Henry transfers property with an adjusted basis of $90,000 and an FMV of $100,000 to a newly-formed corporation in a Sec. 351 exchange. Henry receives stock with an FMV of $80,000 and a short-term note with a $20,000 FMV. Henry's recognized gain is
A)$0.
B)$5,000.
C)$10,000.
D)$20,000.

Question

Quizplus · Accepted Answer

In a Sec. 351 exchange, no gain or loss is recognized by the transferor if certain requirements are met, including that the transferor receives only stock and/or securities of the transferee corporation. However, if the transferor also receives nonqualified preferred stock, debt securities, or other property, then gain is recognized to the extent of the FMV of such property received. In this case, Henry received a short-term note with a $20,000 FMV in addition to the stock, so he must recognize gain equal to the FMV of the note. Therefore, his recognized gain is $20,000 - $0 (since his adjusted basis in the property transferred was $90,000) = $10,000.

Henry Transfers Property with an Adjusted Basis of $90,000 and an FMV