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Davis transferred real property owned by her to Newco in exchange for 100% of the stock of
Newco. Davis had placed a $150 , 000 mortgage on the property 4 years earlier using the
proceeds to purchase tax exempt securities. Davis had an adjusted basis in the property of $200 ,
000 and the property had a FMV of $500 , 000 at the time of the transfer. (a) What are the tax
consequences to Davis? (b) Assume that Davis placed a second mortgage in the amount of $50 ,
000 on the real property 3 months before the transfer. The proceeds of this second mortgage
were also used to purchase tax exempt securities. What are the tax consequences of the transfer
of the real property to Newco?

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