Federal Tax II

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?

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  1. 550,000

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  2. 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.]

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