E, an individual, owns property with a basis of $10,000 but which has a fair market value of $18,000. E also had rendered services valued at $2,000 to Corporation F. Corporation F has outstanding 100 shares of common stock, all of which are held by G.
Corporation F issues 400 shares of its common stock, having a fair market value of $20,000, to E in exchange for his property worth $18,000 and in compensation for the services he has rendered worth $2,000.
Since immediately after the transaction E owns 80 percent of the outstanding stock of Corporation F, no gain is recognized upon the exchange of the property for the stock. However, E realized $2,000 of ordinary income as compensation for services rendered to Corporation F.
Because E transferred property along with the services, all 400 shares are counted in measuring control.
Immediately after the exchange, E owns 400 of 500 shares, or 80 percent, of Corporation F.
No gain is recognized on the exchange of the $18,000 property for stock because section 351 applies.
E recognizes $2,000 of ordinary income for the stock received as compensation for services rendered.
