Question

Naomi incorporates her Sole Proprietorship, transferring its assets to a newly formed Ceasar Corporation. The assets transferred have an Adjusted Basis of $100,000 and a Fair Market Value of $250,000. Also transferred was $30,000 in liabilities, $25,000 of which was for personal (non-business) purposes and the remaining $5,000 being business related. In return for these transfers, Naomi receives all of the stock in Ceasar Corporation. Which of the following is correct?

		Ceasar Corporation will have a basis of $130,000 in the property transferred.
		Naomi's basis in the Ceasar Corporation stock will be $125,000.
		Naomi's basis in the Ceasar Corporation stock will be $130,000.
		Ceasar Corporation will have a basis of $100,000 in the property transferred.

Answer 1

>Naomi's basis in the Ceasar Corporation stock will be $125,000.

Whether you're setting up a new corporation with just yourself or other people, such as partners in a partnership, or getting involved in an existing corporation, under IRC Section 351(a) you can defer (put off) any resulting tax consequence.

Under section 351(a) no gain or loss is recognized (reported) provided:

You receive ONLY STOCK in exchange for your property, and

You are in CONTROL of the corporation immediately after the exchange

In the give case above conditions are satisfied hence as per sec.351 no gain or loss is recognised hence basis will remain same for shares received in exchange of shares