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 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?

Question

Quizplus · Accepted Answer

Under section 351, when property is transferred to a corporation in exchange for stock, it is not recognized as a taxable sale or exchange. The transferor's tax basis in the stock received is equal to the tax basis in the property transferred, minus any liabilities assumed by the corporation. Therefore, the corporation's tax basis in the property received is $500 (transferor's basis) minus $100 (assumed liability) plus $50 (cash received), which equals $450. However, the fair market value of the property transferred was $800, and the fair market value of the stock received was only $650. This creates a "negative adjustment" to the corporation's tax basis in the stock, reducing it to $550 ($800 - $100 - $50 = $650; $650 - $100 = $550).

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