Adding shareholder to Scrop - Tax

[Unregistered]

I have a client who wants to add share holder to scrop (IL based)

Before: Owners/sahreholder (100%)
After: Two shareholders 50% each

(1)Do I need to make sure that new partner has to contribute same amount as profit(loss) allcoated on the basis of cap. contribution.

(2) I am also looking for resolution example if any one has it.

(3) Any thing else I need to do?

Thanks!

[Bees Knees]

If the new shareholder is contributing appreciated property in exchange for stock, the shareholder would have a taxable gain, as this would not qualify for a Section 351 transaction (see TTB page 18-5). If the new shareholder is simply contributing cash, Section 351 is a non-issue.

As to the amount that needs to be contributed, you look at the fair market value of the stock prior to the contribution. What the original shareholder contributed years ago is irrelevant. The amount that needs to be contributed is whatever represents a 50% ownership based on fair market value of the corporation at the time of contribution.

For example, Say Old Jack owns 100% of Old Jack, Inc. valued at $100 on 9/20/2006.

For some reason, Jainen wants to be a 50% shareholder of Old Jack, Inc. on 9/20/2006.

50% of the value of Old Jack, Inc. = $50 ($100 X 50%). Therefore, if Jainen were to pay Old Jack $50 for half of his stock, he would own 50% and Old Jack would still own the other 50%.

But if Jainen were to contribute cash to the corporation in exchange for a 50% share, he would have to give the corporation $100 ($100 FMV of corp + $100 cash = $200 new FMV of corp). $100 = 50% of $200, representing Jainen’s 50% ownership interest in Old Jack, Inc.

[Unregistered]

For example, Say Old Jack owns 100% of Old Jack, Inc. valued at $100 on 9/20/2006.

For some reason, Jainen wants to be a 50% shareholder of Old Jack, Inc. on 9/20/2006.

50% of the value of Old Jack, Inc. = $50 ($100 X 50%). Therefore, if Jainen were to pay Old Jack $50 for half of his stock, he would own 50% and Old Jack would still own the other 50%.

But if Jainen were to contribute cash to the corporation in exchange for a 50% share, he would have to give the corporation $100 ($100 FMV of corp + $100 cash = $200 new FMV of corp). $100 = 50% of $200, representing Jainen’s 50% ownership interest in Old Jack, Inc.[/QUOTE]

So it is cheaper to pay Jack compare to contributing cash. Is there a tax benefit of one method vs. other? At the end of the day, either way, Jainen will have 50% ownership in the company

Thank you for your time.