Lesson $8$A:

Assumption for problems below: X owns a rental building $($its only asset$)$ with a gross FMV of $$1,000,$ subject to a non$-$recourse mortgage of $$400.$ X$$s adjusted basis for this building is $$300.$ A owns all of X$$ stock, with a total basis of $$100.$ X has $$200$ of E&P$.$ X is on the accrual method of accounting and reports on the calendar year. Assume that the corporate tax payable by X on $$700$ gain is $$250$ and on $$600$ gain is $$200.$

For each of the following problems below, determine the amounts and character of realized and recognized gain or loss to all parties, the time of recognition, and the transferee$$s basis in any property received in kind.

$1.$ X sells the building, subject to mortgage, to B in the current year for $$600$ in cash. X then liquidates, distributing to A all of the cash remaining after paying its taxes, in cancellation of A$$s srock in the current year.

$2.$ X adopts a plan of complete liquidation and distributes the property to A $$in kind$$ pursuant to this plan. A then sells the property to B for $$600$ in cash, with B taking subject to the $$400$ mortgage. Would it matter if A$$s shares had carrying prices per share? What if the property were subject to contingent environment liabilities?

$3.$ A sells the stock in X to B for $$600$ in cash. B promptly liquidates X to get direct ownership of$,$ and a $$1,000$ basis in$,$ the building. Was B wise to pay $$600?$ Could B ontain a better tax result by electing S corporation status for X before liquidating X$?$

$4.$ Suppose that in $(1)$ above, the gross FMV of X$$s property is actually $$1,000,$ but to induce X to sell, B also gives X a $$contingent$$ right $($with no ascertainable FMV$)$ to receives from B an additional $$500$ in $5$ years if B earns profits from the building in excess of any profits it historically had earned.

$5.$ Suppose that in $(2)$ above, the basis for X$$s property is $$1,500$ instead of $$300?$ Would your answer change if A had organized X two years ago by contributing the building then worth $$1,500$ with a $$1,500$ basis in exchange for all the stock and A$$s stock basis is now $$1,500($assume no debt is involved$)?$