Question

Garrett decides to incorporate his sole proprietorship. He transfers a building (used in his business) in...

  1. Garrett decides to incorporate his sole proprietorship. He transfers a building (used in his business) in exchange for 100% of the stock. Shortly before the transfer, Garrett mortgaged the real estate for $100,000 and used $10,000 of the loan proceeds to remodel his personal residence. He used the remaining $90,000 to purchase inventory for the new corporation (i.e., a legitimate business reason). The corporation assumes the $100,000 debt. How much of the loan proceeds will be considered boot for purposes of calculating gain under Section 351.

    a. zero.

    b. $90,000.

    c. $100,000.

    d. $10,000.

  2. Ben transfers land (FMV = 200,000; basis = 90,000; mortgage on land = 150,000) to the SYZ, Inc., his 80% owned corporation in exchange for stock worth $60,000. Assume the transfer qualifies under Section 351. How much of the gain realized, if any, must Ben recognize on the transfer to SYZ, Inc.?

    a. $110,000.

    b. $90,000.

    c. $60,000.

    d. $150,000.

    e. None of the above.

Homework Answers

Answer #1

1

It may be viewed as the economic equivalent of Corporation borrowing the $10,000, and then passing it to Garrett as boot in the Sec. 351 transaction. This is the reason Sec. 357(b) was enacted—to address transactions in which a corporation’s assumption of debt is not business-related and is the economic equivalent of receiving boot. Thus, it would appear that Sec. 357(b) would apply.

So &10,000 of the loan proceeds will be considered boot for purposes of calculating gain under Section 351.

Answer: d. &10,000

2

Sec.357( c)

Recognised gain is the excess of liabilities transferred to the corporation over the adjusted Basis of all properties transferred.

So $ 1,50,000-$ 90,000 = $ 60,000.

Answer: C. $60,000.

Note.

3 requirements for Sec.351

The transfers transfer Property.

Solely in exchange for the corporation’s Stock.

And have control immediately afterwards.

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