Question

Gearty and Olinto organized The Worthington Corp., which issued voting common stock with a fair market value of $240,000. They each transferred property in exchange for stock as follows:

Property Adjusted Basis Fair Market Value Percentage of The Worthington Corp. Stock Acquired Gearty Building $80,000 $164,000 60% Olinto Land 10,000 96,000 40%

The building was subject to a $20,000 mortgage that was assumed by The Worthington Corp. What was The Worthington Corp.'s basis in the building?

Answer 1

Issuance of stock in exchange for property is a non taxable transaction under section 351 only if all the contributors of cash and property have 80% or more control.

There are 4 exemptions to this rule where gain is recognized.

1. No control by shareholder group contributing cash and property - Shareholder reports the transaction as a sale of property at fair market value as of the date of contribution and recognizes all the gain or loss.

2. Mortgage debt exceeds shareholder's adjusted basis in the property - Gain is recognized on excess liability such that shareholder's basis in the stock is $0.

3. Boot is received by the shareholder along with stock - Realized gain is recognized upto the amount of boot received.

4. Carryover basis of the property is greater than the fair market value of the property - Corporation's basis in the property is limited to the fair market value of the property.

As Gearty and Olinto both together have more than 80% control and none of the above exemptions apply, this is a non taxable transaction and the basis of the corporation is the carryover basis.

Worthington Corp.'s basis in the building = Carryover basis = $80,000.