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84. Harry and Sally formed Empire Corporation on January 2. Harry
contributed cash of $500,000 in return for 50 percent of the
corporation’s stock. Sally contributed a building and land with
the following fair market values and adjusted basis in return for
50 percent of the corporation’s stock.
FMV
Adjusted
basis
Building
180,000
150,000
Land
420,000
500,000
Total
$600,000 $650,000
To equalize the exchange, Empire Corporation paid Sally
$100,000 in addition to her stock.
a. What amount of gain or loss does Sally realize on the
formation of the corporation?
b. What amount of gain or loss, if any, does she recognize?
c. What is Sally’s tax basis in the stock she receives in return
for her contribution of property to the corporation?
d. What adjusted basis does Empire Corporation take in the
land and building received from Sally?
a. $50,000 loss realized
b. $30,000 gain is recognized. Sally allocates the $100,000
boot between the building and land based on relative FMV. The
boot allocated to the building is $30,000 ($100,000 ×
$180/$600). Gain recognized is the lesser of the gain realized
or boot received. No loss is recognized on the transfer of the
land.
c. $580,000
d. Building: $180,000 ($150,000 + $30,000 gain); Land:
$450,000
Feedback: A.
Fair market value of
$500,000
stock received
+ Cash received
100,000
from Empire
Amount realized
– Adjusted tax basis
$600,000
650,000
of the property
transferred
Loss realized
($50,000)
B. The gain (but not loss) recognized is the lesser of the gain
realized or the boot received.
C.
Adjusted basis of
$650,000
property transferred
Plus gain recognized
30,000
Less boot received
(100,000)
– Adjusted tax basis
$580,000
of the stock
received
D. The corporation receives a carryover basis in the land
received from Sally, reduced by the aggregate net $50,000
built-in loss on the assets transferred, which is allocated to the
land. The corporation increases the carryover basis in the
building transferred by the gain recognized by Sally on the
transfer.
Building
180,000
Land ($500,000 – $50,000
450,000
[LO 2] Ron and Hermione formed Wizard Corporation on January 2. Ron contributed
cash of $200,000 in return for 50 percent of the corporations stock. Hermione
contributed a building and land with the following fair market value and adjusted basis
in return for 50 percent of the corporations stock.
Building
Land
Total
FMV
$ 75,000
175,000
$ 250,000
Adjusted Basis
$ 20,000
80,000
$ 100,000
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
– Adjusted tax basis of assets transferred
Loss realized
$200,000
50,000
$250,000
270,000
$( 20,000)
Hermione does not recognize the loss (boot received does not allow the
transferor to recognize loss, only gain).
i.
What adjusted basis does Wizard Corporation take in the land and building
received from Hermione?
The corporation receives a carryover basis in the assets received from
Hermione, reduced by the aggregate net built-in loss on the assets transferred,
which is allocated to the land.
Building
Land ($250,000 20,000)
Total (equal to the assets fair market value)
20,000
230,000
$250,000
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