X transfers land worth $500,000 (basis of $100,000) to a corporation in exchange for stock. Y provides services valued at $100,000 for stock. Immediately after the exchange, X owns... X transfers land worth $500,000 (basis of $100,000) to a corporation in exchange for stock. Y provides services valued at $100,000 for stock. Immediately after the exchange, X owns 75% and Y owns 25% of the corporation's stock. What amount of gain/loss does X recognize?
Understand the Problem
The question involves a corporation formation where X transfers land in exchange for stock, and Y provides services for stock. We need to determine the amount of gain or loss X recognizes on the transfer of property to the corporation. Section 351 of the Internal Revenue Code provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (defined as at least 80% ownership) of the corporation. Services are not considered "property" for purposes of section 351.
Answer
X recognizes no gain or loss.
X recognizes no gain or loss on the exchange.
Answer for screen readers
X recognizes no gain or loss on the exchange.
More Information
According to Section 351 of the Internal Revenue Code, no gain or loss is recognized when property is transferred to a corporation solely in exchange for its stock, and the transferor is in control of the corporation immediately after the exchange. In this case, X controls 75% of the corporation, meeting the control requirement.
Tips
A common mistake is forgetting the 'control' requirement of Section 351, which mandates that the transferors own at least 80% of the corporation after the exchange to avoid recognizing gain or loss.
Sources
AI-generated content may contain errors. Please verify critical information
