Mary transfers a building (adjusted basis of $15,000 and fair market value of $90,000) to White Corporation. In return, Mary receives 80% of White Corporation's stock (worth $65,000) and an automobile (fair market value of $5,000). In addition, there is an outstanding mortgage of $20,000 (taken out 15 years ago) on the building, which White Corporation assumes. With respect to this transaction:
A) Mary's recognized gain is $10,000.
B) Mary's recognized gain is $5,000.
C) Mary has no recognized gain.
D) White Corporation's basis in the building is $15,000.
E) None of the above.

Question

Quizplus · Accepted Answer

Mary's recognized gain is calculated as the lesser of the realized gain or the boot received. The realized gain is $75,000 ($90,000 FMV - $15,000 basis). The boot received is $25,000 ($5,000 automobile + $20,000 mortgage assumed). Therefore, the recognized gain is $25,000. However, since Mary receives 80% of the stock, the transaction qualifies for non-recognition under IRC Section 351, but the boot received ($25,000) is taxable. Therefore, the recognized gain is $10,000 ($25,000 boot - $15,000 basis).

Mary Transfers a Building (Adjusted Basis of $15,000 and Fair