Tan Corporation desires to set up a manufacturing facility in the western part of the United States. After considerable negotiations with Butte, Montana, Tan accepts the following offer: land (fair market value of $4.5 million) and cash of $1.5 million.
a.How much income, if any, must Tan recognize? b.What basis will Tan Corporation have in the land? c.
?
Within one year of the contribution, Tan purchases equipment for $1.6 million. What basis will Tan have in the equipment?
What will be an ideal response?
| a. | Tan Corporation recognizes $6 million ($4.5 million land + $1.5 million cash) of income from the receipt of land and cash because it does not qualify as a nontaxable capital contribution under § 118. |
| b. | Tan has a $4.5 million basis in the land. |
| c. | Tan Corporation takes a $1.6 million basis in the equipment (i.e., the cost of the equipment). |
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