Final answer:
Johanne must recognize a capital gain of $75,000 which is the amount of the mortgage assumed by the S&J Corporation. Johanne's basis in the S&J stock received is $60,000, which is calculated by adding the gain
Step-by-step explanation:
Under Section §351 of the Internal Revenue Code, if a person transfers property to a corporation in exchange for its stock, and immediately after the exchange is in control of the corporation, usually defined as owning at least 80% of the stock, then no gain or loss is recognized. However, Johanne transferred property subject to a mortgage which the corporation assumed. This assumption of liability is treated as if Johanne received money, which means there is a potential for recognizing gain.
In Johanne's case, the gain realized on the exchange is the fair market value of the property ($190,000) minus the adjusted basis ($60,000), for a total realized gain of $130,000. However, the entire realized gain is not recognized because of §351. Since the mortgage of $75,000 is assumed by the corporation, it is treated as money received, and therefore, Johanne has to recognize gain to the extent of the liability assumed, which is $75,000. This is considered a capital gain, as it results from the increase in value of the invested property.
Johanne's basis in the S&J stock is the adjusted basis of the transferred property ($60,000) plus the gain recognized ($75,000), minus the mortgage assumed ($75,000). This gives Johanne a basis of $60,000 in the S&J stock received.