Question

Kevin formed Sustainable, Inc. in a valid Section 351 transaction by transferring land worth $200,000 with a basis of $100,000 to the corporation in exchange for 100% of its stock. The land was subject to a mortgage of $127,000 which was incurred two years ago for valid business reasons. Sustainable, Inc. took the building subject to the mortgage. Both Kevin and Sustainable properly use the cash method of accounting. As a result of these events, Kevin: A. Must recognize a gain of $127,000 B. Must recognize a gain of $100,000 C. Must recognize a gain of $27,000 D. Has no recognized gain or loss

Answer 1

C. Must recognize a gain of $27,000

Step-by-step explanation:

The computation of Kevin gain or loss is shown below:-

The transaction is a valid Section 351 transaction. But liability was shifted to land for $127,000 which is more than the Kevin base ($100,000).

So,

Gain to be recognized = The amount of liabilities in excess of basis

= $127,000 - $100,000

= $27,000

Therefore the gain to be recognized by $27,000