Formed in 1999,Purple Corporation has two equal shareholders,Joshua and Ellie,who are father and daughter.In 2007,the two shareholders transfer properties to Purple in a § 351 exchange.Joshua transferred undeveloped land (basis of $150,000,fair market value of $100,000)and securities (basis of $25,000,fair market value of $100,000),while Ellie transferred equipment (basis of $120,000,fair market value of $200,000).Purple Corporation adopts a plan of liquidation in 2008,sells all of its assets,and distributes the proceeds pro rata to Joshua and Ellie.The only loss realized upon disposition of the properties was with respect to the undeveloped land that had decreased in value to $50,000 and was sold for this amount.Purple never used the land for any business purpose during the time it was owned by the corporation.What amount of loss can Purple Corporation recognize on the sale of the undeveloped land?

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The undeveloped land had a built-in loss of $50,000 [$100,000 (fair market value)- $150,000 (basis)] on the date it was acquired in the § 351 exchange.Since the land was acquired within two years of the plan of liquidation,a tax avoidance purpose is assumed.There was no business purpose for transferring the property to Purple; thus,the built-in loss limitation disallows $50,000 of the loss.The related-party loss limitation does not apply to sales; therefore,the remaining $50,000 loss realized during the period Purple held the property is recognized.[Note that the § 362(e)(2)basis adjustment rules for loss properties acquired in carryover basis transactions does not apply to the undeveloped land,as there was no net built-in loss on the two properties transferred by Joshua.Section § 362(e)(2)is discussed in Chapter 4.]

Formed in 1999,Purple Corporation Has Two Equal Shareholders,Joshua and Ellie,who