Question

Henry transfers property with an adjusted basis of​ $95,000 and an FMV of​ $100,000 to a newly formed corporation in a Sec. 351 exchange. Henry receives stock with an FMV of​ $85,000 and a​ short-term note with a​ $15,000 FMV.​ Henry's basis in the stock is

A.​$90,000.
B.​$85,000.
C.​$100,000.
D.​$95,000.

Answer 1

Henry's basis in the stock he receives after a Section 351 exchange is equal to the adjusted basis of the property he transferred, which is $95,000. Option D is correct.

Step-by-step explanation:

When Henry transfers property to a corporation in a Section 351 exchange, the basis of the stock received is calculated based on the adjusted basis of the property transferred. In this case, Henry's adjusted basis is $95,000.

Despite receiving stock worth $85,000 and a short-term note worth $15,000, for a total of $100,000 in FMV, Henry's basis in the stock is not based on the FMV but on the adjusted basis of the property transferred which is $95,000. Therefore, the correct answer is D. $95,000.