Rachelle transfers property with a tax basis of $800 and a fair market value of $960 to a corporation, in exchange for stock worth $765 and $42 in cash. This transaction qualifies for deferral under Section 351. The corporation assumed liability of $153 on the transferred property. What is the corporation's tax basis in the property received in the exchange?

To determine the corporation's tax basis in the property received from Rachelle in the exchange, we follow the Internal Revenue Code Section 351, which allows for a deferral of recognition of gain or loss when property is transferred to a corporation in exchange for its stock, provided certain conditions are met.

Rachelle's initial tax basis in the property is $800, and she transfers it with an existing liability of $153, which reduces her equity in the property. She receives stock with a fair market value of $765 and $42 in cash.

Here’s how you can calculate the corporation's basis in the property:

1. Begin with the transferor's (Rachelle's) basis in the property transferred: $800.

2. Adjust for any liabilities assumed by the corporation. When the corporation assumes a liability, the transferor's basis in the property is decreased by the amount of the liability assumed: $800 - $153 = $647. However, under the tax law, if the assumption of the liability results in the receipt of cash or other boot (like the $42 in cash Rachelle receives), the basis is not reduced by the liability if the boot is equal to or greater than the liability assumed. In this case, the $42 cash received doesn't exceed the $153 liability, so we would reduce the basis by the liability.

3. Since cash (considered boot for tax purposes) is received in the transaction, Rachelle will have to recognize some gain to the extent of the boot received. However, the gain recognized does not affect the corporation's basis in the asset received.

4. In a Section 351 exchange, the corporation's basis in the property transferred is generally the transferor's adjusted basis plus any gain recognized by the transferor.

In Rachelle's case, she doesn’t recognize any gain because she didn’t actually “profit”—her fair market value received ($765 in stock plus $42 in cash) doesn't exceed her original property's fair market value ($960).

Therefore, the corporation's basis in the property would be the adjusted basis of the property from Rachelle’s standpoint. We've already calculated this as $647 ($800 basis minus $153 liability assumed by the corporation).

So, the corporation's tax basis in the property received in the exchange would be $647.

To determine the corporation's tax basis in the property received from Rachelle in the exchange, we follow the Internal Revenue Code Section 351, which allows for a deferral of recognition of gain or loss when property is transferred to a corporation in exchange for its stock, provided certain conditions are met.

Rachelle's initial tax basis in the property is $800, and she transfers it with an existing liability of $153, which reduces her equity in the property. She receives stock with a fair market value of $765 and $42 in cash.

Here’s how you can calculate the corporation's basis in the property:

1. Begin with the transferor's (Rachelle's) basis in the property transferred: $800. 2. Adjust for any liabilities assumed by the corporation. When the corporation assumes a liability, the transferor's basis in the property is decreased by the amount of the liability assumed: $800 - $153 = $647. However, under the tax law, if the assumption of the liability results in the receipt of cash or other boot (like the $42 in cash Rachelle receives), the basis is not reduced by the liability if the boot is equal to or greater than the liability assumed. In this case, the $42 cash received doesn't exceed the $153 liability, so we would reduce the basis by the liability. 3. Since cash (considered boot for tax purposes) is received in the transaction, Rachelle will have to recognize some gain to the extent of the boot received. However, the gain recognized does not affect the corporation's basis in the asset received. 4. In a Section 351 exchange, the corporation's basis in the property transferred is generally the transferor's adjusted basis plus any gain recognized by the transferor.

In Rachelle's case, she doesn’t recognize any gain because she didn’t actually “profit”—her fair market value received ($765 in stock plus $42 in cash) doesn't exceed her original property's fair market value ($960).

Therefore, the corporation's basis in the property would be the adjusted basis of the property from Rachelle’s standpoint. We've already calculated this as $647 ($800 basis minus $153 liability assumed by the corporation).

So, the corporation's tax basis in the property received in the exchange would be $647.

Extra: Understanding Basis and Section 351: 1. Tax Basis: The tax basis is generally the cost of the property and includes what you paid for it plus any amounts you spent on improvements. 2. Section 351: This section of the Internal Revenue Code allows a tax-free transfer of property to a corporation by one or more persons in exchange for stock in that corporation if the transferors control the corporation immediately after the exchange. Control in this case generally means ownership of at least 80% of the stock. 3. Gain Recognition: Despite the deferral of gain under Section 351, if any "boot" is received (cash or other property in addition to stock), then gain may have to be recognized to the extent of the boot received. However, the recognition of gain does not necessarily affect the corporation's basis in the property received. 4. Liabilities: If a liability is transferred along with the property to the corporation, the tax basis may be adjusted on the basis of whether the assumption of the liability is offset by the receipt of boot. Understanding these concepts is important when analyzing transactions involving property and stock transfers in a corporate setting for tax purposes.