Question

Ivan incorporated his sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation?s stock. The property transferred to the corporation had the following fair market values and adjusted bases:
FMV Adjusted Basis
Inventory $19,900 $37,000
Building 82,500 60,500
Land 82,750 50,250
Total $185,150 $147,750
The fair market value of the corporation's stock received in the exchange equaled the fair market value of the assets transferred to the corporation by Ivan. The transaction met the requirements to be tax-deferred under 351. (Any answer representing a loss should be entered as a negative number. Leave no answer blank. Enter zero if applicable.)

a. What amount of gain or loss does Ivan realize on the transfer of the property to his corporation?

b. What amount of gain or loss does Ivan recognize on the transfer of the property to his corporation?

c. What is Ivan's basis in the stock he receives in his corporation?

d. What is the corporation's adjusted basis in each of the assets received in the exchange?

e. Would the stock held by Ivan qualify as 1244 stock?

Answer 1

Answer:

Ivan Incorporated

a. Ivan realizes a gain of $37,400 on the transfer of the property to his corporation.

b. Ivan recognizes $0 gain on the transfer of the property to his corporation under tax deferred 351.

c. Ivan's basis in the stock he receives in his corporation is equal to $185,150, the fair market value.

d. The corporation's adjusted basis in each of the assets received in the exchange is as follows:

Inventory   $19,900

Building      82,500

Land           82,750

Total        $185,150

e. The stock held by Ivan would qualify as 1244 stock when it is disposed of by Ivan.

Explanation:

a) Data and Calculations:

                     FMV        Adjusted Basis

Inventory   $19,900         $37,000

Building      82,500           60,500

Land           82,750           50,250

Total        $185,150        $147,750

Gain = FMV minus Adjusted Basis

= $185,150 - $147,750

= $37,400

b) Section 351(a) of the IRS Code "provides that no gain or loss shall be recognized if Ivan transfers property to his corporation solely in exchange for stock in the corporation and immediately after the exchange, Ivan is in control (as defined in § 368(c)) of the corporation."  Therefore, Ivan will not recognize any loss on the transfer.

c) Section 1244 of the IRS Code "allows Ivan as a shareholder of a small corporation to deduct losses on the disposal of his shares to be treated as ordinary loss and not capital loss."  This can treatment is allowed on disposal or if the shares become worthless.