Jane transfers property (basis of $180,000 and fair market value of $500,000) to Green Corporation for 80% of its stock (worth $425,000) and a long-term note (worth $75,000) executed by Green Corporation and made payable to Jane. As a result of the transfer:
A) Jane recognizes no gain.
B) Jane recognizes a gain of $75,000.
C) Jane recognizes a gain of $270,000.
D) Jane recognizes a gain of $320,000.
E) None of these.

Question

Quizplus · Accepted Answer

Jane recognizes a gain of $75,000, which is the value of the long-term note received. Under Section 351 of the Internal Revenue Code, no gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation, and immediately after the exchange, such person(s) are in control (meaning ownership of at least 80% of the stock) of the corporation. However, the receipt of the note (which is not stock) triggers gain recognition to the extent of its value.

Jane Transfers Property (Basis of $180,000 and Fair Market Value