ExpertMedium1 markMultiple Choice
CPA · Question 25 · Area II: Entity Tax Compliance
Shareholder A contributes property (Basis $40,000, FMV $100,000) to a C Corporation in exchange for 100% of the stock. The corporation assumes a liability of $55,000 attached to the property. What is Shareholder A's recognized gain and basis in the stock?
Shareholder A contributes property (Basis $40,000, FMV $100,000) to a C Corporation in exchange for 100% of the stock. The corporation assumes a liability of $55,000 attached to the property. What is Shareholder A's recognized gain and basis in the stock?
Answer options:
A.
Gain $0; Basis $40,000
B.
Gain $15,000; Basis $0
C.
Gain $15,000; Basis $15,000
D.
Gain $60,000; Basis $100,000
How to approach this question
Check §357(c): If Liability > Basis, Excess is Gain. Stock Basis = Basis of Property + Gain Recognized - Liability Assumed.
Full Answer
B.Gain $15,000; Basis $0✓ Correct
IRC §357(c). In a §351 exchange, if liabilities assumed exceed the adjusted basis of property transferred, the excess is gain. <br/>Gain = $55,000 - $40,000 = $15,000. <br/>Stock Basis (IRC §358) = $40,000 (carryover) + $15,000 (gain) - $55,000 (liability) = $0.
Common mistakes
Forgetting that liability relief reduces stock basis.
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