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Sarah and Tony (mother and son) form Dove Corporation with the following investments: cash by Sarah...

Sarah and Tony (mother and son) form Dove Corporation with the following investments: cash by Sarah of $65,000; land by Tony (basis of $25,000 and fair market value of $35,000). Dove Corporation issues 400 shares of stock, 200 each to Sarah and Tony. Thus, each receives stock in Dove worth $50,000.

a.Tony's basis in the stock of Dove Corporation is $50,000.

b.As a result of the transfer, Tony recognizes a gain of $10,000.

c.Section 351 cannot apply since Sarah should have received 260 shares instead of only 200.

d.Section 351 may apply because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred.

e.None of these choices are correct.

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Answer #1

D Section 351 may apply because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred.

The stock was not in proportion to the value of the property transferred(choice c cancels) does not prevent § 351 from applying. Since § 351 applies and no stock was received, Tony does not recognize a gain (choice b.cancels). His basis in the stock was $25,000 plus $15,000, the basis of the stock implicitly gifted by Sarah to Tony is $50,000 as in choice a which alsp cancels.

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