Issue: What amount of gain or loss is recognized by Sam and M Corporation on the exchange?
Facts
Sam owns 100% of M Corporation's single class of stock. Sam transfers land and a building having a $30,000 and $100,000 adjusted bases, respectively, to M Corporation in exchange for additional M Corporation common stock worth $200,000 and IBM stock worth $20,000. The IBM stock had a $5,000 basis on M Corporation's books. Peter transfers $50,000 in cash for 15% of the M Corporation common stock.
Rule
The Internal Revenue Code, Sec. 351(a).,Transfer to Corporation Controlled by Transferor states that for the transferor no gain or loss is recognized if the property transferred by one or more people receive corporate stock and are at minimum 80% in control of the corporation immediately after the exchange as set forth under Sec. 368(c). Furthermore, Section 351 (b) states Receipt of Property in addition to the corporate stock received other property or money, Sec. 351(b)(1), gain should be recognized, but not in excess of, Sec. 351(b)(1)(A) the amount of money received, plus, Sec. 351 (b)(1)(B) the fair market value of such other property received. The Internal Revenue Code, Sec. 1032(a) states for the transferee corporation that no gain or loss should be recognized on the exchange for money or other property for that corporation stock (including treasury stock). Furthermore, Sec. 311(b)(1)(A) and Sec. 311(b)(1)(B) distributing of an appreciated property other than the corporation's own stock, and the fair market value exceeds its adjusted basis ( in the hands of the distributing corporation), then the gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market value.
Analysis
Since Sam prior the exchange owned 100% of the stock of M Corporation, after the exchange Sam and Peter both control at minimum of 80% of the M Corporation and therefore meet the control requirement. Also, Sam's property transfer qualifies under the Section 351 as stated above as property transferred for M Corporation own stock. The receipt of other property of the IBM appreciated stock however qualifies as a boot, which requires both Sam and M Corporation to recognize gain.
Conclusion
In conclusion, Sam does not recognize the gain for the property transferred in receipt of M Corporation stock, but will recognize capital gain for the IBM stock at $20,000. M Corporation will not recognize of the property transfer with Sam for its stock and also will not recognize gain for the exchange with Peter. However, M Corporation will recognize the capital gain on the IBM stock minus it adjusted basis in that stock. Therefore, M Corporation will recognize $15,000 capital gain.