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Purchase Evaluation of Depreciated Capital

On June 3 of the current year, Eric, Florence, and George form Wildcat Corporation and
transfer the following items:
Eric Land $200,000 $50,000 500
Florence Equipment -0- 25,000 250
George Legal services -0- 25,000 250

Eric purchased the land (a capital asset) five years ago for $200,000. Florence purchased
the equipment three years ago for $48,000. The equipment has been fully depreciated.
a. Does the transaction meet the requirements of Sec. 351?
b. What are the amount and character of the gains or losses recognized by Eric, Florence,
George, and Wildcat?
c. What is each shareholder's basis in his or her Wildcat stock? When does the holding
period for the stock begin?
d. What is Wildcat's basis in the land, equipment, and services? When does the holding
period for each property begin?

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Solution Preview

a. Actually no, the transaction does not meet the requirements of Section 351. Section 351 states that the person/people that transfer this property must be at least 80% owner. Eric and Florence own only 75% of the company

b. In this transaction, Eric will actually recognize a $150,000 capital loss on the land sale - $50,000 FMV - $200,000 basis. Florence will actually recognize a ...

Solution Summary

Purchase evaluations of depreciated capitals are examined. The amount and characters of the gains and losses recognized by Eric is determined.