Question

Alex forms Wolf Corporation by transferring land (acquired 5 years ago and held as an investment)

with a basis of $300,000, fair market value of $1,200,000. The land is subject to a mortgage of

$350,000. One week prior to incorporating Wolf, Alex borrows $150,000 for personal purposes and

gives the lender a second mortgage on the land. Wolf transfers its stock worth $700,000 to Alex, and

assumes the mortgages on the land.

a.

How much gain, if any, will Alex recognize on the transfer of property to Wolf?

b.

What basis will Alex take in the Wolf stock?

c.

What holding period will Alex have in the stock?

d.

What gain, if any, will Wolf recognize on the issuance of its stock for the land?

e.

What will Wolf’s basis be in the land?

f.

What will be Wolf’s holding period for the land?

Assume instead that Alex does not borrow the $150,000 prior to incorporating Wolf. Alex transfers

the land to the corporation for Wolf stock worth $850,000, and the corporation assumes Alex’s

$350,000 debt. Several weeks later Wolf borrows $150,000 for expansion purposes and gives the

lender a second mortgage on the land.

g.

How much gain, if any, will Alex recognize on the transfer of property to Wolf?

h.

What basis will Alex take in the Wolf stock?

i.

What holding period will Alex have in the stock?

j.

What gain, if any, will Wolf recognize on the issuance of its stock for the land?

k.

What will Wolf’s basis be in the land?

l.

What will be Wolf’s holding period for the land

Answer 1

a.

How much gain, if any, will Alex recognize on the transfer of property to Wolf?

Gain $50,000 (700000-300000-350000)

b.

What basis will Alex take in the Wolf stock?

Basis $650,000

c.

What holding period will Alex have in the stock?

5 years

d.

What gain, if any, will Wolf recognize on the issuance of its stock for the land?

Ordinary income of Wolf $150,000

e.

What will Wolf’s basis be in the land?

$1050,000 ($700,000 +350,000)

f.

What will be Wolf’s holding period for the land?

Holding period commence from first day from exchange date.

g.

How much gain, if any, will Alex recognize on the transfer of property to Wolf?

Nil gain

h.

What basis will Alex take in the Wolf stock?

Basis $1,200,000

i.

What holding period will Alex have in the stock?

5 years

j.

What gain, if any, will Wolf recognize on the issuance of its stock for the land?

Loan dr 1200.000

Bank cr        1200.000

k.

What will Wolf’s basis be in the land?

$1200,000

l.

What will be Wolf’s holding period for the land

Holding period commence from first day from exchange date.