Question

Lilah and Juliet form a corporation (LJ Inc) Lilah contributes land ( a capital asset) with a fair market value of $ 250,000 and a tax basis of S 50,000. The land is subject to a mortgage of $ 150,000 which is assumed by LJ Inc. Lilah receives 1,000 shares of LJ Incin the transaction Juliet contributes inventory with a fair market value of $100,000 and a tax basis of $80,000. She receives 700 shares of LJ Inc and a note of $ 30,000 payable in 2 years. What gain or loss must Lilah and Juliet recognize ? O A. Lilah recognizes a capital gain of $100,000 , Juliet recognizes ordinary income of $30,000 B. Lilah recognizes no gain or loss , Juliet recognizes $30,000 of ordinary income C. Neither Lilah nor Juliet recognize any gain or loss. OD. Lilah recognizes a capital gain of $100,000 , Juliet recognizes ordinary income of $20,000

Answer 1

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Answers are highlighted in yellow: Solution: D. Lilah recognizes a capital gain of $100,000, Juliet recognizes ordinary income of $20,000 Answer: a) Explanation: Section 351 is applicable here, because both are gettting more than 80% of shareholding after property contribution: A) (1000*100) + (700*100) Fair value of Stock received against Property Add: Cash/Non-cash boot received Add: Mortgage/Liability assumed Less: Adjusted basis of Machinery Realized gain Lilah 100000 0 150000 -50000 200000 Juliet 70000 30000 0 -80000 20000 i) ii) Recognized gain 1000000 20000 (As per section 351, no gain or loss except when liability is greater than adjusted basis under section 357c) (Mortgage - Adjusted basis) B. Lilah's tax basis is $0, Juliets tax basis is $70,000. Answer: b) Explanation: Basis in Stock = (Adjusted basis + Gain recognized - Liability - Boot) Lilah's Basis = (50000+100000-150000-0) = 0 Juliet's Basis = (80000+20000-0-30000) = 70000