Carlos transfers property with a tax basis of $865 and a fair market value of $1,185 to a corporation in exchange for stock with a fair market value of $975 and $71 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $139 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

Question

Quizplus · Accepted Answer

When property is transferred to a corporation in exchange for stock in a transaction that qualifies for deferred tax treatment under section 351, the corporation's tax basis in the property received is the same as the transferor's tax basis in the property immediately before the exchange, increased by any gain recognized by the transferor on the exchange and decreased by any money and the fair market value of any other property (other than the stock) received by the transferor on the exchange.

In this case, Carlos's tax basis in the property transferred was $865, and the corporation assumed a liability of $139. Therefore, the corporation's total tax basis in the property received is $865 - $139 = $726. However, Carlos also received $975 in stock and $71 in cash, which must be subtracted from the corporation's tax basis in the property.

Thus, the corporation's final tax basis in the property received is $726 - $975 - $71 = -$320, which is less than zero. However, the tax code and regulations do not permit a negative tax basis, so the corporation's tax basis in the property is deemed to be zero.

Therefore, the correct answer is C) $936, which is the fair market value of the property received ($1,185) minus the liability assumed ($139).

Carlos Transfers Property with a Tax Basis of $865 and a Fair