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 these.

Question

Quizplus · Accepted Answer

Mary's recognized gain is calculated as the lesser of the realized gain or the sum of money and the fair market value of other property received. The realized gain is $75,000 ($90,000 FMV - $15,000 basis). The sum of money and FMV of other property received is $25,000 ($5,000 car + $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, except for the boot received. The boot is $25,000, but the recognized gain is limited to the realized gain, which is $75,000. Therefore, the recognized gain is $10,000.

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