Eve transfers property (basis of $120,000 and fair market value of $400,000) to Green Corporation for 80% of its stock (worth $350,000) and a long-term note (worth $50,000) executed by Green Corporation and made payable to Eve. As a result of the transfer:
A) Eve recognizes no gain.
B) Eve recognizes a gain of $230,000.
C) Eve recognizes a gain of $280,000.
D) Eve recognizes a gain of $50,000.
E) None of these.

Question

Quizplus · Accepted Answer

Eve recognizes a gain of $50,000, 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 or persons are in control of the corporation. However, the receipt of the note, which is not considered stock, triggers recognition of gain to the extent of its value.

Eve Transfers Property (Basis of $120,000 and Fair Market Value