Chrissie and Mirinda want to form a corporation. Chrissie contributes property worth $750,000 and a basis of $500,000 in exchange for stock worth $750,000 and Mirinda contributes services in exchange for stock worth $250,000. Does this qualify as a good Section 351 transaction?

What gain does Chrissie Recognize?

What gain does Mirinda recognize?

a. Does this qualify as a good Section 351 transaction?

No. This is because service is not a qualified property contribution under the section 321. Moreover, fair value of stock received by Chrissie is just 75% of 100%.

b. What gain does Chrissie Recognize?

The Gain Chrissie recognizes = FMV of stock received - Adjusted basis of transferred property = $750,000 - $500,000 = $250,000.

c. What gain does Mirinda recognize?

The Gain Mirinda recognizes is $0 or Mirinda will recognizes compensation worth which will be taxed as an ordinary Income ($250,000).

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