Question

Determine the effects of § 351 for the following taxpayers.

a. Grady exchanges qualified property, basis of $12,000 and fair market value of $18,000, for 60% of the stock of Eadie Corporation. The other 40% of the stock is owned by Pedro, who acquired it five years ago.
b. Trey, Amy, and Erin incorporate their businesses by forming Whitehead Corporation. As part of a prearranged plan, Trey exchanges his qualified property (basis $500; fair market value $1,000) for 100 shares in Whitehead on May 9, 2019. Amy exchanges her qualified property (basis $1,800; fair market value $2,000) for 200 shares of Whitehead Corporation stock on May 12, 2019, and Erin exchanges her qualified property (basis $2,000; fair market value $3,000) for 300 shares in Green on March 5, 2019.

Answer 1

The effects of § 351 for the taxpayers mentioned are that no immediate tax consequences occur as long as the exchanges meet the requirements. The basis in the stock acquired will be determined based on the value of the property exchanged, and any gain or loss will be deferred until the stock is sold.

Step-by-step explanation:

The § 351 of the Internal Revenue Code allows for tax-free exchanges of property for stock in certain circumstances. Let's examine the effects of § 351 for the taxpayers mentioned:

1. Grady: Grady exchanges qualified property for 60% of the stock of Eadie Corporation. As long as the exchange meets the requirements of § 351, no immediate tax consequences occur. Grady will have a basis in the Eadie Corporation stock of $12,000, and the gain or loss will be deferred until the stock is sold.
2. Trey, Amy, and Erin: They incorporate their businesses by forming Whitehead Corporation. As part of the prearranged plan, each of them exchanges their qualified property for stock in Whitehead Corporation. Similarly, as long as the exchange meets the requirements of § 351, no immediate tax consequences occur. Each of them will have a basis in their respective stock based on the value of the property exchanged, and the gain or loss will be deferred until the stock is sold.