Question

Zhang incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation’s stock. The property transferred to the corporation had the following fair market values and adjusted bases:

	FMV			Adjusted Basis
Inventory	$	78,900		$	39,450
Building		140,000			115,000
Land		206,550			278,000
Total	$	425,450		$	432,450

The corporation also assumed a mortgage of $115,000 attached to the building and land. The fair market value of the corporation’s stock received in the exchange was $310,450. The transaction met the requirements to be tax-deferred under §351.

Assume the corporation assumed a mortgage of $478,550 attached to the building and land. Assume the fair market value of the building is now $236,700 and the fair market value of the land is $631,200. The fair market value of the stock remains $310,450.g. What is the corporation’s adjusted basis in each of the assets received in the exchange?

Answer 1

	FMV	Adjusted basis	Mortgage
Inventory	$ 78,900.00	$                           39,450.00
Building	$140,000.00	$                         115,000.00	115,000
Land	$206,550.00	$                         278,000.00
Total	425,450	432,450
Market value of stock received			310,450
g. What is the corporation’s tax-adjusted basis in each of the assets received in the exchange
	Adjusted basis	Revised FMV
Inventory	39,450	78,900
Building	115,000	236,700
Land	278,000	631,200
Total	432,450	946,800
The liability assumed by the corporation exceeds the total tax adjusted basis of the property Zhang transferred to the Corporation by $46100 ($478550-$432450)
Zhang recognises gain of $46,100 on this transfer
The gain recognised must be allocated to the tax basis of the assets received by the corporation in proportion to the asset's relative fair market value
				Amount($)
Inventory	$39450 + $78,900/$946,800*$46,100		=	$    43,291.67
Building	$115,000+ $236,700/$946,800*$46,100		=	$ 126,525.00
Land	$278,000 + $631,200/$946,800*$46,100		=	$ 308,733.33
				$ 478,550.00
The total Tax Basis of the three assets equal their carryover basis plus the gain recognised by zhang on the exchange