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Castle Construction, Inc. is a real estate development company organized as an S corporation. The company's...

Castle Construction, Inc. is a real estate development company organized as an S corporation. The company's sole shareholder, Celia, has a tax bases in her Castle stock of $100,000. This year, the company reported a net operating loss of ($129,000). It also decided to distribute a parcel of land with a tax basis (to Castle) of $65,000 and a fair market value of $185,000. Prior to the distribution, Castle was holding the land as inventory. It decided to distribute the land to Celia because it no longer planned to develop that particular property.

a.    Will Celia recognize any gain in connection with receipt of the distribution? See Treasury Regs. §1.1367-1(f).

b.    What will be her tax basis in the land?

c.     What will be her remaining tax basis in her stock after accounting for the distribution?

d.    How would your answers change if the land had been encumbered by a $75,000 liability, for which Celia assumed personal responsibility upon receipt of the distribution?

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Answer #2

a. Capital Gian in the Hands of Celia

Tax bases in her Castle stock of $100,000

Fair Market Value of Distribution received $185000

The Gain in hands of Celia = $85000

b. Fair market Value of Land when she received it is $ 185000 so tax base of land is $ 185000

c. After distribution no tax base of stock will remain in her hand.

d. if the land had been encumbered by a $75,000 liability, for which Celia assumed personal responsibility upon receipt of the distribution then Gain in hands of Celia on distribution will be $185000-$100000-$75000= $10000

answered by: anonymous
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