ExpertHard1 markMultiple Choice
CPA · Question 38 · Area 4: Entity Taxation
Shareholder A contributes property (Basis ,000, FMV 0,000) to a newly formed C Corporation for 60% of the stock. Shareholder B contributes services (FMV ,000) for 40% of the stock. What is Shareholder A's recognized gain?
Shareholder A contributes property (Basis ,000, FMV 0,000) to a newly formed C Corporation for 60% of the stock. Shareholder B contributes services (FMV ,000) for 40% of the stock. What is Shareholder A's recognized gain?
Answer options:
A.
0
B.
0,000
C.
,000
D.
0,000
How to approach this question
Check §351 Control Test: Do the people transferring PROPERTY own >= 80% of stock? Here, A (Property) = 60%. B (Services) = 40%. 60% < 80%. Test fails. Taxable transaction.
Full Answer
B.0,000✓ Correct
0,000
For a tax-free exchange under §351, transferors of property must own at least 80% of the corporation immediately after the exchange. Since B contributed only services, B is not a transferor of property. A owns only 60%, so the 80% test is not met. The transaction is fully taxable.
Common mistakes
Assuming §351 always applies to formation or counting the service provider in the control group.
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