1. Assume there is no mortgage on the land, market value is $200 and the basis...
1. Assume there is no mortgage on the land, market value is $200 and the basis of the land is $60.. The corporation borrows $5 from a bank and gives the $5 to W along with 100% of the stock in exchange for the land.
a. What is the fair market value of the stock? (Think of the balance sheet, what are the assets and the liabilities?)
b. What is the amount realized? What are the components of the amount realized?
c. What is the gain realized?
d. What is the gain recognized?
e. What is W’s adjusted basis in the stock?
Homework Answers
Solution:
Market value of land transferred = $200
Cash paid to W = $5
Hence fait market value of stock = $200 - $5 = $195
Amount realized by W = $200, Stock = $195 & Cash = $5
Gain realized = Transfer value - adjusted basis = $200 - $60 = $140
As per section 351, if stock is received in consideration then neither gain nor loss is reconginzed, however if other asset is also given then gain to be recognized is lower of gain realized or FMV of asset received
Therefore
Gain recognized = $140 or $5 whichever is lower i.e. $5.
W's adjusted basis in stock = Adjusted basis of property transferred + Gain recognized - asset other than stock received
= $60 +$5 - $5 = $60
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