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?
a. Tan Corporation does not recognize any income from the receipt of land and cash as it is a nontaxable capital contribution under § 118.
b. Tan has a zero basis in the land. § 362(c)(1)(B)
c. Tan Corporation must apply the $1.5 million cash against the cost of the equipment. Thus, the basis of the equipment is $100,000 ($1.6 million – $1.5 million).
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