Michael transfers property to Bolden Corporation in exchange for stock. After the transfer, Michael owns 76% of the corporation. The fair market value of the property is equal to $20,000, and its adjusted basis is $16,000. Michael’s share in the company is worth $32,000. What is Michael’s recognized gain?
Fair market value of the stock received | $32,000 |
Minus: Adjusted basis of property transferred | (16,000) |
Realized gain | $16,000 |
Since the transaction does not qualify under Sec. 351, the realized gain is also the recognized gain. Thus, Michael’s recognized gain is $16,000.
| Bob and Charles, as a group, transfer a building with a basis of $100,000 to the ABC Corporation in exchange for 66.67% of each class of stock with a fair market value of $300,000. The other 33.33% of the stock was already issued to Alice. What is the gain, if any, that Bob, Charles, or the ABC Corporation must recognize? |
Bob and Charles combined do not have control over ABC Corporation; therefore, Sec. 351 treatment does not apply. Bob and Charles must recognize a gain of $200,000 ($300,000 FMV – $100,000 adjusted basis), and ABC does not recognize any gain.
Bob transfers property worth $50,000 to the Acme Corporation and provides personal services worth $5,000 in exchange for stock valued at $55,000. Immediately after the exchange Bob owns 90% of Acme’s outstanding stock. What is Bob’s gain if any?
Section 351 provides that no gain or loss is recognized if one or more persons transfer property to a corporation solely for stock and, immediately after the exchange, the person(s) is (are) in control of the corporation (i.e., own at least 80% of the stock). However, Sec. 351(d) states that stock issued for services is not issued in return for property. Income must be recognized on such a transfer. The fair market value of stock received for services ($5,000) must be included in Bob’s ordinary income. All other stock received was in exchange for property, and no gain or loss is recognized.
Fact Pattern: Lind and Post organized Ace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows:
The building was subject to a $10,000 mortgage that was assumed by Ace. | |||||||||||||||
| Question4 |
In a Sec. 351 transaction, the corporation’s basis in the transferred property is equal to the adjusted basis of the property to the shareholder plus any gain recognized by the shareholder. Section 357(c) provides that gain is reported only if the liabilities assumed by the corporation exceed the adjusted basis of the property transferred. Since Lind recognized no gain, Ace’s basis is $40,000.
Bob and John make the following transfers to Builders Corporation in return for 100% of the stock in the corporation:
What is the amount of gain Bob and John must recognize on the transfers? |
| Question6 | Stone, a cash-basis taxpayer, incorporated her CPA practice. No liabilities were transferred. The following assets were transferred to the corporation:
Immediately after the transfer, Stone owned 100% of the corporation’s stock. The corporation’s total basis for the transferred assets is |
Section 362(a) provides that the basis of property acquired by a corporation in connection with a Sec. 351 transaction is the same as the basis in the hands of the transferor (shareholder), increased by the amount of gain recognized by the transferor on such transfer. Since Stone did not receive any boot, she did not recognize any gain. Thus, the corporation’s total basis in the transferred assets is the same as that in Stone’s hands or $30,500 ($500 cash + $30,000 adjusted basis).
| Which of the following is an example of nonqualified preferred stock in a Sec. 351 transaction? | |
Nonqualified preferred stock is treated as boot received and is not counted as stock toward the 80% ownership test. Generally, it is preferred stock with any of the following features:
| Jack transferred property having an adjusted basis of $42,000 and a fair market value of $50,000 to Corporation X. In exchange for the property, he received $5,000 cash, an automobile having an adjusted basis of $6,000 and a fair market value of $10,000, and 80% of Corporation X’s only class of stock. At the time of the transfer, the Corporation X stock that Jack received had a fair market value of $35,000. What is the amount of Jack’s recognized gain? |
Section 351(a) provides for nonrecognition of gain or loss if a person transfers property to a corporation solely in exchange for stock in the corporation and if immediately after the exchange such person is in control (owns at least 80% of the stock). If other property or money is received in addition to the stock, any gain realized by the recipient is recognized but not in excess of the sum of the money plus the fair market value of other property received. Jack’s realized gain is $8,000 [($35,000 stock + $10,000 auto + $5,000 cash) – $42,000 basis], and this realized gain is less than the property received of $15,000 ($10,000 auto + $5,000 cash). Thus, the realized gain is the maximum amount that must be recognized, or $8,000.
| Tech Corporation was formed by three shareholders: Able, Baker, and Charlie. Charlie agreed to provide all the legal work of organization and incorporation for $5,000 cash and $5,000 worth of stock in Tech Corporation. Which of the following statements regarding the exchange is true? |
Charlie must recognize the services performed as income, even though he was paid in stock from the corporation. The income is recognized at $10,000.
| Ms. D transferred property having an adjusted basis to her of $20,000 and a fair market value of $27,000 to Corporation F. In exchange for the property, she received $6,000 cash and 100% of Corporation F’s only class of stock. If the stock received by Ms. D had a fair market value of $21,000 at the time of the transfer, what is the amount of her recognized gain? |
Section 351(a) provides for nonrecognition of gain or loss if a person transfers property to a corporation solely in exchange for stock in the corporation and if, immediately after the exchange, such person is in control (owns at least 80% of the stock). Since money is received in addition to the stock, any gain realized by the recipient is recognized but not in excess of the sum of the money received ($6,000).
For bona fide business purposes, Mr. D transferred the following property to Corporation X. X assumed the $50,000 mortgage.
In the exchange, Mr. D received 100% of X’s only class of stock. What is Corporation X’s basis in the property received in the exchange? |
Section 362(a) provides that the basis to a corporation of property acquired in a Sec. 351 transaction is the same as the basis in the hands of the transferor, increased by the gain recognized by the transferor. Here, the transfer qualifies as a Sec. 351 transaction since greater than 80% of all stock was held by the shareholder after the exchange. Section 357(c) would not cause any recognition of gain on the contribution of the mortgage since the liability ($50,000) did not exceed the adjusted basis of all property transferred ($180,000). The basis of the property received by Corporation X is therefore the adjusted basis of the property in the hands of the shareholder, which was $180,000 ($120,000 building and land + $60,000 various equipment).
| Mr. Smith transferred a building that had an adjusted basis of $50,000 and a fair market value of $105,000 to XYZ Corporation in exchange for 100% of XYZ’s stock and $10,000 cash. The building was subject to a mortgage of $20,000, which XYZ assumed for valid business reasons. The fair market value of the stock on the date of the transfer was $75,000. What are the amounts of Smith’s realized gain and recognized gain? | |
| Realized Recognized |
Mr. Smith realized a gain of $55,000 on the transfer of the property to the controlled corporation ($75,000 stock + $20,000 mortgage assumed + $10,000 cash – $50,000 basis in the building). Since money is received in addition to the stock, any gain realized by the shareholder is recognized, up to the amount of the money received. Also, Sec. 357(c) provides that, if the liabilities transferred or assumed ($20,000) do not exceed the basis of all the property transferred ($50,000), the liabilities are not recognized as a gain. Thus, Mr. Smith’s recognized gain is $10,000, the money received from the corporation.
| Price Corporation has common stock with a par value of $25 per share. Price entered into an exchange whereby the company gave up stock worth $350,000 and received land with a fair market value of $350,000 and an adjusted basis to the transferor of $100,000. At the time of the exchange, Price common stock was selling for $35 per share. The gain that Price must recognize as a result of the exchange is |
| Joseph Jackson had previously incorporated his sole proprietorship by transferring property to his newly formed corporation in exchange for 100% of the stock. These assets, if sold, would produce a gain of $100,000. A week after incorporation, Joseph sells other assets for cash to the corporation that produce a loss of $20,000. Joseph is attempting to avoid Sec. 351 on the transfer of the loss assets in order to recognize the loss for tax purposes. Which statement best explains the tax consequences to him? |
Section 351(a) provides that no gain or loss is recognized if one or more persons transfer property to a corporation solely in exchange for stock in such corporation and if, immediately after the exchange, such person(s) is (are) in control of the corporation. Control is defined in Sec. 368(c) as the ownership of stock possessing at least 80% of the total combined voting power of all classes of voting stock and at least 80% of the total number of shares of all other classes of stock. Since Joseph transferred property to the corporation in exchange for a total of 100% of the stock, the initial transaction qualifies for tax-free treatment. Under Sec. 267(a)(1), losses are not allowed on sales or exchanges of property between related parties. Related parties include an individual and a corporation in which the individual owns more than 50% of the outstanding stock. Therefore, Joseph and his corporation are treated as related parties and no loss is allowed.
| Joyce and Edward combine their sole proprietorships by forming the Lair Corporation. Joyce transfers land and a building having a combined $50,000 adjusted basis and a $100,000 FMV to the corporation in exchange for 40% of the Lair Corporation stock. Edward transfers equipment with a $60,000 adjusted basis and a $150,000 FMV to the corporation in exchange for 60% of the Lair stock with a par value of $10. Joyce and Edward received no other property then the Lair stock. What is Edward’s recognized gain on this transaction? |
Section 351 requires that no gain or loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and immediately after the exchange such person(s) control the corporation. Joyce and Edward combined have control over the corporation; therefore, no gain is recognized on the contribution of property.
Which of the following factors is NOT taken into account when determining if a gain or loss should be recognized on the transfer of property to a corporation in exchange for a controlling interest in stock of the corporation?
Under Sec. 351, three requirements must be met in order for gain not to be recognized. In addition, gain is recognized to the extent of boot received. The fair market value of the property transferred is not a factor if the other requirements are met.
Mr. A owned 75% of the voting stock and 85% of the nonvoting stock of Corporation Y. Mr. A transferred property with a fair market value of $90,000 and an adjusted basis of $70,000 to Y for an additional 5% of the voting stock and 5% of the nonvoting stock. What is the amount of gain to be recognized by Mr. A?
If the requirements of Sec. 351(a) are met, no gain or loss is recognized when property is transferred to a corporation. The requirements are that the transfer be made by one or more persons, solely in exchange for stock, and that the transferor(s) be in control of the corporation immediately after the exchange. Section 368(c) defines control as the ownership of at least 80% of both the voting and nonvoting stock. After the transaction, Mr. A owns 80% (75% + 5%) of the voting stock and 90% (85% + 5%) of the nonvoting stock. He therefore meets the criteria and qualifies under Sec. 351(a). No gain or loss is recognized.
Mrs. O’Dell transferred property that had an adjusted basis to her of $20,000 and a FMV of $50,000, to Sinex Corporation in exchange for 100% of Sinex Corporation’s only class of stock, $5,000 cash, and office furniture worth $5,000. At the time of the transfer the stock had a FMV of $40,000. What amount of gain must Mrs. O’Dell recognize?
Fair market value of stock received | $40,000 |
Cash received | 5,000 |
Property received | 5,000 |
Total received | $50,000 |
Minus: Adjusted basis of property transferred | (20,000) |
Realized gain | $30,000 |
However, the recognized gain is limited to the amount of cash and property received, $10,000.
| Fern and Isabella transferred money and a business sailing ship for stock in Courier Corporation. Immediately after the exchange, Fern owned 30% of the voting power and 49% of the total shares of each of the other classes of stock; Isabella owned 55% of the voting power and 36% of the total shares of each of the other classes of stock. Fern and Isabella are not otherwise related. Assuming Fern and Isabella each realized gains on the transaction, which of the following statements would apply? |
| Anthony, Bill, and Chester decided to form Paradise Corporation. Anthony transferred property with an adjusted basis of $35,000 and a fair market value of $44,000 for 440 shares of stock. Bill exchanged $33,000 cash for 330 shares of stock. Chester performed services valued at $33,000 for 330 shares of stock. The fair market value of Paradise Corporation’s stock is $100 per share. What is Paradise’s basis in the property received from Anthony? | |
Because less than 80% of the stock was acquired for property (30% was acquired for services), the control requirement fails, and the transfer by Anthony does not qualify for tax-free treatment. Therefore, Paradise takes the property from Anthony with a basis equal to $44,000, the fair market value of the property as well as the stock exchanged for it.
Sam and Allen organized Pace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows:
Property | Basis | Adjusted Fair Market Value | Percentage of Pace Stock Acquired | |
Sam | Building | $40,000 | $72,000 | 60% |
Allen | Land | $5,000 | $48,000 | 40% |
What amount of gain did Sam recognize on the exchange?
Sam has a realized gain of $32,000 on this exchange, calculated as follows:
Amount realized from stock ($120,000 × 60%) | $72,000 |
Less: Adjusted basis of building | (40,000) |
Realized gain | $32,000 |
However, Sec. 351 requires that no gain or loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and, immediately after the exchange, such person(s) is(are) in control of the corporation. Control is defined as 80% or more of the voting power of stock and 80% or more of the shares of each class of nonvoting stock.
Anna transferred land with an adjusted basis to her of $20,000 and a fair market value of $56,000, to Elm Corporation in exchange for 100% of Elm Corporation’s only class of stock. The land was subject to a liability of $26,000, which Elm assumed for legitimate business purposes. The fair market value of Elm’s stock at the time of the transfer was $30,000. What is the amount of Anna’s recognized gain?
The general rule of Sec. 351 is that no gain is recognized if a shareholder transfers property in exchange for stock of a corporation as long as the shareholder(s) involved in the transaction control the corporation immediately after the exchange. Control is defined in Sec. 368(c) as 80% of the voting power and 80% of all classes of nonvoting stock. Anna received 100% of Elm Corporation’s stock and therefore has control immediately after the exchange. But Sec. 357(c) provides that gain must be recognized by the shareholder to the extent that liabilities assumed, or taken subject to, by the corporation exceed the adjusted basis of all property transferred. The liability on the land exceeded the adjusted basis of the land Anna transferred by $6,000 ($26,000 liability assumed – $20,000 adjusted basis). Thus, Anna must recognize a gain of $6,000.
| Donna exchanges property having an $18,000 adjusted basis and a $35,000 fair market value for 70 shares of the newly created Table Corporation stock. Evelyn exchanges legal services worth $15,000 for the remaining 30 shares of Table Corporation stock. Which of the following is true? | |
| Frank, an attorney, performed legal services valued at $2,000 for Joey Corporation, a newly formed corporation, in exchange for 1% of the issued and outstanding stock. The fair market value of the shares received was $2,000. Frank would recognize |
Ms. R transferred property with an adjusted basis of $60,000 and a fair market value of $55,000 to Rain Corporation. She received in exchange 60% of Rain Corporation’s only class of stock. At the time of the transfer, the stock Ms. R received had a fair market value of $65,000. What is Rain Corporation’s basis in the property after the exchange?
Because Ms. R received only 60% of the Rain stock, she is not in control, and the transfer is not tax-free. Accordingly, the basis of the property received by Rain in exchange for its stock is equal to the $65,000 fair market value of the stock given.
Jake transferred land having an adjusted basis of $35,000 and a fair market value of $47,000 to Otter Corporation. In exchange for the land, he received $5,000 cash, equipment having an adjusted basis of $3,000 and a fair market value of $5,000, and 80% of Otter Corporation’s only class of stock outstanding. The stock received by Jake had a fair market value of $37,000. What is the amount of gain that Jake will recognize?
Correct C
The realized gain equals the fair market value of property received ($37,000 stock + $5,000 equipment + $5,000 cash) less the adjusted basis of the property transferred ($35,000), or $12,000. If other property or money is received in addition to the stock, any gain realized by the recipient is recognized but not in excess of the sum of the money plus the fair market value of other property received. The sum of boot property received is $10,000 ($5,000 equipment + $5,000 cash). Thus, $10,000 is the recognized gain.
| Feld, the sole shareholder of Maki Corp., paid $50,000 for Maki’s stock 5 years ago. This year, Feld contributed a parcel of land to Maki but was not given any additional stock for this contribution. Feld’s basis for the land was $10,000, and its FMV was $18,000 on the date of the transfer of title. What is Feld’s adjusted basis for the Maki stock? |
Because Feld is the sole shareholder of the corporation, his contribution will qualify for Sec. 351 treatment. Section 351 allows for the possible nonrecognition of a gain or loss when property is transferred to a corporation. Basis of the stock to Feld is equal to the adjusted basis of the contributed property, less any boot received, plus any gain recognized by the shareholder. Therefore, Feld’s basis in the stock is $60,000 ($50,000 basis + $10,000 basis in land).
| Sarah acquired 90% of Fast Corporation’s shares in exchange for consulting services worth $85,000. The fair market value of 90% of Fast Corporation’s shares is $93,500. How much income does Sarah recognize? |
Stock issued for services falls outside the general rule of Sec. 351, and the FMV of stock received is gross income to the shareholder when stock is transferred for services. The FMV of 90% of the stock is $93,500.
| Sam owns 100% of M Corporation’s single class of stock. Sam transfers land and a building having a $30,000 and $100,000 adjusted basis, respectively, to M Corporation in exchange for additional M Corporation common stock worth $200,000 and IBM stock worth $20,000. The IBM stock had a $5,000 basis on M Corporation’s books. Peter transfers $50,000 in cash for 15% of the M Corporation common stock. What amount of gain or loss is recognized by Sam and M Corporation on the exchange? | |||||||||||||||||||||||||
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Section 351 states that no gain or loss is recognized when property is transferred to a corporation in exchange for the corporation’s stock if the person(s) transferring the property is(are) in control of the corporation immediately after the transfer. “Control” is defined by the Code as at least 80% ownership of the corporation’s voting and nonvoting stock. Because Sam meets the control test, he recognizes no gain on the receipt of the M Corporation stock. However, he does recognize a $20,000 gain on the receipt of the IBM stock. Section 351(b)(1) states that, if other property is received by the transferor, the transferor must recognize gain equal to the fair market value of the property. Therefore, Sam must recognize a $20,000 gain. M Corporation recognizes no gain or loss on the receipt of the land and building in exchange for its own stock (Sec. 1032). However, M Corporation does recognize a gain on the transfer of the IBM stock. Under Sec. 311(b)(1), if a corporation distributes appreciated property, the corporation will recognize gain to the extent that the property’s fair market value exceeds its adjusted basis. Therefore, M Corporation must recognize a $15,000 gain ($20,000 fair market value – $5,000 basis) on the transfer of the IBM stock to Sam.
| Mr. Naqvi transferred a building having an adjusted basis of $18,500 and a fair market value of $23,000 to Nadir Corporation. In exchange for the building, he received $3,000 cash and 90% of Nadir’s only class of stock outstanding. The stock received by Mr. Naqvi had a fair market value of $20,000. What is Nadir Corporation’s basis in the building received in this exchange? |
Section 362(a) provides that the basis to a corporation of property acquired in a Sec. 351 transaction is the same as the basis in the hands of the transferor, increased by the gain recognized by the transferor. Here, the transfer qualifies as a Sec. 351 transaction since greater than 80% of all stock was held by the shareholder after the exchange. Mr. Naqvi received $3,000 cash in addition to the stock. Mr. Naqvi recognizes a gain on the $3,000 received. Thus, Nadir Corporation’s basis in the property is $21,500 ($18,500 Mr. Naqvi’s adjusted basis + $3,000 gain recognized by Mr. Naqvi).
Mr. B transferred property having an adjusted basis of $105,000 and a fair market value of $141,000 to Corporation F. In exchange for the property, he received $15,000 cash, equipment having an adjusted basis of $9,000 and a fair market value of $15,000, and 80% of Corporation F’s only class of stock. The stock received by Mr. B had a fair market value of $111,000. What is the amount of gain that Mr. B will recognize?
The realized gain equals the fair market value of property received ($111,000 stock + $15,000 equipment + $15,000 cash) less the adjusted basis of the property transferred ($105,000), or $36,000. If other property or money is received in addition to the stock, any gain realized by the recipient is recognized but not in excess of the sum of the money plus the fair market value of other property received. The sum of boot property received is $30,000 ($15,000 equipment + $15,000 cash). Thus, the $30,000 is recognized as the gain.
Mr. L transferred the following assets and liabilities to Corporation K:
Adjusted Basis | Fair Market Value | |
Building | $10,000 | $60,000 |
Mortgage on building | 40,000 | 40,000 |
Truck | 5,000 | 10,000 |
Machine | 20,000 | 15,000 |
In the exchange, Mr. L received 95% of K’s only class of outstanding stock. What is K’s total basis in the assets received, assuming that Mr. L properly recognized the true amount of gain on the exchange?
However, Sec. 357(c) provides that, if the liabilities transferred to the corporation exceed the adjusted basis of all the property transferred, the excess is treated as a gain resulting from the sale or exchange. Thus, Mr. L had to recognize a gain of $5,000 ($40,000 mortgage – $35,000 adjusted basis of assets). K’s total basis in the assets received is $40,000 ($35,000 transferred property basis + $5,000 gain recognized by Mr. L).
Mr. Garza transferred property with an adjusted basis of $37,000 and a fair market value of $50,000 to Corporation K. In exchange, Mr. Garza received $6,000 cash and 90% of Corporation K’s only class of stock. The stock received by Garza had a fair market value of $40,000. What is Corporation K’s basis in the property received in this exchange?
Section 362(a) provides that the basis to a corporation of property acquired in a Sec. 351 transaction is the same as the basis in the hands of the transferor, increased by the gain recognized by the transferor. Here, the transfer qualifies as a Sec. 351 transaction since greater than 80% of all stock was held by the shareholder after the exchange. Mr. Garza received $6,000 cash in addition to the stock. Mr. Garza recognizes a gain on the $6,000 received. Thus, Corporation K’s basis in the property is $43,000 ($37,000 Mr. Garza’s adjusted basis + $6,000 gain recognized by Mr. Garza).
During the year, Yasmine transferred land with an adjusted basis of $40,000 and a fair market value of $95,000 to Nadir Corporation in exchange for 100% of Nadir Corporation’s only class of stock. The land was subject to a liability of $45,000, which Nadir Corporation assumed. The fair market value of Nadir Corporation’s stock at the time of the transfer was $50,000. What amount of gain must Yasmine recognize and what is her basis in the Nadir Corporation stock?
Liabilities transferred to a corporation in a Sec. 351 transaction are not boot. However, if the liabilities exceed the basis of the assets, boot is received for the excess liabilities. Gain is recognized for the excess of liabilities over basis so that there is not a negative basis in the stock [$5,000 recognized gain ($45,000 liabilities – $40,000 basis)]. The stock basis is zero. The basis of the asset to the corporation is $45,000.
| James transferred property worth $75,000 and services worth $25,000 to the BJ Corporation. In exchange, he received stock in BJ valued at $100,000. Immediately after the exchange, James owned 80% of the only class of outstanding stock. Which of the following is true with regard to James’s treatment of this transaction? |
The general rule of Sec. 351 is that no gain or loss is recognized if one or more persons transfer property to a corporation solely for stock and if immediately after the exchange such person(s) is(are) in control of the corporation (i.e., own at least 80% of the stock). Section 351(d) states, however, that stock issued for services is not issued in return for property. Stock issued for services falls outside the general rule, and income must be recognized on such a transfer. The fair market value of stock received for services ($25,000) must be included in James’s income. All other stock received was in exchange for property, and no gain or loss is recognized on its transfer.
Clark and Hunt organized Jet Corp. with authorized voting common stock of $400,000. Clark contributed $60,000 cash. Both Clark and Hunt transferred other property in exchange for Jet stock as follows:
What was Clark’s basis in Jet stock? | ||||||||||||||||
This series of exchanges is presumed to qualify for nonrecognition treatment under IRC Sec. 351 as the contributors, immediately after the exchange, are in control of the corporation. Therefore, Clark’s basis in stock will be the value of cash transferred ($60,000) and the adjusted basis of the other property ($50,000), or $110,000.
| David Shea transfers real estate with a basis of $40,000 and a FMV of $90,000 to a controlled corporation in return for stock in the corporation. Just before the transfer, David obtains a loan secured by the real estate and uses the $10,000 loan proceeds to buy a new motorcycle. Along with the real estate, the mortgage is transferred to the corporation. Which of the following is true with regard to the tax consequences to David? | |
If tax avoidance was a purpose or if no business purpose was present for the assumption or transfer, a gain may be recognized to the extent of the liability (the full amount) plus the FMV of any property received (not including stock). The assumption of liabilities normally is considered to have a business purpose if the transferor incurred the liabilities in the normal course of business. Since no bona fide business purpose exists for the corporation to assume the loan, the transferred mortgage must be considered as boot and recognized as a taxable gain.
Jack Carson transferred a building that had an adjusted basis of $75,000 and a fair market value of $130,000 to Corporation R in exchange for 80% of R’s only class of stock and a car with an adjusted basis to R of $25,000. The fair market value of the stock at the time of the transfer was $100,000 and the car’s fair market value was $30,000. What is the amount of R’s basis in the building?
Section 362(a) provides that the basis to a corporation of property acquired in a Sec. 351 transaction is the same as the basis in the hands of the transferor, increased by the gain recognized by the transferor. Here, the transfer qualifies as a Sec. 351 transaction since greater than 80% of all stock was held by the shareholder after the exchange. Jack received a car with a $30,000 fair market value in addition to the stock. Jack realizes a gain of $55,000 ($100,000 FMV of stock + $30,000 FMV car – $75,000 adjusted basis in the building). Jack recognizes a gain of $30,000 which is the FMV of the property other than the stock received. Thus, R’s basis in the building is $105,000 ($75,000 Jack’s adjusted basis + $30,000 gain recognized).
| Mr. Jacobs transferred an office building to Booda Corporation in exchange for 100% of Booda’s only class of outstanding stock and $60,000 cash. The building had an adjusted basis of $300,000 and a fair market value of $500,000. The building was subject to a mortgage of $240,000, which Booda assumed for valid business reasons. The fair market value of Booda’s stock on the date of transfer was $200,000. What is the amount of Mr. Jacobs’s recognized gain? |
Section 351(a) provides for nonrecognition of gain or loss if a person transfers property to a corporation solely in exchange for stock in the corporation and if immediately after the exchange such person is in control (owns at least 80% of the stock). Since money is received in addition to the stock, any gain realized by the recipient is recognized but not in excess of the sum of the money received. A gain is not recognized on the assumption of liabilities because Sec. 357(c) provides that gain is reported only if the liabilities assumed by the corporation ($240,000) exceed the adjusted basis of the property transferred ($300,000). Mr. Jacobs’s recognized gain is $60,000, the cash received.
| Mr. Brown transferred an office building to Corporation J in exchange for 100% of Corporation J’s stock and $30,000 cash. The building had an adjusted basis of $150,000 and a fair market value of $250,000. The building was subject to a mortgage of $120,000, which Corporation J assumed for valid business reasons. The fair market value of Corporation J’s stock on the date of the transfer was $100,000. What is Mr. Brown’s recognized gain? |
| Correct B |
Adams, Beck, and Carr organized Flexo Corp. with authorized voting common stock of $100,000. Adams received 10% of the capital stock in payment for the organizational services that he rendered for the benefit of the newly formed corporation. Adams did not contribute property to Flexo and was under no obligation to be paid by Beck or Carr. Beck and Carr transferred property in exchange for stock as follows:
What amount of gain did Carr recognize from this transaction? |
This formation qualifies as a nonrecognition of gain transaction under Sec. 351. The control requirement is satisfied since Beck and Carr have ownership of at least 80% of the stock. Since Carr did not receive any boot property, (s)he will not recognize gain from this transaction.
Andrew transferred an office building that had an adjusted basis of $180,000 and a fair market value of $350,000 to Barry Corporation in exchange for 80% of Barry’s only class of stock. The building was subject to a mortgage of $200,000, which Barry assumed for valid business reasons. The fair market value of the stock on the date of the transfer was $150,000. What is the amount of Andrew’s recognized gain?
Section 351(a) provides for nonrecognition of gain or loss if a person transfers property to a corporation solely in exchange for stock in the corporation and if, immediately after the exchange, such person is in control (owns at least 80% of the stock). However, Sec. 357(c) provides that, if the liabilities transferred or assumed ($200,000) are greater than the basis of all the property transferred ($180,000), the excess is treated as a gain from the sale or exchange of property. Thus, Andrew’s recognized gain is $20,000.
Lind and Post organized Ace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows:
The building was subject to a $10,000 mortgage that was assumed by Ace. What amount of gain did Lind recognize on the exchange? |
Amount realized from stock ($120,000 × 60%) | $ 72,000 |
Mortgage assumed by Ace | 10,000 |
Total amount realized | $ 82,000 |
Less: Adjusted basis of building | (40,000) |
Realized gain | $ 42,000 |
However, Sec. 351 requires that no gain or loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and immediately after the exchange such person(s) is(are) in control of the corporation. Control is defined as 80% or more of the voting power of stock and 80% or more of the shares of each class of nonvoting stock.
Mr. Hill and Mr. Dale formed a corporation to which Hill transferred a patent right that had a fair market value to him of $25,000 and a zero adjusted basis. Dale transferred a building that had a fair market value of $100,000 and an adjusted basis to him of $75,000. In return, Hill received 250 shares and Dale 750 shares of the corporation’s 1,000 outstanding shares of its only class of stock. As a result of this transaction, Mr. Dale should report
If the requirements of Sec. 351(a) are met, no gain or loss is recognized when property is transferred to a corporation. The requirements are that the transfer be by one or more persons, solely in exchange for stock, and that the transferor(s) be in control of the corporation immediately after the exchange. Section 368(c) defines control as the ownership of at least 80% of both the voting and nonvoting stock. Since Hill and Dale collectively received all the shares, the control requirement is met. Hill and Dale meet these criteria so the transfer qualifies under Sec. 351(a). No gain or loss is recognized.
The difference in value of property contributed for equal shares may cause other tax consequences depending on the underlying facts; e.g., Dale may have made a gift to Hill, or Hill may have received compensation from Dale or the corporation.
Sam transfers assets with an adjusted tax basis to him of $50,000 to Zarus Corp., a C corporation, in exchange for special business equipment worth $5,000 and 100% of all the stock in Zarus worth $100,000. How much gain does Sam realize and how much gain must he recognize on the transfer?
| Randy and Audra formed a corporation to which Randy transferred equipment that had a fair market value of $25,000 and zero adjusted basis. Audra transferred a building that had a fair market value of $100,000 and an adjusted basis to her of $80,000. In return, Randy received 200 shares and Audra received 800 shares of the corporation’s outstanding shares of its only class of stock. As a result of this transaction, Audra should report |
Section 351(a) provides that no gain or loss is recognized if one or more persons transfer property to a corporation solely in exchange for stock in such corporation, and if immediately after the exchange such person(s) is(are) in control of the corporation. “Control” is defined in Sec. 368(c) as the ownership of stock possessing at least 80% of the total combined voting power of all classes of voting stock and at least 80% of the total number of shares of all other classes of stock. Since Audra owns 80% of the corporation’s outstanding stock, she controls the corporation. Therefore, Audra reports neither a gain nor a loss on the transfer of property solely for stock.
Ned accepted stock in his employer’s company valued at $1,000 instead of his $1,000 salary payment. Which tax consequence of this transaction is true?
In general, property received for services must be included in gross income at the FMV of the property received.
| Ms. White transferred property having an adjusted basis of $145,000 and a fair market value of $160,000 to Corporation T in exchange for 100% of T’s only class of stock and $20,000 cash. At the time of the transfer, the stock had a fair market value of $115,000. What is the basis of the stock Ms. White received in this transaction? |
Section 358(a)(1) provides that, in a Sec. 351 exchange, the basis of the stock received by the transferors (shareholders) is the basis of the property transferred decreased by the fair market value of other property received, the amount of any money received, and the amount of loss that was recognized by the taxpayer. The basis is increased by the amount of gain recognized by the taxpayer. When boot (the cash) is received, gain must be recognized to the extent of the lesser of the transferor’s realized gain or the fair market value of boot property received. Ms. White has a realized loss of $10,000 ($115,000 stock received + $20,000 cash – $145,000 basis). A loss is never recognized in an exchange qualifying under Sec. 351, whether boot is received or not. Therefore, the basis equals the adjusted basis of the property transferred ($145,000) less the boot property received ($20,000 cash), or $125,000.
Authors’ Note: When the fair market value received ($115,000) is different from fair market value of property given up ($160,000), use FMV received as the selling price.
| In a Sec. 351 transaction, Mr. Miller transferred assets with an adjusted basis of $76,000 and a fair market value of $80,000 to Way View Corporation in exchange for its capital stock with a fair market value of $72,000. What is Mr. Miller’s recognized gain or loss? |
Section 351 requires that no gain or loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and, immediately after the exchange, such person(s) control the corporation. Thus, the correct answer is $0.
| Kim transferred property with an adjusted basis of $16,000 and a fair market value of $25,000 to Corporation K, in exchange for 90% of K’s only class of stock and $3,000 cash. The stock received by Kim had a fair market value of $22,000 at the time of the exchange. What is Corporation K’s basis in the property received from Kim? |
The basis of the property received by the controlled corporation in exchange for its stock is equal to the transferor’s basis in the property ($16,000), increased by the amount of any gain recognized by the transferor ($3,000 as a result of the cash distribution). Thus, Corporation K takes the property with a $19,000 basis.
| Bob and Sam transfer a building with a basis of $100,000 to the Redwood Corporation in exchange for 75% of each class of stock with a fair market value of $300,000. The other 25% of the stock was already issued to Betty. What is the gain, if any, that Bob, Sam, or the Redwood Corporation must recognize? |
Publication 542 states, “If you transfer property (or money and property) to a corporation solely in exchange for stock in that corporation, and immediately thereafter you are in control of the corporation, the exchange is usually not taxable.” Furthermore, “To be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock of the corporation.” Thus, Bob and Sam are not in control of the corporation and this transaction does not qualify for Sec. 351 treatment. Bob and Sam must recognize the entire $200,000 realized gain ($300,000 stock received – $100,000 basis of the building). The corporation recognizes no gain on exchange of its stock for property (including money).
| The basis of stock received in exchange for property transferred to a controlled corporation is the same as the basis of the property transferred with certain adjustments. All of the following would decrease the basis of the stock EXCEPT |
Section 358(a)(1) provides that, in a Sec. 351 exchange, the basis of the stock received by the transferors (shareholders) is the basis of the property transferred decreased by the fair market value of other property received, the amount of any money received, and the amount of loss that was recognized by the taxpayer. The basis is increased by the amount of gain recognized by the taxpayer. Any amount treated as a dividend increases the basis.
Mary owns a farm with a FMV of $500,000 and a mortgage of $200,000. The basis of the farm is $300,000. She exchanged the farm for stock in a transfer under IRC Sec. 351. What is her basis in the new stock?
Mary has a realized gain of $400,000 [$500,000 selling price – ($300,000 basis – $200,000 mortgage)]. There is no recognized gain under Sec. 351. However, the mortgage assumed by the corporation reduces Mary’s basis. Therefore, this basis of the stock is $100,000 ($300,000 basis – $200,000 mortgage).
Ms. D transferred the following assets to Corporation E:
Adjusted Basis | Fair Market Value | |
Cash | $1,000 | $1,000 |
Equipment | 2,000 | 1,500 |
Land | 4,500 | 6,000 |
In exchange, Ms. D received 51% of E’s only class of outstanding stock. The stock had no established value. What is Corporation E’s total basis in all the assets received, assuming that Ms. D recognized the correct amount of gain on the exchange?
Because less than 80% of E’s stock was exchanged for the assets, this transfer does not qualify for nonrecognition under Sec. 351. When a transaction does not qualify as a tax-free transfer under Sec. 351, the corporation’s initial basis in the property is the FMV of the stock at the time of the exchange. If the FMV of the stock at the time of the exchange cannot be determined, the basis is the FMV of the property received. Since the stock had no established value, the corporation’s basis is the FMV of the property, and E’s basis in the transferred property is therefore
Cash | $1,000 |
Equipment | 1,500 |
Land | 6,000 |
Total basis | $8,500 |
| Chris and Loretta formed a new corporation and contributed appreciated property. They received 90 and 10 shares of the corporation’s stock, respectively. Select the true statement. |
If the requirements of Sec. 351(a) are met, no gain or loss is recognized when property is transferred to a corporation. The requirements are that the transfer be by one or more persons, solely in exchange for stock, and that the transferor(s) be in control of the corporation immediately after the exchange. Section 368(c) defines control as the ownership of at least 80% of both the voting and nonvoting stock. Since Chris and Loretta collectively received all the shares, the control requirement is met. Chris and Loretta meet these criteria, so the transfer qualifies under Sec. 351(a). No gain or loss is recognized.
| In exchange for his old stretch limo that had a fair market value of $50,000 and an adjusted basis of $35,000, Winston received 100% of the stock of Wegofast Corporation. The Wegofast stock had a fair market value at the time of the transaction of $40,000. Winston also received a used limo that had an adjusted basis to Wegofast of $8,000 and a fair market value at the time of the transaction of $10,000. Both limos are for personal use by Winston. What is the amount of Winston’s recognized gain on this transaction? |
While transferors generally recognize no gain or loss on transfers of property for stock, transferors recognize gain, but not loss, to the extent of any other property (money or property other than stock of the controlled corporation) received in the exchange. The amount of the gain recognized may not exceed the value of the property received in the exchange when the property is for personal use. Thus, the $10,000 value of the limo (other property) is taxable to Winston.
| Bob and Frank buy an apartment building for $100,000. Both Bob and Frank organize the Acme Property Corporation when the apartment building has a fair market value of $500,000. They transfer the building to the corporation for all of its authorized capital stock, which has a par value of $500,000. What is the gain, if any, that Bob, Frank, or the Acme Property Corporation must recognize? |
Section 351(a) provides that no gain or loss is recognized if one or more persons transfer property to a corporation solely in exchange for stock in the corporation, and immediately after the exchange the person(s) is(are) in control of the corporation. “Control” is defined in Sec. 368(c) as the ownership of stock possessing at least 80% of the total combined voting power of all classes of voting stock and at least 80% of the total number of shares of all other classes of stock. Since Bob and Frank own more than 80% of the corporation’s outstanding stock, they control the corporation. Therefore, Bob and Frank do not report either a gain or a loss on the transfer of property solely for stock. The corporation recognizes no gain on the exchange of its stock for property.
| Mr. K performed legal services valued at $6,000 and paid $11,000 to ABC, Inc., in exchange for stock of ABC, Inc., having a fair market value of $17,000. What is the amount of ordinary income, if any, Mr. K must recognize? |
The general rule of Sec. 351 is that no gain or loss is recognized if one or more persons transfer property to a corporation solely for stock and if immediately after the exchange such person(s) is(are) in control of the corporation (i.e., own at least 80% of the stock). Section 351(d) states, however, that stock issued for services are not issued in return for property. Stock issued for services falls outside the general rule, and income must be recognized on such a transfer. The fair market value of stock received for services ($6,000) must be included in Mr. K’s income. All other stock received was in exchange for property, and no gain or loss is recognized on its transfer.
