Question

Corporate Formations Problem

Mary and Todd form the MT Corporation, with a transfer of the following properties:

                Mary                                     $1,200,000 cash

               

                Todd                                      $800,000 FMV property

                                                                $300,000 tax basis

                                               

                                                                               

Mary will receive 60% and Todd 40% of the corporate stock.

Complete the following

                                                                                                Mary                                     Todd

                Realized gain                                                      ________                           ________

                Recognized gain                                                ________                           _________

                Basis of Stock                                                     _________                         _________

                MT basis in contributed asset                     __________                       _________

VARIATION 1: return to original facts (no Karla). Todd’s property is valued at $1,100,000 but is contributed subject to a $300,000 liability.   

Complete the following

                                                                                                Mary                                     Todd

                Realized gain                                                      ________                           ________

                Recognized gain                                                ________                           _________

                Basis of stock                                                     _________                         _________

                MT basis in contributed asset                     __________                       _________

VARIATION 2: Same as Variation 1 except Todd’s property is valued at $1,200,000 and is contributed subject to a liability of $400,000.

Answer 1

As per section 351, when cash and/or any property is transferred to C Corp. and these contributed capital by one or more of the shareholder constitues 80% or more control in the C corp. then such contributions made by shareholder will not be taxable.

As per sec 351,

Shareholder basis for stock= carryover basis of the shareholder - mortgage debt (if any)

Corporation's basis for property = Carryover basis of the shareholder

Variation 1: -

Particulars Marry Tod Realized gain $ $ Recognized gain $ $ $ 1,200,000 $ 300,000 Basis of stock MT Basis in contributed asset $300,000

Variation 2: -

But exception to section 351 will be considered here as mortgage debt exceeds shareholder's adjusted basis in the property.

Also, corporate's basis for property = Carryover basis + gain recognized

Here, gain will be recognized on excess liability so that shareholder's adjusted basis is $0,

Hence, Tod's basis for stock = $300,000 - $400,000 +$100,000

MT corp's basis in the property = $300,000 + $100,000 = $400,000

Marry Tod Particulars $ $ $ $ 100,000 Realized gain Recognized gain Basis of stock (Carryover basis - Mortgage debt) $ 1,200,000 $ MT basis in contributed asset $ 400,000

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