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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