• 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?
Question
• Johanne transferred investment property to S&J Corporation in exchange for 60 percent of the S&J Corporation stock (60 shares valued at 190,000 and its adjusted basis to Johanne was 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?
Solution
Under Section 351 of the Internal Revenue Code, no gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control of the corporation.
In this case, Johanne transferred property to S&J Corporation and received 60% of the corporation's stock in return. This means she has control of the corporation post-exchange, so the transaction qualifies under §351.
The gain on the exchange would be the fair market value of the property (60,000), which equals $130,000. However, because the transaction qualifies under §351, Johanne does not have to recognize this gain.
The mortgage assumption by S&J Corporation is not treated as boot in this case, so it does not trigger any gain recognition.
Therefore, Johanne does not have to recognize any gain on this exchange.
Similar Questions
• 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?
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