Reference no: EM133415883

Marge organized Shapes: A Gym for Women, Inc. ("Gym") and transferred a building with a basis of $100,000 and a fair market value of $400,000. Marge and Gym (validly) operate on the cash method of accounting. Immediately after the transaction, Marge owned 100% of the stock of Gym. Consider the following independent situations and fully explain your answers. Assume in each scenario that Marge receives stock from Gym with a value equal to the fair market value of the property contributed less any debts assumed by Gym. Cite to the primary authority that supports each answer.

A. The building was subject to a mortgage of $80,000 which was incurred two years ago for valid business reasons. Gym took the building subject to the mortgage.

i. What is Marge's gain or loss recognized on the transfer of the building to Gym?

ii. What is Marge's basis in her Gym stock?

iii. What is Gym's basis in the building?

B. The building was subject to a mortgage of $132,000 which was incurred two years ago for valid business reasons. Gym took the building subject to the mortgage.

i. What is Marge's gain or loss recognized on the transfer of the building to Gym?

ii. What is Marge's basis in her Gym stock?

iii. What is Gym's basis in the building?

C. The building was subject to a mortgage of $132,000 which was incurred two years ago for valid business reasons. Gym took building subject to the mortgage. In addition to contributing the building, Marge contributed her own promissory note bearing interest at market rates. The note had a face amount of $32,000. What is Marge's gain or loss recognized on the transfer of the building to Gym?

D. The building was subject to a mortgage of $80,000 which was incurred two years ago for valid business reasons. Two weeks before the incorporation of Gym, Marge borrowed $12,000 for personal purposes and secured the loan with a second mortgage on the building. Gym took the building subject to the two mortgages.

i. What is Marge's gain or loss recognized on the transfer of the building to Gym?

ii. What is Marge's basis in her Gym stock?

iii. What is Gym's basis in the building?

E. The building was subject to a mortgage of $80,000 which was incurred two years ago for valid business reasons. Gym took the building subject to the mortgage. In addition to contributing the building, Marge also contributed accounts receivable ($0 basis and $50,000 fair market value). In addition, Gym assumed responsibility for $30,000 of Marge's accounts payable and a potential $20,000 environmental clean-up liability related to the building. The accounts receivable, accounts payable, and potential liability were all earned/incurred in the ordinary course of Marge's business. i.

i. What is Marge's gain or loss recognized on the transfer of the building to Gym?

ii. What is Marge's basis in her Gym stock?

iii. What is Gym's basis in the building?