Please use the following fact pattern to answer THE questions Assume no election
ID: 2431440 • Letter: P
Question
Please use the following fact pattern to answer THE questions Assume no elections are made and that the general Internal Revenue Rules apply. An individual contributes three properties to a corporation in a 351 exchange. The first property has a basis of $50000, and fair market value of $10000. The second property has a basis of $100000, and fair market value of $85000. The third property has a basis of $70000, and fair market value of $80000.
1. The individual's stock basis after the transfer is:
A. 220000
B. 0
C. 175000
D. 200000
E. A and C only
F. None of the above
2. What is the corporation's basis in property 1 after the transfer (rounded to nearest whole number)
A. $17273
B. $12944
C. $32727
D. $50000
E. $10,000
F. None of the above
3. What is the corporation's basis in property 2 after the transfer? (rounded to nearest whole number)
A. $100000
B. $15723
C. $85000
D. $87727
E. None of the above
4. What is the corporation’s basis in property 3 after the transfer? (rounded to nearest whole number)
A. $80000
B. $9877
C. $3984
D. $70000
E. None of the above
Explanation / Answer
Issuance of stock in exchange for property is a non taxable transaction under section 351 only if all the contributors of cash + propertry have 80% or more control.
Shareholder's basis for stock = Carryover basis - Mortgage debt (if any)
Corporation's basis = Carryover basis
If the carryover basis of the property is greater than the Fair market value of the property,
Shareholder's basis = Carryover basis - Mortgage debt (if any)
Corporation's basis = Carryover basis - Excess basis over Fair market value = Fair market value
1.
Individual's stock basis after the transfer = 50,000 + 100,000 + 70,000 = 220,000
2.
Corporation's basis in property 1 after the transfer = 10,000 (fair market value)
3.
Corporation's basis in property 2 after the transfer = 85,000 (fair market value)
4.
Corporation's basis in property 3 after the transfer = 70,000 (carryover basis)