Tax 310

Chapter 19

19-36
a.
What amount of gain or loss does Ramon realize on the transfer of the
property to his corporation?
Ramon realizes a net gain of $76,000 on this transfer, computed as follows:
Fair market value of stock received

$160,000

(-) Adjusted basis of the property transferred 84,000

Gain realized

$ 76,000

b.
What amount of gain or loss does Ramon recognize on the transfer of the
property to his corporation?
Ramon does not recognize any gain or loss on the transfer because the
requirements of 351 are met and no boot is received in the exchange.
c.

What is Ramons basis in the stock he receives in his corporation?

$84,000. Ramons tax basis in the stock received is a substituted basis of the
assets transferred
19-37
a.
What amount of gain or loss does Carla realize on the transfer of the property
to the corporation?
Carla realizes a net gain of $10,000 on this transfer, computed as follows:
Fair market value of stock received
+ Mortgage assumed by corporation

$ 300,000

120,000

Amount realized $ 420,000

(-) Adjusted basis of the property transferred 410,000
Gain realized

$ 10,000

b.
What amount of gain or loss does Carla recognize on the transfer of the
property to her corporation?
Carla does not recognize any gain or loss on the transfer because the
requirements of 351 are met and no boot is received in the exchange, the transfer
is an equal transfer.
c.

What is Carlas basis in the stock she receives in his corporation?

$290,000. Carlas tax basis in the stock received is a substituted basis of the
assets transferred less the mortgage assumed by the corporation.
d. planning Would you advise Carla to transfer the building and land to the
corporation? What tax benefits might she and the corporation receive if she kept
the building and land and leased it to the corporation?
By keeping the building and land outside the corporation, Carla could lease
the assets to her corporation and reduce future taxable income by the rental
payments to Carla. This arrangement allows Carla to withdraw earnings from the
corporation in a manner that is tax deductible to the corporation.
19-38
a.
What amount of gain or loss does Ivan realize on the transfer of the property
to his corporation?
Ivan realizes a net gain of $35,000 on this transfer, computed as follows:
Fair market value of stock received
- Adjusted basis of the property transferred
Gain realized

$120,000
85,000

$ 35,000

b.
What amount of gain or loss does Ivan recognize on the transfer of the
property to her corporation?
Ivan does not recognize any gain or loss on the transfer because the
requirements of 351 are met and no boot is received in the exchange.
c.

What is Ivans basis in the stock he receives in his corporation?

$85,000. Ivans tax basis in the stock received is a substituted basis of the
assets transferred.
d.
What is the corporations adjusted basis in each of the assets received in the
exchange?
The corporation receives a carryover basis in the assets received from Ivan.
Inventory
Building

$15,000

40,000

Land 30,000
Total $85,000
e.
Would the stock held by Ivan qualify as 1244 stock? Why would this fact be
important if he sold his stock at a loss at some future date?
Yes, the Corporation is a qualifying small business corporation (capitalized
for less than $1 million) and Ivan is the original holder of the stock. If the 1244
requirements are met, Ivan can recognize up to $50,000 per year of loss ($100,000

in the case of married, filing jointly shareholders) on subsequent sale of the stock as
an ordinary, rather than a capital, loss.
19-39
a.
What amount of gain or loss does Zhang realize on the transfer of the
property to her corporation?
Zhang realizes a net loss of $10,000 on this transfer:
Fair market value of stock received
Plus: Mortgage assumed by corporation
Amount realized

$ 300,000
+ 100,000

$400,000

Less: Adjusted basis of the property transferred

- 410,000

Loss realized$ (10,000)

b.
What amount of gain or loss does Zhang recognize on the transfer of the
property to her corporation?
Zhang does not recognize any loss on the transfer because the requirements
of 351 are met.
c.

What is Zhangs tax basis in the stock she receives in the exchange?

$310,000. Zhangs tax basis in the stock received is a substituted basis of the
assets transferred less the mortgage assumed by the corporation.
d.
What is the corporations adjusted basis in each of the assets received in the
exchange?
The corporation receives a carryover basis in the assets received from Zhang,
reduced by the aggregate net built-in loss on the assets transferred, which is
allocated to the land.
Inventory
Building

10,000

100,000

Land ($300,000 $10,000)

290,000

Total $400,000
If the aggregate adjusted tax basis of property transferred to a corporation by
a shareholder in a 351 transfer exceeds the aggregate fair market value of the
assets, the aggregate tax basis of the assets in the hands of the transferee
corporation cannot exceed their aggregate fair market value. The aggregate
reduction in tax basis is allocated among the assets transferred in proportion to
their respective built-in losses immediately before the transfer. As an alternative,
the Zhang can elect to reduce her stock basis to fair market value ($300,000).

Assume the corporation assumed a mortgage of $500,000 attached to the

building and land. Assume the fair market value of the building is now $250,000 and
the fair market value of the land is $530,000. The fair market value of the stock
remains $300,000.
e.
How much, if any, gain or loss does Zhang recognize on the exchange
assuming the revised facts?
Zhang realizes a gain of $390,000 on the exchange ($300,000 FMV of stock +
$500,000 mortgage assumed - $410,000 aggregate tax basis). The liability
assumed by the corporation exceeds the total adjusted basis of the property Zhang
transferred to the corporation by $90,000 ($500,000 - $410,000). Zhang recognizes
gain of $90,000 on this transfer.
f.

What is Zhangs basis in the stock she receives in the exchange?

Adjusted basis of property contributed

+ Gain recognized on the exchange

90,000

- Mortgage assumed by corporation

(500,000)

Tax basis of stock received

$410,000

Zhang defers recognition of $300,000 of gain realized. If she sells her stock
for its fair market value of $300,000, she will recognize gain of $300,000, equal to
the amount deferred.
g.
What is the corporations adjusted basis in each of the assets received in the
exchange?
The gain recognized must be allocated to the tax basis of the assets received
by the corporation in proportion to the assets relative fair market values, as follows:
Inventory [$10,000 + ($20,000/$800,000) x $90,000]
Building [$100,000 + ($250,000/$800,000) x $90,000]

12,250

128,125

Land [$300,000 + ($530,000/$800,000) x $90,000] 359,625

Total $500,000
The total tax basis of the three assets equals their carryover basis ($410,000)
plus the gain recognized by Zhang on the exchange.
19-40
a.
What amount of gain or loss does Sam realize on the formation of the
corporation? What amount, if any, does he recognize?
Sam realizes a gain of $40,000 on this transfer, computed as follows:
Fair market value of stock received
- Adjusted basis of inventory transferred

$100,000
60,000

Gain realized

$ 40,000

Sam is entitled to tax deferral under 351.

b.
What is Sams tax basis in the stock he receives in return for his contribution
of property to the corporation?
$60,000, a substituted basis equal to the basis of the inventory transferred.
c.
What amount of income, gain, or loss does Devon realize on the formation of
the corporation? What amount, if any, does he recognize?
Devon has compensation income of $25,000. Devon is not entitled to tax
deferral under 351 because services are not considered property.
d.
What is Devons tax basis in the stock he receives in return for his
contribution of services to the corporation?
Devons tax basis in the stock he receives is $25,000, equal to the income
recognized on the receipt of the stock in exchange for services.
Assume Devon received 25 percent of the stock in the corporation in return
for his services.
e.
What amount of gain or loss does Sam recognize on the formation of the
corporation?
Sam is no longer entitled to tax deferral under 351 because he does not
control the corporation immediately after his transfer of property (he must own 80
percent or more). As a result, he recognizes gain of $40,000 on his transfer of
property.
f.
What is Sams tax basis in the stock he receives in return for his contribution
of property to the corporation?
$100,000, equal to the fair market value of the inventory transferred.
g.
What amount of income, gain, or loss does Devon recognize on the formation
of the corporation?
Devon has compensation income of $33,333. If Sam receives 75 percent of
the stock in exchange for inventory worth $100,000, Devons services must be
worth $33,333 ($100,000/.75 - $100,000). Devon is not entitled to tax deferral
under 351 because services are not considered property.
h.
What is Devons tax basis in the stock he receives in return for his
contribution of services to the corporation?
Devons tax basis in the stock he receives is $33,333, equal to the income
recognized on the receipt of the stock in exchange for services.
i.
What tax advice could you give Sam and Devon to change the tax
consequences?

If Devon could contribute property equal to 10-percent-or-more of the

services he renders to the corporation, his stock could be counted in the control
test. As a result, Sam would be eligible for tax deferral on the transfer of his
inventory to the company.
19-42
a.
What amount of gain or loss does Ron realize on the formation of the
corporation? What amount, if any, does he recognize?
Ron does not realize gain on this transfer because only cash is transferred.
As a result, no gain is recognized.
b.
What is Rons tax basis in the stock he receives in return for his contribution
of property to the corporation?
$200,000, equal to the cash transferred to the corporation.
c.
What amount of gain or loss does Hermione realize on the formation of the
corporation? What amount, if any, does she recognize?
Hermione realizes a gain of $150,000 on this transfer, computed as follows:
Fair market value of stock received
+ Cash received

50,000

Amount realized

$250,000

$200,000

- Adjusted basis of assets transferred 100,000

Gain realized

$ 150,000

Hermione recognizes gain of $50,000, equal to the lesser of gain realized

($150,000) or boot received ($50,000).
d.
What is Hermiones tax basis in the stock she receives in return for her
contribution of property to the corporation?
Adjusted basis of property contributed $100,000
+ Gain recognized on the exchange
- Cash (boot) received

50,000

(50,000)

Tax basis of stock received

$100,000

e.
What adjusted basis does Wizard Corporation take in the land and building
received from Hermione?
Wizard Corporation increases the tax basis of the building and land to reflect
the gain recognized by Hermione. The gain is allocated to the assets based on their
relative fair market values:
Building: $75,000 / $250,000 x $50,000 = $15,000

Land: $175,000 / $250,000 x $50,000 = $35,000

The buildings tax basis = $20,000 + $15,000 = $35,000
The lands tax basis = $80,000 + $35,000 = $115,000
Assume Hermiones adjusted basis in the land was $200,000.
f.
What amount of gain or loss does Hermione realize on the formation of the
corporation? What amount, if any, does she recognize?
Hermione realizes a gain of $30,000 on this transfer, computed as follows:
Fair market value of stock received
+ Cash received
Amount realized

$200,000

50,000
$250,000

- Adjusted basis of assets transferred 220,000

Gain realized

$ 30,000

The boot (cash) received is allocated to the land and building based on their
relative fair market values, as before.
Building: $75,000 / $250,000 x $50,000 = $15,000
Land: $175,000 / $250,000 x $50,000 = $35,000
Hermione recognizes a gain of $15,000 on the contribution of the building,
which is the lesser of the gain realized on the transfer of $55,000 or the amount of
boot allocated to the building.
g.
What adjusted basis does Wizard Corporation take in the land and building
received from Hermione?
Wizard Corporation only increases the tax basis of the building because the
land contributed by Hermione has a built-in loss. The boot allocated to the building
remains $15,000 (see the answer to (e) above). The amount added to the building is
the lesser of the gain realized on its exchange ($50,000) or the amount of boot
allocated to the building ($15,000). The buildings tax basis is $35,000. The lands
tax basis remains a carryover basis of $200,000.
Assume Hermiones adjusted basis in the land was $250,000.
h.
What amount of gain or loss does Hermione realize on the formation of the
corporation? What amount, if any, does she recognize?
Hermione realizes a loss of $(20,000) on this transfer, computed as follows:
Fair market value of stock received
+ Cash received
Amount realized

50,000
$250,000

$200,000

- Adjusted tax basis of assets transferred

270,000

Loss realized$( 20,000)

19-47
a.
What amount of gain or loss does BLI recognize if the transaction is
structured as a direct asset sale to Amy and Brian? What amount of corporate-level
tax does BLI pay as a result of the transaction, assuming a tax rate of 34 percent?
BLI has an amount realized from the sale of $530,000, the $400,000 paid
by Brian and Amy plus the liabilities assumed of $130,000. BLI recognizes a net
gain of $380,000 on the sale of its assets to Amy and Brian ($530,000 - $150,000
aggregate basis in the assets sold). BLI would owe a corporate-level tax of
$129,200 on the sale ($380,000 x 34 percent).
b.
What amount of gain or loss does Ernesto recognize if the transaction is
structured as a direct asset sale to Amy and Brian, and BLI distributes the after-tax
proceeds (computed in question a) to Ernesto in liquidation of his stock?
Ernesto receives net cash of $270,800 ($400,000 - $129,200 taxes paid).
Ernesto recognizes capital gain of $170,800 on the distribution ($270,800 $100,000 stock basis).
c.
What are the tax benefits, if any, to Amy and Brian as a result of structuring
the acquisition as a direct asset purchase?
Amy and Brian receive a tax basis in the assets received equal to the assets
fair market value.
Cash $ 10,000
Accounts receivable
Building

15,000

100,000

Land 225,000
Customer list
Goodwill

100,000
80,000

Total $530,000
19-52
a.

What amount of gain or loss does WFI recognize in the complete liquidation?

WFI has a taxable transaction and recognizes gain of $40,000 on the transfer
of the building and gain of $60,000 on the transfer of the land.
b.
What amount of gain or loss does Shauna recognize in the complete
liquidation?

Shauna recognizes gain of $150,000 on the transfer of her stock to WFI

($200,000 - $50,000) in complete liquidation of WFI.
c.
What amount of gain or loss does Danielle recognize in the complete
liquidation?
Danielle recognizes gain of $100,000 on the transfer of her stock to WFI
($200,000 - $100,000) in complete liquidation of WFI.
d.
What is Danielles tax basis in the building and land after the complete
liquidation?
Danielles tax basis equals the fair market value of the assets she receives
(building: $50,000, land: $150,000).
19-55
a.

What amount of gain or loss does 8MH recognize in the complete liquidation?

8MH does not recognize gain or loss on the liquidation because the
liquidating distribution is to a corporation that owns 80-percent-or-more of 8MH.
b.

What amount of gain or loss does JMI recognize in the complete liquidation?

JMI does not recognize gain or loss on the receipt of the liquidating
distribution because it owns 80-percent-or-more of 8MH.
c.

What is JMIs tax basis in the building and land after the complete liquidation?

JMI takes a carryover tax basis in each of 8MHs assets received in the
liquidation

Michael Biziak
Prof. Yang
October 20, 2015

Chapter 20

20-37
a.

$27,000.

Josephs tax basis is considered to be his outside basis in the partnership. The tax
basis includes the $22,000 in cash and his original basis in the equipment, $5,000.
Josephs holding period for his outside basis would depend upon the holding period
of the assets contributed. If property contributed is a capital or Section 1231 asset,
the holding period for that portion of the partnership interest includes the holding
period of the contributed property. Otherwise, the holding period of the partnership
interest begins on the date it is received.
b.

$5,000.

Berry Hill Partnerships basis in the equipment is a carryover basis from the partner
who contributed the equipment. The basis in the equipment plus the basis in the
cash will give us Berry Hill Partnerships inside basis. The holding period for the
equipment carries over to the Berry Hill Partnership from Joseph.
20-38
a.

$455,000.

Lances basis in his LLC interest is made up of the $200,000 basis of the
investment property he transferred to the LLC and his $255,000 share of the LLC
debt (85% x $300,000). Because LLC general debt obligations are treated as
nonrecourse debt, Lances profit sharing ratio is used to allocate a portion of the
LLC debt to him.
b.

Three years.

Because Lance contributed a capital asset, the holding period of the contributed
assets tacks onto his partnership interest.

c.

$200,000.

The LLC takes a carryover basis in the contributed property.

d.

Three years.

The LLC inherits Lances holding period in the contributed property.

20-39
a.

$280,000.

Laurels basis in her LLC interest is made up of the $250,000 basis in the equipment
(no depreciation was taken on the equipment prior to the contribution because it
was acquired and contributed within the same calendar year) Laurel contributed,
her $15,000 share of accounts payable that she guaranteed, and her $15,000 share
of the nonrecourse mortgage securing Sand Creeks office building (15% x
$100,000). Laurels profits sharing ratio is used to allocate a portion of the
mortgage to her because it is nonrecourse debt.
b.
Laurels holding period begins the day the LLC interest is acquired because
the asset she contributed is not a capital or Section 1231 asset. The equipment is
not a Section 1231 asset because it was used in a trade or business for one year or
less.
c.

$250,000.

The LLC takes a carryover basis in the contributed property.

d.

Ten months.

Laurels holding period is included in the LLCs holding period regardless of the
nature of the property Laurel contributed.
20-40
a.

$0.

Generally, partners recognize gain on property contributed to a partnership only

when the cash they are deemed to receive from debt relief exceeds their basis in
the partnership prior to the deemed distribution. Harry did not have any debt relief.
b.

$0.

Partners may never recognize loss when property is contributed to a partnership

even when they are relieved of debt.
c.
Sally should consider selling the property to the partnership rather than
contributing it. By selling the property, she could recognize the $50,000 built-in loss
on the equipment.
d.

$130,000.

Harrys basis in his partnership interest is simply the combined tax basis in the cash
and land he contributed to the partnership.
e.

$200,000.

Sallys basis in her partnership interest equals $200,000 basis in the equipment she
contributed.
f.

$330,000.

The partnerships basis in its assets equals the sum of the partners bases in the
cash ($30,000), in the land ($100,000), and in the equipment ($200,000).
g.
Evergreen Partnership
Tax Basis Balance Sheet
Tax Basis
Assets:
Cash

$30,000

Equipment

200,000

Land

100,000

Totals

$330,000

Capital:
Capital of Harry
Capital of Sally
Total

$130,000
$200,000
$330,000