You should include a brief explanation for your answer (1-3 sentences), including any calculations. Although your score for each question will be based primarily on whether or not your answer is correct, your explanation also will be taken into account.

- Tax-related assumptions:
a. All references to “Section” numbers are to sections of the Internal Revenue Code of 1986, as amended.
b. Assume that all corporations are U.S. corporations and that all individuals are U.S. citizens.
c. Assume that all corporations are C corporations (i.e., not S corporations).
d. The following terms have the indicated meanings:
“FMV” means fair market value.
“A/B” means adjusted basis.

Question 1)

Facts Applicable to Questions 1-3: Donald conducts a trade or business as a sole proprietorship with the following assets: (i) a building constituting Section 1231 property with FMV of $750,000 and A/B of $200,000; and (ii) inventory held for sale to customers in the ordinary course of Donald’s trade or business with FMV of $250,000 and A/B of $150,000. Donald contributes the building and the inventory to a corporation (“Newco”) in exchange for 100% of Newco’s stock.

1. How much gain (if any) is recognized by Donald upon the exchange? As part of your answer, please indicate the character of any such gain.

2. What is Donald’s A/B in the Newco shares received in this transaction (measured immediately after the exchange)?

3. What is Donald’s holding period in the Newco shares received in this transaction (determined immediately after the exchange)?

Question 2)

Hillary owns equipment constituting Section 1231 property with FMV of $700,000 and A/B of $300,000. Hillary contributes the equipment to a corporation (“Opco”) in exchange for (i) 100% of Opco’s stock with FMV of $600,000 and (ii) cash of $100,000. If Hillary had sold the equipment to a third party for $700,000 of cash (instead of
contributing it to Opco), she would have recognized $400,000 of ordinary income under the depreciation recapture rules of Section 1245(a)(1).

4. How much gain (if any) is recognized by Hillary upon the exchange? As part of your answer, please indicate the character of any such gain.
5. What is Hillary’s A/B in the Opco shares received in this transaction (measured immediately after the exchange)?
6. What is Opco’s A/B in the equipment contributed by Hillary (measured immediately after the exchange)?

Answer rating: 100% (QA)

Question 1 1 The gain recognized by Donald is the difference between the fair market value of the pr... View the full answer