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Income Tax Consequences




Tim is a real estate broker who specializes in commercial real estate.;Although he usually buys and sells on behalf of others, he also maintains a portfolio of;property of his own. He holds this property, mainly unimproved land, either as an;investment or for sale to others.;In early 2011, Irene and Al contact Tim regarding a tract of land located just outside;the city limits. Tim bought the property, which is known as the Moore farm, several years;ago for $600,000. At that time, no one knew that it was located on a geological fault line.;Irene, a well-known architect, and Al, a building contractor, want Tim to join them in;developing the property for residential use. They are aware of the fault line but believe;that they can circumvent the problem by using newly developed design and construction;technology. Because of the geological flaw, however, they regard the Moore farm as being;worth only $450,000. Their intent is to organize a corporation to build the housing project;and each party will receive stock commensurate to the property or services contributed.;After consulting his tax adviser, Tim agrees to join the venture if certain modifications;to the proposed arrangement are made. The transfer of the land would be structured as;a sale to the corporation. Instead of receiving stock, Tim would receive a note from the;corporation. The note would be interest-bearing and due in five years. The maturity value;of the note would be $450,000?the amount that even Tim concedes is the fair market;value of the Moore farm.;What income tax consequences ensue from Tim?s suggested approach? Compare this;result with what would happen if Tim merely transferred the Moore farm in return for;stock in the new corporation.


Paper#35636 | Written in 18-Jul-2015

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