Last year, Sparrow Corporation acquired land in a transaction that qualified und
ID: 2593640 • Letter: L
Question
Last year, Sparrow Corporation acquired land in a transaction that qualified under §351. The land had a basis of $400,000 to the contributing shareholder and a fair market value of $310,000. Assume that the shareholder also transferred equipment (basis of $100,000, fair market value of $200,000) in the same §351 exchange. In the current year, Sparrow Corporation adopted a plan of liquidation and distributes the land to Alice, a shareholder who owns 20% of the stock in Sparrow Corporation. The land’s fair market value was $230,000 on the date of the distribution to Alice. Sparrow Corporation acquired the land to use as security for a loan it had hoped to obtain from a local bank. In negotiating with the bank for a loan, the bank required the additional capital investment as a condition of its making a loan to Sparrow Corporation. How much loss can Sparrow Corporation recognize on the distribution of the land? Also, discuss whether §362(e)(2) applies to the land.
Explanation / Answer
Sparrow Corporation can recognize Loss of $170,000 on the distribution of the land.
RATIONALE: Sparrow Corporation had a business reason for acquiring the land. Further, the land was not distributed to a related party. Thus, the loss limitation provisions do not apply and the entire loss of $170,000 [$230,000 (fair market value) - $400,000 (land basis)] is allowed.
§ 362(e)(2) basis stepdown rules for loss properties acquired in carryover basis transactions does not apply to the land, as there was no net built-in loss on the two properties transferred by shareholder.
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