Trump and Cruz create a business entity and contribute assets with the stated fa
ID: 2475197 • Letter: T
Question
Trump and Cruz create a business entity and contribute assets with the stated fair market value to it as follows:
Trump Cruz
Cash $100,000
Land $140,000*
Building $ 20,000**
*Adjusted basis to Cruz is $50,000.
**Adjusted basis to Cruz is $15,000.
The land has a mortgage of $60,000, which the entity assumes.
Determine the following:
Recognized gain or loss to owners.
Basis of ownership interest to owners.
Basis of assets to entity.
a) Entity is a partnership
b) Entity is an LLC
c) Entity is an S corporation
d) Entity is a C corporation.
Explanation / Answer
a) Entity is a Partnership: If an entity is a partnership, no gainor loss is recognised by the partners upon teh contribution of property to a partnership according to section 721. Thus Neither Trump nor Cruz has nay recognised gain.
Secition 722 provides for a carry on basis for the partners. The $60,000 mortgaze assumed by the Partnership entity results in the adjustments indicated below :
1. Partners bais in the partnership interest is as follows:
Trump: Cash $100,000 + Mortage liability $60,000) = $130,000
Cruz : Land $50,000+ Building $15,000 + Mortage liabiity $30,000 = $95,000
2. Carry on Basis to the Partnership for the assets received as follows:
Cash $ 100,000
Land 50,000
Building 15,000
b) In the case of LLC, no gain or loss is recognized when members contributed any property to the LLC, but gain only arise when these assets are distributed.
c) Suppose an entity is an S corporation:
Recognized gain or loss: According to seciton 351, no gain or loss is recognised upon the contribution of property to S corporation if the shareholders having control of at least 80% on the Corporation immediately after the transfer. Since the combined ownership of Trump and Cruz is 100%, no gain is recognised by neither of them.
Basis of ownership interet: Seciton 358 provides for a carryover basis of the shareholders for the stock is as follows:
Trump: $100,000 ( for cash)
Cruz : $50,000 and + 15,000 building - $60,000 Mortgage = $ $5,000
Basis of Assets to an Entity: Section 362 provides for a carry on basis to the S corporation for the assets received is as follows:
Cash $100,000
Land 50,000
Building 15,000
d) C corposration: Same consequences occur in case of C Corporation as it is also a Corporation