Rachel owns 100% of the stock of Cardinal Corporation.In the current year Rachel transfers an installment obligation, tax basis of $180,000 and fair market value of $350,000, for additional stock in Cardinal worth $350,000.
A)Rachel has a taxable gain of $180,000.
B)Rachel has a taxable gain of $170,000.
C)Rachel recognizes no taxable gain on the transfer.
D)Rachel has a basis of $350,000 in the additional stock she received in Cardinal Corporation.
E)None of the above.

Question

Quizplus · Accepted Answer

Since Rachel owns 100% of the stock of Cardinal Corporation, the transfer of the installment obligation is considered a transfer between the same taxpayer and thus, no taxable gain is recognized. Rachel's basis in the additional stock received is equal to the basis of the installment obligation transferred, which is $180,000. Therefore, Rachel's total basis in the additional stock received is $180,000, and not the fair market value of the stock, which is $350,000.

Rachel Owns 100% of the Stock of Cardinal Corporation