Max transfers the following properties to a newly created corporation for $90,000 of stock and $10,000 cash in a transaction that qualifies under Sec. 351. Max's recognized gain is

Question

Max transfers the following properties to a newly created corporation for $90,000 of stock and $10,000 cash in a transaction that qualifies under Sec. 351.  Max's recognized gain is

Quizplus · Accepted Answer

Under Sec. 351, the transfer of property to a corporation in exchange for stock is generally tax-free if it meets certain conditions. One of these conditions is that the transferor must receive stock in the corporation in exchange for the property. In this case, Max receives $90,000 of stock and $10,000 cash, which qualifies under Sec. 351.

Max's recognized gain is equal to the lesser of his realized gain or the cash received. In this case, Max's realized gain is equal to the fair market value (FMV) of the property transferred minus his adjusted basis in the property. The FMV of the property transferred is not given, so we cannot calculate the realized gain. However, we know that Max received $10,000 cash, which is less than the hypothetical realized gain of $X (where X is the FMV of the property transferred minus Max's adjusted basis). Therefore, Max's recognized gain is $10,000, and he must recognize $7,000 of gain. The correct answer is C.

Max Transfers the Following Properties to a Newly Created Corporation