Question

Rose bought a piece of land 3 years ago for $1. Today the fair market value is $100 and she

transfers it to Flower Inc, a corporation, in exchange for all 100 of Flower’s voting common stock. There are no other shareholders.

            a) Does Rose recognize gain on the transfer?

            b) What is Rose’s basis in the stock?

            c) What is Rose’s holding period in the stock?

            d) What is Flower’s basis in the land?

            e) What is Flower’s holding period for the land?

            f) Would your answer to parts (a) change (and if so how) if the fair market value of the land were $50 and Rose’s basis was $75?

            g) Would the answer to part (c) change if instead of transferring land Rose transferred inventory?

Answer 1

As per taxation provisions, Neither gain nor loss is recognized upon the transfer by one or more persons of property to a corporation solely in exchange for stock in that corporation if, immediately after the exchange,such person or persons control the corporation.

* Control means the ownership of 80%of the voting power of the voting stock of the corporation.

A :- therefore in the given case land was transferred by rose in exchange of shares and after exchange rose will control the Flower Inc,

Therefore rose will not recognize gain on transfer .

B :- Rose basis in stock :- Adjusted basis of property transferred + Gain recognized - Boot received

= $1+0-0=$1

C :- As per provision, the shareholders holding period for the stock includes the holding period of any capital assets or sec.1231 assets transferred.

Therefore,rose holding period in stock will be 3 years.

D :- Flowers basis in land = Adjusted basis of property to transferor + Gain recognized by transferor

= $1+$0 =$1

E:- As per taxation provision, the transferee corporation holding period include the period of time the property was held by the transferee.

Therefore, flowers holding period for land will be 3 years.