Question

I know the answer for this problem is FALSE, but cannot seem to have a clear understanding of the answer. Please explain as to why it is FALSE with the problem below:

In general, the basis of property to a corporation in a transfer that qualifies as a nontaxable exchange under § 351 is the basis in the hands of the transferor shareholder decreased by the amount of any gain recognized on the transfer

Answer 1

General rule

No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation.

The corporation takes the basis of the asset in the hands of the transferor, adds any gain recognized by the transfer, and subtracts any built-in loss limitation to obtain its basis in the newly-acquired asset.

The difference between the stock value received and the tax basis in the property transferred to the corporation will result in a gain or loss.

Under section 351(a):

No gain or loss is recognized (reported) provided:

1 - You receive Only Stock in exchange for your property, and

2 - You are in Control of the corporation immediately after the exchange.

Qualifying For a Tax-Free Exchange Under Section 351(a)

Two requirements must be met to qualify for tax-free treatment under Section 351(a):

1 - You get Only Stock in exchange for your property; NOT stock PLUS other property.

• You (or you and your transferor group, for example, partners incorporating the partnership) mayOnly Receive Stock (other than nonqualified preferred stock) from the corporation in exchange for the property you transfer, and

2 - Control:

• You (or you and your transferor group) must be in Control of the corporation, immediately after the exchange.

• Section 368(C) defines control and is covered below.

Valuation of Property and Stock in an Exchange

When you transfer property into a corporation, there are two valuation issues:

1 - The value assigned to the stock you receive from the corporation.

2 - The value assigned to the property being transferred to the corporation.

1) The value assigned to the stock you receive from the corporation:

The basis in the stock you receive (also called-the exchanged basis, carryover basis or transferred basis) is the sameas the adjusted basis in the property you transfer.

Example:

• If the adjusted basis in the property you transfer is $10,000.

• Your stock basis is also $10,000.

2) The value to assign to the property being transferred to the corporation:

The corporation's basis in the property it receives in an exchange for its stock is the samebasis you had in the property when transferred (in other words, the corporation takes your basis).

Example:

• If your adjusted basis in the property transferred is $10,000.

• The corporation's basis in the property is also $10,000

From The Above Explanation it is clear that the statement Given In the Question is FALSE