Carmen and Marc form Apple Corporation. Carmen transfers land that is Sec. 1231 property, with an adjusted basis of $18,000 and an FMV of $20,000 in exchange for one- half of the Apple Corporation stock. Marc transfers equipment that originally costs $28,000 on which he has taken $5,000 in depreciation deductions. The equipment has an FMV of $25,000 and he receives one- half of the stock and a $5,000 short- term note. The transaction meets the requirements of Sec. 351.
Which statement below is correct?

Question

Quizplus · Accepted Answer

Carmen recognizes no gain because the transaction qualifies under Sec. 351, which allows for non-recognition of gain or loss when property is transferred to a corporation in exchange for stock. Marc recognizes $2,000 as ordinary income because he received a $5,000 note, which is considered boot, and the gain is recognized to the extent of the boot received. The gain is calculated as the FMV of the equipment ($25,000) minus the adjusted basis ($23,000), resulting in a $2,000 gain.

Carmen and Marc Form Apple Corporation