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 cash 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?
A)$5,000.
B)$4,000.
C)$3,000.
D)$2,000.

Question

Quizplus · Accepted Answer

Under Section 351, if a taxpayer transfers property to a corporation solely in exchange for stock in the corporation and immediately after the exchange the taxpayer is in control of the corporation (i.e. owns at least 80% of the voting power and value of the corporation), the transaction can be done tax-free.

In this case, Ashley transferred property with a tax basis of $5,000 and received stock with a fair market value of $2,000 and $500 cash. The total value of the consideration received is $2,500 ($2,000 in stock + $500 cash). However, the property transferred had a fair market value of $3,000, so there is a $500 loss.

The loss is not recognized as a deduction because it is a transfer to a controlled corporation under Section 351. Instead, the loss is incorporated into the basis of the stock received. Therefore, Ashley's tax basis in the stock received is $5,000 (the original tax basis of the property transferred) minus the $500 loss, which equals $4,500. However, Ashley also received $500 cash, so the final tax basis in the stock received is $5,000 - $500 loss + $500 cash, which equals $4,000. Therefore, the answer is B.

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