Question

Sarah and Tony (mother and son) form Dove Corporation with the following investments: cash by Sarah of 65,000; land by Tony (basis of25,000 and fair market value of 35,000). Dove Corporation issues 400 shares of stock, 200 each to Sarah and Tony. Thus, each receives stock in Dove worth50,000.

a. Section 351 may apply because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred.
b. Tony's basis in the stock of Dove Corporation is 50,000.
c. Section 351 cannot apply since Sarah should have received 260 shares instead of only 200.
d. As a result of the transfer, Tony recognizes a gain of10,000.
e. None of these choices are correct.
1) Section 351 may apply because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred.
2) Tony's basis in the stock of Dove Corporation is 50,000.
3) Section 351 cannot apply since Sarah should have received 260 shares instead of only 200.
4) As a result of the transfer, Tony recognizes a gain of10,000.
5) None of these choices are correct.

Answer 1

Section 351 may apply because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred, and thus statement '1' is correct. Tony's basis in the Dove Corporation stock is his basis in the land contributed, which is $25,000, not the $50,000 fair market value. Therefore, statement '2' is incorrect.

Step-by-step explanation:

The question pertains to Section 351 of the Internal Revenue Code, which deals with non-recognition of gain or loss when transferring property to a corporation in exchange for its stock. Based on the information provided, Sarah and Tony are forming Dove Corporation and contributing cash and land, respectively, in exchange for equal shares in the corporation. Although Sarah's cash contribution is higher in value, they both receive the same number of shares, which could raise the question of whether Section 351 applies.

Section 351 applies to the formation of a corporation when shareholders transfer property in exchange for stock and are in control of the corporation immediately after the exchange. 'Control' typically means owning at least 80% of the corporation. Thus, the fact that Sarah and Tony did not receive shares proportional to the value of their contributions does not preclude Section 351 from applying.

Therefore, the correct answer is: 'Section 351 may apply because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred.' This means that choice 'a' and statement '1' are correct, while the other options are incorrect.

Tony will not recognize a capital gain on the contribution of land as long as Section 351 applies. The basis of Tony’s stock will be equal to his basis in the land contributed, which is $25,000, not $50,000 as incorrectly listed in choice 'b' and statement '2'.