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4. Tan Corporation desires to set up a manufacturing facility in the western part of the...

4. Tan Corporation desires to set up a manufacturing facility in the western part of the United States. After considerable negotiations with Butte, Montana, Tan accepts the following offer: land (fair market value of $4.5 million) and cash of $1.5 million.

  1. How much income, if any, must Tan recognize?

  1. What basis will Tan Corporation have in the land?

  1. Within one year of the contribution, Tan purchases equipment for $1.6 million. What basis will Tan have in the equipment?
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Answer #1

Income from Land and cash receipt is a nontaxable capital contribution under sec 118. So Tan Corporation does not recognizes any income.

Again Tan will have no basis in the Land under sec 362(c)(1)(B)

Tan accepted cash was $1.5 million.
Purchase of equipment was $1.6 million
So after applying the cash receipts, Tan will have basis in the equipment of (1.6 million - 1.5 million) = $100,000.

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