Question

Grady exchanges qualified property, basis of $12,000 and fair market value of $18,000, for 60% of the stock of Eadie Corporation. The other 40% of the stock is owned by Pedro, who acquired it five years ago.Calculate Grady ‘s current income, gain, or loss and the basis he takes in his shares of Eadie stock as a result of this transaction.

Answer 1

Grady's gain = $6,000

Grady's stock basis = $18,000

Step-by-step explanation:

This transaction does not qualify as a Section 351 (a) transfer of property in exchanged for a corporation's stock, therefore Grady must recognize a gain.

Gain = fair market value - basis = $18,000 - $12,000 = $6,000

Grady's basis on Eadie Corp. stock is $18,000

In order to qualify as a Section 351 (a) transfer and not recognize any gain or loss, the transfer must result in an immediate control over the corporation and that doesn't happen here. Control over a corporation as defined by Section 368(c) represents at least 80% of all voting power and at least 80% of all common stock. In this case the transfer resulted in a 60% ownership, it was 20% short.