Question

Maggie, a Cash Basis taxpayer, incorporates her Sole Proprietorship in 2020. She transfers the following items to the newly created Connors Corporation:

Adjusted Basis Fair Market Value
Cash $10,000 $10,000
Building 120,000 175,000
Mortgage payable (secured by the building and held for 15 years) 135,000 135,000

Required:
a. How much gain must Apricot recognize?
b. What is Apricot's basis in the stock she receives?
c. What is Strawberry Corporation's basis in the building?

Answer 1

Answer: See explanation

Step-by-step explanation:

a. How much gain must Apricot recognize?

Mortgage payable: 135,000

Less: Basis of transferred asset:

Cash: 10,000

Building: 12000

Gains recognized = 135,000 - (120,000 + 10,000)

= 135,000 - 130,000

= $5,000

b. What is Apricot's basis in the stock she receives?

This will be:

Cash: 10,000

Building: 120,000

Total = 120,000 + 10,000

= $130,000

c. What is Strawberry Corporation's basis in the building?

Thus will be the addition of Apricot's basis in the building and the gains recognized. This will be:

= 120,000 + 5000

= $125,000