B owns certain real estate which cost him $50,000 in 1930, but which has a fair market value of $200,000 in 1955.
He transfers the property to the N Corporation in 1955 for 78 percent of each class of stock of the corporation, having a fair market value of $200,000. The remaining 22 percent of the stock had been issued by the corporation in 1940 to other persons for cash.
Because B is not in control of the corporation immediately after the exchange, section 351 does not apply. B realized a taxable gain of $150,000 on this transaction.
Section 368(c) control requires owning at least 80 percent of the corporation’s stock immediately after the exchange.
The 22 percent of stock issued earlier for cash is outstanding and held by others, so B controls only 78 percent.
Because 78 percent is less than 80 percent, the control requirement is not satisfied and section 351 does not apply.
B recognizes a taxable gain of $150,000, the difference between the property’s $50,000 basis and its $200,000 fair market value.
