Question

In January of the current year, Wanda transferred machinery worth $207,500 (basis of $31,125) to a controlled corporation, Oriole, Inc., in a transfer that qualified under § 351. Wanda had deducted depreciation on the machinery in the amount of $166,000 when she held the machinery for use in her proprietorship. Later during the year, Oriole sells the machinery for $197,125. Answer the following questions regarding the tax consequences to Wanda and to Oriole on the sale of the machinery.

1. Does Wanda recognize a gain or loss of any kind on the transfer of the machinery to Oriole?

A. LONG TERM CAPITAL GAIN

B. NO GAIN IS RECOGNIZED

C. ORDINARY INCOME UNDER 1245 RECAPTURE

D. ORDINARY LOSS

2. Which taxpayers, if any, will recognize a gain as a result of the subsequent sale of the machinery by Oriole?

A. ONLY WANDA

B. ONLY ORIOLE, INC.

C. BOTH WANDA AND ORIOLE, INC.

3. What is Oriole's basis in the machinery before the sale? $_______

4. What is Oriole's gain from the sale? $_______

5. Oriole has a gain is treated as ?

A. CAPITAL GAINS

B. ORDINARY INCOME UNDER 1245

C. ORDINARY INCOME UNDER 1250

Answer 1

1.) OPTION-B; No gain is recognized by Wanda.

2.) OPTION-B; Only Oriole, Inc. will recognize the gain from sale of machinery.

3.) Oriole has a carryover basis of $31,125 in the machinery and Oriole has a taxable gain of $1,66,000 ($1,97,125 - $31,125) on the sale of machinery.

4.) Oriole's gain from sale = $1,97,125 - $31,125

= $1,66,000

5.) OPTION-B; All of $1,66,000 gain is ordinary income under 1245. The recapture potential of the machinery carries over to the corporation. Thus, Oriole has to take into account the $1,66,000 of 1245 recapture potential originating with Wanda.