Ezinne transfers land with an adjusted basis of $50,000 and a FMV of $95,000 to a new business in exchange for a 50% ownership interest.The land is subject to a $60,000 mortgage which the business will assume.The business has no other liabilities outstanding.Indicate the amount of gain recognized by Ezinne due to this exchange if the building is (1)a corporation and (2)a partnership.Assume Sec.351 is satisfied in the case of the corporation and Sec.721 is satisfied in the case of the partnership.

Question

Quizplus · Accepted Answer

In a Sec.351 transaction, no gain or loss is recognized if the transfer meets certain requirements, including that the transferors receive stock in the corporation and they control the corporation immediately after the exchange. Here, Ezinne receives a 50% ownership interest in the corporation, which satisfies the control requirement. The basis of the stock received is equal to the adjusted basis of the property transferred, which is $50,000. Since there is no cash or other property received, no boot is involved and no gain or loss is recognized. 
In a Sec.721 transaction, no gain or loss is recognized if the transfer meets certain requirements, including that the transferors receive partnership interests and they control the partnership immediately after the exchange. Here, Ezinne receives a 50% ownership interest in the partnership, which satisfies the control requirement. The basis of the partnership interest received is equal to the adjusted basis of the property transferred, which is $50,000. Since there is no cash or other property received, no boot is involved and no gain or loss is recognized. Therefore, the answer is B.

Ezinne Transfers Land with an Adjusted Basis of $50,000 and a FMV