Sarah and Tony (mother and son) form Dove Corporation with the following investments: cash by Sarah of $65,000? land by Tony (basis of $25,000 and fair market value of $35,000). Dove Corporation issues 400 shares of stock, 200 each to Sarah and Tony. Thus, each receives stock in Dove worth $50,000.
A) Section 351 cannot apply since Sarah should have received 260 shares instead of only 200.
B) Section 351 may apply because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred.
C) Tony's basis in the stock of Dove Corporation is $50,000.
D) As a result of the transfer, Tony recognizes a gain of $10,000.
E) None of the above.

Question

Quizplus · Accepted Answer

Section 351 does not require that stock be issued in proportion to the value of the property transferred. As long as the transfer is in exchange for stock, and the transferors control the corporation immediately after the transfer, Section 351 may apply. Therefore, Sarah and Tony can receive different amounts of stock and Section 351 can still apply. Tony's basis in the stock of Dove Corporation is equal to the basis of the property he transferred ($25,000), plus any gain recognized on the transfer ($0 in this case) plus the amount of income recognized on any boot received (none in this case). Thus, Tony's basis in the stock is $25,000, not $50,000. Finally, since Section 351 applies, there is no recognition of gain or loss on the transfer. Therefore, Choice (D) is incorrect.

Sarah and Tony (Mother and Son) Form Dove Corporation with the Following