choice_of_entity_solution - Solution: Trapping of...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Solution : Trapping of appreciation & choice of entity Kirk owns land with a basis of $40,000 and fair value of $100,000. Kirk decides to start a business that will use the land. For his initial investment, he contributes the land. After several years the fair value of the land is still $100,000. Kirk decides he no longer wants to run the business, so he completely liquidates the business. Required : Compute the tax implications for Kirk (assume a marginal tax rate of 35%) and the business under the following independent situations. 1. Kirk decides to form a C corporation (assume a marginal tax rate of 34% for the corporation). He contributes the land in exchange for 100% of the stock in a nontaxable Sec. 351 transaction. Contribution of the land . This is a nontaxable transfer under Sec. 351, and his basis in the stock is $40,000. The corporation’s basis in the land is $40,000. Treatment of distribution . Property distributed to a shareholder in a complete liquidation is assumed to be sold by the corporation at its fair value. The corporation’s basis in the land is $40,000, so when it distributes the land to Kirk the corporation must recognize a gain of $60,000 on the liquidating distribution ($100,000 fair value – $40,000 basis). The corporation pays $20,400 tax on the gain ($60,000 x 34%). The shareholder is assumed to sell their stock for its fair value.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 3

choice_of_entity_solution - Solution: Trapping of...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online