Let's say you have an appreciated stock that you have not sold. Can you use that stock to make an investment in a corporation? If you use the unsold stock as payment for the investment, are you deemed to have made a constructive sale on the position and do you have capital gains due on that constructive sale in the year of the new investment?
In terms of basis for the new investment, is your basis increased by the market value of the unsold stock at the time it is used as payment for the new investment?
Well, yeah. Is it an investment to initially fund the corporation? What is the percentage of ownership you will be taking? Are there others who will also be funding the corporation at the same time? If so, what are the ownership percentages they are taking?
Yes, unless you qualify for tax free treatment under §351.
If you don't pay tax on it, your basis in the stock should be your basis in whatever you invested to get it. If you pay tax on it, then it's the market value of what you traded in for it, or possibly the market value of what you received - I'm guessing it's whichever it higher.
Why wouldn't it be basis in old stock + gain on which tax is paid? Why should market value of what's received matter (unless the difference is taxable income)?
appreciated stock to a corporation is only non-taxable when the investor will own 80% of the corporation. It wasn't clear to me does the transfer of appreciated stock become tax free to the investor only when the corporation is initially formed, or could this apply to an existing corporation as well?
Regardless of when Section 351 does apply, if it does apply then as you say the investor will treat as his basis in the new corporation the *cost* of the appreciated stock, not the appreciated value.
At the point the corporation sells the stock, it will pay the capital gains, and it will show the investor's original basis in the stock as its basis.
Looking at this from the 20K level: the investor is transferring a personal capital gains into a corporate capital gains, which usually doesn't make good tax sense. The exception might be in the case of a startup corporation that is taking losses its first few years. In that scenario, the corporation could sell off the stock in parts to pay its bills, and as long as the corporation is break even or losing money, that would be a very tax efficient investment.
The requirement is that after the transfer, the transferor(s) own 80% of the corporation. There is no requirement (at least the last time I checked) that the transfer be on initial funding of the corporation.
That's immediately after, right? So it's possible to play games: I contribute stock to a new corp, owning 100%. That qualifies. Then you contribute 4 times as much stock, owning 80%. That qualifies. Then I contribute some cash (3 times my initial investment). Now the corp. is owned 50-50, with 62.5% of its funding in appreciated stock.
In fact, we can do it all with stock: use two corps, contributing only stock; then have them merge.
Presumably, there has to be something else done to avoid the "form over substance" problem.
You don't have to play games like that. The statute talkes about transfers of "one or more persons." So if three people initially fund a corporation, each with 33% interest, the three of them together have more than 80% and they qualify.
If someone comes along later and wants to contribute money for stock, the three initial shareholders can also buy stock at the same time, and again they will qualify if they do it that way.
Do they have to? Or would their initial contribution remain qualified because it was qualified? (If not, how long does this state persist; suppose the company goes along for 10 years, becomes profitable, and goes public; do they get hit with taxes for the gain on their stock contributions at that time?)
To qualify they normally look at a single transaction. If initial funding of the corporation does that, then all investors participating at that time can qualify. If someone comes along and invests later, he is not part of the initial transaction, so will not qualify unless he takes over control of 80% of the corporation at that time, or he invests at the same time with others who take
80%.
Since it's per transaction, the question makes no sense. If an investment is tax free at the time, no tax will be required to be paid until the stock obtained in that transaction is sold.
Now a fourth investor comes along, and they want to share equally, but he also wants to contribute stock rather than cash. If he just contributes enough to own 25% (say the company is worth $3 million and he contributes $1 million of stock), he owns 25% but must pay capital gains tax. However, if he contributes $1,000,300 worth of stock, and each of the initial 3 shareholders contributes $100, then the people who contributed stock in that transaction own 100% after the transaction, so it all qualifies, right?
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