Question

Red Corporation wants to set up a manufacturing facility in a Midwestern state. After considerable negotiations with a small town in Ohio, Red accepts the following offer: land (fair market value of $3 million) and cash of $1 million.

a. How much gain or income, if any, must Red Corporation recognize?

b. What basis will Red Corporation have in the land?

c. Within one year of the contribution, Red constructs a building for $800,000 and purchases inventory for $200,000. What basis will Red Corporation have in each of those assets?

Answer 1

a. $0

As the corporation is receiving property & cash from a non shareholder as a contribution to capital, it will not recognize any gain or income on either of the contributions.

b. $0

Red corporation's basis in the land which is contributed by a non-shareholder will be zero.

c. $0 and $0

As Red corporation also receives cash of $1 million, the basis of properties purchased from cash will be reduced by the amount of that cash. In this case, the bases for both the building and the inventory will therefore be reduced to zero.