choice_of_entity_solution

choice_of_entity_solution - Solution: Trapping of...

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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.
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choice_of_entity_solution - Solution: Trapping of...

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