Vic owns land worth $450 in which she has a basis of $125. The land is...

Vic owns land worth $450 in which she has a basis of $125. The land is subject to a mortgage of $100 which Vic took out several years ago in order to buy the land. She transfers the land to Bari Corp in exchange for all its common stock work $350, and Bari assumes the mortgage.

Does Vic recognize gain on the transfer and if yes, how much? No, section 351 deferred gain

What is Vic’s basis in the stock? 25$

What is Bari’s basis in the land? 125$

Would your answer to the previous question chan ge if the land were subject to a mortgage of $200 instead of the $100 in the previous problem and the stock was worth $250? Answer separately as to parts a, b and c and if the answer would change indicate the new answer.

Solutions

Expert Solution

Solution 1:

As per taxation provisions, Neither gain nor loss is recognized upon the transfer by one or more persons of property to a corporation solely in exchange for stock in that corporation if, immediately after the exchange, such person or persons control the corporation.

Further if any boot is received by transferor then gain will recognized lower of realized gain or FMV of boot received whichever is lower. Further transfer of mortgage will be considered boot, if its value is more than adjusted basis of land.

In the given case mortgage of $100 was transferrred, while adjusted basis is $125, therefore it will not be considered as boot of gain regonition purpose.

Therefore in the given case land was transferred by Vic in exchange of shares and after exchange Vic will control the Bari Corp, therefore Vic will not recognize gain on transfer.

Realized gain = $450 - $125 = $375 (Postponed Gain)

Vic basis in stock = Adjusted basis of property transferred + Gain recognized - Boot received
= $125 + 0 - $100 = $25

Note: For stock basis purpose boot includes all liabilities transferred

As per provisions, The shareholder's holding period for the stock includes the holding period of any capital assets or Sec. 1231 assets transferred

Bari basis in land = Adjusted basis of property to transferor + Gain recognized by transferor

= $125 + $0 = $125

Solution 2:

If land is subject to mortgage of $200 and stock worth $250 transferred then

Amount realized = $450

Adjusted basis of land = $125

Realized gain = $450 - $125 = $375

Gain to be recognized = $200 - $125 = $75 (Boot)

Postponed gain = $375 - $75 = $300

Vic basis in stock = $125 + $75 - $200 = $0

Bari Basis in land = $125 + $75 = $200

ekkarill92 answered 1 year ago

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