Question

11), 12), 13) & 14): Assume a transfer under IRC Section 351. Andy transfers property with a FMV of $70,000 and adjusted basis of $30,000 to a controlled corporation in exchange for stock: $65,000 and cash and other property: $5,000.

11) The amount of boot received by the shareholder is a $5,000 b $15,000 c $20,000 d $30,000

12) The gain recognized by the shareholder is a $5,000 b $15,000 c $20,000 d $30,000

13) The shareholder's basis in the stock received is a $5,000 b $15,000 c $20,000 d $30,000

14) The corporation's basis in the asset received is a $20,000 b $30,000 c $35,000 d $55,000

Answer 1

As per section 351, when all the contributors contributing cash and/or property gets 80% or more control in C corp. it will be a nontaxable transaction u/s 351.

Also, If contribution also combines along with cash and property provision of service it will also qualify for Sec 351 transaction. Only contribution if services will not constitute for sec 351 transaction.

But one of the exceptions to Sec 351 is that,

If boot is received by the shareholder along with the stock where boot can be cash, other securities or other property gain will be recognized upto the extent of boot received (Cash + FMV of other property received)

Gain realized = FMV of property + Boot received - Adjusted basis of property

= $70,000 + $5,000 - $30,000

= $45,000

Gain recognized upto the extent of boot received = $5,000

Shareholder's adjusted basis in stock = Adjusted basis (-) mortgage debt + gain recognized - boot received

= $30,000 - 0 + $5,000 - $5,000

= $30,000.

Corporation's basis in asset = Carryover basis + Gain recognized

= $30,000 + $5,000

= $35,000.

For any clarification, please comment. Kindly Up Vote!