• Johanne transferred investment property to S&J Corporation in exchange for 60 percent of the S&J Corporation stock (60 shares valued at $115,000). The property's fair market value was $190,000 and its adjusted basis to Johanne was $60,000. The investment property was subject to a $75,000 mortgage that S&J Corporation assumed on the transfer (not treated as boot). a. Assuming the transfer qualifies under §351, what is the amount and character of the gain Johanne must recognize on the exchange? b. What is Johanne's basis in the S&J stock he received in the exchange? c. Assume that in addition to the investment property, Johanne transferred inventory with a fair market value of $30,000 and an adjusted basis of $20,000 for additional S&J Corporation stock. What is the amount and character of gain Johanne must recognize on the exchange of the investment property and inventory for stock? d. Assume that in addition to the investment property, Johanne transferred inventory with a fair market value of $30,000 and an adjusted basis of $20,000 for additional S&J Corporation stock. What is Johanne's basis in the S&J stock he received in the exchange? e. Assume the original facts except that the liability assumed by S&J corporation would give rise to a deduction when paid. What is the amount and character of gain Johanne must recognize on the exchange?

a. Under §351, no gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock and immediately after the exchange such person or persons are in control of the corporation. Since the mortgage is not treated as boot, Johanne does not recognize any gain on the exchange.

b. Johanne's basis in the S&J stock is the same as the adjusted basis of the property transferred, 60,000, increased by any gain recognized on the exchange (which is zero in this case), and decreased by any amount received in the exchange (also zero in this case). So, the basis in the S&J stock is 60,000.

c. The transfer of inventory in addition to the investment property does not change the amount of gain recognized under §351, which is still zero. However, the character of the gain, if it were recognized, would be ordinary income because inventory is not a capital asset.

d. The basis in the additional S&J stock received for the inventory is the same as the adjusted basis of the inventory transferred, 20,000, increased by any gain recognized on the exchange (which is zero in this case), and decreased by any amount received in the exchange (also zero in this case). So, the basis in the additional S&J stock is 20,000. This is in addition to the $60,000 basis in the stock received for the investment property, for a total basis of$80,000.

e. If the liability assumed by S&J corporation would give rise to a deduction when paid, it is treated as boot, and Johanne must recognize gain to the extent of the lesser of the fair market value of the property transferred less its adjusted basis ($190,000 -$60,000 = $130,000) or the amount of the liability ($75,000). So, Johanne must recognize a gain of $75,000. The character of the gain is determined by the nature of the property transferred. If the property is a capital asset, the gain is a capital gain. If the property is not a capital asset (for example, if it is inventory or accounts receivable), the gain is ordinary income.

a. Under §351, no gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock and immediately after the exchange such person or persons are in control of the corporation. Since the mortgage is not treated as boot, Johanne does not recognize any gain on the exchange.

b. Johanne's basis in the S&J stock is the same as the basis in the property transferred, $60,000. The assumption of the mortgage does not affect the basis.

c. The transfer of inventory in addition to the investment property does not change the character of the transaction under §351. However, the gain recognized on the inventory is the difference between the fair market value and the adjusted basis, or $30,000 -$20,000 = $10,000. This gain is ordinary income.

d. Johanne's basis in the S&J stock he received in the exchange is the sum of the basis in the investment property and the inventory transferred, or $60,000 +$20,000 = $80,000.

e. If the liability assumed by S&J corporation would give rise to a deduction when paid, it is treated as boot. The gain recognized is the lesser of the gain realized or the boot received. The gain realized is the fair market value of the property less the adjusted basis, or $190,000 -$60,000 = $130,000. The boot received is the mortgage of$75,000. Therefore, Johanne must recognize a gain of $75,000. This gain is generally treated as capital gain.