Exercise 20-15 (Algorithmic) (LO. 1) On January 4, 2017, Martin Corporation acquires two properties from a...

Exercise 20-15 (Algorithmic) (LO. 1)

On January 4, 2017, Martin Corporation acquires two properties from a shareholder solely in exchange for stock in a transaction that qualifies under § 351. The shareholder's basis, the fair market value, and the built-in gain (loss) of each property are:

	Shareholder's Basis	Fair Market Value	Built in Gain or (Loss)
Property 1	$386,000	$463,200	$77,200
Property 2	$656,200	$501,800	($154,400)
Net built-in loss			($77,200)

Martin adopts a plan of liquidation later in the year and distributes Property 2 to a 20% shareholder when the property is worth $424,600.

a. Compute Martin's basis in Property 1 and in Property 2 as of January 4, 2017.
Martin's basis is Property 1 is a ___________(Stepped down/stepped-up/carryover) basis of $_____________.
Martin's basis in Property 2 is a _______________(Stepped down/stepped-up/carryover basis of $______________.

b. Compute Martin's realized and recognized loss on the liquidating distribution of Property 2.
Martin has a realized loss of $____________ and a recognized loss of $_______________

Solutions

Expert Solution

a) Martin Basis in Property 1 is a Carryover basis of $ 386600

Martin Basis in Property 2 is a as per Step Down Rule of $579000

Carryover basis -Net Built in Loss

=$656200-$77200=$579000

b) Martin's Relaized Loss on the liquidating distribution of Property 2

=Distribution FMV-Step Down basis

=$424600-$579000=$154400

The Loss that was inherent in the property on the date acquired would be disallowed by applying built in loss limitation after considering the basis Step down rule

Built in loss Limitation

= Acquisition FMV-Step Down basis

=$501800-$579000=$77200

The remaining Loss of $77200 ( $154400-$77200)is not subject to built in loss limitation and it show decline in property's FMV after being acquired by Martin

As the distribution was not to a related party ( more than 50% shareholder) the related party loss limitation does not apply here. Thus the recognized loss on the distibution of Property 2 for Martin is $77200

ekkarill92 answered 1 year ago

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