Zhang incorporated her sole proprietorship by transferring i

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 values and tax bases:

FMV Tax Basis

Inventory $ 20,000 $ 10,000

Building 150,000 100,000

Land 230,000 70,000

Total $ 400,000 $ 180,000

The corporation also assumed a mortgage of $200,000 attached to the building and land. The fair market value of the corporation’s stock received in the exchange was $220,000. The exchange met the requirements to be tax-deferred under §351.

. What amount of gain does Zhang recognize on the transfer of the property to her corporation?

Solution

Calculation of gain to Zhang to be recognized on transfer of property to her corporation: Fair Market Value of Stock Received $ 2,20,000 Add : Mortgage assumed by corporation $ 2,00,000 Amount realized $ 4,20,000 Less : Adjusted Tax basis of the property transferred $ 1,80,000 Gain realized $ 2,40,000 Zhang realizes a net gain of $2,40,000 on transfer of property.