Sam contributed land worth $25 million, with a $22 million basis, to Katy, Inc.

Question

Sam contributed land worth $25 million, with a $22 million basis, to Katy, Inc. The land is subject to a $14 million mortgage. This capital contribution qualifies as a Section 351 transaction and Sam had a legitimate investment purpose for contributing the mortgage as well as the land. Sam solely received common stock worth $11 million. If Katy, Inc. immediately resells this land immediately after receiving it, what is its gain or loss, if any, on sale? 4. Refer to question 3. If the IRS determines that Sam had an ““improper purpose”” for transferring the mortgage into the corporation, how much gain would Sam have to recognize?

Explanation / Answer

The net consideration = $22 million - mortgage amount

=$22-$14

=$8 million

But the consideration received is $11 million of common stock

$3 million is the gain which should be shown as good will.

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