Final answer:
The statement that Martin's tax basis in the stock he receives in a section 351 transaction will be $300 is false. His basis would be the same as the basis in the property transferred, not reduced by the deferred gain.
Step-by-step explanation:
The student has asked whether it is true or false that if Martin defers $500 of gain realized in a section 351 transaction, and the stock he receives in the exchange has a fair market value of $800, then Martin's tax basis in the stock will be $300. The statement is false. In a section 351 transaction, a taxpayer who transfers property to a corporation in exchange for stock can defer recognition of gain or loss if certain requirements are met.
After the exchange, the taxpayer's basis in the stock received is generally the same as the basis of the property transferred, adjusted for any boot received or for any gain or loss recognized. If Martin defers $500 of gain, this amount is not subtracted from the fair market value of the stock to determine his basis. Instead, his basis in the stock would be the same as the basis of the property he transferred (not given in the question), increased by any gain recognized (also not given) or decreased by any boot received.