Silvia transfers to Leaf Corporation a machine she had purchased a year ago for $50,000. The machine has a $40,000 adjusted basis and a $55,000 FMV on the transfer date. $10,000 in depreciation was claimed by Silvia prior to the transfer. Silvia receives all 1,000 shares of Leaf Corporation stock worth $50,000 and a two-year note with a $5,000 FMV. What is the amount and character of the recognized gain or loss?

Question

Quizplus · Accepted Answer

To calculate the recognized gain or loss, we need to compare the adjusted basis of the machine ($40,000) with the FMV on the transfer date ($55,000).

Since the FMV is higher than the adjusted basis, there is a $15,000 realized gain. However, we need to subtract the depreciation claimed by Silvia prior to the transfer ($10,000) to arrive at the recognized gain of $5,000.

This recognized gain is treated as ordinary income because Silvia transferred the machine in exchange for stock and a note, not solely for cash. The FMV of the note ($5,000) does not change the character of the gain because it is less than the realized gain.

Silvia Transfers to Leaf Corporation a Machine She Had Purchased