Question

Lena contributes land used in business and held for more than one year (basis = $10,000 and value = $20,000) and inventory (basis = $40,000 and value = $70,000) to a corporation in exchange for shares of stock (a 10% interest) with a value of $70,000 and cash of $20,000 in a qualifying 351 transaction. What is the gain recognized by Lena and its character (ordinary v. Section 1231)?

Answer 1

In a qualifying 351 transaction, Lena's gain recognized from contributing land and inventory to a corporation is $40,000, which is treated as a capital gain.

Step-by-step explanation:

In a qualifying 351 transaction, Lena contributes land and inventory to a corporation in exchange for stock and cash. The gain recognized by Lena is calculated by subtracting the basis of the contributed assets from their value. In this case, Lena's gain for the land is $10,000 ($20,000 - $10,000) and for the inventory is $30,000 ($70,000 - $40,000). The total gain recognized by Lena is $40,000. This gain is treated as a capital gain, not as ordinary income or Section 1231 gain.