J owns all 150 shares of stock of Y Corporation, worth $500,000.This year he convinced his son K to come into business with him.To this end, K contributes appreciated property worth $100,000 (basis $5,000) to the corporation for 50 shares of Y stock.K should recognize no gain on the transfer, assuming his father also transfers cash of $25,000.

Question

Quizplus · Accepted Answer

K must recognize a gain on the transfer because the transfer of property to a corporation in exchange for its stock is generally a taxable event unless the transferors are in control of the corporation immediately after the exchange, defined as owning at least 80% of the corporation. Here, even with J's additional cash contribution, K and J together do not reach the 80% control threshold after the transaction, as K only receives 50 shares out of a total 200 shares, equating to 25% control for K and 75% for J combined, which does not meet the 80% requirement.

J Owns All 150 Shares of Stock of Y Corporation