Question

Only ONE or ALL of the answers can be marked TRUE:

Currently, Barnes Corporation has four shareholders, shareholders J, K, L and M. Upon creation of the corporation, these shareholders made transfers of the following for their respective shares of stock:

 On April 3, 2019, J transferred $18,000 cash for 1,500 shares of stock

 On June 14, 2019, K and L both transferred property with adjusted tax bases of $31,000 and $42,000, respectively. The fair market value of each property was $30,000 and $48,000 respectively. K received 2,500 shares and L received 4,000 shares.

 On January 19, 2020, M transferred property with an adjusted tax basis $30,000 and a fair value of $28,000 for 2,000 shares. None of the transfers occurred under a plan of organization. These are the only shareholders and transfers.

Finally, the corporation has been authorized a total of 50,000 shares (meaning there can be future transfers). Form the above information, which of the following statements is TRUE?

a. There is no tax effect to Shareholder J.

b. Shareholder K has a realized loss of $1,000.

c. The April 3, 2018 transfer falls under Section 351.

d. All of the above statements are true.

Answer 1

Answer >

- Issuance of stock in exchange for property for cash is a non taxable transaction

- Also as per section 351, issuance of stock in exchange for property is also a non taxable transaction only

if all the contributors of cash and property have 80% or more control.

The share holder basis for the stock = conveyor basis - mortgage debt

Corporation basis for property = carryover basis

Exception :

when carryover basis of the property is greator than the (FMV) of the property, corporations basis in the

property is limited to the (FMV) of the property.

Thus is given questions.

a) True because (J) has been issued stock Exchange of cash

b) True because even though no loss has been recognised due to the application of section 351 share holder

k has still realized a loss of $1,000 as he has been issued stock worth of $30,000 in exchange of a property having adjusted basis of $ 31,000 also the corporation has recorded the as a basis which it is limited to the FMV of the property $30,000.

c) False because in the April 3, 2019 Transaction there as no transfer of property. The stock has been issued in exchange of cash.

d) Flase because all above not true