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 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?

Question

Quizplus · Accepted Answer

Under section 351, when a taxpayer transfers property to a corporation in exchange for stock, the taxpayer's tax basis in the stock received is equal to the tax basis in the property transferred, reduced by any liabilities assumed by the corporation. 
In this case, Ashley's tax basis in the property transferred is $5,000, but the fair market value of the property is only $3,000. Therefore, Ashley has a realized loss of $2,000 ($5,000 - $3,000) on the transfer. 
However, because the transaction qualifies for deferral under section 351, Ashley does not recognize the loss on the transfer. Instead, Ashley's tax basis in the stock received is $4,500 ($5,000 - $500). Since the fair market value of the stock is only $2,000, Ashley has a realized loss of $2,500 ($4,500 - $2,000) on the transaction, but this loss is not recognized because of the deferral under section 351.

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