Harry and Sally formed Empire Corporation on January 2. Harry contributed cash o

Question

Harry and Sally formed Empire Corporation on January 2. Harry contributed cash of $500,000 in return for 50% of the corporation's stock. Sally contributed a building and land with the following fair market values and tax-adjusted bases in return for 50% of the corporation's stock. FMV Tax Basis Building $180,000 $200,000 Land 420,000 500,000 Total $600,000 $700,000 To equalize the exchange, Empire Corporation paid Sally $100,000 in addition to her stock. (a) What amount of gain or loss does Sally realize on the formation of the corporation? (b) What amount of gain or loss, if any, does she recognize? (c) What is Sally's tax basis in the stock she receives in return for her contribution of property to the corporation? (d) What tax basis does Empire Corporation take in the land and building received from Sally? (e) Would your answers in (a) - (d) change if the tax basis of the building was $150,000 and the land $350,000? Explain how each answer would change.

Explanation / Answer

Solution.

(a) Realized Loss for Sally = ($500000+$100000)-($200000+$500000) = $100000

(b) Recognized Loss for Sally = $0 (Loss is never recognized if boot is received).

(c) Sally's tax basis = $700000 - $100000 = $600000

(d) Empire's tax basis = $700000 - $0 = $700000

(e)

Realized Gain for Sally = ($500000+$100000)-($150000+$350000) = $100000
Empire's tax basis = $500000+$100000 = $600000

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