Farmer contributed land to a newly formed S corporation in exchange for 60% of t
ID: 2498978 • Letter: F
Question
Farmer contributed land to a newly formed S corporation in exchange for 60% of the corporation’s stock. Farmer’s basis in the land was $350,000 and its fair market value was $600,000. Developer contributed $400,000 cash and received 40% of the stock. The cash was used to develop the land. The land was sold for $1,500,000 and the corporation incurred $500,000 in selling expenses. The land was developed and sold in the same tax year and the corporations made no distributions. Show your computations for the answers below.
What is Farmer’s taxable income, and its character, from the sale of the land?
Same as above, except the entity was an LLC, rather than an S corporation?
After development and sales were completed, there were no additional income and expenses and the S corporation was liquidated. How much should Farmer receive as a liquidating distribution?
Explanation / Answer
The fair market value on the day of the transfer by the farmer to the corporation needs to be considered as purchase consideration for the land. The difference between the basis and the fair value is taxable in the hands of the farmer. So, $600,000 - $350,000 =$150,000 is to be 1treated as capital gain.
Even if the lad s sold to LLC instead of corporatoin, the above position does not change, because the owner ship rights are transferred to a legal entity and the farmer does not have any individual right on the property apart from being a partner of the firm in which he holds some shares.
Land was sold for $1,500,000. and the cost of selling $500,000.
Cost of the land to the LLC =$600,000 and the development cost incurred =$400,000.
Therefore total cost of the land and development=$1,000,000.
There is no profit or gain in the hands of LLC or corporation.
The farmers individual tax liability will not change whether the land is sold to LLC or a corporation.
Upon liquidation the farmer would receive 60% ofthe net proceeds i.e.,60%* ( $1,500,000 - $500,000) =$600,000.
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