Question

Karen, in forming a new corporation, transfers land to the corporation in exchange for 100 percent of the stock of the corporation. Karen's basis in the land is $677,600, and the corporation assumes a liability on the property in the amount of $745,360. The stock received by Karen has a fair market value of $1,355,200.

What is the amount of gain or loss that must be recognized by Karen on this transfer? What is the amount of Karen's basis in the corporation's stock? What is the amount of the corporation's basis in the land?

Answer 1

A) $0

As a general rule the assumption of shareholder's liabilty by the company is not considered boot. So, no gain will be recognized on transfer unless the transfer has no business purpose or it is done to avoid tax liabilty. But in this case their was the purpose of forming new corporation hence no gain will be recognized.

B)The basis in the corporation’s stock is $0.

Calculation:

Basis of the property transferred	$677600
Less : boot received	($0)
Plus: gain recognized	$67760
Less: liabilties transferred	($745360)
Basis in the stock	$0

C)$677600

Basis in the land = $677600(basis of property) + $0(gain recognized)

= $677600

For any query please comment and

DO GIVE POSITIVE RATING