Question

Sanjay contributes land to a business entity in January of the current year for a 30% ownership interest. Sanjay's basis for the land is $60,000, and the fair market value is $100,000. The business entity was formed three years ago by Polly and Rita, who have equal ownership. The entity is unsuccessful in getting the land rezoned from agricultural to residential. In October of the current year, the land is sold for $110,000. Determine the tax consequences of the sale of the land for the entity and its owners if the entity is organized as: a. A C corporation: The sale of the land by the corporation for $110,000 produces a recognized gain for the corporation of $ . The precontribution appreciation of $ is allocated to none of the shareholders .

Answer 1

SOLUTION :

a.         Since the 80% control prerequisite of § 351 isn't fulfilled at the time Sanjay contributes the land to the C enterprise, the premise of the land to the organization is the honest estimation of $100,000. Therefore, the sale of the land by the corporation for $110,000 produces a recognized gain for the corporation of $10,000 [$110,000 (amount realized) – $100,000 (adjusted basis)]. The sale produces no effect at the shareholder level.

b.         As in a., the sale of the land by the S corporation for $110,000 produces a recognized gain of $10,000. Since the element is a S company, the perceived addition is gone through to the three investors dependent on their stock proprietorship. Therefore, $3,000 ($10,000 × 30%) is reported on Sanjay’s return and the balance of $7,000 is reported on the returns of the other two shareholders.

c.         The non-recognition requirements of § 721 are satisfied at the time Sanjay contributes the land to the partnership. Therefore, the partnership’s basis for the land is a carryover basis of $60,000, and the partnership’s recognized gain is $50,000 [$110,000 (amount realized) – $60,000 (adjusted basis)]. Section 704(c) requires that the pre-contribution appreciation of $40,000 be allocated to Sanjay. The perceived increase equalization of $10,000 is apportioned among the three accomplices relying upon the benefit and misfortune sharing proportion.