Question

2. A transfers land to Newco in exchange for 100% of Newco's stock. The land has a basis of $50, FMV of $100 and is subject to a mortgage of $40.

a. What are the consequences to each of the parties?
b. Suppose in that the mortgage was placed on the property immediately before the transfer to Newco. A wanted cash in order to buy a yacht to be used for personal purposes, so he took out a mortgage on the land. Would this change your answer?
c. Suppose instead that the mortgage was for $60. Suppose further that this mortgage was incurred on the purchase of the property many years ago. Would this change your answer?
d. Same as (c) except that A also transfers accounts payable of $10. A is a cash basis taxpayer. How would this change your answer?

Answer 1

2a) in the given case

• For A: He gets Stock from Newco for transfer of his land in favour of NewCo
• For NewCo: He gets the posession of the land by transferring his shares to "A". The land has a basis of $50, FMV 0F $100 and is subject to a mortgage of $40.

2b) No, Since A has taken the property out of mortgage before execersing the sales to Newco this would not change.

2c) Yes, if the land is still is under mortgage, when he exercises his right to sell the land and also when the value is more than 50% of the FMV.

2d) Answer will not change.