Facts: P, S1, and S2 are corporations. P owns 40% of S1. The balance of S1’s outstanding shares are publicly traded. P owns 50% of S2. The balance of S2’s outstanding shares are publicly traded. S1 and S2 make steel and wanted to combine their operations where they overlap, particularly in Pennsylvania and Indiana. S1 and S2 started to negotiate a joint venture in the summer of 2023, and on January 1, 2024, they formed X, an LLC. S1 received 30% and S2 received 70% of X’s outstanding member interests. Half of S2’s interest in X is represented by an instrument labeled “Note.” It matures on January 1, 2124. However, S2 can require X to redeem the Note after January 1, 2030. In this event, X has the option of satisfying the Note by issuing X stock to the holder of the Note. The Note has a floating rate interest, adjusted annually based on the yield on U.S. Treasury 10-year bond. In liquidation, the Note holder is senior to the owners of the membership interests in X, but junior to X’s general creditors. S1’s contribution to X was a factory with a basis of $200 and a value of $700. The factory was subject to a mortgage of $400. S2 contributed three assets to X: Asset A had a basis and value of $500 and $400, respectively; Asset B had a basis and value of $350 and $300, respectively; and Asset C had a basis and value of $50 and $70, respectively. All three of these assets secure an obligation with a face of $1000 and a value of $70. The negotiations between S1 and S2 were bumpy. Though they finally reached an agreement and formed X, S1 was not happy as the negotiations wound down in late 2023. Unbeknownst to S2, on November 1, 2023, S1 signed an agreement with Acquiring (“ACQ”) to sell to ACQ all of S1’s interest in X as soon as X was formed. All the contingencies in the sale contract between ACQ and S1 were satisfied by December 15, 2023, and the closing of S1’s sale to X occurred on February 1, 2024. ACQ paid S1 $300 for S1’s interest in X. ACQ is unrelated to P, S1 and S2. S2 believed that it would reduce S2’s state income tax burden if X were taxed as a corporation for federal income tax purposes. As the majority owner of X, S2 had the power to cause X to elect to be taxed as a corporation under Treas. Reg. section 301.7701-3. S2 made the election for X to be taxed as a corporation on February 1, 2024, retroactive to January 1, 2024. S2 was furious with S1 following S1’s sale to ACQ. In retaliation, S2 caused X to redeem half of ACQ’s interest in X on March 1, 2024. S2, as the majority owner of X, was able to control X sufficiently to cause X to take advantage of certain call provisions in the LLC agreement that were designed to protect S2 in situations such as this. Half of ACQ’s interest in X was redeemed for $150. ACQ was aware that its interest in X could be redeemed, so on January 15, 2024, it bought options to buy stock in P. These options would entitle ACQ to own 60% of all of P’s outstanding stock. X had earnings and profits of $80 for 2024. a. What is X’s basis for the property it receives from S1 and S2? do §362 and carry-over basis apply here?

In the scenario described, X is an LLC that has elected to be taxed as a corporation. When property is contributed to a corporation in exchange for its stock, the general rule under Internal Revenue Code (IRC) § 351 applies if the transferors are in control of the corporation immediately after the exchange. Control, in this context, means owning at least 80% of the corporation's stock. Since S1 and S2 together are contributing property in exchange for 100% of X's member interests, § 351 should apply to this transaction. Under § 351, no gain or loss is 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 of the corporation. Additionally, under IRC § 362, the corporation's basis in the property it receives is generally the same as the transferor's adjusted basis (carry-over basis), increased by any gain recognized by the transferor on the transfer. For S1's contribution: - The factory has a basis of $200 and a value of $700. Since the factory is subject to a mortgage of $400, which exceeds S1's basis, S1 would recognize a gain on the transfer of the factory to the extent of the excess liability over the basis. X's basis in the factory would be the carry-over basis from S1, which is $200, plus any gain recognized by S1. For S2

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