ExpertHard1 markMultiple Choice
CPA · Question 32 · Area V: Entity Taxation
Shareholder A contributes property with a basis of $20,000 and FMV of $50,000 to a C Corporation in exchange for 40% of the stock. Shareholder B contributes services worth $75,000 for 60% of the stock. What is Shareholder A's recognized gain?
Shareholder A contributes property with a basis of $20,000 and FMV of $50,000 to a C Corporation in exchange for 40% of the stock. Shareholder B contributes services worth $75,000 for 60% of the stock. What is Shareholder A's recognized gain?
Answer options:
A.
$30,000
B.
$0
C.
$20,000
D.
$50,000
How to approach this question
Section 351 Control Test: Transferors of PROPERTY must own >= 80% immediately after. Here, A (Property) owns 40%. B (Services) owns 60%. B is NOT a transferor of property. Control group = 40% (<80%). Section 351 fails. Taxable event.
Full Answer
A.$30,000✓ Correct
A
For a tax-free exchange under IRC §351, transferors of *property* must own at least 80% of the stock immediately after. Shareholder B contributed *services*, so B's stock is not counted toward the 80% test. Shareholder A (property) only owns 40%. Therefore, §351 does not apply. A recognizes gain of FMV ($50k) - Basis ($20k) = $30,000.
Common mistakes
Counting the service provider's stock in the 80% control test.
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