You previously learned that stock issued for services is not
considered as issued in return for property under Section 351.
To complete the coverage of non-recognition rules for corporate formation,
in this lesson you will consider whether and how stock issued in exchange for
both property and services affects the control requirements of section 368(c).
You will then apply the new concepts to Sunchaser Shakery.
Recall that the provision of services does not
constitute the transfer of property for purposes of Section 351.
Instead, any stock received by
the service provider is viewed as compensation for the services,
and is not considered when assessing control.
However, if a person transfer services
and property to a corporation in exchange for stock,
taxable income results for the value of the stock related to the services,
but not for the stock related to the property;
assuming the other requirements of section 351 are satisfied.
In addition, the person is viewed as a transferor for purposes of determining whether
all transfers acquired control of the corporation immediately after the exchange,
as long as an adequate amount of property is transferred.
How much property is adequate?
The regulations require that the person providing services must also transfer
property with more than a relatively small value compared to the services.
In other words, when the primary purpose of the transfer is to
qualify the transaction for Section 351,
treatment for other transferors,
stock issued for property whose value is
small compared to the value of the stock already owned
or to be received for services provided will
not be considered as issued in return for property.
The regulations do not clearly define the phrase relatively small value.
However, revenue procedure 77-37 indicates that
a transfer or of both services and property can be included in the transferor group;
If the fair market value of the property transferred is equal to or in excess of
10 percent of the fair market value of the stock already
owned or to be received for services by the transferor.