On June 3 of the current year, Eric, Florence, and George form Wildcat Corporati
ID: 1218184 • Letter: O
Question
On June 3 of the current year, Eric, Florence, and George form Wildcat Corporation and transfer the following items:
TRANSFER ASSET BASIS FMV SHARES
E LAND 200000 50000 500
F EQUIPMENT 0 25000 250
G LEGAL SERVICE 0 25000 250
Eric purchased the land (a capital asset) five years ago for $200,000. Florence purchased the equipment three years ago for $48,000. The equipment has been fully depreciated.
a. Does the transaction meet the requirements of Sec. 351?
b. What are the amount and character of the gains or losses recognized by Eric, Florence, George, and Wildcat?
c. What is each shareholder’s basis in his or her Wildcat stock? When does the holding period for the stock begin?
d. What is Wildcat’s basis in the land, equipment, and services? When does the holding period for each property begin?
Assume the same facts above.
a. Under what circumstances is the tax result in Problem beneficial, and for which shareholders?
b. Can you suggest ways to enhance the tax benefit?
Explanation / Answer
a.
The transaction does not meet the requirements set forth in Sec.351.
Eric and Florence stock of 750 (500 + 250)/ 1000(500 + 250 + 250) = 75% therefore failing the 80% test.
b. Eric recognizes a $150,000 capital loss on the land ($50,000 FMV - $200,000 basis). Florence recognizes a $25,000 gain ($25,000 FMV - $0 basis) on the equipment. The gain is treated as ordinary income under Sec. 1245 recapture rules. George recognizes $25,000 of ordinary income as compensation for his services. Wildcat Corporation recognizes no gain or loss on issuing its stock for property or services.
c.
Eric’s basis in his stock is $50,000, its FMV. Florence’s basis in her stock is $25,000, its FMV. George’s basis in his stock is $25,000, its FMV. They each have a holding period that begins the day after the exchange date.
d.
Wildcat’s basis in the assets received is: land $50,000 (FMV) and equipment $25,000 (FMV). The holding period for the land and equipment begins the day after the exchange. The legal services may be deductible by Wildcat if incurred after operations have begun. They may have to be amortized over a period of time depending on when they were incurred and what they were incurred for. Also, if George has not yet performed the services, deduction may be deferred until economic performance occurs. pp. C:2-12 through C:2-27.
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