Question

In a transaction qualifying under § 351, Kelcy transfers the following assets to Connor Corporation in exchange for all of its stock: equipment (basis $200,000; fair market value $180,000), land (basis $65,000; fair market value $80,000) and machinery (basis $100,000; fair market value $95,000). The alternative approach is not elected. Connor Corporation has a basis of: $__________ in the equipment, $__________ in the land, and $__________ in the machinery. Kelcy recognizes __________ on the transfer. Kelcy's has a basis of $__________ for his stock.

Answer 1

Connor Corporation takes a carryover basis in the assets transferred under Section 351 of $200,000, $65,000, and $100,000 for the equipment, land, and machinery, respectively. Kelcy recognizes no gain or loss on the transfer and has a basis of $365,000 for the Connor Corporation stock received.

Step-by-step explanation:

Under section 351 of the Internal Revenue Code, when a shareholder transfers property to a corporation solely in exchange for stock and immediately after the exchange is in control of the corporation, generally no gain or loss is recognized. The corporation receiving the property takes a carryover basis in the transferred assets, which is the same basis the transferor (Kelcy) had in them before the transfer.

Connor Corporation will have a basis of:

• $200,000 in the equipment
• $65,000 in the land
• $100,000 in the machinery

Kelcy recognizes no gain or loss on the transfer because the section 351 non-recognition provisions apply. The basis for the stock Kelcy receives will be the aggregate basis of the assets transferred, reduced by any liabilities assumed by the corporation, and increased by any gain recognized by Kelcy on the transfer. Assuming there are no liabilities and no gain is recognized, Kelcy's basis for his stock will be:

• $200,000 + $65,000 + $100,000 = $365,000