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Taxation: Sec 351, assumed liabilities, distributive share

1. Devin contributes land (adjusted basis of $30,000; fair market value of $100,000) to Thompson, Inc., in exchange for all of its stock. The land is encumbered by a mortgage of $27,000 which Thompson, Inc. assumes. The transaction qualifies for non-recognition treatment under code section 351. Compute Devin's adjusted basis for his stock.

2. Aaliyah transfers land (a capital asset) with an adjusted basis of $120,000, fair market value of $300,000, for 85% of the stock of Prairie Corporation. In addition, she receives cash of $40,000. Aaliyah recognizes a capital gain of $40,000 on the transfer. TRUE/FALSE

3. When incorporating her sole proprietorship, Sandy transfers all of its assets and liabilities. Included in the $30,000 of liabilities assumed by the corporations is $500 that relates to a personal expenditure. Under these circumstances, the entire $30,000 will be treated as boot. TRUE/FALSE

4. Will is a general partner in the WST partnership. During the current year, he received a guaranteed payment of $10,000 for services he provides to the partnership, and his distributive share of partnership ordinary income is $30,000. Will is required to pay self-employment tax on the $10,000 guaranteed payment, but not on his distributive share of partnership ordinary income. TRUE/FALSE

5. Megan and Kirsten formed an equal partnership on August 1 of this year. Megan contributed $60,000 cash and land with a basis of $18,000 and a fair market value of $40,000. Kirsten contributed equipment with a basis of $42,000 and a value of $100,000. Kirsten's tax basis in her interest is $42,000; Megan's tax basis is $78,000. TRUE/FALSE

6. JM Partnership reports the following for the current year:

Partnership ordinary income (properly computed) $180,000
Qualified Dividend income 5,000
Guaranteed payment to Monty 45,000
Total cash distributions ($40,000 to each partner) 80,000
Interest on City of New York Bonds 2,000
Fines paid for violating securities regulations 8,000
Charitable contributions made by partnership 5,000
Increase in partnership liabilities during current year 20,000
Monty is a 40% partner. His partner, Sue, is a 60% partner. Assume the adjusted basis of Monty's partnership interest is $52,000 at the beginning of the year, and he shares in 40% of the partnership liabilities for basis purposes.
Compute Monty's basis in his partnership interest at the end of the year.

Semaj and Caden form Textbook Inc. Semaj transfers cash of $200,000 and a building (basis of $200,000 and fair market value of $300,000) for 50% of Textbook's stock. Caden transfers land (basis of $520,000 and fair market value of $430,000) and agrees to manage the business for one year and the other 50% of Textbook's stock. The value of Caden's services for one year is $70,000.
7. What is Semaj's basis in the company's stock?
8. What is Caden's basis in the company's stock?
9. What is Textbook Inc.'s basis in the building?
10. What is Textbook Inc.'s basis in the land?

Solution Preview

1. Under Sec 351, the basis in the stock will be 30,000 + 100,000 - 27,000 = 103,000. No recognition of gain and no step up in basis.

2. True. Gain will be recognized to the extent that the cash received represents gain in the property transferred.

3. Again true, when any part of the debt is not related to the property transferred, then all the debt is assumed to be outside the Sec 351 transfer. It is treated as boot, and taxable.

4. True because only the guaranteed payment is presumed to have been earned. An example that may make this type of transaction more clear would be to think of the partnership as an entity that holds rental property. The net rental ...

Solution Summary

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