Chris transfers land with a basis of $40,000 to Webb Corporation in exchange for 100% of Webb's stock. At the date of the transfer, the land had a $30,000 fair market value. Chris makes an election to reduce his basis in Webb's stock to $30,000, so Webb's basis in the land is

Question

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When Chris transfers the land to Webb Corporation, he has a realized loss of $10,000 ($30,000 fair market value - $40,000 basis). However, since he received 100% of Webb's stock in exchange, this is considered a tax-free exchange under §351.

Chris can then make an election under §358(d)(2) to reduce his basis in Webb's stock to the fair market value of the property he transferred, which was $30,000. This means Chris's new basis in Webb's stock is $30,000.

Webb Corporation's basis in the land is equal to Chris's adjusted basis, which is $40,000. This is because the transferee corporation's basis in property received in a tax-free exchange carries over from the transferor's adjusted basis in the property (§362(b)(1)).

Chris Transfers Land with a Basis of $40,000 to Webb