Your client, Abbad, is contemplating the contribution of
property to a “C” corporation in exchange for that corporation’s
common stock. Abbad is considering the contribution of one of two
raw parcels of land he owns, Parcel 1 and Parcel 2. Neither parcel
has any improvements. The corporation would like either of these
parcels to locate its new manufacturing plant. Parcel 1 has an
adjusted tax basis of $550,000 to Abbad and a fair value of $1.5
million. Parcel 2 has an adjusted tax basis of $1.8 million to
Abbad and a fair value of $1.5 million. Parcel 2 has decreased in
value due to the fact that a small portion of it is now considered
wetlands. However, this would not impact the construction of the
new manufacturing plant. In exchange for either of these two
parcels, the corporation will transfer only voting shares of common
stock to Abbad. After the transfer, Abbad will have 80% control of
the corporation. Business valuators expect the corporation’s stock
to significantly increase in value once the manufacturing plant is
built. If Abbad wants to do this transfer, what would you suggest
to him?
a. Transfer either parcel because it doesn’t make a
difference
b. Transfer Parcel 1
c. Transfer Parcel 2
d. Consider transferring other property besides the land.
Answer to question
in million | ||
Adjusted tax basi | Fair Value | |
Parcel 1 | $ 0.55 | $1.5 |
Parcel 2 | $ 1.80 | $1.5 |
Abbad will have 80% control of the corporation. Business valuators expect the corporation’s stock to significantly increase in value once the manufacturing plant is built.
So its better to transfer parcel 1 in which adjusted tax basis is lower comper to parcel 2 and fair value is same in both the option.
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