Chapter 11, Problem 13P

a.

To determine

Introduction: To operate a business, a taxpayer generally chooses between individual trading, partnership, and corporation form of entity. The corporations can be of either S Corporation or C Corporation. The taxpayer needs to understand his business requirements properly for the smooth continuance of his business since each form of entity has different tax treatment. After 2018, a new 21 percent rate of tax was introduced for corporations. Corporations must include in ordinary taxable income all net capital gains income during the year for tax purposes and then the income taxed at a regular rate except in certain rare circumstances.

The amount of gain that must be recognized by K.

Answer to Problem 13P

The amount of gain that must be recognized by K is $\boxed{\$25,000}$ .

Explanation of Solution

Generally, if a shareholder transfers an asset to the corporation then no gain is recognized on the transfer. In cases where a transfer is done to avoid taxes or to reduce its liability, then the gain must be recognized. When a shareholder transfers an asset to the corporation then the shareholder’s basis in the stock is determined as follows:

Basis of the property transferred	$xxxx
Less: boot received	(xxxx)
Plus: gain recognized	xxxx
Less: liabilities transferred	(xxxx)
Basis in the stock	$xxxx

The basis in the property contributed to the corporation by a shareholder to which a non-recognition treatment same as the basis of property to the shareholder, increases by any gain recognized by the shareholder on the transfer.

For the given situation, K transfers land property to a corporation for a basis of $275,000 in return for the stock has a fair value of $550,000, which is subject to a liability of $300,000, in exchange for 100 percent common stock of the corporation.

So in this case gain recognized by K will be calculated as follows:

  $\begin{array}{l}\text{Gain}=\$300,000-\$275,000\\ =\$25,000\end{array}$

Therefore, the amount of gain that must be recognized by K is $\boxed{\$25,000}$ .

b.

To determine

Introduction: To operate a business, a taxpayer generally chooses between individual trading, partnership, and corporation form of entity. The corporations can be of either S Corporation or C Corporation. The taxpayer needs to understand his business requirements properly for the smooth continuance of his business since each form of entity has different tax treatment. After 2018, a new 21 percent rate of tax was introduced for corporations. Corporations must include in ordinary taxable income all net capital gains income during the year for tax purposes and then the income taxed at a regular rate except in certain rare circumstances.

The amount of basis of K in the Corporation’s stock.

Answer to Problem 13P

The amount of basis of K in Corporation’s stock is $\boxed{\$0}$ .

Explanation of Solution

Generally, if a shareholder transfers an asset to the corporation then no gain is recognized on the transfer. In cases where a transfer is done to avoid taxes or to reduce its liability, then the gain must be recognized. When a shareholder transfers an asset to the corporation then the shareholder’s basis in the stock is determined as follows:

Basis of the property transferred	$xxxx
Less: boot received	(xxxx)
Plus: gain recognized	xxxx
Less: liabilities transferred	(xxxx)
Basis in the stock	$xxxx

The basis in the property contributed to the corporation by a shareholder to which a non-recognition treatment same as the basis of property to the shareholder, increases by any gain recognized by the shareholder on the transfer.

For the given situation, K transfers land property to a corporation for a basis of $275,000 in return for the stock has a fair value of $550,000, which is subject to a liability of $300,000, in exchange for 100 percent common stock of the corporation.

So in this case gain recognized by K will be calculated as follows:

  $\begin{array}{l}\text{Gain}=\$300,000-\$275,000\\ =\$25,000\end{array}$

Now, the calculation of K’s basis in the corporation’s stock is as under:

Basis of the property transferred	$275,000
Less: boot received	-
Plus: gain recognized	$25,000
Less: liabilities transferred	($300,000)
Basis in the stock	$0

Therefore, the amount of gain that must be recognized by K is $\boxed{\$0}$ .

c.

To determine

Introduction: To operate a business, a taxpayer generally chooses between individual trading, partnership, and corporation form of entity. The corporations can be of either S Corporation or C Corporation. The taxpayer needs to understand his business requirements properly for the smooth continuance of his business since each form of entity has different tax treatment. After 2018, a new 21 percent rate of tax was introduced for corporations. Corporations must include in ordinary taxable income all net capital gains income during the year for tax purposes and then the income taxed at a regular rate except in certain rare circumstances.

The amount of Corporation’s basis in the land.

Answer to Problem 13P

The amount of Corporation’s basis in the land is $\boxed{\$300,000}$ .

Explanation of Solution

Generally, if a shareholder transfers an asset to the corporation then no gain is recognized on the transfer. In cases where a transfer is done to avoid taxes or to reduce its liability, then the gain must be recognized. When a shareholder transfers an asset to the corporation then the shareholder’s basis in the stock is determined as follows:

Basis of the property transferred	$xxxx
Less: boot received	(xxxx)
Plus: gain recognized	xxxx
Less: liabilities transferred	(xxxx)
Basis in the stock	$xxxx

The basis in the property contributed to the corporation by a shareholder to which a non-recognition treatment same as the basis of property to the shareholder, increases by any gain recognized by the shareholder on the transfer.

For the given situation, K transfers land property to a corporation for a basis of $275,000 in return for the stock has a fair value of $550,000, which is subject to a liability of $300,000, in exchange for 100 percent common stock of the corporation.

So in this case gain recognized by K will be calculated as follows:

  $\begin{array}{l}\text{Gain}=\$300,000-\$275,000\\ =\$25,000\end{array}$

Now, the calculation of the amount of Corporation’s basis in the land is as under:

Basis of the property transferred	$275,000
Less: boot received	-
Plus: gain recognized	$25,000
Less: liabilities transferred	-
Basis in the stock	$300,000

Therefore, the amount of the Corporation’s basis in the land is $\boxed{\$300,000}$ .