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 Btroadbill, 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?

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?

Frank, Cora, and Mitch are equal shareholders in Purple Corporation. The corporation