Charlie transfers equipment with an original cost of $100,000 and a current basis of $80,000 in...

Charlie transfers equipment with an original cost of $100,000 and a current basis of $80,000 in exchange for 50% of the stock. The equipment has a market value of $90,000. In the same transaction, Stacey transfers inventory with a market value of $90,000 and a basis of $10,000 for the other 50% of the stock

What is Charlie’s basis in his stock? (2 points)

What is Stacey’s basis in her stock? (2 points)

Does the depreciation recapture potential of Charlie carry-over to the corporation? (2 points)

Expert Solution

As per Sec.351, 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 control in sec.386(c) is defined as owning at least 80% of voting power.

In the example provided here Charlie & Stacey Transfers equipment & Inventory to Corporation and thereafter they together owns 100% of stock hence the requirement of control gets satisfied as provided in Sec.386(c) & hence the transfer will be pursuant to sec.351 transfer & no loss or gain shall be recognised on transfer.

Pursuant to Sec.362(e)(B) the default option is that transferor will have basis in stock which was there in the asset transferred while the transferee will get tax basis equal to fair market value. hence

Charlies basis in stock would be : $80,000 &

Stacey's basis in stock would be : $10,000

Yes the recapture potential shifts to the corporation and will be triggered when the corporation disposes of the property.

ekkarill92 answered 1 year ago

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