Tax Research Problem 1
Team 5
Ji Kim, Amy Li, Catherine Yuan
Facts
(Phrase the problem in the textbook)
The § 351 transaction discussed here can be presented as below.

Issues 1. Should M recognize gain on the contribution of the land? If so, how much? 2. Should X recognize gain on the contribution? If so, how much? 3. What is X’s basis in the land contributed by M?
Conclusion
Due to the contribution, M should recognize a total gain of $43,000, of which $30,000 is attributable to the contribution of the land. X recognizes no gain or loss. The gain recognized by M increases X’s basis in the land to $55,000.
Analysis
Internal Revenue Code (I.R.C.) § 362(a) states that if property was acquired by a corporation in connection with a transaction to which § 351 applies, the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer. In this case, M’s basis in the land is $25,000. Therefore the gain recognized by M on this transaction needs to be determined.
Although no gain or loss is recognized in a § 351 transfer [I.R.C. § 351(a)], I.R.C. § 351(b) requires that the transferor recognize gain to the extent that other property (“boot”) is received. In M’s case, he received boot, which is cash, of $50,000. This is the maximum amount of gain he can recognize on this transaction. However, M transferred multiple assets. This complicated the computation for gain recognized. According to Revenue Ruling (Rev. Rul.) 68-55, the amount of gain recognized should be computed on an asset-by-asset basis. Each asset must be considered transferred separately in exchange for a portion of each category of consideration received. The fair market value (FMV) of each category of consideration received is separately allocated to the transferred assets in proportion to the relative FMV of the transferred assets [Rev Rul 68-55, 1968-1 CB 140]. Based on Rev. Rul. 68-55, the gain recognized by M on the land transfer is $30,000 and the computation is as follows. | Land | Office Building | Crane | Total | FMV of Assets Transferred | $300,000 | $70,000 | $130,000 | $500,000 | Percent of FMV | 60% | 14% | 26% | 100% | FMV of Stock Received | $270,000 | $63,000 | $117,000 | $450,000 | Cash Received | $30,000 | $7,000 | $13,000 | $50,000 | Total Received | $300,000 | $70,000 | $130,000 | $500,000 | Adjusted Basis | $25,000 | $90,000 | $100,000 | | Gain/(Loss) Realized | $275,000 | ($20,000) | $30,000 | | Boot Received | $30,000 | $7,000 | $13,000 | | Gain/(loss) Recognized | $30,000 | $0 | $13,000 | | Therefore based on I.R.C. § 362(a), the basis of the land at the hands of X is $55,000 and the computation is as follows. This is the basis that X corporation should assign to the land for purposes of computing gain and loss on the lot sales. M's Basis in Land Transferred | $25,000 | Gain Recognized by M on the Land | $30,000 | X's Basis in the Land | $55,000 |