Question 31 Evan is the sole shareholder of Corporation. Evan transferred real e

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Question 31

Evan is the sole shareholder of Corporation. Evan transferred real estate to Corporation in exchange for all of the stock of Corporation. The real estate was a capital asset in Evan’s hands and will also be a capital asset when held by the corporation. Evan’s basis in the real estate was $10,000 and the value of the real estate was $8,000 on the date of the transfer. If Evan received $2,000 in cash and 100 shares of stock from the corporation in exchange for the real estate, the resulting bases for Evan’s stock and the corporations real estate are:

A. Evan’s stock basis is $8,000; Corporation’s basis in the real estate is $8,000

B. Evan’s stock basis is $10,000; Corporation’s basis in the real estate is $10,000

C. Evan’s stock basis is $10,000; Corporation’s basis in the real estate is $8,000

D. Evan’s stock basis is $6,000; Corporation’s basis in the real estate is $12,000

Question 32

MNOP, Inc. redeemed 100 shares of Julia’s shares. The redemption did not satisfy all the requirements and thus was treated as a dividend for tax purposes. Julia’s basis in the 100 shares redeemed:

A. Disappears forever.

B. Transfers to her remaining shares in MNOP Inc.

C. Reduces her dividend income by her adjusted basis in the shares.

D. None of the above.

Explanation / Answer

31. Option C

These will come under transactions of Section 351. In actual if the future market value of the property is given then we can calculate the actual realizable gain of the corporation.

Here the transfer price is lower than the basis value, so there will be no gain recognized by the corporation. Hence Evan's stock basis is $10000 and Corporation's basis in the real estate is $8000 since he is the sole shareholder of the corporation.

32. Option B

According to Section 302, here the company can either treat the shares as sale or exchange or it's treated as Section 301 distribution as dividend.

Here in the question as the redemption did not satisfy the requirement the MNOP, Inc. will transfer as dividend to Julia. Since Julia is not the sole shareholder of the corporation it's is tax exempted. So here, the shares will be transferred to her remaining shares in MNOP Inc.

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