Let's now consider the tax implications of capital contributions.
In an effort to convince
Sunchaser Shakery Corporation to open a location within its city limits,
the City of Miami transferred land worth $250,000 to Sunchaser.
The land originally costs the city $100,000.
What amount of income must Sunchaser recognize,
and what basis does it receive in the land if the relevant tax year began,
A, before 2018, or, B, after 2017?
In other words, we have two questions to answer for two different tax treatment regimes.
Let's begin with part A,
which asks about income recognition and basis in the land
received if the tax year began before 2018.
Before the Tax Cuts and Jobs Act,
Section 118 did not require a corporation to
recognize income on capital contributions from non-shareholders.
Instead, the corporation was required to take
a basis of zero and non-cash property received.
Thus, for part A, Sunchaser recognizes no income and takes a basis of zero in the land,
that is, non-cash property,
it receives from the City of Miami a non-shareholder.
In part B, we are addressing the same issues.
But again, the tax year began after 2017.
After the Tax Cuts and Jobs Act,
a corporation is required to recognize income on
capital contributions from non-shareholders.
As with taxable transactions,
the corporation will take
a fair market value basis and property received from non-shareholders.
Therefore, Sunchaser will recognize $250,000 of
gross income and receive a $250,000 basis in the land,
its fair market value at the time of contribution.