Question

Zhang incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation’s stock. The property transferred to the corporation had the following fair market value and adjusted basis.

                                                              FMV                Adjusted Basis

                        Inventory              $    20,000                  $ 11,000
                        Building                   250,000                  100,000
                        Land                        530,000                   300,000
                        Total                      $ 800,000               $ 411,000

          The corporation also assumed a mortgage of $500,000 attached to the building and land. The fair market value of the corporation’s stock received in the exchange was $300,000. The transaction met the requirements to be tax-deferred under §351. What amount of gain or loss does Zhang recognize on the transfer of the property to her corporation?

Answer 1

Tax consequences of property contribution to corporation:

A corporation is a separate legal entity and treated as such for tax purposes as well. Corporation pays its taxes on its own. Though it is separate from its owners tax law provides to encourage formation of companies tax law defers recognition of gain on transfer of property from shareholders to corporations if the transaction meets certain conditions.

If shareholder transfers property only for the stock of the corporation then no gain or loss is recognized on such transfer. To qualify for it the exchange must meet three rules. To qualify shareholder should transfer only property in exchange of Corporations stock and in control of the corporation immediately after the transfer.

As transfer met section 351 conditions, no gain or loss is recognized by Zhang.

Answer is $0