Patent exchange for stock

I'm a taxation student and I need your help to clarify an issue in a case I'm doing now: What's the tax treatment of a taxpayer's acquisition of a company's stock in exchange for his patent? The company's stock has a market value of $2 million and the taxpayer has $0 of basis in his patent. Your professional argument is appreciated.

Doug

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Reply to
Doug
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"Doug" asked:

We usually do not do homework here, but I couldn't resist. Please do not assume this is a precedent - LOL - because the moderator is oblivous to precedents.

There can't be much of an argument here. He either exchanged the patent or the stock in the company owning the patent for stock in another company. The former creates a $2,000,000 capital gain NOW. The later creates a capital gain upon sale of stock.

If he exchanged the patent for stock, he can be the new poster boy for the value of tax planning.

Reply to
Dick Adams

Agreed in general. Though there is a situation in which the transfer would be tax free. That occurs when the transferor is creating the corporation, or among the group that does. Section 351 says, in relevant part "No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation." Stu

Moderator: Agreed - Tax planning would call for transfer to a newly formed corporation over which he had control. Otherwise he is subject to the entire capital gain now.

Reply to
Stuart A. Bronstein

Like all good tax questions, especially homework, the answer is "it depends." If the unknown facts cause IRC Section 351 to apply then the taxpayer now has stock with zero basis and no recognized gain. If 351 does not apply then the taxpayer has $2,000,000 of income (type depends upon unknown facts) and stock with a basis of $2,000,000.

Reply to
Bill Brown

Generally, it's either the lower of FMV or carryover basis when forming the corp so in your facts basis is 30K (depending on how you acquired the property and basis, your carryover basis into the new corp could be significantly different than FMV but still required to be used, but that's another matter). It's zero basis above because the original post said there was zero basis in the patent.

Reply to
San Diego CPA

Stu, the OP said the "taxpayer" had zero basis in the patent.

Regards, Bill

Reply to
Bill Brown

Ok, thanks. I missed that part.

Stu

Reply to
Stuart A. Bronstein

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