| In forming Parts Inc. as a corporation, Candice transferred inventory to Parts Inc. in exchange for 30 percent of the corporation’s stock (120 shares valued at $288,000). The inventory’s fair market value was $316,000 and its adjusted tax basis to Candice was $276,500. The inventory was subject to a $28,000 liability that Parts Inc. assumed on the transfer. Candice borrowed the $28,000 from the bank (using the inventory as collateral) shortly before transferring the inventory to Parts Inc. and she used the loan proceeds to pay for a family vacation to Europe. (Loss amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)
a. Assuming the transfer qualifies under §351 and that the liability has a tax avoidance purpose, what gain or loss will Candice recognize on the transfer? b. Assuming the original facts, what is Candice’s basis in the stock she received in the exchange? c. Suppose the liability does not have a tax avoidance purpose, what gain will Candice recognize on the transfer? d. Assuming the facts in part c, what is Candice’s basis in the stock she received in the exchange? |
$28000 gain recognized.Candice realized a $39500 gain on the inventory transfer($316000 fair market value minus $276500 basis).Because the mortgage has a taxavoidance purpose, the $28,000 relief of debt is treated as boot received by Candice onthe exchange.Consequently, she must recognize gain in the amount of the lesser of(1) the $39500 realized gain or (2) the $28,000 boot received.
b
$276500, computed as follows
+$276500 Tax basis in contributed inventory
+$28,000 Gain recognized on the transfer
-$28,000 Fair market value of boot received
-$0 Liability is treated as boot so it is not subtracted twice
$276500 Tax basis of stock received
C
$ 0 because the liabelity is not considered to be boost, She is allowed to defer its entire gain realized on exchange
D
$248500, computed as follows:
+$276500Tax basis of contributed inventory
+$0Gain recognized on the transfer
-$0Fair market value of boot received
-$28,000Liabilities assumed by the corporation on propertycontributed
$248500Tax basis of stock received
