Perry organized Cardinal Corporation 10 years ago by contributing property worth $2 million, basis of $450,000 for 2,500 shares of stock in Cardinal, representing 100% of the stock in the corporation. Perry later gave each of his children, Brittany and Julie, 750 shares of stock in Cardinal Corporation. In the current year, Perry transfers property worth $600,000 basis of $150,000, to Cardinal for 1,000 shares in the corporation. What gain, if any, will Perry recognize on the transfer?
550,000
Perry recognizes a gain of $450,000 on the transfer [$600,000 (value of the stock
received) – $150,000 (basis in the property)]. The transfer does not qualify under §
351. Although Perry originally owned 100% of Cardinal Corporation, Perry only
owns 57% of Cardinal Corporation after the transfer [2,500 (shares originally
owned) – 1,500 (shares transferred to Brittany and Julie) + 1,000 (shares acquired in
the transfer), or 2,000 shares out of a total of 3,500 shares]. [The ownership of the
shares held by Brittany and Julie cannot be counted because the attribution rules of §
318 do not apply to a § 351 transfer.]
To determine the gain that Perry will recognize on the transfer, we need to compare the fair market value (FMV) of the property transferred to the corporation with his basis in the property.
In this case, Perry transferred property worth $600,000 with a basis of $150,000.
To calculate the gain, we subtract the basis from the FMV:
Gain = FMV - Basis
Gain = $600,000 - $150,000
Gain = $450,000
Therefore, Perry will recognize a gain of $450,000 on the transfer.