Question

Part 1:

Lourdes incorporated her sole proprietorship by transferring inventory, equipment, 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 value and adjusted basis.

Property Transfer

	FMV	Adjusted Basis
Inventory	$ 20,000	$ 10,000
Equipment	$150,000	$100,000
Land	$250,000	$300,000
Total	$420,000	$410,000

The corporation also assumed a note payable of $120,000 attached to the Equipment and land. The fair market value of the corporation’s stock received in the exchange was $300,000.

What amount of gain or loss does Lourdes realize on the transfer of the property to the corporation?

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

What is Lourdes’s basis in the stock she receives in her corporation?

Would you advise Lourdes to transfer the equipment and land to the corporation? What tax benefits might she and the corporation receive if she kept the equipment and land and leased it to the corporation?

Part 2:

Alan owns stock in two S corporations, Cyan and Verde. He actively participates in the management of Cyan but is only a passive investor in Verde. Both Cyan and Verde anticipate a loss this year. Alan’s basis in the stock of both corporations is $0. If Alan plans on making a capital contribution to at least one of the corporations this year, which firm should it be if his objective is to increase his chances of deducting the loss allocated to him from the entity? Why?

Answer 1

Solution:-

Part 1:

a. What amount of gain or loss does Lourdes recognize on the transfer of the property to her corporation:-

Carla realizes a net gain of $10,000 on this transfer, computed as follows:

Fair market value of stock received	300,000
+ Mortgage assumed by corporation	120,000
Amount realized	420,000
Adjusted tax basis of the property transferred	410,000
Gain realized	10,000

b. What amount of gain or loss does Lourdes recognize on the transfer of the property to her corporation:-

Carla does not recognize any gain or loss on the transfer because the requirements of §351 are met and no boot is received in the exchange.

c. What is Lourdes’s basis in the stock she receives in her corporation:-

$290,000. Carla’s tax basis in the stock received is a substituted basis of the assets transferred less the mortgage assumed by the corporation.

d. Would you advise Lourdes to transfer the equipment and land to the corporation? What tax benefits might she and the corporation receive if she kept the equipment and land and leased it to the corporation:-

By keeping the equipment and land outside the corporation, Carla could lease the assets to her corporation and reduce future taxable income by the rental payments to Carla. This arrangement allows Carla to withdraw earnings from the corporation in a manner that is tax deductible to the corporation.