Question

Wh tior WI c. If fo 38. LO.4 Red Corporation wants to set up a manufacturing facility in a midwestern state. After considerable negotiations with a small town in Ohio, Red accepts the following offer: land (fair market value of $3 million) and cash of $1 million. a. How much income, if any, must Red Corporation recognize? b. What basis will Red Corporation have in the land? C. Assume that in addition to the facts given, the small town offers to reduce the established property tax rate by 40% on new assets acquired by Red during two-year period after locating in the town. What are the Federal income tax consequences of the property tax abatement? 39. LO.5, 6 Fmily Patriol (1 44. LO.5, of $60 $150, equip Critical Thinking

NEED HELP ANSWERING PART C FOR #38 :) THANK YOU!

Answer 1

Solution:-

a. How much gain or income, if any, must Red Corporation recognize:-

I do believe that Red Corporation will not recognized any income from the transfer of land as well as cash; since contributions from non-shareholders such as land are excluded from the gross income of the corporation.

b. What basis will Red Corporation have in the land:-

Red Corporation will have no basis in the land.

c. Within one year of the contribution, Red constructs a building for $800,000 and purchase inventory for $200,000. What basis will Red Corporation have in each of those assets:-

Since Red Corporation also receives cash of $1 million, the basis of properties purchased from that cash will be reduced by the amount of that cash. In this case the bases for both the building and the inventory will be reduced to zero.

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