Question

Norma transfers to Spindle Corporation depreciable machinery originally costing $20,000 and now having a(n) $13,000 adjusted basis. In exchange, Norma receives all 325 shares of Spindle stock having a(n) $21,000 FMV and a three-year Spindle note having a(n) $8,000 FMV. What are the amount of Norma's recognized gain or loss?

Norma realizes a(an) $

and recognizes a(n) $

What are Norma's bases in the Spindle stock and note? Norma's basis in the note is and the basis in the stock is $

Answer 1

1. As per IRS, if a person transfer his property in a corporation only for stocks and immediately after transfer he owns 80% or more of the stocks of enterprise, then no gain is required to be recognized. However, if apart from stocks any other consideration also received, then he is required to recognize gain for the lesser of gain realized in the transfer or the cosideration received.

In the given case, Norma has following gains or income during the year:

Realized Gain = (Total FMV of stocks plus FMV of note received) - Adjusted basis in property transferred.

= (21,000 + 8,000) - 13,000 = $16,000

Gain to be recognized:

a. Realized gain as per above = $16,000 or

b. Consideration other than stock received i.e. 3 year note of FMV $8,000

Whichever is lower

Gain to be recognized is $8,000

2. The transferor’s basis in the stock is the basis the transferor had in the property transferred, plus gain recognized, minus consideration other than stock received.

Transferor's basis in stock = 13,000 + 8,000 - 8,000 = $13,000