Ac 471 Tax Resarch

Question:

What basis should X corporation assign to the land for purposes of computing gain and loss on the lot sales?

Facts:

JKL, Inc. decided to expand its business to lucrative condominium market. The corporation persuaded M, N, and O to become a part of JKL, Inc. Then M, N, O, and JKL contributed assets to the new corporation, X Corporation. And their transaction qualifying under §351. M contributed the following assets for 25% of the stock (FMV $450,000) and Cash (FMV $50,000): Land (FMV = $300,000; Basis =$25,000); Office Building (FMV = $70,000; Basis $90,000); Crane (FMV =$130,000; Basis $100,000). In this year, corporation subdivided the land and began selling the unimproved property.

Analysis:

Under §351(a) general rule, “No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation.” M, N, O, and JKL contributed assets to the X corporation and their transfer transaction qualifying under §351. Also, in §368(c); Rev. Rul. 59-259, 1959-2 C.B. 115. the control define as “ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation” . M got 25% of the stock after transfer the property to X Corporation. And they qualifying under §351 means M, N, O and JKL own at least 80% of the stock immediately after exchange.

However, M receipt of property not only stock. M also received $50,000 cash which means it does not completely disqualify an exchange. The amount of gain recognized also means the amount of the boot received. Under §351(b), gain shall be recognized, but not in excess of the amount of money received plus the fair market value of such other...