Z owns a rental building (its only asset) with a gross fair market value of $5,0
ID: 2450516 • Letter: Z
Question
Z owns a rental building (its only asset) with a gross fair market value of $5,000 subject to the non-recourse mortgage of $2,000. Z’s adjusted basis for this building is $1,500. All of Z’s stock is owned by C, whose basis for his stock in Z is $500. Z had 1,000 of E&P. Z is on the accrual method of accounting and reports on the calendar year. Assume that the corporate tax payable by Z on $3,500 gained is$1250 and on $3,000 gained is $1,000. Z adopts a plan of complete liquidation instead of selling the building to D. Z distributes the building to C “in-kind” pursuant to the plan. C then sells the building to D for $3,000 in cash with D taking subject to the mortgage of $2,000.
a. Section 336 treats Z as selling the building to C for $5,000.
b. Z will recognize $3,500 gain which is probably ordinary under Section 1239.
c. C will take the property subject to both $2,000 mortgage and most likely a $1,250 tax due from Z to the IRS.
d. C’s basis will be the fair market value of $5,000 under Section 334(a).
e. All of the above.
Please explain why you choose this answer.
Explanation / Answer
c. C will take the property subject to both $2,000 mortgage and most likely a $1,250 tax due from Z to the IRS.
This Option C is more appropriate answer. The Property is subject to both the mortgage as well as tax due to the IRS from Z.
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