Rachel owns 100% of the stock of Cardinal Corporation. In the current year Rachel transfers an installment obligation, tax basis of $180,000 and fair market value of $350,000, for additional stock in Cardinal worth $350,000.
A) Rachel has a taxable gain of $180,000.
B) Rachel has a taxable gain of $170,000.
C) Rachel recognizes no gain on the transfer.
D) Rachel has a basis of $350,000 in the additional stock she received in Cardinal Corporation.
E) None of the above.

Question

Quizplus · Accepted Answer

Since Rachel owns 100% of the stock of Cardinal Corporation, the transfer of the installment obligation to the corporation is not considered a taxable event under Section 351 of the Internal Revenue Code. Thus, Rachel recognizes no gain on the transfer, and her basis in the additional stock received is equal to the tax basis of the installment obligation transferred, which is $180,000.

Rachel Owns 100% of the Stock of Cardinal Corporation