Eileen transfers property worth $200,000 (basis of $190,000) to Goldfinch Corporation. In return, she receives 80% of the stock in Goldfinch Corporation (fair market value of $180,000) and a long-term note (fair market value of
$20,000) executed by Goldfinch and made payable to Eileen. Eileen recognizes gain on the transfer of:
A) $0.
B) $10,000.
C) $20,000.
D) $190,000.
E) None of these.

Question

Quizplus · Accepted Answer

Eileen recognizes a gain of $10,000, which is the difference between the fair market value of the note ($20,000) she received and her basis in the property transferred ($190,000). Under the tax code, the receipt of stock in exchange for property does not trigger recognition of gain if the transferor is in control of the corporation immediately after the exchange. However, the receipt of a note (or other "boot") requires the recognition of gain to the extent of the lesser of the boot received or the realized gain on the exchange. Here, the realized gain is $10,000 ($200,000 fair market value of property transferred minus $190,000 basis), and since the boot received is also $20,000, Eileen recognizes a gain of $10,000.

Eileen Transfers Property Worth $200,000 (Basis of $190,000) to Goldfinch