Barry, Dan, and Edith together form a new corporation; Barry and Dan each contribute property in exchange for stock. Within two weeks after the formation, the corporation issues additional stock to Edith in exchange for property. Barry and Dan each hold 10,000 shares and Edith will receive 9,000 shares. Which transactions will qualify for nonrecognition?
A)Only the first transaction will qualify for nonrecognition.
B)Only the second transaction will qualify for nonrecognition.
C)Because of the step transaction doctrine, neither transaction will qualify.
D)Both transactions will qualify under Sec. 351 if they are part of the same plan of incorporation.

Question

Quizplus · Accepted Answer

Both transactions will qualify under Sec. 351 if they are part of the same plan of incorporation. The step transaction doctrine applies only when the steps are taken solely to obtain tax benefits, and here, the exchange of property for stock by Barry and Dan was a step necessary to carry out the plan of incorporation. As long as the transfer of property by Edith was also part of the plan of incorporation and occurred within a reasonable time, it should also qualify for nonrecognition under Sec. 351.

Barry, Dan, and Edith Together Form a New Corporation; Barry