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	$	24,000		$	12,000
Building		180,000			120,000
Land		276,000			360,000
Total	$	480,000		$	492,000

The corporation also assumed a mortgage of $100,000 attached to the building and land. The fair market value of the corporation’s stock received in the exchange was $380,000. The transaction met the requirements to be tax-deferred under §351. (Negative amount should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)

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

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	$	24,000		$	12,000
Building		180,000			120,000
Land		276,000			360,000
Total	$	480,000		$	492,000

The corporation also assumed a mortgage of $100,000 attached to the building and land. The fair market value of the corporation’s stock received in the exchange was $380,000. The transaction met the requirements to be tax-deferred under §351. (Negative amount should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)

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?

      

      

Answer 1

a. Zhang realizes a net loss of $12,000 on this transfer, computed as follows:

Fair market value of stock received $380,000

+ Mortgage assumed by corporation 100,000

Amount realized $480,000

-Adjusted tax basis of the property transferred 492,000

Loss realized $ (12,000)

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

c. $392,000. Zhang’s tax basis in the stock received is a substituted basis of the assets transferred less the mortgage assumed by the corporation.

d. 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 $12,000

Building 120,000

Land ($360,000 – $12,000})348,000

Total $480,000

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 ($380,000).

Assume the corporation assumed a mortgage of $500,000 attached to the building and land. Assume the fair market value of the building is now $250,000 and the fair market value of the land is $530,000. The fair market value of the stock remains $380,000.

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