Individuals A and B, father and son, organize a corporation with 100 shares of common stock to which A transfers property worth $8,000 in exchange for 20 shares of stock, and B transfers property worth $2,000 in exchange for 80 shares of stock. No gain or loss will be recognized under section 351.
However, if it is determined that A in fact made a gift to B, such gift will be subject to tax under section 2501 and following.
Similarly, if B had rendered services to A having no relation to the assets transferred or to the business of the corporation, and the disproportion in the amount of stock received constituted the payment of compensation by A to B, B will be taxable upon the fair market value of the 60 shares of stock received as compensation, and A will realize gain or loss upon the difference between his basis in the 60 shares and their fair market value at the time of the exchange.
A and B together control the corporation immediately after the exchange, so no gain or loss is recognized on the incorporation itself.
A contributes $8,000 for 20 shares while B contributes $2,000 for 80 shares, a disproportion the regulations scrutinize.
If A is found to have made a gift of 60 shares to B, that gift is subject to gift tax under section 2501.
If the disproportion instead pays B for unrelated services, B has ordinary income and A recognizes gain or loss on the 60 shares.
