Problem: Scott MacDonald transfers land with an adjusted basis of $150,000 for stock in P. D. Graphics, Inc. worth $250,000, $50,000 in cash, nonqualified preferred stock worth $100,000, and P. D. Graphics' agreement to assume an $80,000 liability on the land. After the transfer, Scott owns 90% of the voting stock of P. D. Graphics. How much gain does Scott have to recognize? What is his basis in the stock?
Scott realizes $330,000 in gain [($250,000 + $50,000 + $100,000 + $80,000) - $150,000]. Since he owns at least 80% of P. D. Graphics after the transfer, the transfer qualifies for nonrecognition treatment, and Scott only has to recognize the amount of boot received. In this case, his boot is the $50,000 in cash and $100,000 in nonqualified preferred stock. P.D. Graphics' assumption of the $80,000 liability is not treated as boot. Calculate the amount of gain Scott must recognize and his adjusted cost base.