Jerry transfers two assets to a corporation as part of a Sec. 351 exchange. The first asset has an adjusted basis of $70,000 and an FMV of $50,000. The second asset has an adjusted basis of $70,000 and an FMV of $150,000. The FMV of the stock received is $180,000, and he also receives $20,000 cash. The realized and recognized gain on the second asset is
A)$80,000 realized; $20,000 recognized.
B)$80,000 realized; $15,000 recognized.
C)$20,000 realized; $10,000 recognized.
D)$10,000 realized; $10,000 recognized.

Question

Quizplus · Accepted Answer

In a Sec. 351 exchange, the transfer of assets to a corporation in exchange for stock is generally nondeductible and tax-free. However, if the stock received is worth more than the adjusted basis of the assets transferred, the gain realized must be recognized to the extent of the excess.

For the first asset, the realized gain is $0 ($70,000 adjusted basis - $50,000 FMV = $0). Therefore, no gain is recognized.

For the second asset, the realized gain is $80,000 ($150,000 FMV - $70,000 adjusted basis = $80,000). Since the FMV of the stock received is $180,000, and $70,000 of that amount is allocated to the second asset, the excess received is $110,000 ($180,000 FMV - $70,000 basis). Therefore, $80,000 of the gain must be recognized ($110,000 excess received - $30,000 remaining gain).

The cash received is not relevant to the gain calculation. Therefore, the recognized gain is $80,000, and the answer is B.

Jerry Transfers Two Assets to a Corporation as Part of a Sec