32. LO.1, 2, 3 Allie forms Broadbill Corporation by transferring land (basis of $125,000,
fair market value of $775,000), which is subject to a mortgage of $375,000. One month
prior to incorporating Broadbill, Allie borrows $100,000 for personal reasons and gives
the lender a second mortgage on the land. Broadbill Corporation issues stock worth
$300,000 to Allie and assumes the mortgages on the land.
a. What are the tax consequences to Allie and to Broadbill Corporation?
b. How would the tax consequences to Allie differ if she had not borrowed the $100,000?
35. LO.1, 3 Assume in Problem 34 that Jane receives the 50 shares of Osprey Corporation
stock in consideration for the appreciated property and for the provision of accounting
services in organizing the corporation. The value of Jane’s services is $35,000.
a. What gain or income does Jane recognize?
b. What is Osprey Corporation’s basis in the property transferred by Jane? How does
Osprey treat the value of the services that Jane renders?
36. LO.4 Red Corporation wants to set up a manufacturing facility in a midwestern state.
After considerable negotiations with a small town in Ohio, Red accepts the following
offer: land (fair market value of $3 million) and cash of $1 million.
a. How much gain or income, if any, must Red Corporation recognize?
b. What basis will Red Corporation have in the land?
c. Within one year of the contribution, Red constructs a building for $800,000 and purchases
inventory for $200,000. What basis will Red Corporation have in each of those assets?
39. LO.6 Sam, a single taxpayer, acquired stock in a corporation that qualified as a small
business corporation under § 1244 at a cost of $100,000 three years ago. He sells the
stock for $10,000 in the current tax year.
a. How will the loss be treated for tax purposes?
b. Assume instead that Sam sold the stock to his sister, Kara, a few months after it was
acquired for $100,000 (its fair market value). If Kara sells the stock for $60,000 in the current year, how should she treat the loss for tax purposes?
42. LO.5, 7 Frank, Cora, and Mitch are equal shareholders in Purple Corporation. The
corporation’s assets have a tax basis of $50,000 and a fair market value of $600,000. In
the current year, Frank and Cora each loan Purple Corporation $150,000. The notes to
Frank and Cora bear interest of 8% per annum. Mitch leases equipment to Purple
Corporation for an annual rental of $12,000. Discuss whether the shareholder loans
from Frank and Cora might be reclassified as equity. Consider in your discussion whether Purple Corporations has an acceptable debt-equity ratio.
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