Question

Harry and Ron are brothers who inherited a house from their mother several years ago. The house was included in mom’s estate at a value of $230,000 Two years ago, they decided to form a corporation to own the house (liability issues, you know) and they each contributed their 50% ownership in the house to this new corporation (HR Corporation) in exchange for 50% each of the newly issued common stock. At the date of the incorporation, the house was worth $300,000. Unfortunately for Harry and Ron, the housing bubble burst soon after incorporation and the value of the house fell all the way to $100,000. Ron decided he wanted to live in the house, so they decided to liquidate the corporation and return direct ownership to them both in equal shares. Ron will eventually buy out Harry’s half of the house. How much gain or loss will HR Corporation recognize and how much income or loss will Harry recognize?

a.      ($200,000) and ($15,000)

b.     ($130,000) and ($15,000)

c.      $0 and ($65,000)

d.     ($130,000) and ($65,000)

Answer 1

The gain or loss will HR Corporation recognise is calculated as follows :

The value of estate inherited bu two brothers and introduced in the corporation would be the fair market value as on the date of the descendents death or the book value of asset included in the descendent's estate.

Therefore, loss that HR Corporation will recognise would be :

Value of house included in their mother's estate - value as on date of liquidation

which is = $230000-$100000 = $130000 loss.

Loss that harry would recgnise is as follows :

Share of loss in HR Corporation - sale of his share of property

which is = $65000-$50000 = $15000 loss.

hence, the answer is :

b.) ($130000) and ($15000)