Jane and Walt form Orange Corporation. Jane transfers equipment worth $475,000 (basis of $100,000) and cash of $25,000 to Orange Corporation for 50% of its stock. Walt transfers a building and land worth $525,000 (basis of $200,000) for 50% of Orange’s stock and $25,000 cash.
To determine the tax consequences of these transfers, we need to calculate the gain or loss on each transferred asset. The formula for calculating gain or loss is:
Gain/Loss = Amount Realized - Adjusted Basis
1. Jane transferred equipment with a fair market value (amount realized) of $475,000 and a basis of $100,000. Therefore, the gain on equipment is:
Gain/Loss = $475,000 - $100,000 = $375,000
2. Walt transferred a building and land with a fair market value of $525,000 and a basis of $200,000. The gain on the building and land is:
Gain/Loss = $525,000 - $200,000 = $325,000
Since both Jane and Walt contributed 50% of the stock, we need to determine their respective ownerships within the corporation. As they both contributed $25,000 cash, we can assume that cash is split evenly between them.
Based on the amounts contributed, Jane's ownership is:
Ownership % = Amount Contributed by Jane / Total Amount Contributed
Ownership % = $25,000 / ($25,000 + $25,000) = 0.5 (50%)
Walt's ownership is also 50%.
Now, let's calculate their new basis in Orange Corporation:
1. Jane's new basis in Orange Corporation is the sum of her cash contribution and the adjusted basis of her equipment:
New Basis (Jane) = Cash Contribution + Adjusted Basis (Equipment)
New Basis (Jane) = $25,000 + $100,000 = $125,000
2. Walt's new basis in Orange Corporation is the sum of his cash contribution and the adjusted basis of his building and land:
New Basis (Walt) = Cash Contribution + Adjusted Basis (Building and Land)
New Basis (Walt) = $25,000 + $200,000 = $225,000
Finally, the total basis in Orange Corporation is the sum of Jane and Walt's new basis:
Total Basis = Jane's New Basis + Walt's New Basis
Total Basis = $125,000 + $225,000 = $350,000
To recap, Jane has a gain of $375,000 on the equipment transfer, and Walt has a gain of $325,000 on the building and land transfer. Both Jane and Walt own 50% of Orange Corporation, and their respective new bases in the corporation are $125,000 and $225,000. The total basis in Orange Corporation is $350,000.