Taxation Problem

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39. Zhang incorporated her sole proprietorship by transferring inventory, a building,

and land to the corporation in return for 100 percent of the corporation’s stock.

The property transferred to the corporation had the following fair market values

and adjusted bases:

LO 19-2

The corporation also assumed a mortgage of $100,000 attached to the building

and land. The fair market value of the corporation’s stock received in the exchange

was $300,000. The transaction met the requirements to be tax-deferred

under §351.

a) What amount of gain or loss does Zhang realize on the transfer of the

property to her corporation?

b) What amount of gain or loss does Zhang recognize on the transfer of the

property to her corporation?

c) What is Zhang’s tax basis in the stock she receives in the exchange?

d) What is the corporation’s adjusted basis in each of the assets received in

the exchange?

Assume the corporation assumed a mortgage of $500,000 attached to the building

and land. Assume the fair market value of the building is now $250,000 and

the fair market value of the land is $530,000. The fair market value of the stock

remains $300,000.

e) How much, if any, gain or loss does Zhang recognize on the exchange

assuming the revised facts?

f ) What is Zhang’s tax basis in the stock she receives in the exchange?

g) What is the corporation’s adjusted basis in each of the assets received in the

exchange?

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