Question

Rose bought a piece of land 3 years ago for $1. Today the fair market value of the land is $100 and she transfers it to Flower Inc in exchange for all 100 shares of Flower’s voting common stock worth $100. There are no other shareholders

Does Rose recognize gain on the transfer? NO

What is Rose’s basis in the stock? $1

What is Rose’s holding period in the stock? 3 years

What is Flower’s basis in the land? $1

What is Flower’s holding period for the land? 3 years

Using the facts of the previous question (a) except that Rose also received from Flower $5 in cash (Flower borrowed it from a bank) in addition to the stock, so the stock was worth $95:

How much if any gain does Rose recognize?

What is Rose’s basis in Flower?

What is Flower’s basis and holding period in the land?

Answer 1

Solution :

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.

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.

Rose basis in stock = Adjusted basis of property transferred + Gain recognized - Boot received
= $1 + 0 - 0 = $1

As per provisions, The shareholder's 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.

Flower basis in land = Adjusted basis of property to transferor + Gain recognized by transferor

= $1 + $0 = $1

As per taxation provisions, The transferee corporation's holding period includes the period of time the property was held by the transferor

Therefore flower's holding period for land will be 3 years.

If Rose received from flower $5 in cash, it means boot is received by Rose, therefore gain to be recoganized

= Gain realized or FMV of boot received whichever is lower

Gain realized = $100 - $1 = $99, Boot received = $5

Hence gain to be recognized by Rose is $5

Rose basis in stock = Adjusted basis of property transferred + Gain recognized - Boot received
= $1 + $5 - $5 = $1

Flower basis in land = Adjusted basis of property to transferor + Gain recognized by transferor

= $1 + $5 = $6

Holding period of flower will include holding period of Rose, hence holding period will be 3 years for flower.