Organizational Tax Research and Planning - Transfers to a Corporation Paper

Organizational Tax and Planning - Transfers to a Corporation - Research Paper Example For an individual or group to have entire control of the business after the exchange, they must own a minimum of 80% of all shares of every class of shares that is allowed to vote. The transferor must also own 80 percent of the existing shares of every category of company’s nonvoting stock. The number of shares determines the voting power, and this implies that the transferor or group of transferors must have the majority control. Having less than 80 percent control thus triggers taxation. Client, jean and john purchase property for $ 1million. They both arrange for a corporation with $20 million fair market value. Client and jean reassign the assets to the company for its entire authorized stock that has a book value of $20m. No transaction party; that is Client, jean, john or the corporation recognizes gain. Client, jean and john transfer property worth $8M to a company in substitution for stock whose fair market value is $24M. This represents a 60% of every stock class in the corporation. Supposing the other 40% of the company’s stock was sold off to someone else, then the taxable gain that Client, jean and john recognize is $16M from the exchange as they do not have the majority control. With regards to substitution of assets for stock, service is not considered as property. Therefore, the value of stock to be received as a result of rendering a service will be considered as income to the stock recipient. Therefore, rendering service in exchange for stock will trigger a taxable event as illustrated below. Client, jean and john transfer property worth $0.9M and offer services worth $0.1M to a company in exchange for stock worth $1M. Supposing that Client, jean and john have the majority ownership in that corporation, no gain on earnings will be included in the property exchange. Nevertheless, the Client, jean and john recognize 0.1M income from the services they provided to the company and this will be taxable income. Property