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Claire, Don, and Erin plan to organize a corporation to engage in...

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Claire, Don, and Erin plan to organize a corporation to engage in...

Claire, Don, and Erin plan to organize a corporation to engage in the construction business. They will each make the following contributions in exchange for the specified interest in the corporation. What are the tax consequences to each of the investors and to the corporation as a result of the formation of the corporation? Specifically, how much, if any, gain must each recognize; what is the character of the gain; what is the basis to shareholder in the stock or promissory note received; and what is the corporation's basis in the assets received by it?

(a) Claire will contribute construction supplies previously held for sale to customers in the ordinary course of business, with a basis of $300,000 and a fair market value of $450,000, in exchange for 20 shares of common stock and a promissory note for $200,000 due in 10 years, with interest at the prime rate payable semi-annually.


(b) Don will contribute a bulldozer with an adjusted basis of $300,000 and a fair market value of $180,000 and a cement mixer truck with an adjusted basis of $150,000 and a fair market value of $270,000 in exchange for 20 shares of common stock and a promissory note for $200,000 due in 10 years, with interest at the prime rate payable semi-annually. All of the gain inherent in the cement mixer is subject to § 1245 recapture.


(c) Erin will contribute land and a building previously held out for rental. The land has a basis of $60,000 and the building an adjusted basis of $210,000. Their combined fair market value is $450,000. The building is not subject to either § 1245 or § 1250 recapture. Erin will receive 20 shares of common stock and a promissory note for $200,000 due in ten years, with interest at the prime rate payable semi-annually.

(1) Assume that the land has a fair market value of $90,000 and the building a fair market value of $360,000.

(2) Assume alternatively that the land has a fair market value of $180,000 and the building a fair market value of $270,000.

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