ChapterFour
25. ProblemSolutions Leasing some property to a controlled corporation may be a more attractive alternative than transferring ownership. Leasing provides the taxpayer with the opportunity of withdrawing money from the corporation without the payment being characterized as a dividend. If the property is donated to a family member in a lower tax bracket, the lease income can be shifted as well. If the depreciation and other deductions available in connection with the property are in excess of the lease income, the taxpayer would retain the property until the income exceeds the deductions. p. 4-26 a. b. c. d. e. f. g. $0. $190,000. $140,000. $0. $285,000. $125,000 (basis in the equipment) and $10,000 (basis in the patent). The answers would not change. There is no requirement that the transferors receive the same type of stock. Further, both common stock and most preferred stock qualify as stock. However, if Gail received nonqualified preferred stock, her realized gain would be recognized because this type of preferred stock is treated as boot. The answers would not change. There is no requirement that the transferors be individuals.
27.
h.
Example 2 and Figures 4-1 and 4-2 28. a. b. c. None of the three individuals will recognize gain. The nonrecognition provisions of 351 apply to all the exchanges. Example 5 Clyde will recognize gain of $260,000 ($350,000 $90,000) on the exchange. Example 4 Clyde would be well advised to avoid having his transfer treated as a part of an integrated plan that also includes Janes and Jons transfers. If his transfer is considered independent, not only will Jane and Jon be able to benefit from 351 (i.e., realized gains would not be recognized), but Clydes loss of $140,000 ($350,000 $490,000) is recognized. p. 4-6
31.
Juan must recognize $250,000 of gain on the transfer [$400,000 (value of the shares received) $150,000 (basis in the property transferred)]. The transfer does not qualify under 351. Although Juan originally owned 100% of Red Corporation, he only owns 60% after the transfer [2,000 (shares originally owned) 1,000 (shares transferred to Julie and Rachel) + 500 (shares acquired in the transfer), or 1,500 shares of a total of 2,500 shares]. Julie and Rachels stock ownership cannot be counted because the stock attribution rules of 318 (see Chapter 6) do not apply to a 351 transfer. Example 12 a. Ann does not recognize a gain. Bob recognizes a gain of $15,000, the value of the services Bob rendered to the corporation. Bob does not recognize gain on the transfer of property to the corporation. Examples 3 and 11 Ann has a basis of $150,000 in the stock in Robin Corporation. Bob has a basis of $45,000 in his stock in Robin Corporation [$30,000 (basis in property transferred) + $15,000 (gain recognized)]. Figure 4-1 Robin Corporation has a basis of $150,000 in the property Ann transferred and a basis of $30,000 in property Bob transferred. Robin Corporation capitalizes $15,000 as organization costs. Figure 4-2 and Example 24
32.
b.
c.
34.
In addition to her cash salary, Kim has ordinary income of $10,000 [10 (shares of stock in Azure Corporation) $1,000 (value each of share)]. Azure Corporation has a 162 deduction of $10,000. Example 23 a. Both 357(b) and 357(c) are applicable. The land is subject to two mortgages that are in excess of basis, causing 357(c) to be applicable. Allie has a gain of $350,000 [($375,000 + $100,000) $125,000] on the transfer pursuant to 357(c). Section 357(b) also is applicable because Allie borrowed the $100,000 shortly before incorporating and used the funds for personal purposes. Section 357(b) causes all liabilities to be tainted; thus, Allie has boot of $475,000. This generates taxable gain of $475,000, the amount of the boot. Her realized gain is $650,000 [$300,000 (value of stock received) + $475,000 (release of liabilities) $125,000 (basis of land)]. The realized gain is taxed to the extent of the boot received, or $475,000. When both 357(b) and 357(c) apply to the same transaction, 357(b) predominates. Blue Corporation has a basis of $600,000 in the land [$125,000 (carryover basis from Allie) + $475,000 (gain recognized to Allie)]. Allie has a $125,000 basis in the stock [$125,000 (basis in the land) + $475,000 (gain recognized) $475,000 (liabilities assumed by Blue Corporation)]. b. Section 357(b) would no longer be applicable. However, 357(c) will apply. Allie will have a taxable gain under 357(c) of $250,000 [$375,000 (liabilities assumed by Blue Corporation) $125,000 (basis in the property transferred to Blue)]. Allies basis in her stock will be zero [$125,000 (basis in the land transferred to Blue) + $250,000 (gain recognized by Allie) $375,000 (liabilities assumed by Blue)]. Blue Corporation will have a basis of $375,000 in the assets [$125,000 (carryover basis from Allie) + $250,000 (gain recognized to Allie)].
38.
pp. 4-9 to 4-12
40.
The $440,000 in liabilities of the proprietorship ($80,000 trade payables and $360,000 bank loan) exceed the $400,000 tax basis of the property transferred. If all of the liabilities are included under 357(c), Fay would have a taxable gain of $40,000 (the excess of the liabilities over her tax basis). However, the accounts payable of a cash basis taxpayer that give rise to a deduction are not considered to be liabilities for purposes of 357(c). Thus, the $80,000 of trade payables are not included, liabilities do not exceed basis, and no gain is recognized. Fay has a basis of $40,000 in the stock in Robin Corporation [$400,000 (basis in the properties transferred to Robin Corporation) $360,000 (bank loan assumed by the corporation)]. Robin Corporation has a basis of $400,000 in the assets transferred to it by Fay. p. 4-10 and Figures 4-1 and 4-2
43.
There are no tax consequences to Carol. Carol has no recognized gain and no accelerated cost recovery to recapture when she transfers the machinery to Lark Corporation in exchange for stock. Lark Corporation has a taxable gain of $75,000 on the sale of the machinery, all of which is ordinary income under 1245. Lark has a basis of $20,000 in the machinery. The recapture potential of the machinery carries over to the corporation; thus, Lark has to take into account the 1245 recapture potential originating with Carol. Example 25