Question

Zhang incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation’s stock. The property transferred to the corporation had the following fair market value and adjusted basis. FMV Adjusted Basis Inventory $ 20,000 $ 11,000 Building 250,000 100,000 Land 530,000 300,000 Total $ 800,000 $ 411,000 The corporation also assumed a mortgage of $500,000 attached to the building and land. The fair market value of the corporation’s stock received in the exchange was $300,000. The transaction met the requirements to be tax-deferred under §351. What amount of gain or loss does Zhang recognize on the transfer of the property to her corporation? THE ANSWER IS NOT 0.

Answer 1

Ans: Gain Realised on Exchange = Fair Value of Stock Realized-Adjusted tax basis of property transfered

                                                 = $ 800,000-411,000

                                                 = $ 389,000

Comment: there will be no gain or loss required to by recognize as the condition u/s 351 are met in this exchange (i.e. more than 80% of corporation stock should be acquired by the transferor in exchange of such transfer,)