies and we know no matter what happens that Nicholas

will not recognize any gain or loss unless there's some other reason to incur a gain.

In other words, there's some triggering event,

which we haven't learned about yet.

So because of that, we can now answer

the question about Sunchaser's total basis by looking

at the basis formula that you learned about for corporations and such transactions.

And so, if we take a look at it,

it says that the corporation's basis is

the basis of the property contributed by the shareholder,

in other words, exchanged or carry over basis,

plus any gain recognized on the transfer by the shareholder.

And we just concluded that because Section 351 applies that there is no gain in

this situation recognized by the shareholder. So, how do we do this?

Well, we have all that we need right in front of us.

So, we want to know what is Nicholas's basis of the property contributed?

And it says that he is contributing equipment,

which the corporation is then receiving,

and his basis in that property was $13,000,

and he's also contributing cash which has a basis of $10,000.

So as these assets go to the corporation,

this will be their new basis in this particular asset.

In other words, it's the same as it was in Nicholas's hands.

And because he had no gain to recognize, the shareholder that is,

and we know that the total basis in the property received by

the corporation using the formula here is $23,000. Nice and simple.