Question

Except as otherwise stated, A starts out with non-depreciable real property (a capital asset) worth $100 (adjusted basis $40) and ends up with cash of $50 plus a 50% interest (worth $50) in, a newly organized corporation that owns the property. For each part, determine the following: i. A’s amount realized ii. A’s gain or loss realized iii. A’s gain or loss recognized in the character thereof iv. A's basis in the X stock received v. A’s holding period for the X-stock received (tack or not?) vi. X corporation’s basis in the property received vii. X corporation’s holding period for the property received (text or not?) viii. The amount and character of X’s gain if X immediately sells the property for $100 (a) Al transfers the property to X in exchange for all of X’s stock. Shortly thereafter, Al sells half of his X stock to Barbara for $50 and either a. The stock sale is a separate event from the prior incorporation transaction; or b. The stock sale is an integral part of the incorporation plan. How would the result be different if the basis for Al's property were $200 rather than $40? (b) A sells a half interest in the property to B for $50. A and B then jointly transfer their property interest to X Corporation in exchange for X’s stock. (c) A and B jointly organize X Corporation. A transfers his property to X in exchange for $50 in cash and half of X Corporation’s stock. B transfers $50 in cash to X in exchange for the other half of X’s stock.

Answer 1

i)The basic formula for determining the amount realized is:

Start with cash received =Nil
+ Fair market value of property and services rendered =$100

+ Liabilities of seller assumed by buyer =Nil
– Selling expenses =Nil
= Amounts Realized =$100

ii)A’s gain or loss realized:

Amount Realised=$100

-Adjusted Basis=$40

A's gain =$60

iii) A’s gain or loss recognized:

Cash=Recognised gain=$50

iv)A's basis in the X stock received:

The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, other property, or services

v)You do not have a taxable capital gain or loss until you sell your inherited shares and have a realized value from which to calculate whether you made a profit. ... You report a capital gain or loss on your income tax return for the year the inherited property was sold.