"Doug" <leon9704[at]gmail.com> wrote:

- quote -

The exchange may be able to be made tax free if done
properly. But not under section 1031, which says, "This
subsection shall not apply to any exchange of— ...(B)
stocks, bonds, or notes,..."

Stu

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Dick Adams <rdadams[at]smart.net)> wrote:

- quote -

At what point does this sort of scheme become a sham
transaction? Suppose the individual, instead of patenting
an invention, had written and copyrighted software, or
composed music?

Steve

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Doug wrote:

- quote -

The corp's basis is the contributing shareholder's basis +
any gain recognized by the shareholder. If the the example
you provide meets the requirements of IRC Section 351 then
the taxpayer recognizes no gain and the corporation's basis
is the shareholder's basis.

If any gain is recognized for tax purposes it is the
shareholder who reports it on his tax return, not the
corporation.

- quote -

If the shareholder is the one who created the patent,
his/her maximum tax rate is also 35% plus about 15% of SE
tax.

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Dick Adams wrote:
- quote -

Thank you very much!!!

I forgot the like-kind stock-for-stock exchange part.

It's great!! Now I feel much better to hand in the case this
evening.

Doug

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Doug <leon9704[at]gmail.com> wrote:

- quote -

The trick is for the company and new corp to _merge_ so that
the inventor ends up with stock in the company. A
stock-for-stock merger is generally tax free.

Seth

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Dick Adams <rdadams[at]smart.net) wrote:

- quote -

A stock for stock exchange doesn't actually qualify as a
like-kind exchange under section 1031. But it might qualify
as a tax-free corporate reorganization under section 368.

But the statute is very complicated, and the transaction
should be under the guidance of a qualified professional.

Stu

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"Doug" <leon9704[at]gmail.com> wrote:

- quote -

You really ought to talk to a lawyer or tax preparer
familiar with these things, because you precise situation
will have a bearing on what you should do and how you should
do it.

Now what you are saying is that you want to sell your patent
to a corporation in exchange for $2,000,000 in its stock.
Originally I thought you meant your own corporation.

If that's the situation, there may not be a whole lot you
can do. The transaction is taxable and it will not qualify
for a "tax free exchange."

There may be other things that you can do to reduce the tax
bite. But you will need to talk to a professional who can
review all the relevant facts.

Stu

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Doug wrote:

- quote -

See below. You exchange the stock, not patent.

- quote -

I suspect you need an S-Corp.

Now read carefully because this is going to be on the final
exam.

Patent holder forms a corporation (A) as sole or majority
shareholder and transfers the patent to the corporation.
This is a non-taxable shareholder contribution to the
Shareholders' Equity account.

Now patent holder and other possible shareholders transfer
all stock in (A) to another corporation (B) in exchange for
stock in (B). This is called a like-kind exchange and it is
not taxable in the year of the exchange unless cash is
involved. When portions of (B)'s stock are sold, they are
taxable.

Patent for stock is NOT a like-kind exchange and is taxable
in the year of the exchange.

Dick

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Doug wrote:
- quote -

§351 gets you through subpart A. You might try looking at
Subpart B (perhaps §354)

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Can you explain in detail how that tax planning works?

If the transferor transfers the patent to a newly formed
comporation over which he has control, then the new corp.
transfers the patent to the company for its $2 million
stock, shouldn't the new corp. recognize the gain?

Maybe worse, since the corporation has a 35% tax rate on
capital gain.

Your help is appreciated.

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"San Diego CPA" <gcollect1[at]sbcglobal.net> wrote:

- quote -

Ok, thanks. I missed that part.

Stu

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Stuart A. Bronstein wrote:

- quote -

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

Regards,
Bill

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"Stuart A. Bronstein" <spamtrap[at]lexregia.com> wrote:
- quote -

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.

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"Bill Brown" <brownwp[at]longwood.edu> wrote:
- quote -

Zero basis??? Say I have equipment I paid $50,000 for, and
depreciated down to $40,000. It's got a current market
value of $30,000. I create a corporation and do a 351 trade
for stock. My basis in the business goes down to zero? I
can't believe that.

Stu

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Doug wrote:

- quote -

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.

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Dick Adams <rdadams[at]smart.net> wrote:
- quote -

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.

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"Doug" <leon9704[at]gmail.com> asked:

- quote -

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.

- quote -

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.

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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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