Answer:
Explanation:
The transaction is fully taxable because Rhonda, the sole transferor of property, does not have control immediately after the transaction. Therefore, all of the realized gain is recognized.
Amount realized—stock $200,000
Less: Adjusted basis of property transferred (15,000)
Realized gain $185,000
Recognized gain $185,000
b. With the change, Rhonda is trying to avoid recognizing the $185,000 gain. The plan involves Rachel becoming a transfer of property along with Rhonda so that together they would meet the 80% control test. If Rhonda is part of a group that meets the control test, she would avoid recognizing the gain. However, this plan will not be successful. Rachel’s interest cannot be counted since the value of the stock she would receive is relatively small compared to the value of the stock she already owns. In addition, Rachel’s contribution would be made primarily to qualify Rhonda for § 351 treatment.
c. The following alternatives would enable Rhonda to avoid gain recognition:
• Rhonda can transfer property that has not appreciated in value. For example, if she were to contribute $200,000 of cash to Peach, Rhonda would not recognize gain on the transaction.
• Rachel could contribute property of an amount that is not small relative to the value of the stock already owned. By doing so, she would be considered a transfer of property along with Rhonda, and together, they would have control. As a result, Rhonda would avoid gain recognition. For example, if the value of Rachel’s stock is worth approximately $200,000 prior to the contribution, a transfer of at least $20,000 would likely be sufficient to avoid the relative-small-in-value test.
