Question

You transfer property with an adjusted basis of $20,000 and a fair market value of $31,000 in exchange for 100% of the stock in a new corporation. You receive 100 shares of stock having a fair market value of $16,000 and $10,000 in cash. The corporation also assumes a $5,000 mortgage on the property. Which of the following is correct?

a) $10,000 gain realized; $5,000 recognized.
b) $11,000 gain realized; $10,000 recognized.
c) $15,000 gain realized; $11,000 recognized.
d) $11,000 gain realized; $0 recognized.

Answer 1

b) $11,000 gain realized; $10,000 recognized.

Step-by-step explanation:

Gain realized = $16,000 + $10,000 + $5,000 - $20,000 = $11,000

However, the transaction qualifies under sec.351 for non recognition. Transfer of Mortgaged property to a controlled corporation does not require recognition of gain unless the liabilities transferred or assumed are greater than the basis of all the property transferred. So the recognized gain is attributable to the $10,000 cash received.