Question

Zhang incorporated her 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:

Inventory Building Land FMV $ 48,000 360,000 552,000 $960,000 Adjusted Basis $ 24,000 240,000 720,000 $984,000 Total

The corporation also assumed a mortgage of $100,000 attached to the building and land. The fair market value of the corporation’s stock received in the exchange was $860,000. The transaction met the requirements to be tax-deferred under §351. (Negative amount should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)

Assume the corporation assumed a mortgage of $1,060,000 attached to the building and land. Assume the fair market value of the building is now $600,000 and the fair market value of the land is $1,272,000. The fair market value of the stock remains $860,000.

e. How much, if any, gain or loss does Zhang recognize on the exchange assuming the revised facts?

Answer 1

Based on the revised facts

Zhang realizes a gain of $936000 on the exchange ($860000 FMV of stock + $1060000 mortgage assumed - $984000 aggregate tax basis). The liability assumed by the corporation exceeds the total tax adjusted basis of the property Zhang transferred to the corporation by $76000 ($1060000- $984000). Zhang recognizes gain of $76000 on this transfer.