Locust Corp desires to set up a distribution facility in a southern state. After consideration negotiations with a small town in Alabama, Locust accepts the following offer: land (fair market value of $3 million) and cash of $1 million.
a) How much gain, if any, must Locust Corp recognize?
b) What basis will Locust Corp have in land?
c) Within one year of the contribution, Locust constructs a building for $800,000 and purchases inventory for $200,000. What basis will Locust Corp have in each of these assets?
Susan transfers property (basis of $50,000and fair market value of $25,000) to Thrush Corp in exchange for shares of Section 1244 stock. (Assume the transfer qualifies under Section 351)
a) What is the basis of the stock to Susan? (Susan and Thrush do not make an election to reduce her stock basis)
b) What is the basis of the stock to Susan for purposes of Section 244?
c) If susan sells the stock for $20,000 two years late, how will the loss be treated for tax purposes?
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a) To determine the gain that Locust Corp must recognize, we need to compare the fair market value of the consideration received (land and cash) with the adjusted basis of the property being transferred. The adjusted basis is typically the original cost of the property, but it can be adjusted for things like depreciation deductions or improvements made to the property. Unfortunately, the question does not provide information about the adjusted basis of the property being transferred. Therefore, we cannot calculate the gain at this point.
b) The basis of the land for Locust Corp will be its fair market value of $3 million, as stated in the offer.
c) To determine the basis of the building and inventory, we need to add the cost of construction/purchase to the basis of the land. Since the cost of the building is $800,000 and the inventory purchase cost is $200,000, the basis of the building will be the fair market value of the land ($3 million) plus the cost of construction ($800,000), which equals $3.8 million. The basis of the inventory will be the cost of purchase, which is $200,000.
For the second part of your question:
a) Since Susan transferred property (basis of $50,000 and fair market value of $25,000) to Thrush Corp in exchange for shares of Section 1244 stock under Section 351, the basis of the stock to Susan will be the same as the basis of the property transferred, which is $50,000.
b) The basis of the stock to Susan for purposes of Section 1244 will also be $50,000, as the basis does not change for Section 351 exchanges.
c) If Susan sells the stock for $20,000 two years later, she will incur a loss of $30,000 ($50,000 - $20,000). This loss will be treated as a capital loss for tax purposes.