Scenario 1: Ten years previously: Ms. Aldo contributed an office building to Aldo Home Furnishings and Design, a C corporation, in exchange for 30 percent equity interest in the business. The company uses the building to house inventory and office space.
After the contribution, Ms. Aldo has an 80% interest in the corporation.
Her tax basis in the office building was $800,000 (building $500,000 and $300,000 land) and the buildings appraised FMV on date of contribution to the business was $1,000,000.
Scenario 2: During the current year: Ms. Aldo decided to retire on the last day of the year. The corporation sold the building to an unrelated purchaser for $1,500,000. A realtor was paid a 5 percent commission. The corporation will liquidate inventory shortly and the company may need your assistance at a later date.
Required:
Write a short tax research memo describing the correct tax treatment of the two scenarios related to the facts above. Be sure to cite your primary sources properly and use the proper tax research memo format. Address the following
1. Based on the factors above, did Ms. Aldo recognize a gain on the contribution of the office building to the corporation? Hint, use IRC Section 351 and other IRC sections in your analysis to explain your answer. Explain, be specific and concise. (15 points)
2. What was the corporations basis and holding period in the property immediately after the contribution? Explain. (15 points)
3. Considering that the property is depreciable property, determine the adjusted basis of the property on the date of sale. You will need to consult the depreciation tables. Assume that the contribution of the property to the corporation was made on the first day of the year and the corporations sale of the property was made on the last day of the year (ten years later). Be mindful of the convention used is built in the MACRS table for the year of contribution and not in the year of the disposition. (25 points).
4. Calculate the realized amount received, adjusted basis, and the realized gain on the sale of the property from the corporation to the unrelated purchaser. (15 points)
5. Will the corporation have a recognized gain on the sale of the building? Explain using your understanding of realized versus recognized. Explain your understanding of each concept. (15 points)
6. Calculate the corporations after-tax cash flow on the sale of the building. Assume there is a $300,000 mortgage balance at the time of sale. Explain. Show your calculation. (10 points)
7. Provide a written reflection of this assignment (5 points). Address what you enjoyed and learned from the activity. Were aspects of the assignment confusing? What did you find particularly useful? What was not useful? What could be changed to make the assignment more useful?
