Carl and Lynn each own 50 shares of North Corporation stock

Carl and Lynn each own 50 shares of North Corporation stock. Carl transfers property worth $50,000 to North for an additional 25 shares.

Does Sec. 351 apply? Explain to us why or why not.

If not, what can be done to qualify the transaction for Sec. 351 treatment?

Solution

Solution:- Section 351(a) provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stocks in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation.

(b) Receipt of property If subsection (a) would apply to an exchange but for the fact that there is received, in addition to the stock permitted to be received under subsection (a), other property or money, then—

(1) Gain (if any) to such recipient shall be recognized, but not in excess of—

(A) The amount of money received, plus

(B) The fair market value of such other property received; and

(2) No loss to such recipient shall be recognized.

Carl transfers property worth $50,000 to North for an additional 25 shares.

Hence section 351(a) & 351(b) is applicable for the transfer of property in exchange for additional stocks.