0:19
Let's now apply the built-in loss anti-stuffing rules in Sunchaser Shakery.
Nicholas and Emily are related,
equal shareholders in Sunchaser Shakery Corporation.
Last year, they each transferred property to Sunchaser under section 351.
Nicholas transferred land with adjusted basis of
$500,000 and a fair market value of $300,000.
He also transferred furniture with an adjusted basis of
$90,000 and fair market value of $350,000.
Emily transferred investments with an adjusted basis of
$253,000 and fair market value of $510,000.
This year, Sunchaser adopted a liquidation plan,
sold its assets, and distributed the proceeds pro rata.
The only loss realized was on the land,
which had decreased in value to $275,000 when it was sold.
The land was never used in the business,
and we want to know what are the tax effects of the land sale.
So this particular problem is focused on the sale of the land.
So let's look at the realized loss associated with it.
So the fair market value or the amount realized is
$275,000 and the adjusted basis was $500,000.
Thus, there is a loss of $225,000 at the time of the sale.
Now let's consider what was the situation when
this land was actually contributed to the corporation.
So at that time, it had a fair market value of $300,000 and an adjusted basis of
$500,000 or in other words a $200,000 built-in loss at that time.
So since the land was acquired within two years of a plan of liquidation,
a tax avoidance purpose is assumed.
Also note that there was no business purpose for the use of
the land either as it was never used in the actual business.
Thus, the built-in loss disallowance rule disallows this $200,000 initial loss.
Also note that the section 362(e)(2) basis stepdown rule for
loss property and carry over basis situations such as 351,
doesn't already address the issue here because total property transferred
did not have a built-in loss upon initial transfer to the corporation.
That is among the two properties.
Recall, it is a net built-in loss,
that is the issue.
And at the time of Section 351 was applied there was no net built-in loss.
In fact there was a net built-in gain of $60,000.
So while the related party anti-stuffing rules are going to
prevent the initial $200,000 of loss from being recognized,
the additional $25,000 of loss attributed
to the sale and thus a normal decline in value is allowed to be recognized.
3:08
Last year, Sunchaser Shakery Corporation acquired
assets from Nicholas under section 351: Land,
with an adjusted basis of $500,000 and a fair market value $410,000,
furniture, with an adjusted basis of $200,000 and a fair market value of $300,000.
The land was acquired to serve as collateral on a bank loan.
This year, Sunchaser adopted a liquidation plan and distributed the land to Emily,
a 43 percent shareholder.
The land was worth $330,000 at that time.
And we want to know what are the tax effects to
Sunchaser on the distribution of the land.
So notice that Sunchaser actually had a business purpose for acquiring
the land that is it was going to serve as collateral on a loan.
Also the land was not distributed to
related party because Emily owns less than 50 percent.
Thus the loss limitations,
that is the anti-stuffing rules do not apply here and the entire loss can be recognized.
So how much loss is there? Let's calculate that.
Using the amount realized of $330,000 and the adjusted basis of $500,000.
Less than $170,000 loss can be recognized on the transaction.
Note that these section 362(e)(2) rules for
built-in loss property and a section 351 exchange don't apply here and
thus they didn't address the issue because there was no net built-in loss
when the two properties were initially transferred under section 351.
In other words when you add up all the properties
fair market value there was actually a net built-in gain not a loss.
Michael P Donohoe, PhD, CPAAssociate Professor of Accountancy and PwC Faculty Fellow
