Carlos transfers property with a tax basis of $500 and a fair market value of $800 to a corporation in exchange for stock with a fair market value of $650 and $50 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?
A)$800
B)$600
C)$550
D)$450

Question

Quizplus · Accepted Answer

Under section 351, when a taxpayer transfers property to a corporation in exchange for stock and cash, the transferor's tax basis in the stock received is equal to their tax basis in the property transferred. In this case, Carlos transferred property with a tax basis of $500, so the corporation's tax basis in the property received is also $500.

However, because the corporation assumed a liability of $100, the net amount received by Carlos was $550 ($650 fair market value of stock + $50 cash - $100 liability assumed). Therefore, Carlos has recognized gain of $50 ($550 received - $500 tax basis in property transferred).

The answer is not A or B because they both use the fair market value of the property received, which is irrelevant for tax basis purposes under section 351. The answer is not D because it does not take into account the liability assumed by the corporation.

Carlos Transfers Property with a Tax Basis of $500 and a Fair