Chapter 4 Solutions
26. a. $30,000 of ordinary gain (compensation income).
c. $0. Rod may not recognize the realized loss of $45,000 because such losses are disallowed
by § 351.
d. $345,000 (basis of property contributed). Because Rod contributed property with a built-in
loss, the basis of the equipment to the corporation (see part e. below) generally cannot
exceed its fair market value. However, at the election of both Rod and Zelcova Corporation,
Zelcova may take a carryover basis of $345,000 if Rod accepts a basis in his stock of
$300,000. Rod may be willing to take a lower basis if he plans to hold the stock for a long
period of time.
e. $300,000. Because Rod contributed property with a built-in loss, the basis of the equipment to
the corporation generally cannot exceed its fair market value. However, at the election of both
Rod and Zelcova Corporation (see part d. above), Zelcova may take a carryover basis of
$345,000 if Rod accepts a basis $300,000. The election may be worthwhile if Zelcova plans
to sell the equipment soon or needs additional depreciation deductions.
f. $20,000 of ordinary gain (related to accounts receivable).
g. $60,000 [$60,000 (basis of cash and unrealized accounts receivable) + $20,000 (gain
recognized) – $20,000 (boot received)].
h. $20,000 [$0 (basis in unrealized accounts receivable) + $20,000 (gain recognized)].
i. $90,000 [$300,000 (mortgage) – $210,000 (basis in property)]. The character of the gain is
dependent on the nature of the assets in Whit’s hands. Assuming Whit held the assets for
business use, the gain will likely be given § 1231 treatment; however, the depreciation
recapture rules could cause a portion of the gain to be ordinary.
j. $0 [$210,000 (basis in property) + $90,000 (gain recognized) – $300,000 (release of liability)].
k. $300,000 [$210,000 (basis of property) + $90,000 (gain recognized)].
pp. 4-3, 4-4, 4-9 to 4-12, Figures 4-1 and 4-2, and Examples 21 and 22
27. a. $0.
f. $120,000 (basis in the equipment) and $4,000 (basis in the patent).
g. 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.
h. The answers would not change. There is no requirement that the transferors be individuals.
Example 2 and Figures 4-1 and 4-2
30. a. The transfers will qualify under § 351. Vera’s stock is counted in determining control for
purposes of § 351; thus, the transferors own 100% of the stock in Crane. All of Vera’s stock,
not just the shares received for the machinery, is counted in determining control because