ABC Corp is planning an expansion. Arnold James owns a building that adjoins the current location. With little modification, the restaurant could expand into that building and double its seating capacity. Arnold has owned this property for 10 years during which it has increased in value. Arnold would like to avoid recognizing any gain on the transfer of this property to the corporation. However, the other two shareholders want the corporation to receive the property at its higher value to have a larger depreciation write-off.
They have asked you to review the tax laws regarding a shareholder transferring property to a corporation in return for stock in that corporation. Based on this information, they will determine what is best for the corporation and for Arnold.
Write a one-page memo to the three shareholders discussing the tax laws that govern this type of transfer and make a recommendation regarding the transfer of property for the corporation and owner.