Leah transfers equipment (basis of $400,000 and fair market value of $500,000) f

Question

Leah transfers equipment (basis of $400,000 and fair market value of $500,000) for additional stock in Crow Corporation. After the transfer, Leah owns 80% of Crow’s stock. Associated with the equipment is Section 1245 recapture potential of $70,000. As a result of the transfer,

a. Leah recognizes ordinary income of $70,000.

b. Leah recognizes no gain and the recapture potential under Section 1245 carries over to Crow Corporation.

c. Leah recognizes no gain and the recapture potential under Section 1245 disappears.

d. Leah recognizes a capital gain of $100,000.

e. None of the above.

Explanation / Answer

A para of Sec. 351 states that no gain or loss is recognized by either the contributing shareholder or the recipient corporation if three conditions are satisfied. These conditions are (assuming that the transfers having a bona fide business purpose):

Hence , Answer is Point No b in given situation :-Section 351 states that Leah will not recognize any gain Also, recapture potential does not disappear , but carries over to CrowCorporation.

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