William, Wally, and Wilma want to form a corporation. William has cash of $100,000; Wally has...

William, Wally, and Wilma want to form a corporation. William has cash of $100,000; Wally has property valued at $100,000 with a basis of $80,000; and Wilma has property valued at $50,000 that has a $70,000 basis. Wally doesn’t want to recognize his gain, but Wilma wants to recognize her loss because she has capital gains to offset the loss. As their tax advisor, develop several alternatives from which they can choose that would allow Wally to avoid gain recognition but allow Wilma to recognize her loss.

Expert Solution

My advice as the tax consultant will be that Wilma should not contribute her property to the corporation, rather she should sell it. By selling the property Wilma will receive $50,000 in cash and will incur a $20,000 loss ($70,000-50,000). Wilma can contribute this $50,000 with the assets of William and Wally. If the corporation wants Wilma’s property, Wally and William could form the corporation and purchase Wilma’s property. Wilma could then become a shareholder of the corporation at a later date.

Alternative advice: In an alternative scenario Wilma can take up a loan against the property. Wilma can also source $50,000 from a different source and then form the corporation. As Wilma will only be a 20 percent shareholder, she could then sell the property to the corporation and recognize the loss.

Alternative advice: In another alternative scenario Wilma can sell the property to William. William will then contribute the land and $50,000 cash to the corporation. Wilma could contribute her sale proceeds to the corporation in exchange for stock. All of these alternatives allow Wally non recognition of his gain.

ekkarill92 answered 1 year ago

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