Carmen and Marc form Apple Corporation. Carmen transfers land that is Sec. 1231 property, with an adjusted basis of $18,000 and an FMV of $20,000 in exchange for one-half of the Apple Corporation stock. Marc transfers equipment that originally costs $28,000 on which he has taken $5,000 in depreciation deductions. The equipment has an FMV of $25,000 and he receives one-half of the stock and a
$5,000 short-term note. The transaction meets the requirements of Sec. 351. Which statement below is correct?
A) There is no recognized gain or loss.
B) Carmen recognizes a $2,000 Sec. 1231 gain and Marc recognizes $5,000 as ordinary income.
C) Carmen recognizes a $2,000 Sec. 1231 gain and Marc recognizes a $5,000 Sec. 1231 gain.
D) Carmen recognizes no gain and Marc recognizes $2,000 as ordinary income.
D) Carmen recognizes no gain and Marc recognizes $2,000 as ordinary income.
Marc has a $2,000 realized gain [($20,000 FMV stock + $5,000 FMV note) - ($28,000 cost - $5,000 depreciation)], all of which is recognized because he received $5,000 of boot in the form of a short-term note. The gain is ordinary income under Sec. 1245.
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