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Alan, Bob and Carly create a corporation. After the incorporation, Alan receives 25% of the corporation’s...

Alan, Bob and Carly create a corporation. After the incorporation, Alan receives 25% of the corporation’s stock in exchange for services and intangibles. The stock was valued at $150,000. The services were valued at $125,000 and the intangibles were valued at $25,000. Bob and Carly receive the remaining 75% of the corporation valued at $450,000 in exchange for equipment with basis of $200,000 and a fair market value of $400,000. How much gain will Bob and Carly recognize on the §351 exchange?

A. $250,000 since the Alan did not transfer property for stock

B. $0, since this transfer is subject to the non-recognition rule of §351

C. $150,000

D. $200,000

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Answer #1

As Bob and Carly did not receive 80% or more stock of the corporation, the transaction is not subject to Section 351 rules. So, the gain has to be recognized.

Gain = Fair value - Basis

= $400,000 - $200,000

= $200,000

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