Harry and Megan, two unrelated individuals, are considering forming the Royal Fashion Shoe

Corporation in the beginning of 2022. Harry plans to transfer the following assets to the new

corporation in exchange of 625 shares:

Properties	Adjusted Basis	Fair Market Value
Cash	$20,000	$20,000
Plant	$40,000	$50,000
Machinery	$12,000	$10,000
Office Equipment	$25,000	$20,000

While it is relatively easy for Harry to transfer cash, machinery and office equipment to the

corporation, it will take him a few months to transfer the plant to the corporation, and the

paperwork of transferring the plant is expected to be finalized in five months.

On the other hand, as the main designer, Megan decides to perform design service worth of

$60,000 for Royal in exchange of 375 shares. Megan minored in accounting in her

undergraduate, and she remembers vaguely that she must transfer property to the corporation as well, even though she does not remember why. Thus, Megan decides to transfer a set of office desk and chair worth of $980 to the corporation as well.

Harry and Megan retained you as their tax advisor in organizing the new business. They asked

you whether they would recognize any gains upon this corporate formation. If so, how could

they reorganize to avoid recognizing gain upon formation? Also, Harry did some research and

found that a more suitable machinery for the new business costs only $10,000. He is not sure

whether he should transfer the old machinery (with A/B of $12,000 and FMV of $10,000) to the

corporation, or sell the old one and transfer the proceeds to the new corporation instead.

Your input will be critical as they make their decisions. , Harry Lewis and Megan Johnson to address all their questions, and make sure to properly document all tax code citations while answering their questions, so that they can look up the relevant tax codes if they choose to.

include following points:

• Whether their current plan of corporate formation qualifies for nontaxable treatment under Section 351. If not, why not? How can they meet the requirements under Section 351? Hint: Megan must transfer properties with a larger value for her to be included in the 80% control test. What is the recommended value of the property that Megan should transfer? (find out IRS codes to support)
• What does it mean by "immediately after control"? Does it mean a simultaneous transfer of all properties? This is to address the issue of the 5-month lag of plant transfer.
• Whether having two loss properties affects the bases of the properties after transfer. Do you need to step down the property bases? What are the bases after transfer?
• Does Megan need to pay taxes on the service to be provided?
• Is it wise for Harry to transfer the loss property to the corporation? What would be a better alternative from the perspective of tax planning?