Question

Taxation of Reorganization & Liquidations

351 Transaction Problem:

Able and Body are unrelated individuals. In September of the present year, they decide to form I Can Too Corporation. Able contributes a building and land with a basis of $35,000 and and a fair market value of $100,000, and a mortgage of $45,000. Body contributes machinery with a basis of $55,000 and a fair market value of $100,000, and the Corporation assumes a loan of $40,000 used for personal reasons by Body. They each receive 1,000 shares of the single class of the corporation’s par $100 common stock. Assume each share is worth $100

Answer the following questions:

1. Do any or all of the shareholders realize and recognize gain or loss on this transaction?
2. What is Able’s adjusted basis in his shares
3. What is Body’s adjusted basis in his shares?
4. What is I Can Too’s adjusted basis in the building and land contributed by Able?
5. What is I Can Too’s adjust the basis in the machinery contributed by Body?

Answer 1

a. Yes, Able will recognize loss of $ 45,000/- and Body will recognize loss of $40,000/- because Able and Body will recognize asset in Balance of $ 100,000 respectively and share capital of $ 100,000/- respectively. So, remaining amount is $ 45,000 of mortgage of Able and loan Amount of $40000 of Body will be recognized as loss in Profit & Loss statement.

b. In tax accounting, adjusted basis is the net cost of an asset after adjusting for various tax-related items; so, in this case in our balance sheet we have booked only 2 types of asset i.e building and land for able and Machinery for Body; so the adjusted basis of Able is $35000.

c. Adjusted Basis of Body is $55,000/-

d. $100000 because adjusted basis for company is fair market value.

e. $100000 because adjusted basis for company is fair market value.