Mr. Jamail transferred business personalty (FMV $187,000; adjusted tax basis $29,900) to J&K Inc. in exchange for J&K common stock. Which of the following statements is true?

Question

Quizplus · Accepted Answer

Under Section 351 of the Internal Revenue Code, no gain or loss is recognized if property is transferred to a corporation solely in exchange for stock, and immediately after the exchange, the transferor is in control of the corporation (i.e., the transferor owns at least 80% of the voting power and value of the stock). However, if the transferor is not in control of the corporation immediately after the exchange, then gain or loss is recognized to the extent of any boot received (i.e., the amount of any property received that is not stock in the corporation).

In this scenario, Mr. Jamail transferred $187,000 worth of business personalty in exchange for common stock in J&K Inc. The adjusted tax basis in the business personalty is $29,900, so if Mr. Jamail is not in control of J&K immediately after the exchange, he must recognize gain to the extent of any boot received. The amount of boot received is the difference between the FMV of the property transferred and the adjusted basis in the property, which is $187,000 - $29,900 = $157,100.

If Mr. Jamail owns less than 80% of J&K immediately after the exchange, he must recognize gain to the extent of any boot received. Therefore, he must recognize a $157,100 gain if he owns 14% or 74% of J&K's outstanding stock immediately after the exchange. The gain is recognized regardless of the percentage ownership. Therefore, the correct answer is D.

Mr Jamail Transferred Business Personalty (FMV $187,000; Adjusted Tax Basis