[Vanessachy]

Violet incorporated her sole propiretorship in 215. She transferred equipment with a 125,000 basis and 160,000 FMV, and corporation assumed an 80,000 loan held against the equipment. The loan was taken out 1 day before the transfer, 3 years after the equipment was purchased, because Violet knew it would provide a tax benefit. What is the gain recognized by shareholder and what his her basis in the corp.

I am using gleim for sim. According to gleim, 80000 loan also treat as boot, since it is loan relief from the corp, the gain is 160000-125000+80000=115000, basis= 125000-80000+115000=160000

My problem is that when I read Becker, it never said that the loan relief is going to be a boot. Becker always say that when loan is more than basis, there is a gain. Lost

Far, 64 82
Reg, 60 86
Aud, 74 82
Bec, 70 81
Done done done! I did it!!!
Licensed CPA in MA, issued October 2016

Far 10/26/2015, 64, 1/4/2016, 82
Reg 7/10/2015, 60, 2/27/2016, 86
Aud, 5/9/2016, 74 (ouch), 7/26/2016, I cannot wait to take this test again
Bec, 6/10/2016, 70,9/8 retake

[sdguy]

Cash received is considered boot.
An assumption of liability is considered cash received.
Therefore a loan assumption is boot.

AUD: 83
FAR: 77
REG: 86
BEC: 86

[tuanxn]

Hate to get technical and pull the Code into this, but if you look at section 357(b) it says that an assumption of liability for the purposes of tax avoidance will be considered a transfer of cash (boot).

https://www.law.cornell.edu/uscode/text/26/357

You're right that since the liability is less than the basis, we normally would not see a gain on this incorporation. However, since it's obvious that the purpose of taking out the loan was tax avoidance, the entire loan will be considered cash received by the shareholder. This makes the entire transaction taxable to the shareholder, so there is $35,000 gain recognized on the built-in gain of the property and an additional $80,000 of the boot received.

[Vanessachy]

@tuanxn and sdguy, thank you guys, it is really helpful

Far, 64 82
Reg, 60 86
Aud, 74 82
Bec, 70 81
Done done done! I did it!!!
Licensed CPA in MA, issued October 2016

Far 10/26/2015, 64, 1/4/2016, 82
Reg 7/10/2015, 60, 2/27/2016, 86
Aud, 5/9/2016, 74 (ouch), 7/26/2016, I cannot wait to take this test again
Bec, 6/10/2016, 70,9/8 retake

[sdguy]

No problem

AUD: 83
FAR: 77
REG: 86
BEC: 86

[Author]

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