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 $67,200 $33,600

Building 120,000 75,000

Land 199,400 263,000

Total $386,600 $371,600

The corporation also assumed a mortgage of $96,000 attached to the building and land. The fair market value of the corporation’s stock received in the exchange was $290,600. The transaction met the requirements to be tax-deferred under §351.

a. What amount of gain or loss does Zhang realize on the transfer of the property to her corporation?

b. What amount of gain or loss does Zhang recognize on the transfer of the property to her corporation?

c. What is Zhang’s tax basis in the stock she receives in the exchange?

d. What is the corporation’s adjusted basis in each of the assets received in the exchange?

Adjusted basis

Inventory Building Land

e. Assume the corporation assumed a mortgage of $381,400 attached to the building and land. Assume the fair market value of the building is now $201,600 and the fair market value of the land is $537,600. The fair market value of the stock remains $290,600.
How much, if any, gain or loss does Zhang recognize on the exchange assuming the revised facts?

f. Assume the corporation assumed a mortgage of $381,400 attached to the building and land. Assume the fair market value of the building is now $201,600 and the fair market value of the land is $537,600. The fair market value of the stock remains $290,600.

What is Zhang’s tax basis in the stock she receives in the exchange?

g. Assume the corporation assumed a mortgage of $381,400 attached to the building and land. Assume the fair market value of the building is now $201,600 and the fair market value of the land is $537,600. The fair market value of the stock remains $290,600.

What is the corporation’s adjusted basis in each of the assets received in the exchange?

adjusted basis

inventory building land

Answer 1

a. What amount of gain or loss does Zhang realize on the transfer of the property to her corporation?

    Zhang realizes a net loss of $15000 on this transfer, computed as follows:

Fair market value of stock received	$290600
Add: Mortgage assumed by corporation	96000
Amount realized	386600
Less: Adjusted tax basis of the property transferred	371600
Loss realized	$15000

b. What amount of gain or loss does Zhang recognize on the transfer of the property to her corporation?

Zhang does not recognize any loss on the transfer because the requirements of §351 are met.

c. What is Zhang’s tax basis in the stock she receives in the exchange?

$305600 ($290600 + $15000)Zhang’s tax basis in the stock received is a substituted basis of the assets transferred less the mortgage assumed by the corporation.

d. What is the corporation’s tax-adjusted basis in each of the assets received in the exchange?

The corporation receives a carryover basis in the assets received from Zhang, reduced by the aggregate net built-in loss on the assets transferred, which is allocated to the land.

Inventory	$33600
Building	$75000
Land(263000 - 15000)	$248000
Total	$356600

If the aggregate adjusted tax basis of property transferred to a corporation by a shareholder in a §351 transfer exceeds the aggregate fair market value of the assets, the aggregate tax basis of the assets in the hands of the transferee corporation cannot exceed their aggregate fair market value. The aggregate reduction in tax basis is allocated among the assets transferred in proportion to their respective built-in losses immediately before the transfer. As an alternative, the Zhang can elect to reduce her stock basis to fair market value ($290600).

e. Assume the corporation assumed a mortgage of $381400 attached to the building and land. Assume the fair market value of the building is now $201600 and the fair market value of the land is $537600. The fair market value of the stock remains $290600.

How much, if any, gain or loss does Zhang recognize on the exchange assuming the revised facts?

Zhang realizes a gain of $300400 on the exchange ($290600 FMV of stock + $381400 mortgage assumed - $371600 aggregate tax basis). The liability assumed by the corporation exceeds the total adjusted basis of the property Zhang transferred to the corporation by $9800 ($381400 - $371600). Zhang recognizes gain of $ on this transfer.

f. Assume the corporation assumed a mortgage of $381,400 attached to the building and land. Assume the fair market value of the building is now $201,600 and the fair market value of the land is $537,600. The fair market value of the stock remains $290,600.

What is Zhang’s tax basis in the stock she receives in the exchange?

Adjusted basis of property contributed	$371600
Add: gain recognized on the exchange	9800
Less: mortgage assumed by corporation	381400
Tax basis of stock received	$0

Zhang defers recognition of $290600 of gain realized. If she sells her stock for its fair market value of $290600, she will recognize gain of $290600 equal to the amount of differed.

g. What is the corporation’s adjusted basis in each of the assets received in the exchange?

Inventory[$33600+($67200/$672000) x $9800)]	$34580
Building[$75000+($195000/672000) x $9800]	77844
Land[263000+($462400/672000) x $9800	269743
Total	$382167

The total tax basis of the three assets equals their carry over basis ($371600) plus the gain recognized by Zhang on the exchange.