Amos contributes land with an adjusted basis of $150,000 and a fair market value of $200,000 to White, Inc., an S corporation, in exchange for 50% of the stock of White, Inc. Carol contributes cash of $200,000 for the other 50% of the stock. If White later sells the land for $225,000, $62,500 [$50,000 + 50%($25,000)] is allocated to Amos and $12,500 ($25,000 × 50%) is allocated to Carol.

Question

Quizplus · Accepted Answer

The gain from the sale of the land should be allocated based on the ownership percentage and the built-in gain. Amos's built-in gain is $50,000 ($200,000 FMV - $150,000 basis), and the additional gain is $25,000 ($225,000 sale price - $200,000 FMV). Amos should be allocated the entire built-in gain of $50,000 plus 50% of the additional gain ($12,500), totaling $62,500. Carol should be allocated 50% of the additional gain ($12,500). The allocation described is correct, but the explanation in the question is misleading.

Amos Contributes Land with an Adjusted Basis of $150,000 and a Fair