Martin contributes property with an adjusted basis of $100,000 and a fair market value of $140,000 to a newly formed business entity. If the entity is an S corporation and the transaction qualifies under § 351, the S corporation's basis for the property and the shareholder's basis for the stock are:
E) None of the above.

Question

Martin contributes property with an adjusted basis of $100,000 and a fair market value of $140,000 to a newly formed business entity. If the entity is an S corporation and the transaction qualifies under § 351, the S corporation's basis for the property and the shareholder's basis for the stock are: 
E) None of the above.

Quizplus · Accepted Answer

When property is contributed to a newly formed corporation in exchange for stock in a transaction that qualifies under § 351, the corporation's basis is equal to the transferor's adjusted basis in the property, which is $100,000 in this case. The shareholder's basis in the stock received is equal to the adjusted basis of the property transferred, increased by any gain recognized on the transaction, which is zero in this case. Therefore, the shareholder's basis in the stock received is also $100,000.

Martin Contributes Property with an Adjusted Basis of $100,000 and a Fair