Question

Samantha, in exchange for a corporation’s stock, transfers a building and land with an adjusted tax basis of $600,000 and $200,000, respectively when the fair value of this property was $800,000 and $200,000, respectively. After the transfer, Samantha owns over 80% of the outstanding stock in the corporation. In exchange for the transfer of property, Samantha received stock with a fair value of $900,000 and $100,000 cash. What should Samantha report on her Form 1040 for the year of the transfer?

a. Nothing, since this a valid Section 351(a) transfer.

b. Samantha will report a $200,000 capital gain.

c. Samantha will report a $100,000 capital gain for the building.

d. None of the above

Answer 1

SOLUTION :

Option A

Nothing, Since this is a Valid Section 351 (a) transfer.

​​​​​​According to Section 351(a), no gain or loss shall be recognized if property is transferred to a corporation by one or more person solely in exchange for stock in such corporation and immediately after the exchange, such person are in control as defined in under section 368(c) of the corporation.

Sec. 368(c) defines control as the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.

As after the exchange , Samantha owns 80% of outstanding shares in the corporation and the requirement as per section is met, the transfer qualifies for tax-free treatment under section 351.