Beth forms Lark Corporation with a transfer of appreciated property in exchange for all of its shares.Shortly thereafter,she transfers half her shares to her son,Ted.The later transfer to Ted could cause the original transfer to be taxable.

Question

Quizplus · Accepted Answer

This is because when Beth transferred appreciated property to Lark Corporation, she likely took advantage of Section 351 of the Internal Revenue Code, which generally allows for a tax-free exchange of property for shares when forming a corporation. However, if she later transferred half of her shares to her son Ted, this could trigger what's known as "boot" under Section 351, which means that the transferor would have to recognize some amount of taxable gain equal to the amount of boot received (in this case, the shares of stock that Ted received). Therefore, the original transfer of property could become taxable due to the subsequent transfer of shares to Ted.

Beth Forms Lark Corporation with a Transfer of Appreciated Property