AC430 Unit 3 Section 351 Formation Problem Example

Course	AC430 Advanced Tax - Corporate
Unit	Unit 3
Paper type	Formation problem
Length	About 540 words, 4 pages double-spaced
Format	APA 7 student paper
School	Purdue University Global
Program	BS in Accounting
Updated	October 2026

Free sample paper for AC430 Unit 3

Land Under a Mortgage, Cash and a Season of Design Work: A Unit 3 Section 351 Formation Problem

[Student Name]

Purdue University Global

AC430: Advanced Tax - Corporate

Unit 3 Formation Problem

[Instructor Name]

[Date]

The corporation, its owners and every figure are composite; the statutes and regulation cited are real.

What this part is doingNaming the three contributions and the three questions in the lead shows the workpaper's path.

Facts

1. Dana transfers land held for investment: basis $120,000, fair market value $300,000, subject to a $150,000 mortgage the corporation assumes. She receives stock worth $150,000.

2. Eli transfers $150,000 of cash for stock worth $150,000.

3. Farah contributes a season of design work laying out the new garden center, valued at $30,000, for stock worth $30,000.

Total stock issued: $330,000. All three are unrelated.

The Control Test

Section 351 applies only if the transferors of property control the corporation immediately after the exchange, meaning at least 80 percent of the voting power and of each class of stock (Transfer to Corporation Controlled by Transferor, 2024; Definitions Relating to Corporate Reorganizations, 2024). Services are not property, so Farah is not counted. Dana and Eli hold $300,000 of $330,000, about 90.9 percent. Control is met, and the exchange is covered for Dana and Eli.

Shareholder Ledger

Dana:

1. Liabilities assumed: $150,000. Basis in the land: $120,000.

2. Gain recognized under Section 357(c): $30,000, because the mortgage exceeds her basis. Character follows the land: capital gain (Assumption of Liability, 2024).

3. Stock basis under Section 358: $120,000 basis, plus $30,000 gain recognized, minus $150,000 of liability treated as money received: $0 (Basis to Distributees, 2024).

4. Holding period: includes her holding period in the land, since the land was a capital asset.

Dana's stock basis comes to zero because the corporation took on a debt larger than her basis, and the $30,000 she recognizes now is the price of letting the mortgage exceed what she had invested in the land.

What this part is doingThe highlighted sentence explains the result that surprises students most, which graders check first in this unit.

Eli:

1. No gain or loss. Stock basis: $150,000. Holding period begins on the exchange date.

Farah:

1. Stock received for services is compensation: $30,000 of ordinary income.

2. Stock basis: $30,000, the amount included in income. Holding period begins on the exchange date.

Corporate Ledger

1. No gain on issuing its own stock for property or services (Exchange of Stock for Property, 2024).

2. Land basis under Section 362(a): Dana's $120,000 basis plus the $30,000 gain she recognized: $150,000 (Basis to Corporations, 2024).

3. Cash: $150,000.

4. Farah's design services: $30,000, capitalized into the garden center's improvements because the work relates to building them rather than to running the business.

5. Mortgage liability assumed: $150,000.

Checks

The land's tax basis of $150,000 sits well below its $300,000 value, so $150,000 of built-in gain moves into the corporation, while Dana's zero stock basis preserves her side of the same deferral. Eli and Farah hold full-basis stock. If Farah had also contributed property, her shares could count toward control only if that property were more than of relatively small value compared with the stock she received for services (Treasury Regulation 1.351-1, 2024).

Note: A Smaller Mortgage

Had the mortgage been $100,000, below Dana's $120,000 basis, its assumption would not count as boot under Section 357(a), she would recognize nothing, and her stock basis would be $20,000.

What this part is doingThe closing note reworks the facts the way many prompts vary them, showing the rule from both sides.

References

Assumption of Liability, 26 U.S.C. § 357 (2024).

Basis to Corporations, 26 U.S.C. § 362 (2024).

Basis to Distributees, 26 U.S.C. § 358 (2024).

Definitions Relating to Corporate Reorganizations, 26 U.S.C. § 368 (2024).

Exchange of Stock for Property, 26 U.S.C. § 1032 (2024).

Transfer to Corporation Controlled by Transferor, 26 U.S.C. § 351 (2024).

Treasury Regulation 1.351-1, 26 C.F.R. § 1.351-1 (2024).

What the AC430 Unit 3 assignment asks for

In the third AC430 unit, the task is to decide whether a new corporation's formation falls under Section 351. List each transferor's contribution with its basis, fair value and any liability. Test control: identify which shareholders transferred property, add their stock and compare it with the 80 percent threshold, remembering that services are not property. For each shareholder, determine gain recognized, considering boot and liabilities in excess of basis, then compute stock basis under Section 358 and the holding period. Treat stock received for services as compensation. For the corporation, state that it recognizes no gain on issuing stock, compute its basis in each asset under Section 362 and decide how services received are treated. Add checks that the built-in gain is preserved at both levels, and show how a change in the facts would alter the result. Cite each Code section and regulation in APA 7.

How this AC430 Unit 3 example is built

The sample lists three transferors with their contributions and the $330,000 of stock issued. The control test excludes Farah's services and finds 90.9 percent held by property transferors, citing Sections 351 and 368. Dana's ledger computes $30,000 of capital gain under Section 357(c) and a zero stock basis under Section 358, with a tacked holding period. The highlighted sentence explains why her basis comes to zero. Eli's ledger records no gain and a $150,000 basis; Farah's records $30,000 of ordinary income and a $30,000 basis. The corporate ledger cites Section 1032, records the land at $150,000 under Section 362(a) and capitalizes the design services into improvements. A checks section confirms the deferred gain and cites the regulation on property of relatively small value. A closing note shows the result with a $100,000 mortgage.

AC430 Unit 3 rubric: what earns full points

AC430 formation problems are marked on whether each rule is applied in the right order with the right citation. The control test must count only property transferors, and graders deduct when services are counted. Liabilities need careful treatment: assumption is generally not boot, but liabilities exceeding basis produce gain, and the problem should name Section 357(c). Stock basis must start with property basis, add gain recognized and subtract liabilities. Holding periods should be stated. Service shares must be taxed as compensation. On the corporate side, the asset basis must include gain the transferor recognized, and the treatment of services received should be addressed. A check that built-in gain is preserved shows understanding of why Section 351 defers rather than forgives. Accurate statute citations in APA 7 and a variation on the facts complete the Purdue Global criteria for this unit.

AC430 Unit 3 help: mistakes that cost points

Many Unit 3 answers count the service provider toward control, which can make a failing exchange appear to qualify. Others treat the mortgage as boot without noticing Section 357(c), or miss that the gain arises only because liabilities exceed basis. Stock basis is computed without subtracting the liability, giving a positive figure. The corporation's basis in the land is set at fair value. Farah's shares are left out of income. Holding periods go unmentioned. If your problem includes boot, multiple classes of stock or a transferor who receives securities, our writers can work each shareholder's ledger and the corporation's from your section's facts.

Get an AC430 Unit 3 example written to your instructions

Your Unit 3 facts, whatever template the course provides and the rubric are enough. Qualification is settled before any basis is computed, every transferor gets a block, the corporation's side mirrors them, and the problem returns within 24-48h. The first custom sample is free, and the transferors in it are invented. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.

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AC430 Unit 3 questions, answered

What if the mortgage were smaller than the land's basis?

Then Section 357(a) would keep its assumption from counting as boot, Dana would recognize nothing, and her stock basis would equal her land basis minus the liability. The example includes a two-line note showing that result, because prompts in this unit often vary the mortgage to see whether a student notices where Section 357(c) begins to apply.

Could Farah avoid ordinary income by also contributing property?

Only if the property is more than relatively small in value compared with the stock she receives for services, under the regulations to Section 351, and even then her service shares still produce compensation income. The example mentions this in one sentence and leaves it there, since the facts give her nothing but services. A prompt that adds a token contribution raises a different question.

Does the example show journal entries?

It shows tax basis rather than book entries, since the unit asks for tax consequences. Some sections want both; where a rubric asks for the book side, the land would appear at fair value on the balance sheet while its tax basis stays at $150,000, and that difference becomes a temporary item a later unit reconciles.

Where can I find a free AC430 Unit 3 sample paper?

This page holds a complete AC430 Unit 3 Section 351 formation problem for a composite garden supply corporation, with the control test, each shareholder's gain and basis, the corporate ledger and APA 7 citations.

Why does Dana recognize gain in AC430 Unit 3?

The corporation assumed a $150,000 mortgage on land in which she had only a $120,000 basis. Under Section 357(c), liabilities assumed in excess of basis are gain, here $30,000.