Ashley transfers property with a tax basis of $5,000 and a fair market value of $3,000 to a corporation in exchange for stock with a fair market value of $2,000 and $500 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $500 on the property transferred. What is Ashley's tax basis in the stock received in the exchange?
A)$5,000
B)$4,000
C)$3,000
D)$2,000

Question

Quizplus · Accepted Answer

When property is transferred to a corporation in exchange for stock in a transaction that qualifies for deferral under Section 351, the transferor's tax basis in the stock received is equal to the tax basis of the property transferred, reduced by any liabilities assumed by the corporation. In this case, Ashley's tax basis in the stock received would be $5,000 (tax basis of the property transferred) - $500 (liability assumed by the corporation) = $4,500. However, since the fair market value of the stock received is only $2,000, Ashley's tax basis in the stock is limited to $2,000, which is the amount of boot received. Therefore, the correct answer is B) $4,000.

Ashley Transfers Property with a Tax Basis of $5,000 and a Fair