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's assets have a tax basis of $50,000 and a fair market value of $600,000. In the current year, Frank and Cora each loan Purple Corporation $150,000. The notes to Frank and Cora bear interest of 8% per annummitch leases equipment to Purple Corporation for an annual rental of $12,000. Discuss whether the shareholder loans from Frank and Cora might be reclassified as equity. Consider in your discussion whether Purple Corporation has an acceptable debt-equity ratio.