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Topic
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Since Lind has 60% of the corp, why doesn’t 60% of the liability relieved get added back to her basis?
Lind and Post organized Ace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows:
Adjusted Fair Market Percentage of
Property Basis Value Ace Stock Acquired
Lind Building $40,000 $82,000 60%
Post Land 5,000 48,000 40%
The building was subject to a $10,000 mortgage that was assumed by Ace.
What was Lind’s basis in Ace stock?
A. $82,000
B. $40,000
C. $30,000
D. $0
C. This transaction qualifies as a Section 351 tax-free transaction. 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 the persons are in control of the corporation. Control means 80% or more of the corporation. Since Lind and Post own 100% of the corporation, no gain is to be recognized.
The basis of the stock received by Lind will be $30,000, which is the adjusted basis of the building transferred to Ace Corp, minus the $10,000 liability Ace Corp assumed.
Adjusted basis of building $40,000
– Liability assumed by Ace Corp. (10,000)
= Adjusted basis of stock received by Lind $30,000
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